A question for published novelists regarding taxes.

It depends how much money you get as an advance, and what tax bracket you already are in. But yes, you do pay taxes (and wait till you have to deal with foreign sales, and dual taxation forms etc). And yes office supplies can be write-offs. In fact you really should talk to someone about that, because there are things you would never think would be write-offs that are. For example, I work from home, so a portion of my rent is a write-off.

For example, I work from home, so a portion of my rent is a write-off.

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Plus a portion of electricity, gas, heating, telephone ( add up the calls to publisher / agent etc.) any new PC bits, stamps, travel expenses involved in research / meetings, books bought for research etc. Basically anything you need to run your business ( which is what it is) can be tax deductable. ( UK laws, USA might be different but not much I don't think).

Find yourself a good local book keeper, or friendly accountant. A good one can save you more than you pay them.

edit: I'm not published but I do do my husbands small business accounts.

I took a portion of my new computer, office supplies, office space, internet access - all kinds of stuff. Talk to an accountant (my brother's a CPA - which totally rocks at this time of the year ) - preferably a public one, since they are usually real up-to-date on tax law changes. You might be surprised at what all you can take.

Keep in mind I am NOT an accountant or tax expert--but this is what I've done since 1986 when I started getting paid for my writing:

tomothecat said:

Do you pay taxes on your writing advances?

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Yes. I fill out a Schedule C and pay the Self-employment tax, which you still have to fill out even if you have a day job. Writing has been considered "Miscellaneous Income" in the past.

Are office supplies (paper, ink, envelopes) considered a tax write-off?

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Yes, if they are for your business. You will enter those costs on the Schedule C form--SAVE YOUR RECEIPTS!!!!!! ALL OF THEM!!!!--and deduct them.

I deduct the percentage of space in my home that is my office, along with the percentage of utilities that apply, along with long distance charges, reference books & trade publications--anything specifically to do with my writing business.

Or do you just get to collect your advance, as well as your portion from store sales, for yourself after your agents' commision?

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There's no free lunch, sorry. Uncle Sam wants his cut of your earnings.

Your publishers and/or agent will send you a "Miscellaneous Income" form in January, which will have the total of all money paid to you for that year. The amount will go on the appropriate IRS Schedule forms. The miscl. income form will include all your royalties. If the total amount is zero, you will enter zero on your return. You will include a copy of the form when you send in your return.

Note that book royalties are different from gas royalties, should you own a gas or oil well.

My advice? Put at least half your advance in a safe place and forget you have it until April 15th.

Or make quarterly payments to the IRS--I make them electronically direct from my bank to them four times a year. My estimates are always short, but it takes the edge off. If I don't have enough to pay my taxes, I arrange a payment schedule. So long as I pay X amount every month + interest, I have been okay with them.

Your publisher/agent doesn't make the automatic deductions you get from a regular "day job" employer. You will owe taxes on your earnings as a writer. You will pay self-employment taxes as a writer.

Many writers have accountants. I can't afford one and learned to do my own taxes.

I LOVE Turbo Tax. I got the one for small businesses and it hauls out deductions I didn't know about. Since I bought a house it figures out that extra complication too. Now instead of a week to do my taxes it only takes a couple hours.

BUT--- you HAVE to have your receipts for all your deductions. I total them up each month and keep them in a spread sheet file. The physical receipts go into a box for that year. When I'm done for the year I seal the box and put it in a safe place with all the other tax boxes.

The IRS doesn't care how you make your money. Just give them their cut and they'll be happy.

Two thing to add to what's already been said.

First, it's better to think of it as "reporting the income" as opposed to "paying tax on the income," because, depending on your financial situation, you may not pay tax on the income, but you need to report it on Schedule C. And then, as others have said, take your deductions, and pay the tax, if any, on the net. (Although don't forget self-employment tax, which I always do forget about, so it throws off my expectations at tax time.) Also, most writers report income/expenses on a "cash basis" as opposed to an "accrued basis," so the income and expenses are reported as they are actually received/spent by the writer, rather than when they're owed/incurred. In other words, until you actually receive the advance, even if there's a promise to pay it (and many publishers now dole it out in bits: part on signing, part on receipt/approval of the manuscript and part on publication, or some variation on that), there's no income to report.

Second, make sure your tax guy, friend or not, has experience representing small businesses (which is what writers are, in the IRS's terms), and not just experience doing taxes for non-self-employed individuals or corporations. I've seen HUGE amounts of bad advice out there, purportedly coming from tax guys, and it's obvious they know nothing about Schedule Cs.

JD, not giving individual advice, just general information

Also --

Many, if not most agents are now sending out a 1099 which reflects the gross amount, before agent commission, not the net amount. So if you had an advance of 10K, you would have received only 8.5K from the agent, who would have deducted commission before sending you a check.

But the 1099 will show !0K of income, on which you must pay taxes. What you do is to deduct the 1500 agent commission as a business expense.

But if your 1099 reflects the after-commission amount, 8.5K, you obviously can't deduct the commission -- you have to pay on the entire amount listed.

In Australia you have to be very careful if you claim a percentage of your home (which you own - not renting) as a home office. When you sell your house you'll have to pay that percentage as Capital Gains Tax.

In Australia there are a number of ways you can claim travel costs (driving to book signings etc. I claimed a ten week trip to England) Each requires different (and strict) record keeping.

And there is a difference between royalties (which authors receive) and income.

And, again in Australia, if you receive royalties for your work and even if you don't consider it is an income source, just a hobby, you have to pay tax. I found that tax ruling only yesterday.

If you are embarrassed by recieving huge amounts of money from royalties, it would be better to let an accountant handle your tax for you.

A good accountant will save you money in the long run. And yes, save receipts for everything.

I just wanted to pop in here and say "Thank you" to the OP for posting this thread, as well as to the people who have responded, for their information. I've been wondering about this stuff for years, and this thread will be of immense help when I finally do get my first book published ... or even perhaps one of my short stories.

I appreciate you all very much. Thanks again!

Wow, thanks for the info, all. I have been wondering about this stuff for quite a while as well. I'll definitely look into some of this stuff.

-giusti

You're welcome!

All this stuff is vital to writers who may not be aware that writing IS a small business and not just about getting into a bookstore and doing signings!

I learned my basics from Robert Asprin--who used to be a bean counter for IBM!

Yes, thanks for posting!

This gives me a little nudge to get in touch with the guy who does our taxes. I know he is pretty savvy about the tax situation for those who are self-employed. (I'm in independent practice as a psychologist).

But the writing is more complicated. I just made my first-ever money as a writer in January. (Half of my very modest book advance.) No income to show for 2007--but certainly many expenses.

So for this past year, I should probably think of the writing as a start-up business, where you are allowed/expected to show a loss for the first year or two.

Better contact that tax guy!

Sean D. Schaffer said:

this thread will be of immense help when I finally do get my first book published ...

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Again, ask an accountant. Some expenditure (like my trip to England) happened before the book was published and I was still able to claim.

Mumut said:

Again, ask an accountant. Some expenditure (like my trip to England) happened before the book was published and I was still able to claim.

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Cool. I appreciate the suggestion, and I will do so when the time comes. Thanks.

In the UK even my new glasses--variofocals and pretty expensive, and I need them for computer work-- are tax deductable.

As well as TurboTax (a wonderful program), get an accounting program like Quicken. Set up a separate bank account and minimize your cash expenditures (use a check or credit card -- checks are better). Record your purchases as they happen. It will make this time of year a lot easier.

Talk to an accountant and read some books on tax planning. There are distinct advantages to getting that big check in January instead of December. Further, your state taxation rules might provide further complications. For example, in New Hampshire, if I earn more than $50,000 (net) per year other than from interest and dividends (subject to the interest and dividends tax, not an income tax, but sure feels like it), I am subject to the Business Profits Tax (again, it's not a income tax, but sure feels like it). As a result, some years I've negotiated payments over two years to keep me under the $50,000.

Tax planning is complicated, but it can save you a lot of money. Or you can buy the Navy a destroyer. And some expenses, like Mumut's trip to England, can be deductible before you receive the big check. And expenses to your writing business may be deductible against other income.

As I said, find an accountant. And as Jan says, one who specializes in small businesses. Read some books.

Best of luck,

Jim Clark-Dawe

The thing about receipts... If it's not immediately completely obvious what the items on the receipt are for, make notes on the back. If you're ever audited or if your tax accountant asks, you may need to provide more detailed information later.

About taxes and what's deductible and what isn't - it varies from country to country, so your best bet is ALWAYS to consult a tax accountant who knows small business tax accounting, as previously stated. And it cannot be stated enough that a good tax accountant familiar with small business accounting will be worth paying.

Did you sign the contract for your sale in 2007 and get the check in '08?

If so, then you can take those deductions on your '07 return.