Tax Advice from a Debut Novelist
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Let me begin by saying that I am not a tax professional, and that my number one piece of advice for any artist/writer/freelancer/contract employee at tax time is to find an accountant who’s used to working with complicated weirdoes artists and get them to walk you through the process. They will know legalities and loopholes that I can only dream of, and they will know how they apply to your particular state, which may be different from mine. Professionals are there for a reason.
That said, I know that even looking for an accountant can be an emotionally fraught experience on par with searching for a good therapist, and once you find one it can help to have some sense of what questions you’ll need to ask. (My advice? Ask on Twitter, Facebook, etc. Get a word of mouth recommendation. People know.) Plus, I think it’s nice when people stand up and say “I HAVE BEEN THERE. I FELT VERY DUMB, AND CAN HELP YOU FEEL LESS DUMB YOURSELF,” especially in the oft-opaque creative professions, and I will therefore happily share with you the fruits of my wisdom, the outcome of my panic attacks, and the tax strategies I’ve been offered over the years — some of which I even follow. My advice is based on my experience, and will therefore be most applicable to people with their first book deals and anyone who gets a major portion of their income as a 1099 instead of a W-2.
Will the government take this blood tithe from me always?
So let’s dive in. First, do you know the difference between a 1099 and a W-2? For a long time I didn’t, and honestly I still get confused. But basically, if you’re a full-time exempt employee, at the end of the year your employer will send you a W-2 to submit with your taxes that lays out how much money you earned and how much was withheld as taxes on your behalf. As a freelancer or novelist or what have you, you don’t have a full-time employer: you work for yourself. But the people who pay you still have to report that money to the government so you can pay taxes later. That means that in order to get your book advance or freelance check, you need to submit a W-9 form to whoever’s going to pay you. They will then send you a 1099 report at the end of the year, which is the equivalent of a W-2. You use this to figure out how much to pay in taxes. (For more on tax forms for contractors, visit this website.)
Here is a complicated fact that almost made me cry when I first found out about it: when you start earning freelance income (again, this might mean your advance, your royalties, or any other money that doesn’t have taxes withheld automatically), the government will expect you to start paying estimated taxes each quarter (April 15, June 15, September 15, and January 15) instead of just paying in one big chunk at the end of the year — though you still have to submit regular taxes then, too. (If your estimated taxes are perfect, then you won’t have to pay any extra at the end of the year, just submit the paperwork — though I’ve never quite managed this.)
This isn’t as bleak as it sounds, though. First off, you don’t have to pay the estimated taxes retroactively. (Or if you miss the deadline, the fine is small — it’s like $50.) So the first year you sell a book or switch to freelancing, you do your taxes as usual, and maybe even have a W-2 thrown in from your previous job. The amount you earned as a freelancer that year will be used to calculate (i.e. make an estimation) for how much you should pay each quarter in the next year, and you’ll probably get handy pre-printed forms and envelopes to help you remember to pay.
But wait, you might say — as I once said, crippling the hand of the novelist friend who was trying to explain this to me while also eating a chicken pot pie — what if I don’t anticipate earning freelance income next year? What if it was a one-time thing? Will the government take this blood tithe from me always? No. If this is your situation, you just need to explain it to the IRS in a formal letter. This is an area where an accountant can really help you, because it sounds absurd to me that a simple explanation would be enough to satisfy the most monstrous bureaucracy in all of history — but I’m given to understand it works. Maybe there’s a form too; I’m not sure. Basically, people with full-time employers pay taxes all year too, they just don’t have to think about it. (Bliss!) Estimated taxes aren’t there to screw you, just to help submit the money that you owe throughout the year, like everyone.
Estimated taxes aren’t there to screw you, just to help submit the money that you owe throughout the year, like everyone.
Now let’s assume that you do plan to keep selling books and freelancing into the foreseeable future. That means estimated quarterly taxes will be your jam. It also means that you will need, for the equally foreseeable future, to do the following:
1. Keep a record of everything you buy or do that can be deducted from your taxable income as a business expense. As a writer this means laptops (if bought in the same year you’re paying taxes for), books, travel to conferences, food eaten at those conferences, meals attended for professional purposes, health insurance, research trips related to professional writing, and even a part of your rent if you have an area of your apartment dedicated to work. (You have to calculate that based on the square footage of the space vs. your apartment. So, the deductible portion of your rent is to your overall rent as the square footage of your office is to the overall square footage of your apartment.) If you are shitty at keeping receipts, you can also just look back at your credit/debit card expenditures for the year before doing your taxes. These should exist online, but some companies archive them after three months, which just means you have to call the company (shudder of sympathetic horror) and ask them to send you your records for the year. They will do this. Make a spreadsheet.
2. See if you actually have enough deductions to matter, or if, as has always been the case for me, you still just take the standard deduction. If so, dang. But good job for trying.
If you are shitty at keeping receipts, you can also just look back at your credit/debit card expenditures for the year before doing your taxes.
3. Figure out whether you need to form an official small business or just pay your taxes as a sole proprietor. I am a moron (probably) and haven’t yet formed a company out of which to pay myself — I’m told that although it costs money to set such a company up (and then get a business bank account and pay yourself out of it) there are significant tax benefits. Oh well. In practical terms this means that when I fill out W-9s for people who want to pay me, I use my social security number instead of an EIN, or Employer Identification Number (and probably lose some money.) If you’re only going to be freelancing/book writing for a year or two (or doing so irregularly) then you probably want to stick with being a sole proprietor. If you plan to make a real business of this, you should probably (goddamnit) set up a real business — and I cannot emphasize enough how much you should get the advice of an accountant to do so.
4. Either way, hold back at least 30% of your income in a separate bank account. Take this out of every check. Do not view this as your money, because it is not. (Though you can keep the interest you earn if it’s in a savings account!) An accountant can help you calculate how much to “self-withhold.” I keep back 33% of everything, but I don’t know the right amount for you. (Not, by the way, an issue of personal preference so much as a reflection of your tax bracket/financial situation.)
The process to submit quarterly taxes is simpler than annual taxes, because you don’t have to calculate anything new.
5. Pay estimated state and federal taxes before each quarterly deadline. Again, either your accountant, the Internet, or (eventually) the government can supply you with the necessary forms & envelopes to make this super easy. Since I’m no longer new to this rodeo, the IRS sends me the forms I need in the mail, but you can print them yourself just as easily (1040-ES for federal taxes; find them here. Each state should have their own form too). The process to submit quarterly taxes is simpler than annual taxes, because you don’t have to calculate anything new (you should be able to figure out how much to pay quarterly while doing your taxes in April, and the amount is the same every quarter). Just get your 1040-ES, write in your social security number or EIN and the amount you’re paying, and send it in with a check. (Here’s a list of the addresses to send your payments to, broken down by state.)
Let me close by saying this: I am probably like you. I do not like this stuff, and every year when my taxes are done I throw an emotional party on par with Studio 54 in its heyday, and allow myself the exquisite luxury of forgetting I’ll ever have to do my taxes again. But over the past few years, I’ve downgraded the process from “panic attack” to “serious annoyance” (it takes up a weekend day! Shitty!) by educating myself just a little about what needs to be done. The first year I had 1099 income, my husband and I got an accountant, just as I have been begging you to do for yourself. Since then, we’ve gone back and forth about whether to use one again, usually just using the example he set and muddling through by ourselves on TurboTax. (Because of the extra filing fees and annoyance, it’s ended up being sort of a wash in terms of value.) My basic message to you is just that you’re not crazy to think you need help — this is stressful for almost everyone. But with a little time and effort, you will get through it, and you too will bask in the balmy sea of forgetting.
 Note: we file our taxes jointly, despite the fact that my husband is a regular W-2 employee and I am a special snowflake. This is one of those decisions that our accountant helped us make, and that we have been blindly following ever since.