Author Income?

Hi Mike. I'm not an American so I don't know how it's taxed in your neck of the woods. It's earned income here in the Great White North (which, at least where I am, is anything but - currently enduring Day 8 of 85-92 F weather with a humidex well over 100.)

I'm going to port this thread over to the Novel Writing board. If you don't get a definitive answer there, we'll try Nonfiction or Freelance in a day or so.

mreddin said:

This is a silly question but I'm curious.

Does an author have to pay capital gains on an advance or is it considered "earned income"? I'm just curious how hard the tax hit is. (I am presuming authors are concerned self employeed.)

Mike

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You don't pay capital gains on book sales. The advance, in full, is "an advance against future sales," so for tax purposes it's the same as a book sale.

It's considered income, and expenses of writing (disposable office supplies, postage, promotional goodies, conventions, etc.) may be applied to the income before taxes are owed. However, you WILL owe taxes, so it's wise to consider putting aside a chunk when it arrives, because the Feds are going to want you to begin making quarterly tax deposits as you start to get more checks. My accountant recommended that on writing income of $5,000 in a quarter, I should make a tax deposit of $1,000 to be safe. The first year, you can probably get away with paying at the end, but remember that the publishing house is reporting to them, so they'll come after you eventually if you try that for too many years!

(Capital gains, BTW, is tax on "profit" from one value to another, generally owed on real estate or other tangible items. So, a house sale of $100,000 when it originally cost $50,000 will make you owe tax on the other $50,000 -- plus or minus some extra rules. Just an example...)

An advance on royalties is a royalty payment. For most U.S. taxpayers, the place to report it is Schedule E. Depending on one's circumstances, however, it may have to go on Schedule C, and you then have to pay self-employment tax on it as well as income tax. The IRS has issued rulings to determine when royalties are Sch. C income and when they're Sch. E income.

mreddin said:

My thought was that a published book might be considered an asset.... If that asset gets sold, it would be a capital gain....
A bonus question: Would monies paid to an editor during the development process (but before the sale) or any marketing done subsequent to the sale serve as a write off against those earnings?

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Asset...capital gain...oh, no, the IRS doesn't think that way at all about writing.

You can deduct expenses on Sch. C; not sure about Sch. E, which I haven't used. Expenses also include office supplies, postage, and so forth. (Keep records.) If you use a room in your home for nothing but business purposes, you can deduct a fraction of rent or depreciation.

There's a lot more detail. It'd be a good idea to get the applicable tax forms and instructions before you need them.

http://www.irs.gov

To go off at a slight tangent here, you might be interested in the following. It does make me wonder why so many people want to be writers!

I have pulled the following statistics out from a report which was commissioned by the UK-based Society of Authors in 2000. They make pretty depressing reading.


Sales of more than 50,000 paperbacks a year should yield an income of about £20,000.

For most authors, average UK sales per title are in the region of 3,000 to
8,000 in paperback and 1,000 in hardback, which equates to an income of
between £2,500 and £5,000 per book.

75% of authors earned under £20,000 in 1999. The average annual income was £16,000, while 5% (82) of authors polled earned more than £75,000. Only 3% (51) earned over £100,000.

Although the national average wage was £20,919 when the report was compiled, 61% of the writers polled earned under £10,000. 46% earned under £5,000, of whom 123 said that writing was their main source of income, while 14 had no other source of income at all.

One author who earned between £20,000 and £30,000 commented, "Although I earn a living wage, I have published more than 60 books, half of which are in print, some of which have sold more than 200,000 copies worldwide. I am considered highly successful. But I don't think my earnings reflect this."

The Society of Authors estimates that the number of full-time writers
supporting families by their writing is very small-probably nearer 1,000
than 2,000.

The level of advances is dropping. The majority of advances are under
£5,000. Only 51% of writers said that more than half their works earned out
their advances.

Of those who had given up salaried employment to write, only 32% were better off.

Assets

Mike: First, let me express my congratulations on the placement of your work.

Your book and any copyrights you own are indeed assets and are part of your estate. You have not technically sold this asset, because you own the copyright. You have only sold the right to publish it. By way of receiving monies for that right to publish, you have converted an asset of no calculable worth into something of tangible value. The publisher will deduct whatever it has advanced you from your first royalty check, which is accompanied by a statement. As with any earned income, right now, the IRS is only concerned about getting the taxes they feel you owe based on what you earn annually. After you die, rest assured they will come back for the estate or inheritance taxes they feel your heirs owe.

As far as editing services, those fall under professional services. As long as you have receipts or invoices to back them up, you can itemize them. If your writing deductions far outweigh your income, you might not pay any taxes. Personally, I would just have a CPA handle the tax preparation for you. Relax, celebrate those royalties when they arrive, and keep on writing.

also, be careful about deducting a home office. If you sell that home, it can come back to bite you in the butt. You'd have to pay a lot of money. I forget the technical term for it, but I was warned about it years ago. My dad retired from the IRS after thirty years.

And you can deduct all that stuff, like office supplies, but if you show a loss three out of five years, they call it a hobby.

Home office

Christine N. said:

also, be careful about deducting a home office. If you sell that home, it can come back to bite you in the butt. You'd have to pay a lot of money. I forget the technical term for it, but I was warned about it years ago. My dad retired from the IRS after thirty years.

And you can deduct all that stuff, like office supplies, but if you show a loss three out of five years, they call it a hobby.

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There is often a tax burden when taking the home office deduction and then selling the home, but it's usually negligible, does not always apply, and even when you do have to pay, it will usually be only a fraction as much as you've saved by taking the deduction.

But like any other deduction, you should only take it if you need it. If your income situation is such that you do need the home office deduction, however, taking it is a win/win situation. I've never seen anyone come out behind by taking the home office deduction, and they usually come out far ahead, even when paying the extra tax upon selling the home.

I've also rented/leased space for an office, and it's a great way to go, if you can afford it.

Generally speaking, however, it's neither wise nor necessary to claim any such deduction until after you're making a reasonable profit from your writing.

Tax Guesstimates.

A book advance is considered earned income, or more appropriately, contract work. You're given a 1099 at the end of the year and you file that with your regular W-2 and such.

As a 'contractor' or 1099 employee, you are responsible for these percentages:

Social Security/OASDI : 12.4% of your 1099 income (up to 90k this year).
Medicare/Health Insurance: 2.9% of your 1099 income.

Federal is based on a sliding scale dependant on how much you earn, and what you are claiming. I advise you to check out the free IRS publications on the web, my favorite being Publication 15, or 'Circular E'. Here's a link:

http://www.irs.gov/pub/irs-pdf/p15_04.pdf

The page I'm looking at that you would find handy is page 36, the Annual Table of tax income. You select your withholding (Single or Married) and what bracket your income falls under. For example if you were single and had NO dependents, and your advance fell into the 7k range, you would calculate: $7000.00 - $2650.00 (which the IRS generously gives you as a tax break) = $4350.00 taxable. Since the tax bracket for that particular range is 10%, you'd be paying $435.00 on your advance.

All told, on a 7k advance with NO other income considered (say you were unemployed) you would pay a total of $1506.00 in income taxes ($868 for SS, $203 Med, $435 Federal tax).

Of course, if you make more wages throughout the year (and who doesn't?) that will affect factors as well. Same with dependents -- if you have 10 of the buggers in there, that's going to reduce your amount of income that's taxable since you are supporting others.

If you GET to this point, I suggest you hire a CPA (or automatically save 40% to be safe). Paying an accountant for an hour's worth of work would do a lot to save you from the grief of realizing too late how much you REALLY owe at the end of the year.


Jessica (who does business taxes for a living, but is not a CPA, so recommends if you have questions, ask one of those. )

Lots of conflicting information here. Check with your CPA.


(I'd think "advance" is a royalty payment (in advance of sales) and would be considered "royalty" income)

When I started writing, my CPA took a number of advanced courses on entertainment accounting so he could continue to do our taxes. So, I trust his judgment. Here's what happened last year:

Writing income was categorized as a "business", and the income and expenses appeared on Schedule C, "Profit or Loss from Business."

Income is Gross Income of a business, (rather than Royalties which appears on Item 17 on the main form 1040, under "Rental real estate, royalties, partnerships, S corporations, trusts, etc.", which would be listed on Schedule E. According to Schedule E, Royalties are things like gas/oil leases and such.)

Expenses on Schedule C are broken down into sections like Advertising, Commissions, Car/truck expense, depreciation, contract labor, insurance (not health), legal and professional services and office expense.)

My agent fell under "commissions"
My copies, ARCs for review, website maintenance, bookmarks and postcards fell under "advertising"
Postage, dues and subscriptions, and office supplies fell under "Office expense"
My entertainment attorney fell under "Professional Services" and I presume that either this is where a professional editor would show up, or as contract labor. Definitely a question for the CPA.
And my convention appearances and booksigning expenses showed up under "Travel, meals and entertainment."

I paid income tax, social security tax, (no state income tax in Texas, but probably that would be an issue elsewhere), medicare contribution and self-employment tax. Of course, last year I posted a negative number due to my promotion expense, but I'm planning that this year the numbers will reverse!

Hope that helps!

Just a couple of side notes:

(1) An "advance" is merely a payment before performance is due. As such, it is strictly earned income, to be reported on Schedule C (not Schedule E, nor on the line labelled "royalties" on Form 1040)—even if it is an "advance against unearned royalties."

(2) Unfortunately, some publishers—in fact, most publishers—tend to report royalties on form 1099 as "royalties." They're not always royalties; if any substantive work was done on that particular property during the tax year, they're not royalties. (Technically, for tax purposes, royalties are passive income. Improving marketability, such as an author tour, still passive; but actually changing the nature of the underlying work, such as finishing your proofreading, is active, and therefore should be treated as earned income.) This matters because royalties are not subject to self-employment tax, but earned income on Schedule C is. The saving grace is that individual taxpayers may rely on the 1099-MISC's characterization of income as "royalties," so there wouldn't be any penalty or interest due if you're later audited by the IRS and the auditor knows publishing industry accounting. Since nobody really knows publishing industry accounting…

(3) As a general rule, those who claim that the home-office deduction will kill you at sale time are being alarmist. The only exception is a large home office in a house that greatly appreciates (a factor of ten or more) that is not replaced within three years after sale by another house of comparable value. It's a case of balancing the time-value of deductions now against the speculative differences later while simultaneously ignoring the once-in-a-lifetime exclusion on capital gains. Remember, once per lifetime each person may exclude a large capital gain from sale of his/her primary personal residence; right now, that number is well over $100,000, and is only likely to go up. Further, that capital gain is calculated not on the gross profit on the house sale, but on the net profit after replacing the house within three years.

Perhaps an example makes this clearer. Purchase house X for $50,000 in 1988. Start taking home-office deductions in 2001, averaging $1,100 per year, until the house is sold for $190,000 in 2006. In 2007, replace it with house Y costing $160,000. The gross profit is (190-50)=$140,000. Total home-office deductions were $5,500. Adding those back in, we're looking at a calculated profit of $145,500. Since that's less than $160,000, no taxes will be due; all that will happen is that the basis in the new house will be adjusted downward, so that for tax purposes it will be treated as having a basis of (160-5.5)=$154,500.

Irysangel said:

Social Security/OASDI : 12.4% of your 1099 income (up to 90k this year).
Medicare/Health Insurance: 2.9% of your 1099 income.

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Yep, but you may as well count it as 15.3 because up to that 90K, you pay them together. After 90K, you just pay the 2.9%

As a self-employed person, however, you do get to subtract half the SS tax you pay from your net earnings, so it balances out reasonably well.

income

Cathy C said:

When I started writing, my CPA took a number of advanced courses on entertainment accounting so he could continue to do our taxes. So, I trust his judgment. Here's what happened last year:

Writing income was categorized as a "business", and the income and expenses appeared on Schedule C, "Profit or Loss from Business."

Income is Gross Income of a business, (rather than Royalties which appears on Item 17 on the main form 1040, under "Rental real estate, royalties, partnerships, S corporations, trusts, etc.", which would be listed on Schedule E. According to Schedule E, Royalties are things like gas/oil leases and such.)

Expenses on Schedule C are broken down into sections like Advertising, Commissions, Car/truck expense, depreciation, contract labor, insurance (not health), legal and professional services and office expense.)

My agent fell under "commissions"
My copies, ARCs for review, website maintenance, bookmarks and postcards fell under "advertising"
Postage, dues and subscriptions, and office supplies fell under "Office expense"
My entertainment attorney fell under "Professional Services" and I presume that either this is where a professional editor would show up, or as contract labor. Definitely a question for the CPA.
And my convention appearances and booksigning expenses showed up under "Travel, meals and entertainment."

I paid income tax, social security tax, (no state income tax in Texas, but probably that would be an issue elsewhere), medicare contribution and self-employment tax. Of course, last year I posted a negative number due to my promotion expense, but I'm planning that this year the numbers will reverse!

Hope that helps!

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I've found most of the categories are self-explanatory. I've also found it's usually both better and cheaper to let the IRS answer questions such as where and how to deduct the expenses of a professional editor. Writers are sometimes too quick to pay for a CPA when they can get the same information free from the IRS with a simple phone call.

Jaws said:

J

(2) Unfortunately, some publishers—in fact, most publishers—tend to report royalties on form 1099 as "royalties." They're not always royalties; if any substantive work was done on that particular property during the tax year, they're not royalties. (Technically, for tax purposes, royalties are passive income. Improving marketability, such as an author tour, still passive; but actually changing the nature of the underlying work, such as finishing your proofreading, is active, and therefore should be treated as earned income.) This matters because royalties are not subject to self-employment tax, but earned income on Schedule C is.

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I'm not sure what you're saying here. The IRS tells me I have to report my book royalties as earned income, and I have to pay self-employment tax on every penny of it, or face a severe penalty. I don't have to do this, for example, with such things as oil lease royalties, but I do with book royalties.

Jamesaritchie said:

...you do get to subtract half the SS tax you pay from your net earnings, so it balances out reasonably well.

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This deduction doesn't achieve a balance as far as I'm concerned. All it gets you is exemption of 7.65 percent of your self-employment income from federal income tax, whatever the percentage is in your bracket. No way do you get your money back. People in higher brackets will benefit more, as with so many other features of the U.S. tax system.

Tax

reph said:

This deduction doesn't achieve a balance as far as I'm concerned. All it gets you is exemption of 7.65 percent of your self-employment income from federal income tax, whatever the percentage is in your bracket. No way do you get your money back. People in higher brackets will benefit more, as with so many other features of the U.S. tax system.

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No, you don't get your money back, but it does help even things out with those who aren't self-employed.

I actually find the self-employment tax very fair, once you pass the 90K mark.

A further, and nontechnical, note on royalties: When the IRS says that all royalties on intellectual property are supposed to be reported as "earned income," it is overstating its case and taking advantage of the "nonacquiescence doctrine." Basically, that doctrine allows certain agencies to ignore adverse decisions outside of their circuits; in this case, the IRS chooses to ignore a decision in the 1st Circuit that just hasn't arisen elsewhere. Thus, if you don't live in Maine, New Hampshire, Massachusetts, or Puerto Rico, the IRS will flat-out tell you that they're always earned income; if you do live in those states, the IRS is supposed to tell you that sometimes they're royalties and sometimes they're earned income, although it seems to actually claim that "recent changes in IRS regulations" change the result to what it wants: A larger tax base and more income subject to self-employment tax.

My real point was that one cannot necessarily rely on the box in which something appears on the 1099-MISC to accurately characterize the income in question… but that one cannot be penalized for doing so. I didn't mean to get quite this involved in tax policy!

Earned income

Jaws said:

A further, and nontechnical, note on royalties: When the IRS says that all royalties on intellectual property are supposed to be reported as "earned income," it is overstating its case and taking advantage of the "nonacquiescence doctrine." Basically, that doctrine allows certain agencies to ignore adverse decisions outside of their circuits; in this case, the IRS chooses to ignore a decision in the 1st Circuit that just hasn't arisen elsewhere. Thus, if you don't live in Maine, New Hampshire, Massachusetts, or Puerto Rico, the IRS will flat-out tell you that they're always earned income; if you do live in those states, the IRS is supposed to tell you that sometimes they're royalties and sometimes they're earned income, although it seems to actually claim that "recent changes in IRS regulations" change the result to what it wants: A larger tax base and more income subject to self-employment tax.

My real point was that one cannot necessarily rely on the box in which something appears on the 1099-MISC to accurately characterize the income in question… but that one cannot be penalized for doing so. I didn't mean to get quite this involved in tax policy!

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No, but you can rely on the IRS coming after you hot and heavy and in a very nasty and expensive manner when they disagree with you. Even if you're right, it can cost a fortune to defend yourself.

And, honestly, I think royalties should be counted as earned income. To my mind, that's exactly what it is. I have no gripe at all with the IRS wanting royalties counted this way.

Jamesaritchie said:

No, but you can rely on the IRS coming after you hot and heavy and in a very nasty and expensive manner when they disagree with you. Even if you're right, it can cost a fortune to defend yourself.

And, honestly, I think royalties should be counted as earned income. To my mind, that's exactly what it is. I have no gripe at all with the IRS wanting royalties counted this way.

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Residuals from television commericals and programs are treated by actors as earned income. I really can't see how book royalties are much different. Would that my royalties were large enough that this was a huge problem