We all know that taxes are inevitable. As a newly self-published author, you’re going to encounter taxes sooner or later, so it is essential that you get to know the basics as you begin your new venture.
In this article, we will be exploring some key concepts about taxes that you should understand. Do note, however, that this is not a substitute for legal advice; should you have a very specific problem with taxes, you should consult an attorney or tax professional.
Firstly, if you do make a profit—whether it’s from your paperbacks, hardcovers, or eBooks—then you must file Self-Employment taxes. In the U.S., it is 15.3% of your self-employed net earnings—also known as profit—as long as that profit exceeds $400. This includes your Social Security and Medicare taxes.
For example, let’s say you made about $10,000 in sales, but you had $7,000 in expenses, paying editors, freelancers, and graphic designers. That leaves you with a $3,000 profit, and 15.3% of this would be $459.
But what if you have no profits and/or incurred losses? Losses are very likely during your first year of being a self-published author, but there is no need to fear.
Let’s go back to the earlier example. Your expenses amounted to $7,000, but let’s say you only made $4,000 in sales. When year-end comes, you use this to offset $4,000 of your expenses. So, what will you do about the remaining $3,000 of loss? Well, you can offset it with another income from another source, such as a day job or income carried forward to the next year.
This is allowed because the U.S. tax code allows you to deduct your losses from other sources of income. However, you must treat your writing as a form of doing business with the aim of making a profit eventually. After all, this system is set up to encourage entrepreneurship. (Your government wants you to succeed as much as possible because more income for you means more taxes for them.)
Therefore, treat your self-publishing endeavor as a business. Employ careful planning and goal mapping, including future expenses and income, as a normal business would. The Internal Revenue Service (IRS) will consider your writing a hobby and not a business unless you generate a net profit in at least three of the last five years. Being classified as a hobby won’t let you offset your losses through other income sources. So, it’s in your best interest to treat your authorship as an entrepreneurial endeavor.
In the spirit of entrepreneurship, you must promote yourself as a self-published author. Utilize various social media platforms such as Facebook, Instagram, Twitter, or LinkedIn. You can even set up your own website and visit schools, libraries, and bookshops to promote your books.
You can also get your Business Name Statement or Doing Business As (DBA), under which you can conduct your business processes separately from your real name. Think of it like a pen name but for your business. Be sure to look up how to register your DBA in your state/county/city. There are lots of online resources you can take advantage of, and the U.S. Small Business Administration offers free business counseling.
When you register your business name, you will be issued an Employer ID Number (EIN) or federal tax identification number. This EIN can then be used when you apply for a resale certificate. This ensures that you are a real business entity that purchases or resells products. This is especially useful since you are planning to sell your books. You will also need to research your city’s or state’s local tax and business rules and requirements that may apply to you, such as business licenses and individual income tax returns.
Another important step is to make a distinction between your personal and business finances. Use separate bank accounts if possible. This allows you to keep track of your income and expenses more accurately.
When it comes time to file taxes, report your income and expenses in a Schedule C along with your 1040 form. If the taxes you pay on your income exceed $1,000, then paying quarterly estimated taxes may be necessary. In this case, hiring a tax professional is a worthwhile investment at this level.
Lastly, keeping track of all your business records can save you a ton of headaches and IRS troubles, especially when it’s tax season. Get an accountant or integrate an accounting software for your business to keep track of where the money flows every day.
Remember to keep all your receipts in whatever form—digital or physical. Hang on to financial records, such as bank statements, sales tax returns, W-9s and 1099s, sales slips for direct sales, correspondence with freelancers, PayPal summaries, royalty statements, and other relevant records. Remember to document everything properly to avoid being questioned by the IRS later on.
We know this might seem overwhelming at first. This is the technical and unromantic side of being an author, but it’s very much worth it in the end! By knowing and following this advice, you ensure that your books do not just end up a hobby that leeches off your wallet, but instead an endeavor that might one day replace your day job!
By knowing how to do your taxes properly and setting your writing up as an entrepreneurial venture, you make sure your books make a valuable return and that you are rewarded for your hard work.
Remember to consult your local attorney and accounting firm should you have specific queries, as this is not a substitute for legal advice.