OK, it's tax season. 2007 is already over and done with; if you have had a hard time with this year's taxes, now is the time to plan for next year and put good practices into gear.
I have a standard piece of advice for anyone who is self-employed. This includes writers, and it also includes artists and small press publishers. Here's the advice: throughout the year, for every dollar you earn, bank 30 cents. This is very stringent, but if you are able to adhere to that regimen, you will be able to afford to pay your income tax. If you earn six figures in direct cash, this is a "must." Otherwise, you will receive a very unpleasant surprise when you complete your income taxes.
Many people use accountants to prepare their taxes (or tax preparation services - they're not CPA's - they are people who participate in special tax preparation programs and certification). Because the IRS is so frightening to many, and because taxes are tedious and boring for people who aren't weirdos like me to work on, this is a valid option. Preparation for payment of taxes can consist of carrying one's W-2 form to the service and leaving it. Or of course, there are the "file while you wait" services. With e-filing a standard today, you are automatically flagging yourself by filling out these papers by hand and mailing them in.
Did you know that? Hmn. Other automatic flags which are true are the home office deduction (appropriate for most self-employed writers - where else would they do their business - online at Starbucks? - maybe, but if so, connecting to their internet there and maybe even your coffee is deductible - as allowable by law!).
I'm an adherent of TurboTax myself. The program is very reasonably-priced, and is even online, with a full package for all but the most complex financial situations (it incorporates virtually all schedules and is tied together with state packages very well).
So let's talk some Schedule C. If you earn more than $5,000 a year from writing, you will want to file a Schedule C (sole proprietor). Authors earning large sums of money may choose to incorporate. In this case, my advice isn't for you - you'll have a CPA and an attorney who are both far more knowledgeable than I am. My only advice in this case is, review all of your financial information on a regular basis. You are responsible for your own money. While nearly all professionals are very honest, there are those few who are not. And no person is more vulnerable than a creative artist with his or her head in the clouds, and eyes not focused on the bank or investment statements.
Here's my big advice. If you earn any significant amount of money from writing, you need to treat it as a business. First, have dedicated space, and equipment for your business. I have filing cabinets, an "office" (such as it is!) and things that are used only for my writing. Second, do keep all receipts, and, if you have not already done so, simplify recordkeeping and reduce paper waste by signing up for online banking and using a single credit card or account for expenses related to your writing. Mixing "regular" funds and expenses (such as a married couple with one full-time employed partner and a self-employed writer) can get very confusing.
Third, the great advantage of programs like TurboTax (which I highly recommend, again) is that the former massive books of IRS regulations that I used to keep are now actually built into the program. It has online advice available as you are doing your taxes, as well as a guided program that tells you what to do, and when to do it, while you are preparing your taxes and entering the information.
So, that said, I'm going to give a couple of places where it can get confusing. First, the home office. You may be warned not to take any home office deduction because it's an audit "flag". Depending upon the portion of your home used for the office, following that nancy pants warning could cost you hundreds, and potentially thousands of dollars that are truly yours every year.
In order to take the home office deduction, you must have a dedicated part of your home where you do your writing business. If you haven't already done so, establish such a space. Then, measure out the actual space involved. In my case, it's one of the four bedrooms in my house, so that is easy and straightforward. Also, try to keep other stuff out of the home office -- such as a tv set or rec room stuff. Measure the space. If you are using TurboTax, your job is easy from then on. You simply enter the cost of your rent or house payment, the overall square footage of your home, and put in the square footage that you have measured for your office area. Once you have entered this, it automatically calculates the percentage of your home office deduction. The keys to successfully getting your home office deduction are 1) a dedicated space; 2) careful and accurate measurement; 3) keeping other things out of the space; and 4) knowing the overall area of your home - I guess everybody knows their monthly rent and/or house payment! If you move during the year, this can get complex. You will need to file under ONE address - and take the time to record accurately the amounts paid and areas of office footage for each.
Another area of confusion is business-related deductions. It is probably to your advantage, even if you are half of a dual-income couple earning cash from writing, while your spouse is employed, to deduct your health insurance payments on your Schedule C. You may come out "even" on the total tax paid, but you will reduce the amount of taxable income from your writing business, thereby reducing your overall tax liability much more than based on your spouse's earnings - which will have already had dandy fine withholdings. Remember, when you file - most people receive refunds who are employed with withholding. The IRS is doing you no favor and this is not "free money" to you. This is your money that they banked and earned interest on during the year. Not you. They will assess you an interest an underpayment penalty if you owe significant amounts of taxes during the year and it could have been estimated during the prior year's filing - in other words, if you didn't make your quarterly estimated tax payments (to be discussed in a later article).
With business deductions as a sole proprietor filing Schedule C, don't forget huge categories that, as a writer, may be very important to you. First, in the case of SF/F writers, being a guest at a convention and promoting yourself and your work is not only a legitimate expense -- it's a vital part of conducting the business. Flying to and from the convention is a travel expense. Your meals and lodging are fully-deductible, because you must feed yourself while there, and if you weren't promoting your career as a writer, you wouldn't be staying in that con hotel, or eating in that lovely restaurant. If you take others out to promote/talk business, that is fully-deductible. Other meals and incidental expenses are deductible as allowable by law (use your TurboTax or other program to answer the questions about their nature and purpose - the proper allowable deduction will be calculated for you). Other important categories are: online access, databases for research, books purchases for research or to further your writing - i.e. writing books, dictionaries, style manuals, etc. Obviously, paper and printing and postage are expenses. Programs such as Adobe Acrobat Professional, to produce and read/comment on .pdf files are also deductible. Excel, Word, and of course, products like Final Draft -- all deductible. Memberships in online communities dedicated to the promotion of your writing: deductible. Professional association dues: RWA, MWA, SFWA - deductible. If you're fortunate to have a dedicated phone line - very easily deductible. Your fax machine or copier/printer - you can elect to capitalize the asset in the year you purchased it, and use one of the depreciation schedules.
For every dollar you deduct, you reduce the tax you pay by 30 cents. So keep those business records of absolutely everything. If you didn't do it last year - start now and do it for next year, and use that dedicated file cabinet drawer in your home office, and a special file on your computer and whatever program you like - to keep the information. Best of luck, and remember - the real advantage to keeping all of this information is not to just properly file your taxes, it is also to let you know the progress you are making with your writing career and earnings. You're a business of one. And your earnings matter.