Self-Employed Tax Help 101

by Pam Hillman

Disclaimer: I am not a tax professional. The following are just suggestions and observations from the trenches. Please consult your tax professional before making any decisions regarding your tax preparation.

It’s been four years since I blogged about taxes, but the explosion of hybrid and self-published authors has allowed me to be party to discussions related to taxes in several groups recently. These discussions brought up some thoughts that I didn’t address the first time around. In 2011, I mostly discussed basic office expenses because that seemed to be the “bulk” of the discussion for authors at the time.

But I’m finding that a lot of people also might need some Self-Employed 101 Tax advice as well. I’ll try to keep to the basics, but forgive me if I stray a bit.

And why now when many have already filed their taxes for 2014? Even if you’ve filed already, now is a good time to start keeping accurate records for 2015. But if you haven’t filed for 2014 yet, let’s get ‘er done so we can concentrate on Speedbo!

Let’s say you’ve never been self-employed (also referred to as contract labor or independent contractor). You’ve never had to deal with 1099s, a Schedule C, Depreciation Schedules, Section 179, or anything of that nature.

You received a W2 from your employer, filed your 1040 or 1040EZ form, and you were done. Or, in some rare cases, you were able to itemize your deductions and filed a Sch A. If you had income (ie interest) other than from your W2, then you would have filed a Sch B. But that’s about it.

Okay, that’s the simple explanation for the majority of American taxpayers who are employed by “corporate America”. Self-employed folks operate a little differently. Enough that the tax return gets a lot bigger.

Self-Employed Income

First, let’s talk about a self-employed person’s income. Again, if you work for corporate America, your employer puts you on their payroll and withholds social security, federal, and state taxes out of your check every pay period. Pay periods are usually weekly or biweekly. Your employer mails you a W2 in January every year and that’s what you use to report your income to the IRS. Depending on the elections you chose (ie married with 3 dependents, etc) when you were hired and the number of dependents in your household during the filing year, you may or may not get a refund back.

A self-employed contract laborer might work for multiple businesses or individuals over the course of a year. You, as an author, are a self-employed independent contractor when you sign a contract with a traditional publisher, Amazon, Createspace, etc.

The main difference in working for Corporate America and being self-employed, is that a self-employed person receives the full amount (or gross, if you will) for their work. There are no taxes withheld. And instead of a W2, you should (but not always) receive a 1099 from every company you work for.

Example: In 2015, you uploaded 3 books to Amazon had deposited into your account $2000; you signed a contract with one publishing house and received a $1500 advance. Another publishing house sent you $1200 royalties for a previous year’s book, and for the sake of making sure you don’t starve, lets also say you signed a contract at a traditional publishing house and received an advance of $3000. You should receive a 1099 from each of those businesses and will use those to report your income on Schedule C.

If you receive $600 or less in a calendar year from any individual person or business, that business isn’t required to send you a 1099. However, you are still required to report that income on you tax return. You don’t get a pass just because you didn’t get a 1099. Sorry.

If you don’t receive a 1099, no need to panic. It is very important to keep track of your income from various clients so that you can make sure the 1099 matches the total amount the business paid you throughout the year. If it doesn’t, you need to contact that business immediately.

If you find yourself doing contract labor as well as selling goods or receiving reimbursement for anything other than actual labor, make sure non-labor related reimbursements are documented as such so that amount isn’t included in your 1099. For example, say you are invited to speak at a writer’s conference and the agreed upon speaker’s fee is $700, and the agreed upon travel expense is $500. The 1099 you receive from that organization would only be for the speaker’s fee, not for the reimbursed travel expense since that isn’t labor. Just use common sense and separate labor from goods and other services.

And, just for the record, smaller venues like speaking gigs probably won’t send you a 1099. Just keep good records, report your earnings, and you’ll be fine.

Also, I need to mention the fact that if you are incorporated, those who hire you for a contracted job aren’t required to send you a 1099. But you are still required to file it on your taxes.

Self-Employment Tax

Now, the moment you’ve been waiting for… or not. The single most important difference (leaving health insurance completely off the table) in working for corporate America and being self-employed is that when you work for corporate, your employer pays half of your SE tax. 7.65% comes out of your check and your employer pays the other 7.65%. Self-employed folks pay the entire 15.3%. Ouch.

The good news is that you only pay that 15.3% on your Net Profit (Income minus expenses) on your Sch C.

Self-Employed Expenses

In 2011, I discussed some of the more common expenses that self-employed authors might be able to use on their Schedule C. You can review that post here.

But, if you’ve jumped into the independent publishing pool recently, there are some expenses that weren’t mentioned in the previous blog post. Things like cover artists, freelance editors, and web designers. So, these people might…or might not be… self-employed. Should you issue 1099s to them?

It depends.

Do you plan to pay any of these people $600 or more in a calendar year? If the answer is maybe, then it’s a good idea to have these independent contractors fill out a W9 before you pay them their first payment. A W9 lists their legal name and address and either their social security number or their EIN. Their signature attests that the information is correct. A scanned copy in your files is sufficient documentation.

If you’re unsure if you need to have a W9 on file for contract laborers that you hire, ask your tax preparer. The truth is that they are supposed to report that income. So, if someone balks at supplying a W9, then my question would be why? But having it on file so that you can do due diligence in mailing the 1099 at the end of the year is a good policy.

Even if you have a W9 on file for people you contract to work for you, you don’t have to send them a 1099 at the end of the year unless you paid them over $600 total.

Income, Expenses, and a Little Bit of Everything

I’ll mention a couple of other things that I’ve noticed in discussions the last few weeks. There are so many different scenarios that there’s no way to discuss them all. You have to work income and expenses out in your head and make sure that you explain it to your tax preparer. If your preparer doesn’t understand you or vice-versa, keep talking until you both understand your finances.

Let’s briefly talk about group projects such as ebook collections or any other business endeavor. If you are involved in a group project with other authors, most likely one person on the team will be the project manager (PM). Amazon, Createspace, etc. will pay the PM all royalties and issue the PM a 1099 each year. The PM will then pay the other authors in the collection/project and the PM will issue 1099s to the other team members at the end of the year.

If you are the PM, it’s best to remit to the other people in the group in the same year that you received the funds. It’s just cleaner that way and will be less hassle from year to year.

PayPal, credit card payments, etc.

If you accept payment for services rendered or for products sold online through PayPal, Square, or other credit card merchants, don’t forget to expense out the fees that those services withhold.

If you never receive those fees, then just report the income you actually receive. If you use an invoicing system and are like me and want to balance with your invoices, then you might prefer to report the total amount of paid invoices as income, and the fees as an expense. Either way is okay as long as you have clear records to document. Just don’t forget about those fees because they are a qualified expense….as long as you don’t accidentally double dip!

TIP: Run everything through one bank account, always pay your bills with a check, debit/credit card, Paypal, etc. Always deposit business related income into your bank account. Don’t just cash a check and spend it. Deposit it first, and then write yourself a “personal draft” if you need to.

Also, just for the record, PayPal and other third party providers are required to issue 1099-Ks to anyone who does more than $20,000 and has more than 200 transactions. If you fall in this category and receive a 1099-K, double check to see if the fees are included. If they are, then IMO, the smart thing to do is to report the entire amount from the 1099-K as income on your Sch C, but report the fees (that you never received) as an expense on your Sch C. Your deposits plus the fees that you didn’t receive should match the amount on the 1099-K. Clear as mud?

Free books from your publisher

What do you do if you receive free books from your publisher? You give them away like candy. You didn’t pay for them, nor did you sell them. So no money changed hands. But you can claim the expense of the postage and mailers you bought to send those books out to reviewers.

Purchased books from your publisher

Should you decide to purchase your own books for resale, then you can expense the actual cost of those books (including shipping) on your Schedule C. You will then keep up with books you sell and report that amount as income. You’ll also need to apply for and collect sales tax in your state.

Estimated Taxes

Finally, estimated taxes. As your self-employed business grows and your self-employed income increases, you’ll be required to pay estimated taxes. Estimated taxes are due four times a year and are based on your previous year’s tax return. Your tax preparer will be able to help you determine how much your estimated taxes are. If you expect your Net Income to change drastically mid-year, or you receive a much larger royalty statement than expected, talk it over with your tax preparer ASAP. He or she might suggest an adjustment in your estimated taxes.

Addendum: Someone just sent me this article on Digital Bootstrapper, and it's CHOCK full of good tax tips and advice. Tax Sheltering for Self-Employed Entreprenuers

Hope this helps some shed some light on some of the snares that self-employed authors deal with. Common sense approach always works. But when in doubt, your tax preparer can help you make the best decision.

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