NWU member and tax accountant Therese Francis spoke at a recent NorCal event. These are points she covered in her talk on taxes for writers:
Think like a business, look like a business, be seen as a business and, most of all, take advantage of tax laws for businesses.
The IRS recognizes two types of writers:
- The Hobbyist, who has income, cannot claim a loss, and is very limited in the minimal expenses they can apply against their income
- The Professional Writer, who has income directly and indirectly related to writing, expenses that are directly and indirectly related to writing, and can claim a loss against other types of income to reduce overall taxes.
The types of expenses that a business can take far exceed what a nonbusiness can take. The IRS wants to classify you as a hobby, and you want to be classified as a business, so that you:
- Can take direct expenses against income (expenses that are directly involved in creating the income, such as research costs)
- Can take many types of indirect expenses against income, such as membership in the National Writers Union, subscription to Writers Digest, or a trip to Hawaii to attend a writers conference
- Can take “phantom expenses” such as the standard deduction for an in-home office and standard mileage deduction
- Can take some deductible expenses “off the top” such as health insurance for you and your family or SIMPLE retirement contributions.
- Can have expenses exceed income, and then take that loss against other forms of income, thus lowering your federal and state income taxes
How to look like a business
- Have a state/city/county business licenses
- Register with the state secretary
- Have a checking account and credit card if possible under your name/business name and use it only for business.
- Join professional organizations, such as the National Writers Union, PubWest, or Sisters in Crime
- Participate in those organizations by attending meetings, helping with events, and/or being on the board
- Keep copies of your queries and proposals. Keep copies of the responses.
- Keep a mileage log
- Save receipts – the IRS wants to see what you bought, why you bought it, and how you paid for it. The credit card statement or the bank statement is not enough.
- Track income and expenses. Better yet, actually review the numbers and come up with strategies that will decrease losses/increase profit.
- Attend workshops that improve your business savvy like how to read financial statements or how to create a budget.
- Educate yourself on copyright, trademarks, and other legal issues that affect the industry by attending workshops on intellectual property rights. Then apply the rules by not violating other people’s copyrights, getting required permissions, and purchasing commercial licenses for fonts, artwork, lyrics, quotes, etc.
- Subscribe to magazines that teach about the writing industry such as Writers Digest, Writers Forum, or Book Business.
- Work with a mentor or business coach. You can get free mentoring through SCORE, and assistance through the Small Business Development Centers throughout the country.
- Setup a separate tax savings account and put a percentage of your gross writing income into that account. It shows that you expect to make a profit and intend to pay taxes.
- Write a business plan and update it at least once a year with strategies that
- show intent to improve your business.
When not reading or writing, Therese Francis works as a tax accountant. Her website is firstname.lastname@example.org.