The good news is that the investments of time and energy you have poured into your writing career are finally starting to pay off. Literally. Whether this takes the form of book advances, royalties, or $-per-word checks for articles, you’ve earned the right to be proud of yourself. The bad news is that this marvelous moolah isn’t all yours to keep. Nope. Come tax time, the government is going to want a percentage of your publishing success and you’d best be prepared to account for yourself.
Herein are six tips to lessen the pain (and possibly avoid a tax audit):
1. Even if you have yet to make the transition to full-time author (and your relatives still refer to this quest as your “little hobby”), it’s critical to treat your craft like the professional enterprise it is. If you don’t have one already, there should be a designated “home office” space in which you can perform, uninterrupted, the principal tasks relevant to your writing biz. If this space is used exclusively and regularly for that purpose, you may be able to claim a tax deduction for costs associated with its maintenance (including utilities and repairs). Note: If your writing really is a hobby, the deductions you claim can’t exceed the total amount you have earned.
2. When you work for someone else, a lot of deductions come out of your paycheck before you ever see it – the largest of these typically being state and federal income tax. If you’re a freelancer, the responsibility to estimate these tax amounts is up to you. For every check you receive, set aside approximately 25 percent of it so you won’t be caught short when annual taxes are due. If you’re bringing in large sums of freelance money on a regular basis – as opposed to occasional dribs and drabs – you’ll need to make estimated tax payments every quarter.
3. Familiarize yourself with what’s a legitimate business expense and what’s not. If, for instance, you’re writing a biography about Beethoven, you’re likely to show up on a tax auditor’s radar if you went out and bought yourself a grand piano for $100,000 to just sit in your living room and inspire you. On the other hand, a $2 pair of earplugs so you can immerse yourself in Ludwig’s world of silence would qualify as a research tool. Other deductible expenses include resource materials (books, periodicals, tapes), office equipment and supplies, business insurance and licenses, membership fees, conferences and subscriptions, telecommunications, photocopying and postage, and marketing. Travel, meals and entertainment may also be tax deductible if there’s a verifiable correlation to your writing business.
4. Keep detailed records and receipts for everything you plan to claim as a business-related expense. And no, we don’t recommend throwing everything into a shoebox. Set up an Excel file or purchase an accounting software program to judiciously log every money transaction that comes in or goes out. Create a back-up file and store it somewhere other than where you keep the original.
5. Don’t toss your rejection letters. Yes, yes, we know they’re painful reminders that someone didn’t like your work and you’d just as soon rid yourself of the evidence. When you’re just starting out, however, this paper (or email) trail of correspondence serves as proof that you have actually been trying to hone your craft. Otherwise, that pricey new computer you’re claiming as a business expense could raise the suspicions of a tax auditor that you’re only using it for games and watching cat videos on YouTube. Keep in mind that you have to be earning something from this creative endeavor and that it has to be more than what you’re trying to claim on deductions.
6. Hire a professional who is well versed in the tax laws and filing requirements specific to freelance writers and home-based small businesses. Even if you’re as savvy with numbers as you are with words, tax preparation can be stressful. (And really now, shouldn’t you be putting your brain to better use thinking of a plot for your next book?) If you do try to go it alone, second-guessing what’s allowable, what isn’t and which tax form to fill out could get you in trouble. FAQs can be found on your country’s tax authority website along with a help line to speak with an expert.