Taxes and the Writer

Ellen Spain, Ph.D. is a retired Federal Investigator, educator, Secretary for the Electronic Publishing Industry Coalition (EPIC), Acquisitions Editor-eTreasures Publishing, researcher, published author and much more http://www.ellenspain.com/. The tax information presented is summarized from a lecture I conducted with Martha Eskuchen on March 16, 2012, at EPIC's annual conference in San Antonio, Texas. It should be considered "food for thought" if you consider yourself a professional writer.

ARE YOU a PROFESSIONAL WRITER or are you WRITING AS a HOBBY?

Your first step is to determine whether or not your writing career can be called a trade or business. If you write without pursuit of getting published and making an income, you're not in the trade or business of writing for profit but have a hobby

The Internal Revenue Code of 1986 provides, "gross income to mean all income from whatever source derived, including (but not limited to) . . . royalties". I.R.C. § 61(a)(6).

"Writer" is defined in the Internal Revenue Code (in the section exempting free-lance authors from the requirement of capitalizing expenses associated with producing property): The term "writer" means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a literary manuscript . . . I.R.C. § 263A(h)(3)(A). When an author writes a book, the literary ideas embodied in the manuscript are property.

When the author sells it in exchange for royalties, her interest in the contract by which the royalties are paid is also property. See Reece v. Commissioner of Internal Revenue, 24 T.C. 187 (1955), affd. 233 F.2d 30 (1st Cir. 1956). Royalties paid on the commercial exploitation of a book are taxable to its author.

 "Taxable income" means gross income minus the deductions allowed by the Internal Revenue Code. I.R.C. § 63(a) version IRS 1986.

 If you receive any amount of income from your writing, you are profiting from your writing business and must report it on a Schedule C form.

PROFIT: The IRS considers the following factors in determining your profit motive:

1. The IRS looks at the manner in which you operate. Do you conduct your writing activity in a "businesslike manner", keep accurate records, and operate your writing business in ways similar to profitable businesses. If you need help, consult a professional tax preparer or a tax attorney.
2. The IRS considers how much Time and effort you expend on your writing.
3. The IRS looks at your success in carrying on other similar or dissimilar activities and audits the taxpayers' history of income or losses with respect to the activity.
4. You will need to determine the elements of your personal pleasure in writing to determine if your writing is a hobby or a business. Remember, you can enjoy your work and get bored with a hobby.

RECORD KEEPING    The key to record keeping is to do it on a regular basis. Don’t let it pile up. I use a credit card to track my expenses and always obtain receipts. Here’s how I do my Quicken. I set up a category titled “Writing Expenses” and include the following subcategories:

Conference Fees; Contest Fees; Education/Seminars; Professional Dues; Subscriptions; Gifts/Donations; Meals & Entertainment; Office Equipment; Office Supplies; Postage; Website/Business Cards; Advertising & book Promo; Research; Books related to writing and to the specific research for a story; Hotel; Meals; Airfare; auto mileage; Misc. expenses.

Keeping records:

1.     Post your expenses where they make sense to you.  Keep accurate records, in a neat, orderly manner.

2.     Do not write off anything that isn’t directly related to your writing. If writing is mainly for your enjoyment, don’t deduct your writing expenses. That is not saying that you can't enjoy writing but it must be profit motivated.

3.     Keep a log to document how much time you spend writing.

4.     Do NOT throw away rejection letters or unpublished manuscripts as your work shows a profit motive.

5.     Operate your writing business like a traditional small business.

6.     BE HONEST AND BE ACCURATE:    When in doubt, check it out! Taxpayers hearing claims from preparers offering larger refunds than other preparers are encouraged to check it out with a trusted tax professional or the IRS before getting involved.

ESTIMATING YOUR TAXES:    If you are self-employed, you will need to make the payments every quarter: http://www.irs.gov/pub/irs-pdf/f1040es.pdf.  Use their online workshop to calculate your estimated tax. The dates to pay in estimated payments are: 1st Qtr. – Due April 17, 2012: 2nd Qtr. – Due June 15, 2012: 3rd Qtr. – Due September 17, 2012: 4th Qtr. – Due January 15, 2013

Individual Taxpayer Identification Number (ITIN)

An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA).