The Taxman Cometh

We’re counting down to tax day — April 15th here in the U.S. — which means some folks are scrambling to find their receipts and their statements and all of their various forms to take off to their accountants, while others are playing with tax software or reading through the intimidating tax brochures meant to walk you through filling out the forms yourself.

Writers and taxes have a contentious relationship at best. Writers understand that several aspects of their chosen careers are the very things that raise red flags with the IRS, such as taking a deduction for a home office space, research trips, and other costs of doing business. But that’s no reason to panic.

Whether you’re a new writer who has yet to make any money or a seasoned pro, it’s important to be diligent in your record keeping throughout the year, and to consult with a tax advisor in order to be certain of the tax laws, which tend to change pretty frequently.

A few tips:

Save everything. All those receipts from your trip to a writers’ conference, your books, cabs taken, office supplies, everything. Make sure you jot down a quick note on the back of the receipt regarding what the item was, and its purpose. If it’s a cab or restaurant receipt, indicate if you left a tip, and the amount.

Keep records of bills. If you work from home, you can deduct a portion of your heat, electricity, etc., so be sure to have copies of those household bills in with your work receipts. Likewise, if you pay for your own health insurance as a self-employed writer (as opposed to receiving coverage from a day job or through a spouse’s plan), those bills are also deductible.

Take pictures of your home office space, including any furnishings you’ve designated for work use, such as your desk, computer, bookcase, etc. This documents the existence of your dedicated office so that if you move and are later audited you have proof of that office’s features.

Don’t assume everything you do or purchase that seems “writerly” is automatically deductible. If you spend a thousand dollars every year on novels for your own reading pleasure, you can’t necessarily consider them all “research” materials. Talk to your tax advisor about the sorts of items that you can legitimately call work expenses, and under what circumstances they count.

Organize as you go. Set up a system that’s easy for you to remember and then take a little time once a week or so to keep it going. A simple accordion file with A-Z labels can be an easy way to track receipts. Designate categories that make sense to you and that will simplify the tax process when you sit down to actually do your taxes — whether on your own or with an accountant. For instance, you might separate your receipts out by Technology (computer, printer), Travel (accommodations, food, transportation), Conference fees, Office supplies, Insurance, Books and magazines, Utilities, and so on.

Plan for quarterly taxes. Self-employed individuals, for whom there is no company withholding a portion of their paychecks to send to the IRS, are required to pay their taxes on an installment plan, sending in a partial payment four times over the course of the year. The first year you file as a writer, you won’t need to worry about this, but as you wrap up that first tax return, you will be given the option to calculate your quarterly tax payments for the following year, with the first payment due April 15th, and subsequent payments to be sent on the 15th of June, September, and January. You will pay next year’s taxes based on whatever you earned this year, and must pay at least that amount. If you make more money than anticipated, you will make up the difference the following April. If you end up making less, you’ll get a refund. However, if you pay less than you did the previous year, and also end up owing more, you’ll owe a small penalty on top of the difference.

The safest bet is to plan to pay each quarter, and that means setting aside a portion of every check you receive as a writer to cover those tax bills. It can be difficult, especially in early days when the money might seem like small potatoes, or even later, because writers’ paychecks tend to come in waves — money when you sign a contract and then nothing until you turn in a manuscript, or royalty checks only a few times each year. But the better you become at remembering those tax bills on the horizon, the more likely you’ll be to set aside the money necessary to cover Uncle Sam’s demands. With a little planning and some good deductions, you’ll end up with some money left over at the end of the day.

 

Obligatory disclaimer: I’m not a licensed tax professional, so please do speak with your own tax advisor regarding how to best handle your own tax return.

Prepping for the Tax Man

money-hi from clckr.comWhile everyone’s busy playing April Fool’s pranks today, I want to talk about something serious: Writers and taxes.

No one likes thinking about their taxes, let alone actually doing them. But they are a reality of life, and if you’re self-employed, the become even more complicated than they are for the average working person. There are more calculations, more receipts to save, and kiss goodbye using any of the IRS’s simple forms.

This is why I advocate planning early. Please note here, I am not a tax professional. Most agents do not have accounting backgrounds (though likely some do), so it is important that you speak with an actual accountant when it comes down to doing your tax return. However, I can give you a heads up regarding some of the things to keep an eye out for so you have what you need to file.

Start before you publish. Yes, that’s right. Even if you’re still in the early phases of shopping your novel to agents or editors, you should already take a professional outlook when it comes to your finances. There’s no way of knowing how fast your project might sell, and if payment comes in December then suddenly you were a working writer for that year, able to write off far more things than you could when you were unpaid.

Keep everything. All those pesky receipts? Get yourself a nice little accordion file and organize them as you go. You might already be holding onto obvious receipts, like the ones for office supplies or postage, conference registration, and so on. But keep the ones you’re unsure about, also. Magazine subscriptions? Books? The lumbar pillow for your desk chair? Keep them all, and note their purpose on the back. Your accountant will be able to tell you if something is fair game.

Log your mileage. Do you drive to conferences? Or to the airport before you fly to one? To the post office to send out ARCs for review or prizes from giveaways on your blog? You can deduct a certain amount each year based on the miles you drive your car for work purposes if you are filing as a self-employed individual. Even if you use that car for personal use, too. Just pick up one of the small logs they sell at most office supply stores and keep track of your starting and ending miles, and how many of them were for work purposes. Just leave your log in the car so you remember to use it. You’ll be surprised how quickly you’ll end up with a few hundred dollars more to deduct by year’s end.

Keep your writing area separate. If you can possibly have your own room to designate as your office space, do so, even if it’s not much more than a closet. The rules on what can or cannot be considered a viable working space vary from year to year (and no doubt from country to country — I’m only familiar with U.S. tax laws). Check with your accountant to determine what qualifies. Not only will you be able to deduct a percentage of your rent or mortgage based on the square footage of your office, but of any other cost that goes toward the entire house, such as heat, electricity, etc. It’s worth the deduction if your home layout permits.

Find an accountant who is familiar with writers or at least works with other self-employed individuals. They will be much more in tune with what you can deduct and what to avoid because it might raise red flags with the IRS. Check with local writing groups or online writers’ forums if you need some recommendations, or simply ask local accountants how much experience they have with this area of the tax code.

If you’re not ready for an accountant quite yet, be sure to read one of the many available guidebooks geared toward helping self-employed individuals determine their deductions to make sure you are holding onto all the right paperwork. Better to have too much than to be missing something vital when you’re ready to file.