Hey, SE gang, Mae here with a reminder that tax time is looming. Ugh!
A battle struggling writers often face is whether or not the IRS considers their efforts a business or hobby. Very few of us make bucketfuls of money as writers. For most, expenses outweigh profits during the first few years. That sad reality aside, you need to report those expenses if you’re trying to establish a business. I’m by no means an expert, but here are a few things you can do to keep Uncle Sam from viewing your enterprise as a hobby:
Detailed Record Keeping
This may seem obvious, but the more detailed records you can produce (in the event of a dreaded audit) the more favorable the outcome is likely to be. Keep receipts and make notations on each. In addition, use a spreadsheet to track and itemize by category. I use headings such as Advertising, Supplies, Fees, Contract Labor, Travel, Inventory and a few others. Know what you can deduct and what you can’t.
And just as with your expenses, itemize your earnings and the sources for each. As a hybrid author, I earn royalties on my indie titles through Amazon and local book sales. I also receive regular paychecks from my publisher, breaking everything out separately in a spreadsheet. My tax account says he loves how easy I make it for him. 🙂
Most importantly–remember to back up your files!
Open a Separate Business Checking Account
I have one that is strictly for my author expenses. By the same token, the royalties I earn don’t get mingled with my regular household account. They go into my business account where they’re simple to track and the bottom line is always visible. It’s also easy to hook your account to PayPal for additional record keeping and a convenient means of paying vendors.
Use a Separate Credit Card
I’m a PayPal fan, but there are times when I need to pay something by card due to the vendor. In that case, I have a major credit card that is used solely for my author expenses. And like a bank account, it too can be hooked to PayPal.
A Tax ID Number
If you do book signings where you sell physical copies and your state charges sales tax, you need to sign up for a Tax ID Number. This is something you can usually do online. In the state of Pennsylvania, I’m even able to register for alerts reminding me when my filings are due. This could be quarterly or semi-annually depending on your state, but don’t forget to file. Even if you go a quarter without physical book sales, you still need to report your earnings (or lack thereof).
Credit Card Readers
These are handy little gadgets that turn your smart phone into a credit card reader. The one I use is PayPal Now. It’s a tiny device that plugs into my iPhone and allows me to swipe debit or credit cards when I’m doing book signings. The customer signs on my phone with a stylus and the funds from their account are deposited into my PayPal which can then be transferred to my bank account. The customer receives an electronic receipt via email. I’m even able to calculate in sales tax.
I know I’m probably missing a ton of things, but everything you do to validate yourself as a business rather than a hobby is to your benefit—especially in those first few years when you’re not earning income, or not enough to show a profit.
As an example, when I started sending newsletters, I signed up for a P.O. Box under my author name. I’ve maintained that for two years and plan to continue. I’ve also kept records of the blog appearances I’ve done, the guests I’ve hosted on my own blog, and any promotional materials my publisher has provided. I’m fortunate that they’ve put me in print ads in genre-specific magazines twice, and I’ve maintained copies.
What about you? Do you have any tips you can share in helping authors navigate the choppy waters of tax time? Anything you’ve found particularly helpful? Obviously, a good accountant is tantamount, but throughout the year we’re managing on our own. Let’s talk taxes, and hobby vs. business in the comments below!