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Writing and Taxes

To make a living at anything — even, maybe especially, writing — you need to treat it like what it is: a business. As soon as you start relying on the money coming in from that activity, it leaps out of the realm of being a hobby and transforms into something you ought to take seriously, especially if you think not living out of your car or sleeping on your parents’ couch is a good thing. Part of that means thinking about how to structure your business and what that means for you come Tax Day every year.

(If I haven’t lost you already, then hold onto your hats. This is where it starts to get technical.)

When you start out freelancing, one of the happiest days is the one when your first check arrives in the mail. Some people frame it, which is exactly what your publisher hopes for because that means you’ll never cash it. Others bring it to their local pub, cash it, and spend every penny of it right there. (Don’t worry for your liver. Most first checks aren’t for much.) The rest stick it in their checking account and cackle all the way home.

Come tax time, though, you realize that not all of that money is yours. Just as with the money you earn from any regular job, Uncle Sam wants his cut of that check, and if you already spent it then it’s up to you pony up the cash out of your pocket.

Most of the time, it’s not a big deal. You just tack that extra bit onto whatever your standard tax bill might be or, better yet, knock it off your refund. Once you start making decent money at writing, though, you may be in for a rude surprise.

When you get to the point at which you’re making enough cash at your writing that you’d owe at least $1,000 in taxes on it, then it’s time to get serious. At that point, you need to start making estimated quarterly payments on your taxes, or you’ll get stuck with a penalty at the end of the year. Your first year, the government can give you a mulligan on the penalty if you didn’t owe any taxes at the end of the previous year, but don’t depend on this without the advice of an accountant.

The alternative to making estimated payments is having more money withheld from your paycheck at your day job. If you’re married and file jointly, you can have your spouse do this for you instead. This makes it easier to stomach paying the money because it’s removed from the paycheck before it reaches you, and it’s taken in smaller amounts than you’d have to pay on a quarterly basis. Also, you won’t forget about the taxes and spend that money before the bill comes due.

When you sit down to figure out how much you should set aside, no matter what method you use, you’ll likely be in for a good shock in the form of something called self-employment tax. When you work for someone else, you pay half of your payroll taxes (Social Security and Medicare), and your employer pays the other half. When you work for yourself (as you do for those freelance checks), you get to pony up for both halves of the bill.

For 2011, the US Government actually reduced the self-employment tax a bit to give small businesses a bit of a break. It’s normally been 15.3%, but for money earned this year it’s 13.3% instead.

About 11 years ago, I incorporated my writing business to help with this. There are lots of reasons to form a company once you’re cooking, but the tax benefits are one of them.

I set up an S-corp called Full Moon Enterprises, and I run all of my freelance writing through it. I pay myself a reasonable salary (adjust “reasonable” for whatever field you’re working in) and then take any extra profits the company generates as a dividend. The good thing about that is that I don’t pay any payroll taxes on those dividends, just my standard income tax. I can also raise or lower the extra withholding as I like, depending on how well I’m doing throughout the year. The freelance income curve is often shaped like a roller coaster’s tracks, and it helps to be able to be flexible with it.

I went with an S-corp for several reasons besides the taxes. With an S-corp, all profit and loss pass through to the shareholders (me, in this case), so I don’t have to pay corporate taxes on top of any income taxes like I would with a standard C-corp. It also makes accounting a lot easier at the end of the year, gives me some level of protection against prospective lawsuits, and makes it easier for me to do business with huge corporations that prefer to work with companies rather than individual.

Other people prefer forming LLCs or just running their businesses as a sole proprietor. It’s really up to you and your situation. It’s not really worth setting up an S-corp until you top $30-40k in earnings, but at that point you should sit down with an accountant and an attorney to figure out what works best for you. After all, while I’ve been at this for a long while, I’m neither of those things, and my situation probably differs from yours. As you may hear many times in your writing career, you should seek professional help. Good luck!

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  1. Thanks for this post! I have been wondering more about the nuts and bolts of financial and company structuring. i think it will be some time before i need to do anything but it’s always good to make a plan.

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  2. Hi, Matt — I met you at last year’s Gen Con one day when I was hanging out with Monte. I’m sure your article will help a lot of people. I vividly remember the first year that I started making serious freelance money and didn’t know to hold any back for taxes. Ouch! Ever since then, I put a certain percentage from each freelance check into a special savings account dedicated to accumulating money for my estimated quarterly payments. That also ensures that I won’t use any of the tax money without realizing it. Well, I’m off now to find you on Facebook and Twitter!

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      Hi Ray! I remember you well. Putting aside money into an account is another great idea. It’s too tempting to spend it otherwise. I pay myself bimonthly and usually set aside the money at that time, although since it’s just me I can opt to pay the withholding quarterly instead without penalty. (I think way too much about this stuff.)

  3. Yes, Matt, it’s fair to say that anybody who wants to be a writer should strongly consider seeking professional help.

    But for the stalwart few, I recommend socking some of the money into either a 401K or an IRA. If you sort it out right, you can end up all but alleviating the tax burden. Course, there goes your beer money.

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      Good recommendation as well. I’ve never managed that because of the expenses of raising five young kids, but I dream of one day getting to it. Also, I’m not giving up my beer money. 🙂

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  4. You don’t have to make a profit to write off your writing expenses. You don’t even have to be published or contracted to publish.

    All you have to do is prove that you are a working writer. This can be as simple as having copies of your rejection letters.

    I’m not an accountant or tax attorney so here are some experts to give you the details.

    “Authors and the Internal Revenue Code” (written by author Linda Lewis who is also a tax attorney)

    http://www.eclectics.com/articles/taxes.html

    Article on self-employed writers, recently updated

    http://www.tarakharper.com/k_tax.htm

    “Taxes for writers” by Cyn Mason (copyrighted 1996 so may be out of
    date)

    http://www.forwriters.com/taxes.html

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      Thanks for those links, Marilynn. You can write off items for a while, but you have to prove you’re in it to eventually make a profit. The IRS has guidelines on the difference between a business and a hobby, and you can’t write off hobby expenses in the same way as you can those for a business. For anything other than working with horses, the rule is “The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year.”

      http://www.irs.gov/newsroom/article/0,,id=169490,00.html

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