Don't Let Those Taxes Confuse You!

by bestselling author Jean C. Gordon.

You asked.... We answered! Earlier this summer folks wondered about taxes, and so I went to our go-to gal who's got her finger on the tax pulse... but talks CAREFULLY because situations differ! Jean C. Gordon is experienced on both sides of the aisle, as a financial consultant... and a published author! Perfect day to pick her brain and get our affairs in order!

I’m going to start by thanking Seekerville for inviting me to visit. Then,

I’m going to let you in on a secret. I like taxes. Not paying them, but planning for them and doing income-tax returns. I gladly do all my immediate family members’ returns every year gratis. But it’s October, not April, you may say. Why are you talking about taxes? Because the last few months of the year are a great time to review your tax situation to make sure you’ll be able to take advantage of all the tax opportunities available to you as a writer when you have to file your federal income-tax return next spring.

To help with your review, I’ve taken my professional financial planner cap off the closet shelf, where it’s been since I left my day job a year and a half ago to be a full-time author, and am sharing my “Romancing the IRS,” a presentation on taxes that I’ve given to numerous writers groups.

Is Your Writing a Business?

Before you can look at your business tax situation, you need to determine whether your writing is a business or a hobby. Business losses are deductible. Hobby losses are not. If the IRS determines your writing is a hobby, you can only deduct expenses up to the amount of income your “hobby” produces. That said your writing doesn’t necessarily have to produce a profit every year to be a business. One rule of thumb is that your business should have produced a profit in three out of the past five years.

However, whether or not an endeavor is a business is not simply a matter of numbers. Rather, the IRS uses a facts and circumstances approach, generally considering nine factors. No one factor is controlling, and other factors may be considered. Your tax review mission is to look at these facts and circumstances:

$        How you approach writing (for example, to you look at it as a means to earn money and takes steps to improve your writing)

$        Your writing expertise

$        Time and effort you put into writing

$        Success with similar activities (For me the fact that I was employed as a tax and financial writer was a plus.)

$        History of income or loss

$        Amount of profits

$        Expectations that assets will appreciate

$        Your financial status (Having other employment that “pays the bills” can be a minus if your writing isn’t making a profit.)

$        The pleasure or recreation involved (Not that you shouldn’t enjoy writing, but if all you do is attend  and deduct the costs of conferences in fun places, you may fall down on this one.)

What’s Deductible?

You’ve determined your writing is a business, so what can you deduct? You can deduct ordinary and necessary business expenses. The following are common (but necessarily all) business deductions you may be able to claim:

$        Professional fees and dues, including Romance Writers of America (national and chapter dues), American Christian Fiction Writers, Mystery Writers of America, Sisters in Crime, and other writers groups

$        Continuing education costs

—  College courses

—  Online courses

—  Materials and supplies

—  Photocopy expenses

—  Books for research (but don’t write off every fiction book you buy)

—  Conference/Seminar fees

—  Textbooks

$        Advertising expenses (including reader giveaways)

$        Telephone expenses (for your business)

$        Supplies

—  Business cards

—  Website development and hosting

—  Computer software and supplies

—  Internet connection/use charges

—  Postage and shipping

—  FAX supplies

—  Photocopy expenses

—  Stationery

—  Equipment repair

—  Gifts and greeting cards (to your editor/agent, for example)

—  DVDs, files and videos for research

—  Clerical help

$        Car travel expenses

—  Between jobs or locations

—  Publisher/agent meetings

—  To purchase supplies

—  Professional society meetings

—  Related parking fees and tolls

—  You can track and claim your actual expenses or claim 54 cents per mile (in 2016; reviewed annually)

$        Out-of-town travel expenses

—  Airfare (only yours, not family members who are traveling with you, unless they’re with you as your employee)

—  Car rental, taxi, bus, train

—  Parking and tolls

—  Lodging (Your room only; family members may stay in the room with you but you can’t deduct additional rooms for family member, unless they’re with you as your employee)

—  Meals (only yours, not family members who are traveling with you, unless they’re with you as your employee)

—  Tips

—  Phone calls

$        Equipment purchases

—  Cell phone (for your business)

—  Copier, calculator

—  Recorder

—  Computers and printers

—  Computer peripherals

—  Desk and other office furniture

Under the tax law, your costs of these types of equipment are generally depreciated over five or seven years, meaning you have to spread your deduction over several years. But you have an alternative. You can elect to use so-called Section 179 expensing. By using expensing ,you generally can claim the costs of up to $500,000 (in 2016) of new and used equipment you purchase and put into service by the end of the year on your 2016 tax return, rather than over time.

If you want to offset 2016 business income and potentially lower your tax bill, you might want to buy equipment you are thinking about buying early next year before year-end and use expensing. That way, you could deduct the full cost in 2016.

$        Self-employment taxes (more on this later)

$        Premiums for medical, dental, and qualified long-term care insurance for yourself, your, spouse, and your dependents

$        Retirement plan contributions (self-employed plans, other employer-provided plans, and individual retirement accounts)
If you want to reduce your taxes for 2016, consider increasing your deductible retirement plan contributions before year-end.

$        Home office expenses (based on the percentage of your home the office represents)

—  Deductible mortgage interest

—  Real estate taxes

—  Homeowners insurance

—  Utilities

—  Repairs and maintenance

—  Depreciation

Does My Writing Space Qualify as a Home Office?

The home office deduction is available for homeowners and renters and applies to all types of homes. The first requirement to claim the deduction should be easy to meet. You must show that you use your home as your principal place of business. Next, you must regularly use the part of your home you want to claim as your home office exclusively for conducting business.

For instance, if you use an extra room to run your business, you can take a home office deduction for that extra room. However, if that room is also your guest bedroom, the office part of the room must be distinctly separated from the bedroom part, and you can claim the deduction only for the office part. You also can deduct expenses for a separate freestanding structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. You also need to keep accurate records of all deductible home office expenses (listed above). Sound complicated? It is. However, the IRS offers a simpler way you can choose to figure your home office deduction.

Basically, you figure the square footage of the space dedicated to your business office (not to exceed 300 square feet) and multiply it by five dollars. Your deduction cannot exceed your gross income from the business use of your home less your other business expenses. With this method, you cannot deduction depreciation in the office space. You can deduct the home mortgage interest attributable to your office space in your personal deduction for home mortgage interest. You’re free to change the way you calculate your deduction from year to year.

As a Self-employed Person, What Taxes Do I Have To Pay?

Like everyone else, self-employed people have to pay federal income tax (and state income tax, if applicable) on their earned income. You also have to pay the so-called self-employment tax. Simply, this tax includes the combined amount your employer and you, as an employee, would pay on your income on your behalf for Social Security and Medicare. In 2016, you have to pay 12.4% Social Security tax on up to $118,500 of net writing income (basically, after business deductions), if you have no other earned income. You have to pay 2.9% Medicare tax on all of your earned income. (Individuals with earned income greater than $200,000 (single) and $250,000 (married-joint) pay an additional 0.9% Medicare tax.)

The $118,500 income limit on earned income subject to Social Security tax applies to your total earned income from writing and other employment. For example, if your wages are $78,000, and you have $40,700 in net earnings from writing, you don’t pay dual Social Security taxes on earnings more than $118,500. Your employer will withhold 7.65% in Social Security and Medicare taxes on your $78,000 in earnings. You must pay 15.3% percent in Social Security and Medicare taxes on your first $40,500 in self-employment earnings and 2.9 percent in Medicare tax on the remaining $200 in net earnings.

If you haven’t looked at your writing income for the year and considered your possible tax consequences, now is the time. Your professional tax advisor can help. Or, if you used one of the popular tax programs for your 2015 tax filing, it probably gave your average ordinary income-tax rate. Use that rate and the self-employment rates to get an idea of your 2016 tax liability for your writing income. Personally, I use TurboTax Tax Forecaster (free) and Quick Books Self-employed computer programs for a quarterly picture of my income and tax standing. I’m sure there are other programs and apps you might use.

To take care of your self-employment and income tax on your writing income, you may need to make estimated tax payments. If you have a day job, too, you have an alternative. You can have your (or your spouse’s) employer increase withholding on those wages to cover taxes on your self-employed writing income as well as taxes on your wage income. Similarly, if you’re an older writer, you can choose to adjust the withholding on your Social Security benefit payments and retirement plan withdrawals to cover taxes on your writing income.

Generally, taxpayers have to pay equal estimated tax payments, and the IRS can charge an underpayment penalty for any quarter your payment is short. But if you receive income unevenly during the year, as authors usually do, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Electronic Federal Tax Payment System is the easiest way for individuals and businesses, alike, to pay federal taxes. Tax payments are due:

$        January 15 (Sept. 1 to Dec. 31)

$        April 15 (Jan. 1 to March 31)

$        June 15 (April 1 to May 31)

$        Sept. 15 (June 1 to Aug. 31)

When the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or a holiday.

If you don’t pay enough tax throughout the year—either through withholding or by making estimated tax payments—you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

Now for my closing disclaimer. This blog is for informational purposes only. To the best of my knowledge, the information I’ve presented is correct. However, it should not be taken as tax or legal advice. Before taking action on any of the information I’ve presented, talk with your professional tax advisor.

Any questions? I’ll be around for most of the day to answer any general ones I can. And by asking (or otherwise commenting), you be entered in my giveaway of one print (US only) and one eBook copy of Mending the Motocross Champion, the first book in my new Team Macachek series.

For Amazon bestselling inspirational and sweet romance author Jean C. Gordon, writing is a natural extension of her love of reading. From that day in first grade when she realized t-h-e was the word “the,” she’s been reading everything she can put her hands on. She and her college-sweetheart husband tried the city life in Los Angeles, but quickly returned home to their native small-town Upstate New York, where she sets her books.

They share a 175-year-old farmhouse just south of Albany, NY, with their daughter and son-in-law, two grandchildren, and a menagerie of pets. Their son lives nearby. While Jean creates stories, her family grows organic fruits and vegetables and tends the livestock de jour.

Jean is currently celebrating last week’s release of Mending the Motocross Champion, finishing Holiday Escape, a Team Macachek novella, and working on a new series for Harlequin Love Inspired. Connect with Jean on Facebook, Facebook/JeanCGordon.author, as @JeanCGordon on Twitter, or on JeanCGordon.com

New Release Giveaway

Physical therapist Dana VanAlstyne’s dreams of a family were lost in the dust of a motocross racecourse. Although she’s filled her life with her work and church activities, it hasn’t filled the empty space inside her. Nor has it eased the heartache of being abandoned by a man who wasn’t ready for a wife and children. Now her dream is to open her own private practice. All she needs is the capital to make that happen.

Anton, “Mac,” Macachek may be the top professional motocross racer in the country but he still has one race that matters more to him: winning a championship at Unadilla Raceway and showing the hometown folks the bad boy did amount to something. But when a horrific accident sidelines those plans, he makes a deal with the woman he once loved with all his heart. A woman who abandoned him. If Dana will get him back in racing shape, he’ll fund her new practice. Then an even more dangerous risk is revealed. If Mac races again, he could die.

Does Dana have enough faith to risk her heart again? She loved Mac once, but feared he loved motocross racing more than he loved her. If she helps him mend his broken body, will it also mend her broken heart? Or will it all be lost again in the dust and danger of a motocross racetrack?

TEAM MACACHEK: Meet the strong women and fearless men of the motocross circuit.

Amazon, Nook, Kobo, and iBooks buy links: https://books2read.com/u/3neYV8

Ruthy here! We've got birthday cakes today! Yes, we have banana split cake, banana cake, spread with pineapple and strawberry fillings, layered with fresh whipped cream and drizzled chocolate glace..... And for those who aren't into fillings, we've got Angel Food cake slices, sweet and simple! Stop in, let us serve you a cuppa and some cake.... and some financial conversation!!!

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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