Monday, July 19, 2010

A Taxing Profession

A question came up in Thursday's comments regarding the tax situation for authors. This is sort of a tricky question, and the answers will differ from writer to writer, but I'm happy to try to demistify the basics here.

First: if you are an author, you are effectively self-employed (assuming you have no day job, which is, to be honest, a bit of a stretch). This means you may have to report your earnings to the IRS on a quarterly basis and will certainly have to pay self-employment (SE) tax (15.30%) via Schedule SE of the IRS Form 1040. (You can learn more about the tax forms you'll need here.)

Second: you're eligible for a lot of deductions as an author, particularly those that pertain directly to your writing career. Office supplies, use of your car for travel (e.g. author tours), books, magazine subscriptions, writing workshops/conferences, and dues to professional organizations (such as MWA or RWA) are all deductions you can make. You may want to look into getting an accountant to help make sure you get the greatest number of deductions possible.

Third: some authors are under the impression that royalty payments fall under the capital gains tax (rather than income tax) and are subject to the lower capital gains rate (15%). This isn't the case. (Even if it were, the capital gains tax is set to revert to pre-2003 levels—around 28%—next year, so you wouldn't be saving all that much regardless.)

Finally: speaking of royalties/payment, you need to budget effectively. Publishers take several months to calculate royalty payments, meaning you'll probably only get a handful of "big" paychecks per year. If you've got a day job, it might make sense to keep your writing income in a separate savings/checking account and rely primarily on your day job's salary to budget, pay rent, and so on. If not, you'll have to be careful to budget your money so as to live comfortably year-round, pay your taxes, and (hopefully) set some aside in savings. Again, hiring an accountant to help you go through your finances and construct a budget might make sense.

Questions? To the comments!


  1. Very informative. Thank you, Eric.

    Pointing out that employment elsewhere changes the filing status is something I never thought of before. I had just separated it in my mind, salary over here taxed at x% and advances/royalties over here taxed at y%. But it will cause the "do you have a second job that makes more than [whatever it is this year] a year" to get checked. I wonder what impact that has on the self-employment tax percentage. Do you know?

    As for me, I have a separate bank account set up for advances/royalties so I can keep the money separate. I think it makes accounting easier. (And of course, when I make bazillions of dollars, I wouldn't all my money in one bank. :)

    I have a friend who is a professional comic book artist. The man is the king of the deduction. It's staggering the things he can justify as work related.

  2. I'd like to recommend Self-Employed Tax Solutions by June Walker, a book aimed at the sole proprietor (which most writers are) that gives several examples and tips relevant to writers. I just bought it to get a better handle on my own tax situation, and found it extremely useful - I know for certain that I've already saved $200 by not having to run to a tax professional for the answer to one question! Joseph, I think the answers to your questions are in there.

    I'm glad you brought this point up, Eric. Not paying taxes on advances and royalties can land a writer in trouble very fast. I'm a writer-for-hire, and make a habit of putting 50% of all payments received from clients straight into my savings account, to cover taxes and charitable giving. Any excess is a useful "bonus" for me at the beginning of the year. It's a very hard thing to do, but worth it.

  3. The nice thing about living in LA is that there are lots of tax professionals who cater to people in artistic fields. And they're often reasonably priced. My husband and I visit one every year. If you live in a big city, hiring an accountant might not be as expensive as you think. Definitely ask around.

  4. Thanks for providing this info!

  5. Awesome! I didn't know some of this. Thanks so much for sharing!

  6. Thanks for the information. Definitely going to keep this in mind for when/if it becomes relevant (while remembering to make sure the information is still current by then)! But it's always good to be aware of these issues in advance, especially when dealing with government agencies.

  7. Thanks for the info, Eric. Do you know what would determine whether or not you'd have to report quarterly earnings to the IRS?

  8. If you're going to owe taxes at the end of the year above and beyond what you've paid in you'll need to file quarterly earnings and pay estimated taxes. If you will be getting a refund, you don't. But, always better to err on the side of caution. The forms are easy to fill out and it's better to get more money back in April than to pay fines and interest!