There is a small debate around here, which is filled with confusion. As people know, I received my first royalty check this week. On my anniversary too, which was awesome timing. Anyway, that’s not the real point of this.
I’m setting up a separate account for my royalty money. I’m going through a credit union, so I can set up direct deposit and I won’t get reamed for having a low balance. This is entirely to make taxes easier. At least I’m told it makes taxes easier and I’d rather listen to the guy that does my taxes. Again, this is just the set up.
Am I allowed to use this money for bills? This might sound like a stupid question, but I’m being told by people around me that this money can ONLY be used for my writing. It’s being said in a way where it sounds like I can’t use this money to pay a bill without incurring some governmental wrath next April. I understand that businesses cycle profit back in for growth or something like that. Does this work the same for authors?
I do plan on taking out what I need for Prodigy of Rainbow Tower advertising. That’s maybe $70. Still, I feel like I’m being told that this is money I can’t really use. I know I can’t do much with this check and I probably shouldn’t. Saving up for a new laptop might be the big thing this year. Now, if I can pay a credit card bill or a Verizon bill, I might feel like I’m contributing. Instead, I feel like people are suggesting I hug my money and never let it go. I’m sure this will be great when I need to buy food and it’s the only money that I have.
So, does anybody have a clue what these people might really be talking about? It can’t really be that I can only use this money for writing expenses.
Legends of Windemere 
I don’t really know, knowing nothing about tax law, especially American tax law, but I guess that if you spend it on writing things they can be offset against the income and reduce any tax you may have to pay on that income. Not sure, but I am sure I have heard similar things like that. For heavens sake don’t take this as knowledgeable advice 🙂
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You’re right. Anything I spend on my writing career counts as a deduction. I’ve been keeping a spreadsheet of all my expenses to make tax season easier. I wonder if that’s the issue that people are confusing with ‘do not spend your money’. People talk like this is a business, which it is to a point. It’s a one person business, so I assume stuff like that allows for that one person to avoid starvation with profits.
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Well, it stands to reason that paying your internet/electricity bill will help your writing. 😀
It does sound a little bit like that. But personally, I’d just use it to make my life as convenient as possible. That normally helps my writing a lot.
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Makes sense. Not sure why people around here are making this so complicated.
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if you can use the money to support your writing you could rent office space in your household, there is a percentage of square footage you are allowed to do this with in Canada, so you divide your rent and utilities by that percentage and hence write off part of your rent, or mortgage. As for your credit card bill I’m not to sure how you could make that work… Not sure if this is applicable to you in the states…
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I don’t own the house, so I don’t think I can do this. My confusion is around the whole idea that I’m making money, but it’s sounding like I’m not allowed to live on it. It’s as if everything has to be a deductible, which makes me wonder how anybody survives.
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in Canada you can do the same thing if you rent I would talk to an accountant about it… but ya it kinda sucks being told your money is not really your money to do with as you please
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Definitely. I think the advice is coming from people that view what I’m doing as a traditional business, which it isn’t even close to.
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I am not sure, but if you do use it I think it means your income is higher than it really is, as you have just ‘given/paid yourself some money ‘from somewhere’. That money itself may therefore be due to be taxed. Sounds like a difficult spot.
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It’s ridiculous if you ask me. The more I’m hearing, the less is sounds like I can actually use my royalty money.
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Um…as long as you account for taxes (Or I assume Amazon takes care of that?) you can spend that money on whatever you want…it’s income. I suppose you can use it to buy “business expenses” but unless you’re making a lot of money that will affect your taxes (I assume you file with your spouse?) such as putting you in a new tax bracket (or you say, itemize deductions) I don’t know what people are saying in regards to you ONLY using it for writing expenses. It’s income, spend it, save it…it’s just like a regular job… xD
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Amazon doesn’t take out for taxes, so I’m maintaining a list of deductions as I move along. As another commenter just said, there’s the issue of me giving myself a ‘paycheck/salary’ if I use it on anything. I don’t know if this goes toward artists too. I would think that the money you make is income no matter what, but the tax code is anything but clear and sensible.
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Okay, so the only thing I CAN say is to save 30% of it for taxes. Other than that (and I’ve taken enough accounting classes to know this much) is that its just like all other income. You are self-employed (which means you will end up paying a higher rate on it than if you were employed by somebody else because YOU have to pay your own social security and other taxes, which most employers pay half into) but not necessarily a business, because you aren’t like an LLC or anything. The person giving you tax advice should be able to tell you this stuff, but beyond that…its YOUR income, you aren’t paying yourself xD
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Thanks. Is that 30% the minimum that I would pay before or after deductions? Or is that just a nice safe number.
If anything, I might just use this as an emergency fund until I get a better flow of money from Amazon. Probably be easier once I get direct deposit going.
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It’s just a nice safe number, lol.
And actually, looking at the link I sent you in the comments, someone said Royalty income is not considered EARNED income, so you don’t pay taxes on it. Something to ask a tax expert for sure. I can agree they need to simplify things….I will look into it and get back to you 🙂
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Thanks. I did ask this before and nobody was sure because they haven’t dealt with an artist before.
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Here you go:
http://smallbusiness.chron.com/royalties-subject-selfemployment-tax-12596.html
So, it looks like what the person said on the other thread was true.
“Tax Status
Whether or not your royalty income is subject to self-employment taxes depends on your current activities. If you are active in the profession related to the royalties you receive, the money will be considered compensation subject to self-employment taxes. If not, you won’t be assessed the self-employment tax. For example, an author who wrote a book, but who is not otherwise engaged in the trade of writing for profit, would not have to pay self-employment taxes on the book’s royalties. Also, royalties for the use of mineral rights are generally exempt from self-employment taxes.”
So, if you write a book but do not really write for profit (I’m assuming this means like, getting paid up front for writing an article) then you do NOT pay taxes on your royalty income from your book. Whew. Finding this information is difficult!! (I mean that sincerely lol) xD
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I know. I had a hard time finding what little info I could the first time I tried. It’s such an obscure tax situation from the sound of things. Still an important lesson in this:
I need to find a way to describe my books as use of mineral rights.
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BTW: This means you don’t pay the self-employment tax. As always, you DO pay federal taxes. Just not the social security and medicare….*mind boggled* I don’t quite “get it” lol
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I think it’s going to be confusing for a while. The plus side is that I have more deductions than income, which goes in my favor. I plan on buying a new laptop at the end of the year too, which will be a big help.
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Here you go: http://blog.winepresspublishing.com/2011/01/how-to-report-book-sales-royalties-on-your-tax-return/
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Guess I’m a Schedule C person. Thanks.
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I agree with C. S. J. I treated royalty income as income and never had a problem tax wise. I made sure that I paid the tax on that income. I’ve never heard anyone say that you couldn’t use royalty money for anything but writing stuff. If that’s the case, J. K. Rowling must own a lot of computers, legal pads, and craft books on writing.
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She has her money tied up in pens and pencil lead replacements. Good to hear somebody has gone through this. I’ll see how bad the taxes are next April, but I’m confident that my deductions will keep me somewhat safe.
Though, the real goal is to get to a point where the royalties I get are enough that I don’t have to worry about taxes.
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At the end of the year Amazon will sent you a 1099 form, and report your income to the IRS. When you do your taxes next year, you’ll list the amount as income. Since Amazon doesn’t take taxes out, you’ll have to pay whatever the tax is by yourself.
In my case, I made 38,000 from my day job and 66 from my writing, so it had literally no effect on my taxes. Since you’re selling more books and don’t have another income (although I assume you file jointly) you probably had best have some set aside for April 15th.
Depending on your royalties and your expenses, you may want to have your taxes done by a professional next year, if you don’t already.
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I have a family friend who is a tax accountant do them and we’ve already discussed the situation. I’m claiming every deduction that I can think of. I’m not sure how much I’m going to have to put aside, which is slightly unnerving. I currently have more deductions than income, which might be a plus.
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Charles: The feds will assume you have a business based on the 1099s you receive on your royalties. This means you will owe business tax (social security etc) as well as personal taxes on earned income. You can spend your royalty money any way you see fit. You should keep track of business expenses so you can deduct them from your earnings. Also if royalties are your only source of income and you have standard deductions there will be a threshold where taxes kick in. Get an IRS tax table and see where that is. If you think you owe money to the IRS be sure to send it before the January 15th 2014 cut off in the form of an estimated payment to avoid a penalty . By the way, I am not a qualified tax advisor. Just been doing my own for a number of years so you should check with someone who knows your situation
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Wait. I have to pay my taxes before I file my taxes? I thought I pay everything in April after everything is filed and counted up. I’ll probably owe the IRS some taxes since nothing is taken out.
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If you were working at a regular job you would have withholding. Since there is no withholding on your 1099’s you can do one of two things. 1. Make payments through out the year that total 90% of your tax liability or 2. Pay a penalty that could be equal to 10% of your total tax owed. Up to you. That’s why I said you could estimate your tax on what you earned and make this year’s payment by Jan 15th 2014. If this is all new you should find someone to advise you. I really don’t know your situation and don’t want to mislead you. I just gave you an overview of IRS rules
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I’m going to have to talk to the guy that does my taxes. I have no idea what I’d owe. That penalty sounds ridiculous though. If I don’t know how much it will be then I could overpay and I’m pretty sure the IRS doesn’t do refunds.
Guess I’m going to have to start a religion of Windemere and claim my books as holy tomes.
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The IRS always does refunds on overpayments. Ask the guy about estimated payments. If you start a church I want to be a member of the clergy
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Sure thing. We’ll have swords and free ale at every meeting.
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The free ale part sounds real good. Swords not so much in combination with free ale
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It never goes wrong in the books and movies. Usually.
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Did you ever see clerics with too much wine. not a pretty picture
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You’d think a cleric would be able to hold his or her liquor.
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I love when I get to do this:
Cue mad voice
YOU CANNOT POSSIBLY BE ASKING WHAT TO DO WITH YOUR OWN MONEY, RIGHT?
When you started writing it became your job, right?
What did you used to spend your money on? Life! So do what YOU feel is best. Why is this a question again?
Also buy something nice for your wife. She deserves it.
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I was just wondering if there was something I was missing about the self-employed author thing. I know the taxes work differently than if I had an office job. I’m planning on saving up for a nice laptop when the holiday sales start up later this year.
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I just needed to yell at you.
For giving a crap what other people think;)
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I know I shouldn’t, but they did a good job making me think I’d be sent to the same cell that Wesley Snipes just got out of.
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Not unless you are selling other stuff besides books lol
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Good point. Now I just have to figure out if I have to pay anything before I file for taxes or if I file then pay everything I owe.
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Find a good tax guy:)
I don’t deal with my own for a reason!
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I have a family friend that I can talk to. I also know somebody that is self-employed and might have some insight.
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I would have insight were it not for my hatred of numbers
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I have the same hatred and this gathering of information is making me loathe them even more.
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Shnumbers are for shparkley types
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He does seem the mathematical type.
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12 ounces of hair gel plus.💄…
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Enough white body paint to put a mime to shame?
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it is “man powder” lol
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Loose definition of man here, right?
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You know it. Bella is more manly
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Yup.
I just looked at a few self-employment tax forms and they really are terrifying. It’s like not being a slave to someone else is punished by the government.
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Welcome to America, no? I have dual citizenship. You should see my forms lol
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With any luck, a revolution will occur before next tax season and I’ll get out of having to watch all my money and my first born get sent off to the IRS.
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They will send the kid back they did mine. He hasn’t been quite the same and now he’s even worse at math.
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Then I guess he has a future in the IRS then. They don’t really know math.
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Exactly
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No one can tell you how you’re going to spend your earnings, except for maybe your wife. It is self employment income. Next year when you go to file your 2013 taxes you will claim that income and you will have to pay tax on that sum, just like you do for all other income. The only difference is that Amazon does not withhold the tax. Whether you pay that tax from your actual earnings or otherwise is neither here nor there.
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Got it. Do I have to pay an taxes before I file? Somebody mentioned paying in advance or something.
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Once you hit certain thresholds of success, you need to pay taxes quarterly – this is usually a state tax thing and if you search the Department of Revenue for your state, you should be able to find what the low down is – or ask your accountant – I live in Colorado and the only time I needed to do quarterly tax payments was when I was generating more than $26,000 in sales every 3 months….
🙂 But that was years ago and I hope your accountant friend can send you the link, so you don’t have a big surprise come tax time –
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I’m getting the feeling that taxes were designed to ream a person and toss them in jail. This is the first I’ve heard about quarterly tax payments.
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Check and see if you have a SCORE business center near you – they can answer all these questions for you, point you in the right direction, etc. It’s an organization to help small and new business people.
They helped me with all the info I needed when I started my small t-shirt business in 2004 and I believe they are nationwide! Here’s where to find a chapter near you:
http://www.score.org/chapters-map
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Thanks. Though, I wonder if the rules are the same for artists. I’ve seen some posts that mention there are different tax laws for artists.
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There may be different tax laws for royalties vs. salary vs. how you organize your business,
I always form my businesses as an LLC – here, it’s $25 to file with the state (online) and then I just fill out my 1040 form, and a Schedule C for my yearly taxes – if you’re having money trickling in and not enough to justify hiring an accountant just yet, I would check with the SCORE office or your state DOR site to get the true information regarding taxes for your area!
🙂
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Does the SCORE thing cost anything? I can’t go for an LLC because New York reams those for money. I looked into that and it was horrifying.
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I never paid for anything – When I registered my LLC, I got an email with a link to SCORE and then I contacted them via email – But I would say if you are starting to see success with your writing, it’s best to get started off on the right foot – Other places where I’ve found answers and mentoring over the years:
Your local Chamber of Commerce
Professional Networking Clubs
Local Toastmasters chapter
Toastmasters was the only one I ‘joined’, but I made wonderful friends by being a guest at different clubs, and any group that is full of the self-employed can get you pointed in the right direction for managing your business affairs well given the rules/regulations for your locale.
🙂
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Well, I submitted to SCORE. I’m not really business-minded, which is why this is already giving me a headache. I just want to write, publish, and sell my books then do a single payment in April to make sure I don’t go to jail.
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That’s the downside of being a self-employed creative – you do have choices, though – if it really is a huge headache and downer for you and will take so many hours away from how you earn your living (writing) then get real honest with yourself about how much it will really cost, doing this yourself vs. hiring a professional to assist you – –
There are many folks I’ve worked with that the more economical solution for them was to hire it out – as they could generate more income by NOT doing it themselves than they could save!
🙂
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Hiring a professional would be the easiest for me since I have no idea what I’m looking at. I simply can’t afford one right now. The main thing I’m wondering is if I have to do a lot of tax-based activities now or do I file and pay like I normally do in April.
I’m keeping all of my paperwork and files together and organized, which I thought was the only thing I need to do before tax season starts up.
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Looking at the PDF for the estimated tax payments, it looks like they only ask for those if your tax liability will be greater than $300 – so look at your previous tax returns, your tax bracket and if your income from sales/royalties, etc., after subtracting your deductions will result in more than $300 in taxes due, fill out the voucher and mail in – I didn’t do that the first year and had a whoppin’ bill in April, but since I paid it, no one said boo and then I did the pre-pay thing the following year – –
And here’s hoping for your wild success and the funds to hire a professional soon!
🙂
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Would my previous tax returns mean anything since I only started getting my royalties this year?
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Only for seeing what your previous tax liabilities were – for instance, if previously, you and your spouse always got a refund, and nothing on their job has changed, then you’re paying more each year than you really need too – Looking at your previous year’s return and tax bracket gives you an idea of when/if you’ll hit the $300 tax liability.
You also want to look at tax brackets – if your royalties will put your household in a new tax bracket, that pays more %, you’ll want to be proactive in either pre-paying, or saving money for taxes.
I’m not an accountant and I would highly advise you to contact one – who does your taxes each year? If it’s not you, then call the place who did your taxes, tell them about the royalties and what you project the income to be for the year and they can steer you right.
If it’s you, then keep an eye on your income/deductions, which tax bracket you’re likely to fall into by year’s end and plan accordingly.
I mention this because for two years, my husband worked a position that put us right at the dividing line of the tax brackets – – I added up what it cost for me to work (daycare, vehicle costs, etc.), what I earned and how much extra we paid in taxes – when I got done, I figured out we were paying $3600 per year for the privilege of me working and I chose not to work until my earnings were enough to compensate for being in a new bracket.
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My wife has a new, lower paying job and we tended to get a refund because we have a child. So, it’s going to be hard to go by last year. I’m going to have to contact the guy who does my taxes.
I plan on only using royalty money for business expenses this year until I figure out the taxes. It won’t be much until I buy a new laptop in December.
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Yes! Definitely call the guy who does your taxes – he will be happy to tell you what to track for deductions, and how to be proactive so you’re not waylaid next April!
(Hmph – I should have said that first – somehow got the idea you did your own…and was looking for information – IR sorry for all the links! 🙂
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I’m already tracking my deductions. Been doing that since January, which impressed him. The proactive part is what wasn’t mentioned. Though, he might have said there’s little we can do without knowing how much I’ll get in royalties. It’s such an unpredictable cash flow that it makes it tough to make an estimate.
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He should be able to give you some general thresholds to look for should your royalties start outpacing your deductions each and every month.
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Eventually, my royalties are going to be more than my deductions. I think. The December purchase of a laptop might turn everything around.
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🙂 Always good news to hear about income exceeding expenses! Try not to get wrapped around the tax thingee – just focus on getting enough information to keep from going over the cliff and then get back to your passion (income) 😀
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Thanks. I’d be fine if I just knew what was expected of me. It’s far too confusing.
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If you haven’t read it, I would start here on deciding how to set your business now or later
Click to access pub20.pdf
This is the General Information Guide that discusses the different types of businesses you can set up – and describes each – if writing your books is the only thing you do under the business, you may not need an LLC – (which helps protect your personal assets in case of lawsuit and which I did, when my business included providing in person services for customers)
Here is the link to the information regarding paying estimated taxes – which looks like you can pay quarterly if you expect that your TAX LIABILITY (not income) will exceed $300 for the year.
Click to access it2105i.pdf
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And here is a link that shows upcoming small business seminars in New York State
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/New-York-Workshops
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And here’s the link to the SBA video/learning center, for self-help options!
http://www.sba.gov/sba-learning-center
Hope you find the answers you need!
🙂
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The closest one is still a long drive.
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I never drove to the center – did all my ‘mentoring’ via phone/email
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As far as I know, the IRS will notify you if they want you to pay taxes in advance. That’s how CRA does it in Canada. Next year, after your 2013 return has been assessed, it’ll likely make the request, that is if they even want you to prepay. Dependent on the total income and whether you’re claiming business expenses, will likely determine how often you have to report and/or prepay.
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Makes sense. I can’t pay estimate taxes since this is my first year doing this.
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You got it. 🙂
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The companies sending you royalty checks will report annual payments to the IRS. You’re self employed. You may want to ask your tax person about social security payments you may owe on this income.
Ellespeth
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I have a feeling that I’m going to lose money on this deal.
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Providing legal information here only, not legal advice: writers may want to review the distinctions the IRS draws between businesses and hobbies before assuming they can deduct expenses incurred in their writing careers. Here’s a link to the IRS website explaining how differentiate between business activity and a hobby: http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions
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Thanks. I believe I count for a business since I’m pushing for profit and this thing apparently counted toward me getting denied unemployment. It’s hard to tell on the link because they make it sound like I have to be at this for 3-5 years before a full determination can be made.
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In the UK any monies earned can be used for whatever.
Every pencil you bought, every lunch you eat while doing your work, to earn this money, in the UK if we keep the receipts, because it is tax deductible.
I don’t know US law, I only know UK law as I run my own business, and any money I make I can put into my account, My partners account, or I could make an account JUST for what I do. Either way, I made that money, so I own it.
I don’t know who told you that you can only use money earned from what you do, can only be used for things you work on. This is backwards. You going to buy a new PC or Printer/paper and Ink every time you get paid.
Sorry bud, all I got..
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Thanks. That’s how things work here, but it gets confusing when one is self-employed. There is federal and state taxes that I need to either pay quarterly or pay later with a fine. They fine you for everything from the sound of things.
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I am self employed and I have a programme on my PC. Every day I do a job, be it a free job for family or a £2,000 office job, I put it into this programme, come “Tell us what you earned this year” time of the year. I hit print and it gives me my Tax bill bur minus what I paid out for parts, petrol (Gas) for my car, my Lunch, Money in a parking Meter THE LOT! I miss not a thing. And I send it away, and 9.9/10 get a letter back saying “Thanks Mr Gibson”
Seems easy, but its not that easy,…But I claim back a shit I took in a person house. These Tax people are all crooks, so giving a little back, Is always good fun..A computer programme never lies 🙂
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I should look into something like that.
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http://turbotax.intuit.com/
Let me know if this would help.
I emailed you also..
Cheers
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Good old turbotax. 😉 Thanks.
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No worries mate..
Anything further I can help with.
You know how..
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I hope your tax guru doesn’t charge too much for the right advice.
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He’s a family friend, so I don’t think he’d charge me much.
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That’s good. You wouldn’t want it to eat up your whole royalty check.
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No I dea but good luck, happy anniversary and WHOOP WHOOP 🙂
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Thanks.
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