Income, and income tax, for the short story writer

Since you haven't actually made any money yet, you can safely ask the IRS without running the risk of some surprise audit... Since I'm not in the US, I can't help with specifics, but I do know you need to look at the forms and folders for people with their own business.

I'm not an American ,but I'm sure the principles are the same.

The government don't care if you are are a writer or a coal-miner all they want is a cut of your earnings .

Your earnings are ,all the money you receive for your work minus your legitimate expenses.For a writer that could be,computer ,software ,pencils?

It's up to you to keep a records of all your earnings/expenses and be able to prove legitimacy ,keep all bills and receipts.

In England, you have inform the tax man you are self employed.

It's easy to look after your own tax affairs. But I would suggest, if you think you may be liable for tax, get in touch with your tax office . I'm sure they will be more than happy to give you all the information you will need.

Far be it from me to suggest something illegal, but...if you don't make a lot of money off writing, you might just keep mum about it. This is if you make little $5 sales or something. Once you get more (and, I think, once you start earning royalties) it's time for:

http://mzbworks.home.att.net/deathtax.htm

Crap, I'm going to have to start filing writing income on my own taxes.

(According to the link enclosed, although I'm not sure how accurate it is and would suggest you double-check, in the US "When your net earnings are $400 or more in any year, Self-Employment Tax (Schedule SE) kicks in". I don't know what this means for less than $400).

For earnings over the required level, you will have to file a 1099 form with your income tax. That's how my accountant father-in-law handles my income taxes.

In the US, self-employment income (which is what writers have) is reported on Schedule C (or C-ez), along with any expenses that may offset that income.

Technically, all income, from the very first dollar is reported. There is no minimum threshold beneath which the income need not be reported. OTOH, for the person PAYING the money, there is a minimum, and that person doesn't need to issue a 1099, which is done by the payer, not the payee, unless the payment in a single year is over that amount. So, for instance, if you're paid $200, that's beneath the threshold, so the payer doesn't have to issue a 1099, but you DO have to report it on a Schedule C. You may have expenses to offset it, but then you need to list those expenses to show that it's been offset.

The self-employment tax issue is more complicated, but it flows from the Schedule C. The self-employment tax (roughly 15%) is calculated based on the net (bottom line) of the Schedule C.

For more information, go to irs.gov and search "schedule C."

It's usually a good idea, especially the first year you file a Schedule C, to consult with a qualified professional, someone who has experience with small businesses (which is what a writer is), and get some advice, not just on the specific tax return, but also on record keeping and what is/isn't deductible.

JD, not giving individual legal advice, just general information

You'll have to file a schedule C and a schedule SE, both of which are very simple to do. You can attache these to a 1040 EZ, if you don't want to bother with a long list of itemized deductions, or, if you think it's worth your time, you can use the long form, and itemize everything from pencils to seminars. But you can do a batch deduction on the 1040 EZ, so most go this way, unless they have new, expensive equipment to deduct, the cost of which usually has to be pread over five years.

Until you start making quite a bit of money, $50,000 and above, the killer tax is social security. You have to pay the full tax, a bit more than 15% of your income, rather than the half you pay when working for someone else.

Do NOT keep mum about your sales. You may not tell anyone, but whoever paid you has to file taxes, as well, and the payment to you will be listed in their business deductions. The IRS will then check your taxes to see if you declared this income.

The IRS also does a fair number of audits based only on numbers, meaning random audits.

Youmight slip trhough in any given year, but sooner or later you will get caught, and when you do they'll check back at least seven years. You wouldn't believe the penalties on even a small cheat.

All in all, the tax system treats writers much better than most occupations, an dthere's seldom a reason for writers to gripe.

Anyway, it's really pretty simple, if you go the C/SE attached to a 1040 EZ, and once you look at the forms, you probably won't need to hire a tax preparer.

Though, in theory, you're meant to report every pound in the UK, a friend of mine approached the tax people about her internet jewellery shop a while back. They said it probably wasn't worth worrying about until she was making about £100 a year; otherwise she'd have to fill in forms both as employed and self-employed (it's like having Tea and No Tea!).

nkkingston said:

Though, in theory, you're meant to report every pound in the UK, a friend of mine approached the tax people about her internet jewellery shop a while back. They said it probably wasn't worth worrying about until she was making about £100 a year; otherwise she'd have to fill in forms both as employed and self-employed (it's like having Tea and No Tea!).

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It's roughly the same here.

But it's a dangerous game, and there are, at least here, always benefits to filing, even if you don't have to do so. The biggest benefit is that you no longer have to prove to the IRS that you're trying to earn money as a writer, which means your deductions will be allowed.

And even a writer who earns little, or nothing, especially a writer who earns little or nothing, most likely needs tose deductions.

Another thing to consider is that reporting everything on your tax return means that when you, say, go to buy a home, they can factor that in. Even if you're not making much, showing some income every year for a few years can add to how stable you look - and also make any future earnings (say you get a book deal in a couple years, and get a several thousand as an advance) look less like a fluke, and more like the culmination of hardwork that it was.

At the end of the year you can get a printout from Paypal that will show everything coming into and going out of the account. This makes it pretty easy to figure things out.

Just be careful with Paypal. Don't ever leave large amounts in there for long. They have been known to have tantrums and abscond with your money for "misusing" your account.

I work full time. I also have a home graphic design business. It is very small. Tiny. Just me and the computer. There was a year I made only 600 some dollars on the business and I think that was my best year. Another year I might have made 40 bucks.

I have someone prepare my taxes for me and we only do one form. I don't file the graphic design LLC separately. I pop in my company's Federal EIN number and claim all profits and all expenses.

My expenses are always greater than what I made, and that means I get back more money in my refund then I ever would if I DIDN'T claim the business.

There are quite a lot of expenses I can claim.

1. I keep a mileage journal. Every time I travel to see a client or visit a print shop, I write down the start mileage and end mileage. When it comes tax time I can claim all those miles.

2. Percentage of my cell phone bill. Let's say 10% of my cell calls were business related. Or maybe 50% were. I can claim that.

3. Anti-virus software.

4. I took a class on web design for 100 bucks and claimed it. I bought some design books and a graphic design magazine subscription.

5. Any and all advertising, including if you pay the obscene amount to put your business in the yellow pages, cost of web design, web hosting, business cards, flyers, etc.

6. You can subtract what you paid to have your taxes done THE YEAR BEFORE, the cost of the LLC, license, etc.

8. B/c it is a home business, you can get the sq footage of your house, the sq footage of the room in your house that best represents "your office" and a tax professional will use that info to figure out what percentage of the utility bills and internet bill you can claim for your business.

9. If I bought a laptop or photo printer, I could claim that.

This will be my first year as a published author. I'm not sure where on the form a writer claims his/ her earnings and expenses, but that's why I'll get help preparing the taxes this year, too.

One reason to most definitely report your earnings from published stories, no matter how little the amount of money is that the periodical does it's taxes too and will report as an expense "PAYING MR. SMITH FOR HIS STORY".

So the IRS will know you were paid and that you didn't report it.

It's the same in the graphic design world. A client of mine was a large church. They will claim the costs of posters and brochures paid to my company, so my company had better report getting paid that money.

I assume the expenses you can claim are much the same as what they are for my home business. Travel expense to a writer's conference? How-to books? Perhaps mailing costs for sending out manuscripts? Internet bill. Just keep your receipts and get tax prep help if you need it.

~Sasha
another American

If you own the home, be very careful about taking the home office deduction. It can come back and bite you bigtime, if you ever sell the house.

Ladyhawke_18 said:

My expenses are always greater than what I made, and that means I get back more money in my refund then I ever would if I DIDN'T claim the business.

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Be careful with this. That sounds more like a hobby from a tax point of view to me. The IRS has a test to determine business vs. hobby, and while profit isn't the only consideration, it's a big part.

Saltier is right. Barring special circumstances, you can only take a loss two out of three years. More than this, and an audit can put you in pay back the IRS mode, often with penalties, which is never fun.

That was good reading, Saltier. Of course I had to read it twice to understand it. =o)

This is why I have my taxes prepared by a professional. There are so many details to know and I simply don't know them all.

A few years ago I took a Writing and Taxes class by Diane O'Brien Kelly which was very comprehensive and Diane answered questions at the end of each "lesson". I also signed up for her news letter so I get info about tax law changes too.

I believe that the US cut off is over $400 made a year before you are required to pay taxes on it. After that it gets somewhat complicated, so keep records and receipts on everything you buy for your writing (like ink, books for research, etc.), and I also chose to keep my rejections too so that I can prove that I am actually working toward a career, it's just not a fast process.