Fair warning, this is not going to be a happy post. A lot of times I try to deliver good news or positive vibes with my posts, but today? Well, today you’re probably going to leave unhappy. You’ll see why in a bit.
So, you’ve been published! Your book is out in the wild, selling copies and making you dough! Success! You’re on the way to riches, watching with glee and satisfaction as money slowly funnels into your bank accounts or arrives in publisher’s checks.
For many young authors, this is “the end” of the line as far as they are concerned when it comes to money. They wrote the book, and now royalties roll in. End of story, right?
No, unfortunately. It’s the end of the book’s story, but it’s not the end of the writers. Even if they create a one-hit wonder and call it quits afterwards … they can’t just sit back and relax. Because sooner or later, the IRS will come calling.
Now, from my mention of the IRS, you may rightfully realize that yes, I’m speaking about taxes as a US writer, and any specifics that I’m going to offer are going to be focused around my experiences with the US tax system. Which isn’t to say that if you’re not a US citizen you won’t find something to gain from this post, but it may be more general advice than specific. Regardless of where you live, after all, you’re going to have taxes of some kind. They may not be exactly like what I speak of here, but they may be similar.
Anyway, first things first. You will pay taxes on your book sales.
This is generally the first surprise I find when talking to people who work an ordinary 9-5 job. You WILL pay taxes on the profits from your books … no matter how little they are. Book writing counts as self-employment, either as a contractor or a lone wolf, depending on your deal with your publisher, but there are a lot of things that most people don’t kn0w about self-employment. And the first of them you should know is: you will pay a tax, no matter how little you make.
See, when tax season rolls around for the first time, you’ll find that Self-Employed individuals almost operate under a separate tax code from everyone else. While your friends are all filling out Form 1040 EZ (easy, in case you didn’t catch the intent of the title), you’re going to have to fill out not just a Form 1040 Long (that’s right, you have to do every step of the math now), but you also have to fill out additional forms on top of that: Schedule C (which is profit or loss from business) and then Form SE (the full self-employment tax form).
And yes, you will owe money. This is the other nasty surprise. You know how if you work a normal job, but you’re making below a certain amount per year, you can pretty much count on leniency to get you by? For example, the absolute bottom-line below poverty level in the United States varies from state to state, but for a single individual is considered between $10,000 to $15,000. Again, depends on where you live, but below this point, you are considered living below poverty standards … which aren’t exactly that great to start with.
Anyway, if you’re working regular, employee jobs and find yourself making this little money, you can be rest assured that your taxes are going to contain all sorts of credits, deductions, etc—basically tax “discounts” that will reduce the money you owe at the end of the year to a manageable level.
Now, are you self-employed? You are? Then see those “discounts?”
Say goodbye to ALL OF THEM.
This is not hyperbole, unfortunately. See, all those deductions and the like still exist … however, in a nice twist of financial trickery, all of them are applied before applying your self employment taxes … and the IRS will not let your deductions go below zero.
Which means that you will always owe money. Always. And it’s not going to be a small amount either. Self-employed individuals in the US pay higher taxes by percentile than any other group. And as a writer, you will fall into that group.
I wish I were joking, but this is how bad it is. This year, as usual, I’m on that line for poverty, balancing at being below it. My friends in the same boat? Their taxes are minor, a total (between withholdings and what’s due) of a few hundred dollars.
Me? I worked out my taxes last night. More than a thousand. In fact, the end number is 10.5% of my total income. And I’m on the below poverty line. It is a massive amount more than what my friends owe.
Worse, as I make more, that number rises. For example, if I were to make $100,000 off of my book sales next year—an awesome number to be sure—my self-employment tax would scale upwards. About $50,000 of it would go to the government.
Yeah, when I said this wasn’t going to be a happy post. I wasn’t kidding. It’s full of some unpleasant realities. And one of them is that the US government really doesn’t care much for self-employed, self-starter business owners except to bleed them dry.
—Oh, and before you get rearing to go in the comments about one party or the other, the darn truth of it is that both parties have been guilty of this, and as someone who is self-employed, the last eight years have been crushing increase after increase.—
Now, there is one exception to this: If you make less than $400 in a year, you don’t have to pay taxes. So if your book sales don’t procure more than $400 in a year, you won’t have to pay anything. That said, any and all profit related to the business counts. Which means that Patreon donations, yes, count towards your profits in that business, and must be accounted for.
Right, so first lesson of getting book money? Set at least half if it aside. Start a savings account and just funnel half of what you make into it so that you can meet your taxes. Regardless of how the money comes, Patreon, book sales, whatever, financial advice as I’ve been given it is to plunge half of it into a separate account so that when tax season arrives, you can pay off your taxes without much fear, and keep what’s left.
Now, for those of you who realize that sticking half your income in a bank account when you’re not making much already can be a little daunting … and yes, it is. Especially if you’re already at poverty levels. And I’m not going to sugarcoat it … it sucks. But that’s the way the US Government has decided to treat the self-employed, so …
So, so far here’s what we’ve covered. One, no matter how little you make (unless it’s below $400 total) you will always owe taxes, starting at 10-11% and rising swiftly. So prep for that. Additionally, make sure you’re familiar with the additional forms you’re going to need to print out and work through.
Now, there is one caveat I can add on here: Self-Employment deductions. Remember earlier when I mentioned that all the standard deductions were not going to affect you? Well, the way around that is SE deductions … but with its usual level of self interest, you may find that the IRS has made it fairly difficult to collect. For instance, since I work from home, it would be easy to assume that some of my rent money would count as a business expense. Unfortunately, it’s not so easy. I can count a deduction … but only on a percent of my rent payment that is equal to the percentage equivalent size of my ‘office’ compared to the rest of my house … Sound easy? That’s step one. I also have to fit size restrictions for said office (yup) and the office cannot be used for any other purpose none-business related. Which means it cannot be used at any other time for any other thing other than your business endeavors. So yeah, no making use of said room for anything else or you can’t claim it. See how this can get difficult yet?
There actually are a lot of SE deductions. Actually collecting them, however, is fairly difficult. Receipts must be kept, strange, oddly specific rules followed … and even if you do follow everything to a T and do it right, claim too much and the IRS will subject you to an audit just to make sure how you’ve somehow managed to penetrate the bureaucracy.
Right, having fun yet? We’ve still got one more aspect of taxes as a writer to cover: Semi-Annual taxes. And they’re exactly what they sound like.
See, once you’re making more than a certain amount per quarter ($1000), it’s not enough to pay taxes at the end of the year. The IRS needs you to pay as you go, just like regular withholdings. So once you pass a certain threshold, which is roughly $1000 dollars earned in self-employment per three months, you’ll need to start sending your taxes in every three months. Plus do your normal taxes at the end of the year to make sure you didn’t underpay.
Oh, and lest I forget, your taxes will also be due earlier than normal. Think March 1st rather than April.
Woof. Sounding complicated yet? Yeah, it is. There’s a lot of headaches and a lot of math in this process. But … if you’re going to be a writer, you’re going to have to deal with it.
Now, one last thing. The EIC, or Earned Income Credit.
I almost left this one off of here since it’s sort of dropped off the scale of usefulness it would seem (more on that in moment), but an EIC is, theoretically, a final deduction to your taxes you’re supposed to receive if you’re below poverty levels but working. Sort of a “Hey, you’re trying, let’s give you a break.” I say “theoretically,” however, because it’s dropped like a rock recently. To give you an idea of how far, it was once roughly a $500 deduction to what was owed. This year, however? An astoundingly generous $88.
Yeah, it’s there, and you’ll do the math, but you probably won’t get much. At this rate, in another few years they won’t even bother putting a line for it on the form.
So, let’s summarize then.
- You will pay taxes as long as you make over $400. Make $410? You can expect to pay at least $45 in taxes. The more you make, the more you’ll pay. Yes, it’s unfair, but that’s the penalty for independence the US has decided to stick to the self-employed.
- You’re going to have to use several forms to calculate everything: Form 1040 Long, Schedule C, and Schedule SE at least.
- You can claim some deductions. Standard deductions apply before the lion’s share of your income is accounted for, however, so don’t count on them. SE deductions exist, but are a rigmarole of hoops to jump through, as well as turning the IRS’s ever-watching eye in your direction.
- Once you’re making a decent income (again, I believe it’s +$1000 every three months) you’re going to have to start filing taxes quarterly. Plus do estimated taxes, which is a whole ballgame on its own. And comply with the earlier due dates.
- And last but not least, the most important of all: PREPARE in advance to pay these. Take 50% of your income from your books and stick it in an account. That way when you reach the end of the year, you hopefully have the money to pay what you owe.
Like I said, it’s not fun. I’ve learned to despise tax season. The math, the headaches, and the massive depletion of what little savings I’ve scraped together over the year. It sucks.
But it’s part of being a writer, and I’ve got to deal with it. As will you, once you start selling.
Anyway, I know it this probably wasn’t the funnest post to read. In fact, it’s downright depressing. But … like death, taxes are something you’re going to face. Best to be ready for them.
Good luck. Now go write.