Essential Tax Tips for Self-Published Authors
Cliché or not, we all know the two inevitable things in this world: death and taxes. Funny enough, both of them take you by inches, nibbles, and bits at a time. Well, beating death is somebody else’s job. In this article, we’ll give you general financial planning advice for the self-published author.
Understanding the tax implications of your work is crucial for financial success and compliance with the law. This article will guide you through the various business structures available to authors and provide essential tax tips to help you navigate the complex world of self-employment taxes.
Before we dive in, we’d like to clarify that this is written based entirely on United States tax law. We are not tax preparation professionals or experts in tax and business law. We stand by this advice as generally useful, but your situation may vary. Consult a tax professional before making any final business decisions!
Business Structure Options: LLCs vs S Corps vs C Corps
One of the first things new small businesses often ask themselves is if they should incorporate. At the new, small-business level, the main reason to incorporate is to protect personal assets from liens, debts, and company bankruptcy. The three typical business structure options will all do this for you. They are Limited Liability Corporations (LLCs), S corporations, and C corporations.
Defining Business Structures
Before diving into the tax implications, let’s get the terminology straight.
- Sole proprietorship: This is where you and your business are considered the same entity for tax purposes. It’s easy to set up but offers no personal liability protection.
- Limited Liability Company (LLC): An LLC protects personal assets and provides flexible tax options. It can be taxed as a sole proprietorship for single-member LLCs or a partnership for multi-member LLCs.
- S Corporation: This business structure offers liability protection and potential tax benefits, especially for higher-earning writers. S corps are pass-through entities for tax purposes.
- C Corporation: While less common for writers, C corps offer the strongest liability protection but are subject to double taxation on profits.
What’s the Difference?
S and C corporations require a level of bureaucracy. Technically speaking, these types of corporations require regular shareholder meetings, detailed minutes of those meetings, and generally more meetings across the board. If you’re a self-published author, typically those meetings only involve you.
Additionally, S corps also have ownership rules, such as requiring citizenship and a limited number of owners. LLCs have no punitive ownership rules. So based on simplicity, LLCs may appear to be a good option.
How They Differ in Taxes
C corps face the dreaded “double taxation” problem. That means that all net income is taxed at the flat 21% corporate tax rate and then all distributions and/or payroll are taxed at the owners’/employees’ income tax rates. That’s a lot of taxes!
By contrast, LLCs and S corps are “pass through” entities. This means that profit and loss are not taxed at the corporate level. Instead, owners are taxed at their own tax rates based on the ownership percentage.
S and C corps have complicated rules. C corps have a more significant tax burden. LLCs dodge both of those issues. Based on simplicity and taxation, an LLC is almost certainly the best option for starting a small, probably single-person, publishing business.
The Risks of a Sole Proprietorship
If you don’t choose one of the three above company options, you will be considered a self-employed or sole proprietor. A sole proprietor’s personal assets are not protected and can be seized or forfeited to cover any debts of a failed company. If the self-published author plans on taking on debt to fund the business or acquire assets, then she should definitely choose an LLC, S corp, or C corp.
What To Do When Profit is Income
Growth isn’t likely to be a major decision point for a very long time unless the owner reaches a point where she stops consuming all of the profit as income and can afford to start taking a salary. A small company – let’s say operating at less than $250,000 net income (after all business expenses) – will likely operate as an LLC for a very long time.
Once the profit exceeds roughly $250,000, then a C corp could become the better option. It’s much more attractive to have $1 million net income and pay yourself a salary of $100K with attributable taxes compared to $1 million in personal income tax.
Interstate Commerce
There’s some common wisdom that one should incorporate outside of their home state to reap the benefits of more business-friendly states. This can add many layers of complexity that the average small business owner probably doesn’t want.
Larger corporations incorporate in other states when they can get tax breaks and the like for having corporate offices in one state and manufacturing or retail in another state. As you can imagine, these aren’t likely to be concerns of the average small business owner, especially authors.
That said, you may live in a state that is simply unfair to your situation. If so, the added difficulty may be worth the financial incentive.
The Cost of Doing Business
Unfortunately, setting up a corporation costs money. The good news is, in most states, the fees for filing paperwork and getting business licenses are typically only a few hundred bucks.
But depending on various factors and preferences, you probably need to budget at least a thousand dollars to set up your new corporation. The reason is there are a lot of i’s to be dotted and t’s to be crossed, and this needs to be done correctly, professionally, and on the first try.
Tax Considerations for Self-Published Authors
When preparing your taxes, there are a few important things you should keep in mind:
- Report all income from book sales, speaking engagements, and other author-related activities on your tax return.
- If you’re filing as self-employed, don’t forget to make quarterly estimated tax payments to avoid penalties.
- You’re responsible for paying self-employment tax for both the employer and employee portions of Social Security and Medicare taxes. Check with a tax professional to learn what the tax would be as a percentage of your net earnings.
- If you use a portion of your home exclusively for writing, research your eligibility for a home office deduction or ask a tax professional.
- Keep all receipts and documentation for at least three years after filing your taxes.
Business Expenses Deductions
These are common expenses for self-published authors to deduct:
- Writing supplies and technology (i.e. computer, software, writing instruments, etc.)
- Research costs (i.e. subscriptions, online services, books)
- Marketing and advertising expenses
- Travel expenses for research trips or book tours
- Professional services for editing, cover design, etc.
Choosing the right business structure, keeping accurate records, and staying informed about deductions and tax planning strategies can help you minimize your tax burden. Remember that tax laws change frequently, so it’s important to stay updated or consult with a professional to ensure you’re making the best decisions for your author business.