Your burning questions about taxes on book royalties answered! Self-Published Author Taxes Q&A with ‘Money Girl’ Laura Adams

Okay okay guys I don’t want to freak you out with that horrid word that begins with T and ends in X. But…

Somewhere along the line we all need to think about it. Them. The T word thing. Yuk!

Taxes

 

 

I, for one, am not a fan. But I figure that we’re all in this together, right? So I invited the lovely and knowledgeable Laura Adams (aka Money Girl) to answer my burning questions, that I guess are your burning questions too. Hopefully it will be good info for you to have, and if it’s too early to start thinking about, make sure you bookmark this one for a later date. Cos you know you’ll need it. Okay here goes!

 

[Sorry non-US folks, this one’s for readers in the US. If you, or anyone you know, wants to write up something similar for the UK, Ireland, Oz, Canadia, NZ, Timbuktoo,etc, do get in touch. I would LOVE more internationale posts up on here.]

 

1. What category should self-published authors place ourselves in? Are we considered to be self-employed?

 

Anyone who earns full- or part-time income from a source other than an employer is a self-employed business owner. You must decide what form of business entity you want, such as a sole proprietor, partnership, corporation, S corporation, or Limited Liability Company (LLC). If you haven’t set up a specific business type, you’re operating as a sole proprietor by default.

 

The type of business entity you have determines which income tax return forms you must file and has legal consequences. So be sure to consult with an attorney if you’re not sure what’s best for your situation.

 

You can learn more about business types on the Business Structures page on the IRS web site at irs.gov.

 

2. How should self-published authors report royalty income on our tax returns? Is there a minimum amount we have to earn in order to report royalties?

 

You must report all annual income on forms 1040, U.S. Individual Income Tax Return  and Schedule C, Profit or Loss from Business or Schedule C-EZ, Net Profit from Business.

 

Additionally, you must pay Social Security and Medicare taxes based on the income or loss from your business by filing Schedule SE, Self-Employment Tax. Most business owners are required to file estimated taxes on a quarterly basis, which I address in the next question.

 

3. Are there any steps we should take throughout the year (quarterly payments), or is this something that we can hold off on until March/ April each year?

 

Estimated tax is the method you must use to pay taxes on self-employment income, since you don’t have an employer to withhold taxes for you.

 

If you file taxes as a corporation, you must make estimated tax payments every quarter if you expect to owe tax of $500 or more. Sole proprietors and S corporations must generally file quarterly when they expect to owe tax of $1,000 or more.

 

There are worksheets in Form 1040-ES, Estimated Tax for Individuals and Form 1120-W, Estimated Tax for Corporations with details about who must pay estimated tax and how to figure it.

 

4. How do you recommend keeping track of income and expenses, and do you have a system that you can recommend?

 

You should have a bank account that’s just for your business so you keep the income and expenses separate from your personal transactions. I recommend using simple accounting software that gives you access to advanced functions, which you might need as your business grows. Also, being able to generate detailed reports from an accounting program makes it a cinch to get organized at tax time.

 

QuickBooks is the best-known desktop software for small business—and you don’t need any accounting experience or knowledge to use it. The price right now is $249 and you can get a 30-day free trial.

 

Wave is an excellent online accounting software that’s completely free.  Both programs allow you to import transactions from your bank or credit card account so you don’t have to make manual entries.

 

5. Which of the following expenses are deductible?

 – My Desk

- My Computer

- A room in the house for writing

- Travel expenses/ gas for book signings/ other book-related travel

- Book cover/ website design/ editing/ other book production costs

- Book marketing & advertising costs

- Writing software

 – Coffee 

 

Expenses that are ordinary and necessary for your business—such as a computer, software, travel, production costs and marketing—are generally tax deductible when your goal is to make a profit (as opposed to having a hobby).

 

Generally, you can’t deduct personal expenses; however, you can deduct a portion of an expense that’s used for business.

 

Plus, if you use part of your home (no matter if you own or rent) for business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, office furniture, and repairs.

 

Coffee might be deductible if it’s purchased for a business meeting or used as an employee benefit! Check out Publication 587, Business Use of Your Home and

Publication 463, Travel, Entertainment, Gift, and Car Expenses, for more details.

 

6. Any other resources or tools you recommend self-published authors should get familiar with?

 

As you can see, tax rules for business owners are complex. Therefore, I strongly recommend that you use the services of a qualified tax accountant. He or she will help you understand and follow rules that can change on a yearly basis.

Not only will a tax accountant save you time, energy, and frustration—they can pay for themselves by making sure you take advantage of every possible tax deduction for your business.

*********
Laura Adams is a personal finance expert and award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. She hosts the top-rated weekly Money Girl podcast and has a passion for making money easy to understand. She’s frequently quoted in the national media and millions of listeners and readers benefit from her advice. Learn more about Laura and connect at smartmovestogrowrich.com.

Image courtesy of Tax Credits



Laura Pepper Wu is the co-founder of 30 Day Books: a book studio. She has worked with a variety of authors to successfully promote their books, including many Amazon best-sellers. Laura is the author of wedding non-fiction guides and book marketing guides 77 Ways to Find New Readers for Your Self-Published Book and Fire Up Amazon!

Laura also runs Ladies Who Critique, a critique-partner finding site. When she's not working at the studio, you can find her walking her dog, "yoga-ing" or at a coffee shop in Seattle.

 

  • Julia Tai

    Has anyone used TurboTax online? Any thoughts on this software?

  • laurapepwu

    Hey Julia! I’m using Wave right now. Haven’t heard much about Turbo Tax, will check it out!

  • http://www.facebook.com/twdittmer Tim Dittmer

    Coffee just HAS to be deductible.

  • congressive

    I think it qualifies as “medicine.”

  • Gloria

    My husband is a USA resident and is self publishing his First book in the USA with Amazon our own website EBook etc We are lost about what we should do with our Tax return as we don’t know if it’s going to sell a lot could you give us some advise about the steps we have to take.
    Thanks
    Gloria