*Note: If you haven't figured out why I picked today to talk about taxes, you probably need this post more than you think you do...
Most people in the United States work for someone else, as employees or independent contractors. (And, statistically, most people are employees.)
Most writers have "day jobs" to help support their writing careers.
For those who are self-employed, business owners, or primarily independent contractors, the tax obligations of a writer are probably already familiar. For those whose primary work experience comes as an employee, however, making money from writing means it’s time to think outside the W-2.
WRITING INCOME IS SELF-EMPLOYED INCOME
U.S. residents (and foreign citizens living abroad who pay taxes in the United States) will not receive a W-2 (report of wages earned by employee) from the publisher at the end of the year. Independently published authors won't get a W-2 from the distributions sites through which they sell their books (for example, from Amazon). Instead, an author receives Form 1099 – report of income other than wages, salaries or tips.
People who receive Form 1099 are considered self-employed or independent contractors by the IRS, which is relevant because people in those categories must pay quarterly estimated taxes during every calendar year. As soon as you start making income from writing, you must calculate and pay estimated taxes too.
WHAT ARE ESTIMATED TAXES AND HOW DO I PAY THEM?
Four times a year, on the 15th of April, June, September and December, authors and other self-employed people must estimate the taxes due to the IRS and their state of residence (if the state has an individual income tax – some don’t) on income earned during the previous calendar quarter. On the due date, the author (or contractor) must send a check for the estimated tax amount due (if any) to the IRS (and the state, if appropriate) along with the relevant estimated tax forms.
If you fail to pay estimated taxes on time, or fail to pay enough, the IRS and/or state may assess a monetary penalty against you.
The obligation to pay estimated taxes often comes as a shock to authors who previously worked only as employees or whose employers withheld taxes from the authors' paychecks.
BE PREPARED: ORGANIZE YOURSELF FOR ESTIMATED TAXES
Don’t incur a penalty because you were unprepared! As soon as you (a) sign a publishing contract or (b) self-publish your first manuscript:
1. Find out what you need to know about paying estimated taxes. Get the necessary forms and mark your calendar. If you can't figure it out on your own, attend a local workshop or talk to an accountant.
2. Set aside a portion of every royalty check or periodic self-publishing income to cover your tax obligations – don’t anticipate having enough left over from then-current income when the payment comes due.
3. Don’t forget to document your deductions! Authors may be able to deduct certain costs, including some expenses associated with research, writing, and publication. Consult an accountant or tax advisor to learn which ones, and don’t forget to save and mark receipts to document deductions.
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-related issues.
Susan Spann is a California publishing and business attorney who also writes the Shinobi Mysteries, featuring ninja detective Hiro Hattori. Her debut novel, CLAWS OF THE CAT (Minotaur Books, 2013), was a Library Journal Mystery Debut of the Month. Her second novel, BLADE OF THE SAMURAI, releases July 15, 2014. Susan’s legal practice focuses on publishing law and business. When not writing or practicing law, she raises seahorses and rare corals in her marine aquarium. You can find her online at her website, http://www.SusanSpann.com, and on Twitter (@SusanSpann).