A guest post by Brenda Lindsey.

SHOULD I BE MAKING QUARTERLY ES PAYMENTS?

The rule for everyone is the same. The U.S. is a pay-as-you-go tax system. As you earn income, you must pay taxes. However, a common misconception is that every self-employed individual must make quarterly estimated tax payments. If you file your income tax return and have not paid throughout the year, you will be penalized. There are some general exceptions to the penalty: if you owe less than $1,000 in taxes for the current year; if you have already paid in 90% of what is due in the current year; or if in the previous year you have already paid in 100% of the tax due for the current year. (Look at last year’s Form 1040, Line 61.)

Not all writers are full-time writers.  As a writer, if you also have a wage or salary earning job, you get an added advantage to the pay-as-you-go rule. All payments to the IRS remitted through withholding by your employer will be considered remitted equally throughout the year – even if you change your W4 at the end of the year and have large withholdings to “catch-up” on taxes for income received much earlier in the year. Also, payments to the IRS when your status is “married filing jointly” are considered joint payments and will apply to the joint taxes owed. This is why, if possible (i.e. you or your spouse have another job with an employer), you should consider simplifying the process and avoiding penalties by making all your tax payments through increased withholding by an employer.

If increasing the withholdings through an employer is not an option, you will need to make estimated tax payments on Form 1040 ES. You should estimate the taxes you need to pay (estimated self-employment income less estimated deductions multiplied by your income tax bracket + approximately 15%) and divide by 4. These payments are due on an unusual schedule – April 15, June 15, Sept. 1, and Jan. 15. You can get a refund on your income tax return and still incur ES payment penalties because you did not remit timely payments on the “pay-as-you-go” system. (You can get a waiver if you can show – via Form 2210 – the actual amounts earned by quarter. This would be used, for example, if you received a large advance in the last quarter of the year.)

CAVEAT ABOUT CLAIMING DEDUCTIONS

Be very careful about what you claim as deductible expenses.  This is one of the areas where writers can most easily find themselves in conflict with the IRS.  Remember, only your expenses as a writer can be deducted from your self-employed writer’s income.  For example, if you and your spouse travel together to another city to attend a convention, unless your spouse is also a writer, only your travel, meal, and lodging expenses are deductible.

CONSIDER HIRING A CPA

While it is wise to understand the rules involved and the records you should be keeping, the paperwork should not keep you from your first love – writing. A Certified Professional Accountant can remind you of deadlines, file forms on your behalf and help you to avoid unnecessary penalties. Keep orderly and itemized records of receipts and expenses and consider letting a CPA worry about Uncle Sam.

Good luck with your writing!

A guest post by Brenda Lindsey.

You have finally finished that book you dreamed of writing. As you are showing off that first advance check from the publisher, don’t forget about Uncle Sam. He will want to see that check also.

WHERE DO I REPORT MY INCOME?

Yes, even if you don’t receive a 1099 statement from a publisher at the end of the year, you are still legally required to report writing income.  Amounts received as income from writing books, including but not limited to advances and royalties, are generally considered self-employment income. The Internal Revenue Service will want to see it reported on your Form 1040, Schedule C. (The exception would be if you are fortunate enough to continue receiving royalties after you have quit writing. In that case the royalties are “passive income” and would be reported on Form 1040, Schedule E.)

In addition to tracking the income you receive, you will also want to keep track of your expenses. A good rule of thumb is any expense that you would not otherwise have if you were not in this business, is a business expense. Items such as the business use of your computer, ink or toner, paper, legal fees, subscriptions and office rent are some examples of ordinary business expenses you might deduct from the income on Schedule C.  Other expenses would be things like travel, lodging, and meal expenses for attendance at conventions or seminars.  Get receipts for everything, and don’t lose them.  Or if you drive to a local book signing or conference, that mileage will be deductible.  Make sure you write down the beginning and ending odometer readings as backup for the deduction.

WHAT IF I LOST MONEY?

After deducting all your expenses, you will arrive at your net earnings. If your expenses exceed your income (and they may), then you will have a net loss. Net losses can be used to offset income from other sources. You do not have to have net earnings from your business every year. The rule is if you have net earnings in three out of every five years, the IRS will presume you are in business to make a profit (a requirement to deduct expenses on Schedule C). However, if your business does not have net earnings for three out of every five years, you should be prepared to convince the IRS that you are operating a business and not simply pursuing a hobby. Hobby losses are only deductible on Schedule A as an itemized deduction and have more limitations.

WHAT IS THIS SELF-EMPLOYMENT TAX I’VE HEARD ABOUT?

Net earnings from self-employment are not only subject to income taxes, but they are also subject to self-employment taxes. These “self-employment” taxes are comparable to the Social Security and Medicare withheld as FICA from a “wage-earner’s” paycheck by his employer. The percentage withheld is 7.65% and his employer matches it by paying in another 7.65%, for a total of 15.3%. The employer provides a form to reconcile the withholdings and the match to the IRS.

When you are self-employed, you are your own employer. You must remit the total 15.3% as self-employment taxes. This is reported on your Form 1040, Schedule SE. (There is a cap of $117,000 on the amount of earnings subject to Social Security.) If you forget about self-employment taxes, you may be unpleasantly surprised when you file your income taxes.

(Continued Tomorrow)

Editorial Comment:

The Fictorians are aware that many of our readers are not United States citizens, and consequently conduct their lives and businesses under statutes and regulations that are markedly different from those in the U S A.  Most of our posters for this month are American, and the few who aren’t are Canadian, so the perspective in this month’s posts will of necessity be somewhat limited.  Nonetheless, if you are one of those readers from somewhere other than North America, as you read of issues in our laws and practices, perhaps they will make you mindful of things you should be aware of in your situations as well.