With Great Royalties Come Great Tax Liabilities

Laer Carroll

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(NOTE: I am not giving legal or financial advice below but relating my experiences.)

Maybe my experience with filing my income taxes will help someone else. Most specifically I found that my sister's advice helped considerably. She's a successful business woman and told me I had missed the boat last year in not exploring the tax writeoffs and deductions available to free-lance writers.

My problems began last year. Mid-2018 I published a book which ignored several rules/suggestions I thought universal. I thought it would sink without a trace, but I loved writing it so much and it came to me so easily that I didn't care. To my surprise it took off like a (model) rocket, making so much money I could buy a new car to replace my decrepit 2000 Toyota with a Lexus. (A luxury version of the Toyota sedan I loved.) Then came tax time & I found that I owed $3000+ dollars fed tax and $400+ state tax. Ouch! But I paid it.

Last year I put out a sequel to the first book. Again the rocket. Plus the second book's sales had stimulated a new lease on life on the first book. And on my previous six books. Then came tax time this spring. I owed $10,000+ and $2000+. Ouch! Ouch!

Time to take my sister's advice. I switched tax prep software to the cheapest of several HRBlock versions but with more options. No glory. Same results. I tried a TurboTax version with even more options. Hurray! More deductions meant I owed $7000+ and $1200+.

I switched to tax prep software FreeTaxUSA to double-check the results of TurboTax. And in the process of filling it out I found that I had missed some deductions. And that I'd reported the royalties with the wrong form. I should have used Section C not Section E. The latter also has a royalties line but that referred (IRS documents said) to a different kind of royalties than literary. In the end I wound up having to pay $3600 fed tax and got a $60 state refund.

I take away from these experiences two lessons. One, I should have listened to my sister, the business person that I AM NOT. Two, that maybe I should have gone to a tax pro in the first place. Just because I can help figure out how to launch a satellite into orbit doesn't mean I can figure out how to launch a complicated tax return successfully.

Well, I did. But it took me several FULL days of calculation and research and recalculation and more research. I could have (as I have in the past) written several chapters of a book. I've gotten pretty expert at writing. Maybe I should have spent my time at that instead of DIY effort at something I was NOT expert at.

Next year I still will do my own taxes. But this year already I've published the last book of my well-performing trilogy. It seems as if (though it is still VERY early) it will do even better than the previous two books. I've also got three more books that (Corona viruses permitting) I'll publish, one next week. Maybe next year I will let a pro do my taxes after I've tried my hand at doing so.

(NOTE: The problems I had with HRBlock and TurboTax were my fault, not that of the software. If I had used them properly I believe that I would have gotten the same results as with FreeTaxUSA.)
 

lizmonster

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I hired a tax pro as soon as I sold my first book. I could probably do it myself (I used to do our taxes, and I kind of enjoy it), but it's one less thing for us to worry about, and that alone is worth the money.

I set aside 50% of my money for taxes. Self-employment in the US is expensive.
 

AW Admin

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I hired a tax pro as soon as I sold my first book. I could probably do it myself (I used to do our taxes, and I kind of enjoy it), but it's one less thing for us to worry about, and that alone is worth the money.

I set aside 50% of my money for taxes. Self-employment in the US is expensive.

lizmonster is absolutely right.

Hire a professional tax preparer/accountant who knows something about writers and 1099 income.

And save your receipts. Paper, printing ink, some computer hardware and software, some phone bills, some travel, some postage, and the fees you pay your accountant, are all legitimate deductions.
 

Helix

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Supporting lizmonster and AW Admin -- a tax professional is the way to go. I've had an accountant for decades, and she has been brilliant. Of course, the one year I decided to do my own tax, I got audited. I'd kept all the receipts, so it was a pretty straightforward process, but I had made a mistake -- I'd undercounted the outgoings, so I was entitled to a bigger refund from the ATO. What I got was a letter saying they wouldn't prosecute me this time. I was outraged.

So hire a professional. They'll save you money. And you can save your outrage for other things.
 

stephenf

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I live in the UK, so the tax laws are possibly different.
I have been self employed most of my life. I keep two books, money in and money out . I have two big folders that house all of my proof of money in and money out. You do need to know what is a valid expense . I don't push things too hard, and probably could pay a bit less tax if I did.
So money in minus money out is your income . You can guess how much you will need to hand over , it wise to keep it in the bank to pay the tax man off.
I never had a problem with the tax man ,and I sleep well at night .
 
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Introversion

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Laer, congrats on having the good kind of money problems. :hooray:
 

WeaselFire

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I get high taxes when I earn high amounts of money. Not really a revelation there.

But, did you deduct the room you write in (mortgage, utilities, maintenance...)? Mileage/travel expenses to research sites and conferences? Your internet access? Computer? Postage? Bank fees? File cabinet for your expenses and tax documents?

You will miss a lot of tax deductions if you don't hire a competent accountant. You will pay more taxes if you don't move to a state without income taxes.

Jeff
 

Jason

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In general, if your profession is A, as soon as you are turning a sizable profit margin - it's always better to farm out B, C, D, and E.

Are you a photographer? Hire out the advertising, marketing, website maintenance, social media, accounting, finance, etc.

Are you a sculptor? Hire out the materials, accounts payable/accounts receivable, finance, website maintenance, advertising, marketing, social media, etc.

Are you an actor/actress? Hire an agent, accountant, social media specialist, etc.

Are you a writer? Hire out an agent, publisher, accountant, social media liaison, website administrator, etc.?

How could anyone imagine that being a writer is fundamentally different from any other creative self-employed profession? If it's not your main job, then you ought not to do it.

Hire it out!

That's ultimately what will make it a viable business...
 

WeaselFire

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Actually, it's that everything in the UK is bundled into one big tax bill. You don't really get to deduct much and you end up paying a higher percentage of your income than in the US. But your taxes, theoretically at least, pay for more in the UK than the US. They cover your health care, most of your social benefits and so on.

But... Filling out your taxes is really the easy part. Figuring out how much you actually made is where the pro comes in.

Jeff
 

stephenf

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You will miss a lot of tax deductions if you don't hire a competent accountant. You will pay more taxes if you don't move to a state without income taxes.

Jeff
If you have a large and complex income you might be right . I only have a relatively small income , so I'm not keen on parting with my money for things I can do myself . Some people struggle to read a timetable, so the prospect of DIY accountancy fills them with dread . Personally I don't think it is difficult, you just need to apply yourself . Some people actuly begrudge paying tax, and will pay to try avoiding it . Personally I believe it is an attitude of a parasite . Unfortunately some very large corporations pay very little tax and are guilty of being greedy parasites , but that is a different story .
 
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