Thursday, May 16, 2013

Think Outside the W-2: Authors and Estimated Taxes**

April showers bring May flowers, but June brings a visit from the tax man.

In light of that, I'm taking a break from the series on publishing contracts this week to talk a little about authors and estimated taxes.

Most people in the United States work as employees of someone else. This is true of writers also – many of us do not write full time, and have other employment that helps to pay the bills. Those of us who work as independent contractors or business owners -- aka, the "self-employed" -- already understand the importance of June 15.

For those who work as employees, however, a writing career means it’s time to think outside the W-2.

U.S. residents (and persons living abroad who pay U.S. taxes) who earn income from writing or publishing will not receive a W-2 from the publisher, agent, or independent site (such as Amazon or Smashwords) which sells their works. Instead, authors receive Form 1099 – "a report of income other than wages, salaries or tips."

(Quit rolling your eyes. This won't descend into alphabet soup. I promise.)

People who receive a Form 1099 are self-employed or independent contractors- and those kinds of people must pay quarterly estimated taxes to the IRS. Four times a year, in April, June, September and December, authors and other self-employed professionals must estimate taxes due on income earned during the previous quarter and send those estimated taxes to the IRS and the state tax authority in the author's state of residence (assuming that state has an individual income tax – some don’t).

If you fail to pay estimated taxes on time, or fail to pay enough, the IRS and/or the state will assess a monetary penalty against you.

Estimated taxes often come as a shock to authors familiar with the employee system, where the employer withholds taxes from every paycheck. Don’t incur fines because you didn't know better.

As soon as you sign a publishing contract or self-publish your first manuscript, it's time to get prepared:

1. Get the necessary forms and mark your calendar to make sure you make your payments before the deadlines.
2. Set aside a portion of every royalty check or distribution to cover your tax obligations – don’t anticipate having enough "left over" from then-current income when taxes come due.
3. Don’t forget to document your deductions! Authors can often deduct certain costs, expenditures and expenses associated with writing and publication. Consult a tax advisor to learn more, and don’t forget to save receipts to document your deductions properly.

Paying taxes is never fun, but planning ahead, setting money aside as you earn it, and learning enough about taxes to plan your business wisely can help take at least some of the sting from the ides of April, June, September and December.

**I’m not a tax advisor, and this post should not be taken as tax advice. Consult a qualified accountant or other tax advisor before making decisions on tax issues.

Susan Spann is a California publishing attorney and the author of Claws of the Cat (Minotaur Books, July 16, 2013), the first novel in the Shinobi Mystery series featuring ninja detective Hiro Hattori. You can find her on twitter @SusanSpann  

No comments: