Welcome to Writing Tip Wednesday! A writing career consists of much more than writing stories. Be prepared. Be educated. Make well-informed decisions. For writing craft topics, see the Labels list in the left sidebar as you scroll down the page or check out my handbook in e-book at Amazon or B&N and in print.
Writing is a Business and writers have to pay Taxes, like any other business. The type of business depends on the author’s preference. Several factors can influence which type of business will work best for each individual, including but not limited to amount of income and expenses and use of paid assistants or other employees.
In some cases, writers choose to be self-employed (sole proprietorship)—which means filing a schedule C at tax time and possibly paying quarterly self-employment taxes to avoid penalties for underpayment. Since an employer isn’t contributing half the tax to social security and Medicare like a typical job, the self-employed taxpayer pays the full amount, based on net earnings (profits). All expenses and income are used to figure a profit or loss for the year. This amount is used to calculate the self-employment tax and is also included in the individual’s tax return to help calculate the amount of income tax owed or refund due.
Rather than being a sole proprietorship business, some authors choose to become an LLC—limited liability company. Business and personal finances are separate to add protection from liability, meaning the owners of the company usually aren’t liable for the company’s debts. All states charge an annual fee to maintain an LLC business and many require an annual report or statement of information. Some also have state taxes. LegalZoom.com is a good resource for information on business types.
Another option for authors is incorporation, with either a C or S corporation. Like the LLC, business and personal finances are managed separately, and the owner(s) aren’t usually liable for the company’s debts. Articles of incorporation must be filed with the company’s home state. Even if the corporation has only a single shareholder, it must hold an annual meeting and important corporate decisions should be recorded in meeting minutes. Some states may charge an annual filing fee for corporation status. A “C” corporation is taxed on net earnings and the shareholders are taxed on distributions, meaning the author is taxed twice if she’s a shareholder in the corporation. Income of “S” corporations is taxed at the shareholder level only, making this type the better choice in most cases.
If the business has employees, including the author, an Employer Identification Number (EIN) is required and can be obtained from the IRS. Most states also require tax identification numbers issued by their revenue departments when a business sells goods and/or hires employees.
Since rules vary from state to state, options should be thoroughly researched. The IRS and each state’s department of revenue website contains information on each business type and its filing requirements. A tax professional or business law expert can also help determine the most beneficial choice, based on the individual’s needs. These links also provide easy-to-understand explanations about the business types and their advantages and disadvantages:
Remember to include consultation, setup, and filing fees in an itemized recordkeeping spreadsheet, along with all other writing-related expenses. Record mileage for writing-related trips, national and local dues for writing organization memberships, travel expenses for research/writing-related meetings/conferences/conventions, meals, office expenses, promotion/advertising expenses, contest entry fees, research/resource books, subscriptions, self-publishing expenses, etc. All expenses related to writing should be recorded for the business, whether the author chooses sole proprietorship, LLC, or incorporation.
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