A Taxing Situation

[February 2011] Since I just finished doing my taxes, and I’ve seen more than the usual number of questions from writers who are wondering about how to handle writing income and what can be legitimately deducted, I thought I would dredge up and revamp my essay on the subject from five years ago.

I have a day job that provides me with a W-2 form. It’s neat and tidy. Fill out the forms, enter the correct values, brush my hands together and it’s all done. Writing is my second job, one where I am self-employed. My agent provides me with a form 1099-MISC for royalties from mainstream publications. However, the rest of my income comes in dribs and drabs in the form of checks and PayPal transfers. None of these employers provide tax forms at the end of the year. It’s up to me to keep track of this income and report it on a Schedule C.

Because I am self-employed for this part of my income, my tax burden is higher than for my main income. That’s because a traditional employer pays benefits to the government on my behalf (social security, etc.) whereas when I am my own boss, I have to pony up the full allocation. Also, no taxes are deducted from any of this income. If I don’t pay attention, I may end up owing the government a lot of money at the end of the year . . . and paying a fine to boot if I pass their critical threshold. Rather than submitting quarterly installments of my estimated taxes—which is one way to avoid the year-end clobber—I increase my payroll deductions from my day job to try to keep up with my writing income tax burden.

Schedule C is not a complicated form, but you make your life a lot easier if you’ve been doing the organizational work throughout the year instead of waiting until now to scrounge around for all the receipts and records that represent your income and outflow for the past year. Though it’s too late to put this into practice for the 2010 tax year, I highly recommend using some sort of accounting spreadsheet (Excel or a program like Microsoft Money) to record each expense and income as you receive it rather than waiting until the end of the year to put them all together. Maybe I’m a little obsessive about it, but it makes life so much easier come tax time.

Unlike the main part of the 1040 tax form, where only a percentage of certain expenses reduces gross income, everything I spend that is related to my writing business is deducted straight off any writing income. Spend 44 cents for a postage stamp to mail a query letter, and that diminishes my writing income by 44 cents. (You may feel a little foolish recording an entry for a 44-cent stamp at first, but believe me, when the following spring comes around and you’re looking for whatever you can find to reduce your writing income for tax purposes you’ll be glad you did.) Go to World Horror and many of the expenses involved with that trip can be deducted. Airfare, hotel, ground transportation, registration fees, etc.

Microsoft Money lets me (pretty much forces me to) assign a category to each expense. Over the years, I’ve whittled the various categories down to a handful that simplify my job come tax time. All I have to do is run a report and generate a single page that has all the information I need to enter on the Schedule C part of my tax software. For expenses, everything boils down to one of the following: Conference expenses, professional dues, research materials, marketing, postage, office supplies and bank fees. In TurboTax, I record any 1099-misc forms I receive, the sum total of all other writing income, and the numbers associated with each of these expense categories and I’m done with that part of the taxes. Ten minutes, tops.

The receipts themselves go into a file folder. I make a note on the back of each one to indicate what the expense was for (e.g. Submission to Ellery Queen’s Mystery Magazine). Sometimes a receipt will contain personal expenses as well as business ones, so I circle any items that are tax deductible. If I pick up a pack of pens for signings while I’m at the grocery store, the whole meat and potatoes receipt goes into the file with that one entry circled. At tax time I’ll go through my Money database and check off all the receipts in the file just to make sure I haven’t missed anything. I’m funny like that.

Some people use one credit card exclusively for their business expenses. That means at year-end all transactions are on a single set of statements instead of interleaved with personal finances. Each February or March I decide that sounds like a good idea, but by then it’s too late to start doing that for the current year. Next year, I say, but then I forget . . . until next February or March. Income is easier, so long as I keep records. No one is likely to ask me to prove a declared income item. I get a check, enter it in Money, cash it, and the paper trail ends there.

If you are in the habit of purchasing a lot of your books for resale at conventions, then you have to keep track of that income and outflow, too. I prefer turning that responsibility over to vendors at cons. That way I can also avoid worrying about collecting sales tax. I was forced to acquire a sales tax ID number to sell books at a local event a few years ago, which meant that I also had to file a state sales tax return.

Understand that I am not an accountant or a tax specialist. (I say that in case you do something based on what you read here and you get audited and sent to jail.) Once you decide you’re a professional writer, there are some fundamental decisions you have to make. One is whether or not to declare part of your house as a business office. If your income is great and you really need the deduction, it might be worthwhile, but I haven’t gone that route. It’s too complicated for my taste. You declare the percentage of your house that is devoted to your office—for me that’s my desk: about ten square feet (twenty if you count the piles of papers and books on the floor around it). Much of what I do in that space is business related, but I also do personal things there, too. The implications of declaring a business office rear their ugly head if you sell your house. It looks so messy that I haven’t gone to the trouble to learn all that’s involved. Just be forewarned that if you go down that road you should have a clear understanding of what it might entail.

Toner, paper, postage stamps, photocopying fees, monthly internet service, conference expenses, those are all fairly straightforward. An area where things get messier is if you buy computers, printers and scanners, digital cameras and other durable items that you will continue to use for several years. Here you get into the realm of amortization and depreciation—you put these items into service the year you purchase them and either declare the expense all at once or amortize it over a number of years. Then you start depreciating their value until they are worthless according to the taxation authority. Since I’m not an accountant (see above), and since I use most of these items personally as well as for business, I don’t declare them as business expenses to avoid that whole depreciation/amortization complication. I could probably have saved myself a few bucks over the years by doing so, but I figure I saved myself enough aggravation to offset the fiscal hit.

Not much has changed in my process during the past five years since I wrote the first version of this essay. The price of postage stamp went up from 0.39 to 0.44, I observe, though. Here’s hoping that the season isn’t an overly taxing one for you. This is one time when it is definitely much nicer to receive than to give.

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