Nervous about taxes

If I understand correctly, when you sell through a vender like amazon, smashwords etc, they take out taxes before they pay you...so the tax portion is like any other job.

If you sell books on your website, or some other private venue, then you will need to take care of the taxes. Each state has different laws regarding this. I attended a class (at a conference) regarding tax law. It was taught by people that work for the IRS. It scared the beejeebees out of me! But they said that Washington, where I live, has stricter laws than some others. So your mileage may vary. Good luck!

I'm going to be doing my taxes in the next few weeks, so I don't have any hindsight for you yet. However, I can tell you that I sell both my books through Amazon. I received tax documents from them with the amounts that I sold. It's my understanding that I will be filling out a Miscellaneous 1099 form to cover the amount that I sold and submitting it similar to self-employed income. That all being said, I haven't actually done it yet! It may end up being more involved than that, but it seems like it will be pretty straight forward....

I'll check back and let you know if something goes horribly awry!

I am not a lawyer and I am not giving tax advice. Having said that, if you make very little money, say less than $400 a year from book sales, you may need to fill out additional tax forms but it will probably not cause you to end up having to pay withholding taxes. You didn't say if you have a day job or not or if you are already having taxes taken out of your day job paycheck, but if you are, it will most likely not be a big issue.

If you make more than $400 a year, you will probably need to pay quarterly withholding taxes through EFTPS (online system), but that is not a 100% guarantee. It depends on how much you deduct for business expenses (advertising, editor, cover art, giveaways, proof copies of your books, etc.). You may find that your expenses eat into your profits so much that your total income from book sales is much less than you expected.

It is hard to estimate when you don't have a year of sales under your belt to give you some idea of how much you will make from sales in a year. It is such an individual thing, you really have to experience it to know.

As far as forms go, IIRC, I fill out:
Form 1040
Form SE (self-employmentform)
Profit and/or Loss from Business Form
I think there is one more, but I'm not remembering it right now.

I wish I had my forms in front of me. I did not hire anyone, just went through the forms line by line with the instruction booklet.

I'm not giving tax advice here, just general information about FEDERAL taxes. Local taxes may work differently.

Tax returns for self-published (or trade published) writers tend not to be terribly difficult, and are generally LESS complicated than most other self-employment returns, since you'll get a 1099 (comparable to an employer's W-2) from each place you sell your books. It's not like a plumbing company, for instance, where you'd have to keep track of every client's payments and the costs of the parts you used.

Similarly, writers' expenses tend to be a bit less complicated than a plumber's, since you don't keep an inventory of parts. You'll have expenses like paper and research and cover art and editing, which are fairly easy to keep track of.

Then for the tax filing, you take the numbers from the 1099's, add them up on Schedule C, and subtract your expenses. (if you go to irs.gov, and put Schedule C in the search box, you can see the form, and see that it's not all that complicated.) The bottom line is your net profit. You will then owe payroll taxes (Social Security and Medicare -- think of it as "insurance," or "retirement" not "tax") on that amount, and you'll also include that net profit on the first page of the tax return, in addition to any other types of income you have (like wages and bank interest), and pay income tax on that amount, after your exemptions and personal deductions have been subtracted.

Now, it's possible that if you did this you'd owe some money to the IRS when you file. Just as an example, if you had a thousand dollars in profit (after expenses were subtracted), then you'd owe approximately $150 for Social Security and Medicare. Similarly, assuming you made that thousand dollars in profit, you'd also owe an amount equal to your marginal tax rate (the top rate that you pay, which could be anywhere from 0 to about 30% in most cases) as an income tax. On that example of a thousand dollars profit, that's somewhere between no tax at all and about $300 (plus the $150 for Social Scurity and Medicare).

Incurring taxes isn't the end of the world -- it means you're actually making a profit, which is a good thing! There are a number of reasonably simple ways to deal with owing taxes.

For one thing, if your earnings are minimal, and you've got a job that withholds taxes and you've always gotten a refund at tax time, then chances are the withholding will cover any taxes you owe from the first year of publishing, and you'll just get a smaller refund. If it turns out that you start to earn more from publishing than you expect, but not huge amounts, you can always ask your payroll department to increase your witholding by an amount that will be sufficient to cover the taxes.

If you do start earning enough from publishing to need to do your own pre-payment of taxes, you'll file what's referred to as quarterly payments of taxes. We all complain about them, but they don't need to be complicated. For the first year, you just take the amount of tax you owed the previous year (minus any amounts withheld by your employer), divide it by four, and send that amount to the IRS in April, July, October and January. You can pay in more if you want, especially if you see that your income is rising rapidly, but as long as you make this minimum payment, it will PROBABLY protect you from a penalty, which is the biggest concern. (This is just a general rule; you'd need to check your individual circumstances with a qualified expert in your jurisdiction.)

Finally, and this was a suggestion I read somewhere, if you're concerned that you won't have the cash to pay any tax due in April, then what you do is divide up your earnings as you receive them, depending on your marginal tax rate (highest rate you pay), and set aside the maximum amount you could owe in taxes in a separate savings account for taxes, rather than adding it to your regular checking account. In other words, if you get $100 in royalties, and your marginal tax rate is 20% (just picking random numbers here that are easy to do the math), and Social Security and Medicare are 15%, then you'll need to set aside 35% of the $100, or $35. So, you'd put $35 in a savings account (or a cookie jar, however you manage your finances) or send it to the IRS as quarterly payments, and be free to spend the remaining $65. The amount you set aside is likely to be more than you'll actually owe, because you're basing it on gross, before expenses are deducted, but you'll be getting interest on it if you have it in savings, and it will be a nice little nest egg if you don't need it for taxes. (Just to be clear: if you are required to pay quarterly taxes, then you'd send the appropriate amount to the IRS in the quarterly payments, and if that amount is less than the calculation based on what you've actually earned, you'd put the difference into a savings account, so it's available at tax time. This sounds complicated, but it's not really. Let's say you calculated originally that you should pay $100 a quarter in taxes to avoid a penalty, and then when you get your actual royalties, and you do the math on the GROSS, and it looks like you could owe as much as $300 a quarter in taxes, but probably less after deductions, then you'd put the difference between the original calculation of $100 and the new calculation of $300, for a difference of $200 into a savings account. Or you could simply send the $300 in the next quarterly payment, and get a refund at tax time.)

In any event, I would strongly recommend that you find a tax preparer with small business experience, and arrange for a consultation. There may be a charge, or it may be free, but even if you pay for it, it will be worth it for the peace of mind. It's just a cost of doing business (and if you're hoping to make some money, no matter how little, you need to treat it as a business). The tax preparer can help you get organized, and advise you on local tax issues, as well as federal issues. Finally, it's good to have a tax expert on speed dial for the happy day when you do start to make good money from publishing, when the tax returns might get more complicated or at least involve more money.

GinJones has offered some terrific advice. I'd listen to it. On the other hand, the tax preparer I contacted wanted $300 to do my paperwork, and I didn't want to drop all that money.

I have an outside job so most of my income comes from "real" work (this being work that my family members acknowledge as a job). Using an on-line tax program, I put in the basic info, then filled in the numbers for my writing royalties and expenses, TaxAct translated this onto a 1099-M and a Schedule C, and I paid Uncle his cut.

As I understand it, you don't have to file on a quarterly basis until you expect to owe $1000 or more in taxes (not royalties) from your writing in the coming year. BTW, Amazon, SW, and the others don't deduct any taxes from the royalties they send you.

Retailers do NOT withhold income taxes. You are responsible to pay them. Most USA writers who earn royalties from books, or who sell books themselves, will file as an independent business using Schedule C. That's what I do. I suppose you could also file royalties on Schedule E. I haven't investigated that yet, and won't so long as Schedule C works for me. I've had enough writing income the last four years to require filing Schedule C, and one of those years it resulted in having to pay self-employment tax in addition to income tax. Schedule C isn't really difficult. I have my writing income and expenses on a spreadsheet. Once I fill them out they tie to the lines on Schedule C. So my net income is figured. Easy-peasy.

Now, sales tax on self-sales is another question. I still haven't been able to register for that with the state, because I need a certain document from my city and they are dilatory at getting me that, and I'm dilatory re-asking and re-asking them for it.

NDG

Having just dealt with this for the year, GinJones has given a very complete, wise reply. The 15% tax is called self-employment tax, and for 2013 it is indeed a flat 15% (up to a $150K/year if I remember right). This is what a normal employee has withheld from their paycheck, listed as FICA. The rest of what you owe is income tax, and as with a normal employee the rate depends on how much you make.

Two nuggets of practical advice. One: it's wise idea, as said, to set aside a certain amount each month in a dedicated savings account. Overestimate even, and if there's some left over, hey, you get to give yourself a rebate! I did a poor job of this for 2013. It was a good year and I owe the IRS about 4 times more than in previous years. As someone said, it's not all complaints--a good year is a good year--but let me tell you, it really sucks to be less than fully prepared for it.

Two: GinJones also gets right that for me and I imagine for many writers, your Schedule C, the form for tax on small business, is really, really simple. Compared to other businesses, I have no overhead, no employees, and I didn't have enough business expenses to itemize deductions, just taking the standard deduction as many normal W-2 employees do. You will get 1099-MISC forms mailed to you in January with one blank, number 2, filled in with your annual royalties. You'll get two from Amazon (Amazon.com and Amazon Europe, and maybe more in the future as they continue to expand internationally) and one from other companies, Barnes and Noble LLC and such. They are not hard to enter or account for.

I used Turbotax Home and Business as the free one can't do Schedule C. It costs about $80. It's absolutely a personal decision about whether to take it to a tax professional or not, but I did end up going with this because of the simplicity of the return.

DancingMaenid said:

I know the forum can't offer tax advice, but I was hoping to get a general idea of what other people have to do, or some suggestions about where to find information.

I'm interested in starting to self-publish soon, mainly as a hobby. I don't intend to make a living off of it by any means, but a little extra money wouldn't be bad.

However, it isn't clear to me how paying taxes on writing income works, and I'm really nervous about owing taxes or having my taxes be super complicated (or expensive) to do. I have no idea if I could make enough for it to be an issue. I've known some freelance writers who got burned tax-wise because they weren't prepared or hadn't paid quarterly taxes, and my mom, who owns her own business and has worked as an independent contractor, always has a terrible time doing taxes and has repeatedly warned me against working as an independent contractor or in a similar position. Seeing stuff like this makes me very nervous, and makes me quite grateful for my simple tax returns.

Most of the information I've found online is focused more on deducting business expenses, but that's not a concern for me right now. I just want to know what I'd be in for when it comes to paying taxes on my royalties, and how to avoid owing come tax-time. I don't want to totally give up on the self-publishing idea, but I don't want to complicate my life a lot over a hobby, either.

I appreciate any input. It's been very hard for me to find information.

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Okay, I am speaking from the UK perspective here, but taxes aren't that tough. As a writer you're self employed, so you will need to register with HRMC as such. It's a really easy process and you can do it online. They will them send you a unique tax identifaction number - keep this, you will need it for your tax returns etc.

Every quarter you will complete a tax return for the previous quarter. It looks daunting, but it's not really. and the guys on the HMRC helpline are really great and can explain anything you are unsure about.

You'll need all of your royalty statements - from any publisher and all your self publishing.

Now, because writers tend to be paid twice a year, filling out a quarterly tax return may not be the best option, in this case you can fill it out yearly. This is a little more work, and it also means that your tax for the coming year is a predicted amount, rather than a 'real time' amount like if you had quarterly payments. But again, speak with HMRC if you are unsure.

Then it's literally a case of fillinging in the form with all your relevant details and sending it in.

Bear in mind too that if writing is a second job that it can possibly push you into a new tax bracket - so be prepared for that. Also, while you may have a really great quarter this time, next quarter you might not do so great, so you need to keep on top of things.

But don't panic. The forms aren't that complicated - in fact, I think everyone who receives child benefit (everyone with kids under 16 who earn less than £60k - which is literally millions of people in the UK) now have to fill them out.

But bear in mind, if you don't fill them out and send them in before the cut off date you will have to pay a £100 fine.

I make most of my income via my real day job but I do make a significant amount in royalties. So what I do is just have more withheld from my real job via the w4 - I am single with no dependents and so changed it to 0 withholdings and extra pulled out with each paycheck. That way I can "keep" 100% of my royalties that are paid out and not worry about the taxes since I've set it up to do be done automatically. If I start selling alot more or alot less then I modify how much extra is withheld each paycheck. Last year I made $15,000 in royalties and had a tax refund of $61. Pretty darn close to perfect!!

One thing about self-employment is that Incle Sam will want you to make quarterly tax deposits toward the whole so that there are no taxes due by the end of the year. That's seldom possible since authors well and truly have no idea how much they'll make. So what I do is automatically deduct 30% of each check and immediately pay it over to the IRS. That covers not only Federal but also Social Security and Medicare contributions (mustn't forget about those!)

For writing expenses, I use the following categories:

Postage/FedEx
Book copies (that I buy from retailers for promo when I run out of ARCs)
Gifts/Promo items (conference goodies, holiday gifts for agent/editor, etc)
Website maintenance
Office supplies/Equipment
Printing expense (posters, bookmarks)
Print ads (display ads in magazines, banners on websites)
Dues & Subscriptions (industry magazines, author group memberships
Professional Fees (attoney, accountant)
Meals & Entertainment (mostly at conventions)
Book conferences (Admission fees)
Travel (flights, taxis, bus passes)
Hotels & Lodging (book conventions, signing tours)

Make sure you keep your receipts for any year that you plan to profit, to offset the income. You MUST have a printed receipt with a date, time and store/provider name. If you order online, always select "Email receipt" so you can later just do a search for "Receipt" or "Confirmation" at tax time.

Literateparakeet said:

If I understand correctly, when you sell through a vender like amazon, smashwords etc, they take out taxes before they pay you...so the tax portion is like any other job.

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This is incorrect. You are wholly responsible for your own taxes when you self-publish. The retailers pay you the full amount owed, and you have to calculate your own tax owed.

My approach is simple. I fill out the Schedule C form. I take the standard amount rather than itemizing expenses.

I owe the tax on the Schedule C earnings but this is balanced by what I am owed on my salaried income.

I try to set aside 33% of every sale, whether it's from art or writing, and stuff it into a savings account. Then at tax time I either shove my various 1099 forms and lists of deductions at my accountant (if I've made enough that year to justify the expense of said accountant), or slog through the Schedule Cs on my own. Money comes out of savings to pay tax, and I get to keep the interest.

If I start earning more money I'll have to file quarterly.

DancingMaenid said:

I appreciate any input. It's been very hard for me to find information.

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Did you see the Publishing FAQ [Business of Writing] Tax records

You report writing income as 1099 income; if you make a lot of money from Amazon or publishers, they'll send you a form reporting the money you made -- the IRS gets the information too, and you report it as income.

Otherwise, you track the amounts and report them as income.

You're responsible for not only state and federal income taxes (assuming your state has income taxes) but for paying social security and medicare contributions on that income.

If you make a substantial amount of 1099 income, you'll need to pay estimated quarterly taxes.

There are some really affordable online tax applications that can make all of this much much easier.

Literateparakeet said:

If I understand correctly, when you sell through a vender like amazon, smashwords etc, they take out taxes before they pay you...so the tax portion is like any other job.

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This is absolutely not the case.

You are entirely responsible for paying taxes on monies from Amazon, or Lulu or Smashwords.

You're also responsible for paying social security and medicare in the U.S. on royalties and advances etc.

I fill out the Schedule C form. I take the standard amount rather than itemizing expenses.

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Schedule C expenses are separate and apart from the "standard deduction" (versus itemized deductions). It's actually a potential problem if you DON'T take your Schedule C expenses if you have them. (It has to do with the Earned Income Credit, which probably isn't relevant in most cases, but could be. It also means you're overstating your includible income for Social Security purposes, since self-employment is included in that calculation.)

So, the correct procedure is to take the writing-related expenses on Schedule C, for a net income to pay self-employment tax on, and to carry over to the front of the main Form 1040. Totally separate from that, and IN ADDITION to that, on page 2 of Form 1040, you can either take the "standard deduction" off your adjusted gross income (which includes the net income from writing) or the "itemized deductions," which are things like your mortgage interest, charitable contributions, medical expenses, etc., and NOT the writing-related business expenses.

In other words: the things that are deductible on Schedule C are generally NOT the same things that are deductible in the standard versus itemized deductions portion of the tax return. (There can be some overlap, where a writer is claiming a home office expense that includes some mortgage interest, but generally, they're completely different expenses.)

I'm not giving individual tax advice, just general information on the difference between Schedule C deductions and the "itemized deductions" on Form 1040.

Medievalist said:

There are some really affordable online tax applications that can make all of this much much easier.

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For the last several years I’ve used FreeTaxUSA for both federal & state taxes. From year to year they remember your data, so that each year you only need to enter what has changed. A feature I especially like is that at several points you can show the current tax info & the previous years. This gives you an additional check on how well you entered data this year.

Having not done it previous years, this last year I kept track of my expenses. This reduced my taxes a good deal. You only need to itemize if they are more than a certain amount.

The standard deduction is pretty generous. One year I had an expensive overseas trip to double-check the authenticity of a trilogy. The total came to over $7000. I did both an itemized and a standard-deduction & found it was pretty much break even which deduction I took.

As for 1099s, Amazon gives you two: for the US, and for overseas. B&N gives you one.

GinJones said:

Schedule C expenses are separate and apart from the "standard deduction" (versus itemized deductions). It's actually a potential problem if you DON'T take your Schedule C expenses if you have them.

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In my experience the standard deduction does relate to Schedule C. You have to decide which to go for and the standard amount is always massively more than my actual deductable costs.

the bunny hugger said:

In my experience the standard deduction does relate to Schedule C. You have to decide which to go for and the standard amount is always massively more than my actual deductable costs.

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We take the standard deduction (married filing jointly) and also itemize my writing business expenses on Schedule C. It's not either-or.

Schedule C deductions are business expenses--things like copies, postage, etc., directly related to earning business income.

The standard deduction replaces itemized deductions on Schedule A. Those itemized deductions would be for non-business personal things like charitable contributions, theft losses, etc., or employee expenses. Unless someone has their writing business set up so the business is a free-standing entity with one employee (themselves), any expenses connected to writing income would be deducted on Schedule C, not Schedule A.

How could one even enter a standard deduction on Schedule C? What amount would it be? Am I misunderstanding something?

No, the standard deduction decision on Schedule 1040 is EMPHATICALLY NOT RELATED to the expenses taken on Schedule C. The expenses that can be claimed for Schedule C are completely different expenses than what goes into the standard/itemized deduction on Schedule 1040 line 40. Schedule C expenses are things like advertising, paper, printing of books, advertising, research trips. The potential deductions for itemized deductions are mortgage interest, state taxes, charitable contributions and medical expenses (to the extent they exceed a certain amount). Not the same at all.

The standard deduction is pretty generous. One year I had an expensive overseas trip to double-check the authenticity of a trilogy. The total came to over $7000. I did both an itemized and a standard-deduction & found it was pretty much break even which deduction I took.

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If it was within the last three years, you should get a tax professional to look at that return to see whether it's worth amending it. If you really skipped a $7,000 deduction from your business, you may have paid 15% to 40% of that amount more in taxes than you needed to. The standard versus itemized deduction is IN ADDITION to the business expenses.

Let me give you an example. Let's say, just for simple numbers, you had $50,000 in gross income from publishing on your Schedule C, and you had $10,000 in BUSINESS-related expenses (e.g., paper, printing of books, advertising, the $7,000 research trip, etc.). Let's say you also had $50K in day-job income, but no mortgage or significant medical expenses that exceed the standard deduction.

So, the correct way to report the income would be to show the $50,000 of publishing income on your Schedule C, minus the $10,000 in business expenses, for a net business income of $40,000. You would then pay approximately 15% of that $40K as self-employment tax, or $6,000. Then, you'd take the $40K of net income, and add it to your $50K of day-job income, for a gross income of $90K. From that, you'd subtract your exemptions (approximately $4K for a single person) and your "standard deduction" (approximately $6K for a single person), for a net taxable income of $80K. You'd then pay the appropriate tax rate on that $80K (with a few other minor adjustments), minus whatever withholding/quarterlies you'd paid. Total tax, assuming a 25% tax rate (which isn't a real tax rate, but just for comparison purposes): $20K plus the $6K in self-employment, for a total of $26K.

Now, doing it WITHOUT claiming the expenses on your Schedule C, you'd get: Gross publishing income of $50K, with 15% self-employment tax = $7,500. Then the whole $50K from publishing gets added to the $50K from the day-job, for a total gross income of $100K. Subtract the same exemption ($4K) and standard deduction ($6k), and you'd have taxable income of $90K. Again, at a 25% tax rate, you'd be paying $22,500 plus the $7,500, for a total of $30K.

In other words: an extra $4K in taxes, because you didn't claim the $10k you were entitled to.

Now, the numbers are going to be different for each person, and I just used a random tax rate, because it's too complicated to use the tax tables, but no matter how you calculate it, there's got to be a savings in BOTH the self-employment tax AND the income tax if you're taking your business expenses off the top.

PLUS, the IRS actively encourages you to take all the deductions you're entitled to on Schedule C, so you're not overstating your income for Social Security and/or EIC purposes. Back when I did taxes for HR Block, there was a little pop-up screen at the end of filling in all the blanks on Schedule C, that said something like "Are you SURE you've claimed all the expenses you incurred for your business?" and if the expenses were low compared to the income, we were supposed to document in our notes why it was that there were hardly any expenses.

Anyway, Pup has it right -- the schedule C deduction is completely separate and apart from the 1040 line 40 itemized/standard deductions. If you have expenses related to your business, they MUST go in Schedule C.

I'm not giving individual tax advice, other than the suggestion that after tax season is over, you should consult with a tax professional. (Block used to offer a free or low-cost service called "second look," where they'd go over your return, and you'd only pay a nominal fee for the review, and then if it turned out that there was a mistake, you could decide whether it was worth filing an amended return and paying them for the full return. I'm sure that other tax professionals offer something similar.)

I usually recommend that small business owners hire a tax professional for at least their very first return, just so that they get the basic set-up correct. Then, if it's a simple return, they may be able to sort of copy the format for future returns. But, really, standard deductions have nothing to do with Schedule C. Itemized deductions have nothing to do with Schedule C. Those are both terms that apply to something that is in a completely different portion of the tax return, and that is determined completely without reference to whether there is a Schedule C or whether any expenses (not deductions; expenses) were claimed on Schedule C.

ETA: and if your state has an income tax, a lot of times they use the federal schedule C to determine the taxable business expense, so in addition to overpaying the federal tax by not claiming expenses, you could be overpaying the state tax.

GinJones said:

I'm not giving individual tax advice, other than the suggestion that after tax season is over, you should consult with a tax professional.

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You're getting very close to it, though, Gin, and I'm not sure that's appropriate.

I'm going to close this thread temporarily while I take advice.

I'm going to reopen this thread now, but I want everyone to be careful: we mustn't give legal or financial advice. I hope that's clear.

Quote:
Originally Posted by Literateparakeet
If I understand correctly, when you sell through a vender like amazon, smashwords etc, they take out taxes before they pay you...so the tax portion is like any other job.

shelleyo said:

This is incorrect. You are wholly responsible for your own taxes when you self-publish. The retailers pay you the full amount owed, and you have to calculate your own tax owed.

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I think I understand where the confusion here is - if you are outside of the US and earning income in the US - ie. through self publishing royalties - then Amazon will deduct
30% of your earnings to pay your US tax unless you have sent the correct paperwork to Amazon proving that you are a non-resident alien. To do that you'll need to get a ITIN - international tax identification number from the IRS - I believe you can print the form from their website.

Once Amazon etc have all of this then you will be forwarded 100%of you royalities, which you are there responsible for paying tax on in your own country. Bear in mind though that even if you are still paying 30% tax in the US, you will still have to pay tax on your earnings in your own country - so you'll essentially be taxed twice, which is why it's worth getting that sorted as quickly as possible.

There's a thread here on how to go about getting your ITIN: http://www.absolutewrite.com/forums/showthread.php?t=202216