STATUS: Bursting at the seams. Got two bits of exciting news for one of my clients and it’s under gag. We’re not allowed to share yet. So I guess I’ll just tease all my blog readers with it instead.
What’s playing on the iPod right now? LET’S STAY TOGETHER by Al Green
This topic obviously resonated with quite a few people. In all honesty, I probably should have one of my clients do a guest blog about the topic of finances as a published author. Hopefully they’ll all just chime in on the comments section.
Okay, if you are a published author, here are some things that I recommend.
1. Find and then pay for a good tax accountant who can give you sound accounting advice for your writing business. You may start as a sole proprietor but as many of my authors have done, when real money starts coming in, it may pay (as in tax advantageous) to be an LLC or an S-corp instead.
When I say “pay for,” I mean it. It’s worth every dime to pay a CPA for his/her expertise. Be sure to ask around to other writers and get recommendations for a good one. Like all people in service industry, levels of expertise vary.
Gee, that’s true of agents as well.
2. When you have your contract, note the dates in your money management software for when you can expect to get paid. Then pad it by two months at least. I say this because things don’t always happen on time. The contract can take 2 to 3 months to negotiate and then it’s always another 6 weeks after signing for you to get paid. Foreign monies take even longer than that. As the agent, I always expect payment 6 months from when I’ve sent off the contract to my client for signing. It can take that long. For one client, the foreign publisher lost the contract and it took us a year to get paid. And that was even with me bugging them every other week for it.
You as the author might run into draft problems and not deliver the manuscript on time and so that d&a payment you were hoping to trigger might not happen until several months later. Trust me, this happens more often than not so keep that in mind.
So a couple of addendums to this:
–If you are a debut and your career is young, don’t start by living off your writing. I think you’ll find yourself in a world of hurt if you do that. Writing money is gravy money. Not factored in as part of the monthly living expenses but it can pay for a great vacation or a down payment on a car or what have you. Personally, I say put all of it into a good interest CD that you can’t access for a year. That way you’re forced to ignore it for a while. But heck, I know that’s not always feasible. I’m just suggesting it.
–Don’t quit you day job until the back end royalties can pay for your daily living expenses without issue. Back end is the royalty money you earn once your advance has earned out. This does not include the advance you might earn for your next book because that’s an advanced that hasn’t earned out yet. And just an FYI, statistically speaking (and this is by no means exact), only about 10% of books actually earn out their advances. The good majority of them don’t. And here’s another interesting tidbit, if a book does earn out the advance, it can take 2 years or more before that happens. One of my authors just earned out (which is hugely exciting) but it took 4 years. Now you know why I emphasize back end royalties that pay your daily living expenses without an issue.
3. When you get your check, pay your taxes right then and there. Now some folks are really great money managers. If you are, then you can ignore this. However, I think the majority of us are not quite that anal and I’ve heard stories time and time again where authors don’t do this and find themselves in a world of hurt. Work with your tax accountant to find out what is the likely percentage that you’ll owe and don’t wait, just mail the dang thing to the IRS and tell yourself, this was never my money anyway. If you don’t have a tax accountant, a good rule of thumb is 20% of whatever the check was and send that in. If you’ve overpaid, you’ll get it refunded.
If you’re disciplined money manager, okay, stick the monies you owe the IRS into a high-interest bearing account and then only draw from that account to pay your quarterly taxes (April 15, June 15, Sept. 15, Jan. 15). Make some money on the interest at the very least. Now if your honest with yourself and know that you’ll fall into the trap of thinking the next advance will pay those taxes, don’t wait. Mail your check to the IRS the minute you get your check from the publisher or agent. I can’t force you to do this but I’m really encouraging it.
4. When you get your check, pay yourself first. What exactly does this mean? That means you put away money for retirement even before you pay your bills. If you’re under the salary cap, open yourself up a ROTH IRA (one of the best investing tools out there because when you retire you won’t be taxed on monies you withdraw from a ROTH because you will have already paid the taxes on it). Damn straight folks. And even if you are not good with numbers and investing, just go to Vanguard’s website and look at the ROTH IRA here. Sign up for an index fund that follows the S&P 500. Usually those are the safest with the least amount of crazy ups and downs.
Max it out. Pay in the full amount you are allowed to legally in any given year.
And folks, I’ve been investing for years but I’m no expert. My suggestion here is not to replace advice from a professional financial advisor but if you don’t know where to begin, maybe this will help you to get started.
I’ll also try and dig up the money management/investing titles of all the books I’ve read over the years. It might be a good reading list for you.
5. Open up a SEP (Simplified Employee Pension Plan). You’re a writer and you’re self-employed. This is a retirement vehicle for the self-employed and it allows you, percentage wise, to put the most money away for retirement than you can in an IRA.
6. If you are living off of your writing, create a budget with all your expenses and only pay yourself X amount a month and stick to that. That way you won’t suddenly run out of money and be really anxious for your next payment (see above—which might get delayed, or yikes a contract canceled, or a manuscript rejected and you have to pay back the advance). All grim scenarios but can be a reality.
7. Buy yourself something nice to remember your first check by. I know. Totally opposite of everything I’ve said above but your first check from your first book advance is special. Celebrate it.
Then do all of the above.
Awesome advice here.
I sometimes ask people, “if you suddenly won a million dollars, how would you spend it?”
The winner is the person who says “I wouldn’t”.
Kristin,
I’ve owned my accounting practice for 26 years now and would like to clarify some tax ideas listed in your post.
Many businesses do not need to rush out and organize as an entity (LLC or S-Corp). However, an LLC has advantages over a straight S-Corp. An LLC can be treated as a single member (sole prop tax rules) or as an S-Corp. It is a simple process to elect either. You can be a single member LLC this year and a LLC treated as an S next year by election.
I think once you have a sale and before the any revenue reaches your paw, you need to be an LLC. Example: Assume you will have a $10,000 profit in year one. Not enough to justify an S-Corp, but as an LLC (single member) you can do a triple-net lease back of your home office. If reasonable rent for your home office for $500 per month, you have shifted $6,000 from Schedule C (earned income subject to the 15.3% self employment tax) to Schedule E (unearned rental income only subject to ordinary income tax), about a $900 tax savings per year.
If you have a larger profit, say $50,000+, it is time to elect to treat your LLC as an S-Corp. You are now an employee of the company and must pay all payroll taxes. The beauty of this beast is that you pay yourself a reasonable wage and the rest flows to your personal return without self-employment tax.
The risk of the S-Corp is that it is under assault by Congress. Rep. Rangle would like this loophole closed. Then, S-corps without employees would see no advantage from this strategy.
I agree, a tax professional will save you more than you ever pay her, just like having an agent pays.
I love it when people talk taxes. Makes my blood boil. A good boil. So I get off saving people money, sue me.
One final note: Do not take advice from a blog or a blog comment. Seek a tax pro. Comments on retirement info require further explanation.
And HSAs were not covered and are a valuable tool as well.
Hope this posts only once. Computer is jumpy.
I dream of winning a million dollars and paying off my mortgage, credit card and student loan with one big check each. But its not going to happen, sigh, and I’m not going to hold out hope to sell as many books as Rowling or (what’s that Twilight author’s name again) which is probably what I’d need to do to see that much from writing. I guess I’ll just have to work it away slowly like everyone else.
I hadn’t thought about what to do w/ the money…b/c it never really occurred to me that my book might make money!
This is all very good advice. If and when I see my book starting to have revenue, I’ll be seeking the help of a tax adviser!
This is awesome advice! Makes me want to sell my manuscript. Wait…I wanted to do that already:)
This remind me I’d better enter my recent expenses right away.
This year I’ve been much better at keeping track of my expenses than before, but I’ve been falling behind this month what with all Kristin’s whip cracking getting me to work. 🙂
I’d like to suggest that people find a SYSTEM that works for them, and use it, to record expenses, revenues, and schedules.
For writers, whose business is, after all, relatively simple, that system could be an accordion file, and some sort of calendar/contact program. (Do your schedule and call-backs/contacts on something computerized, though, so that you have the ease of searching.)
Next, get comfy with Excel. It’s amazing what you can do to organize your approach, and to answer questions with that. And even simple businesses need to be able to add columns of numbers with accuracy, and to sort things based upon time, type, etc.
Oh, and don’t forget back ups. Everything should be backed up at least twice, and I like a third.
Kristin,
One more thing about the Roth IRA. And this is really just informational–I wouldn’t encourage people to use this feature–but you can get the money back if you really really need it. Because you’re not contributing pre-tax money to Roths, like with regular IRAs and 401ks, there is no penalty for withdrawing your original contribution (there is a penalty for withdrawing anything earned on that income).
So, people can feel good about paying themselves first, as well as knowing if the direst of emergencies occurred, they could still tap into that (though that is strongly discouraged).
All good advice, but you left out the part where a new author spends as much if not more than s/he earns for publicity, appearances at conferences, office supplies and equipment, etc., etc. I’ve sold through on both of my mass market series’ first books, and I’ve made a profit, after expenses, only one year, and that was in the low four figures.
I’d be thrilled to be able to set up retirement funds or make investments. But most of us don’t have that luxury.
Thank you, thank you, thank you. I can’t tell you how many of your posts I’ve printed and refer to often.
My advice to anyone who hopes to one day be a full-time writer is to start saving money now. If you get a raise, keep living at your old standard and put the money into savings, and put any money you earn from writing into savings.
That way, you have a nice cushion before you quit the day job (or get laid off), and that makes waiting for publishers to send checks a lot less stressful. The publisher checks just replenish the nest egg.
In my case, the savings made it possible for me to freelance and work on my books instead of looking for another job when I got laid off seven years ago.
Thanks for the advice! I have to admit, I had to read this over a few times before I really got some of what you were talking about–I’m a bit slow when it comes to investment talk, even put as simply as you did!
Also, in that list of things a writer should pay for is very often his/her health care. Depending on the State you live in, your age, and what kind of coverage you need, this can be pricey. I wouldn’t necessarily say that setting up a HSA is the better way to go in health care as referenced by an earlier poster. When I looked into it, having a HSA didn’t drop my monthly premium by all that much, and it wasn’t worth it to set aside money in an account for tax purposes–there were other deductions I could take. I also wouldn’t bank too much on interest in any account. Interest on accounts is not real high at the moment for Money markets, savings, etc.
Also, don’t forget in some states, you need to pay a state business tax (WA State for example) once you make over a certain amount of money. (And it’s not that high, I believe around 28K or so for WA State) So along with your federal tax, you will also be paying a state tax.
In other words…don’t quit the day job writers…
Great advice! I tend to avoid thinking about taxes until January. Of course, I don’t make enough (yet) to owe a huge chunk of money, but some day. . .
Couple things:
Make sure your financial/tax advisor understands the quirks of taxes for writers.
And if you have a day job, boost your withholding to cover the added income. That way you don’t have to start paying quarterly taxes until you are able to quit the day job, and it’s one less thing to have to keep track of yourself. Several years back we had a lucrative contract deal. I went from withholding as Married with 2 dependents to single with none and had them withhold an additional $100/mo. No quarterly filing, just larger withholding (MUCH larger) and when April rolled around I had already more than paid what we owed. (And you don’t have to pay your payroll department to adjust your withholding – the CPA will want to be paid for doing the quarterlies. They aren’t difficult and you can easily do them yourself, but why not avoid it altogether if you can?) If you file a joint return and your spouse is the one with a “day job” then adjust his/her withholding for the same effect.
Excellent post and thank you Keith Schroeder for adding your professional advice. Also, for those of you who are RWA members, Stephanie Bond gave an outstanding seminar at the DC meeting on managing your writing business(including advice on contracts). You can check out the RWA site and see about purchasing a copy of the tape.
hi, your blog is very helpful to writers. I’m hoping one day I’ll be a published writer. I hope some day you can check my blog out.
My son, the author (ian@ianthealy.com) forwarded this blog post to me. I’ve been doing his taxes “forever.” I agree with much of what Keith wrote, but I’ll provide some contrasting opinion:
An attorney may have other thoughts, but I think the use of an LLC for a person with no employees is overblown; it makes for a nice cachet, but doesn’t really afford liability protection; a good attorney can always sue you the person in addition to your LLC.
Charging the LLC triple-net rent for an office in the home doesn’t work because of Code Section 280A(c)(6). If the home is jointly owned, the spouse can rent his half to the writer, but the writer is limited to the normal office-in-home deductions.
I’d suggest using a 35% tax rate instead of 20% so as to include self-employment tax. Figure the 35% on income after deductible retirement contributions and business expenses. Whether you pay this through increased withholding from your day job or through estimated tax payments is immaterial.
If you really hit the big time, consider a Solo 401(k) plan instead of a SEP. You can sock a lot more away on lower income.
Don’t rely on my ideas to avoid IRS penalties without getting the full skinny (IRS Circular 230 says I need to say this).
Kristin-
THANK YOU for dishing out the real deal. Writers (myself included) appreciate it. 🙂
Thanks Kristen!
In these days of steadily lowering advances…one wonders whether the publishing industry at large expects any author to earn enough to even be a nice addition to the day job.
What a great post! I, too, am a tax accountant and financial writer. I agree with the above post that an LLC for 10,000 worth of income is probably overkill. LLCs cost money to organize, and it might not justify the tax savings, especially if the taxpayer is paying an attorney to set up the LLC.
I like parnerships (for small businesses) and C-Corps (for larger businesses) the best. Since most husbands and wives work together anyway, just forming a partnership can drop your audit rate from 3.9% all the way down to 1%. This is a huge percentage drop. That’s because self-employed sole-proprietors get audited at a higher rate than any other business. A partnership return usually requires a field auditor and the IRS just doesn’t have enough qualified people to do it.
I’ve been through about 10 audits this year already and they have all been awful. I definately feel that the auditors are feeling pressure this year to produce tax revenue. Anything you can do to lower audit risk is good.
When querying for new books, if an author has been previously published and earned out the advance, is that something to mention in the letter, or would that be too mcubh info?
e.g.
About me:
Previously published under name XYZ, TITLE, PUB, YEAR, advanced earned out.
Or would that come off as braggacio?
Great advice, most writers focus on just getting published, but its important to realize that it doesn’t end there and finances still need to be taken care of. Thanks for the helpful tips!
J. S. Hawley: Newbie author.
Wish this had been written out like this when I first signed my initial contract. What I was pleased to see was that my books earned back their advance and I was able to make some small repairs on house and car and make the holidays and birthdays nice for the kids. As a currently middle of the pack author, they’ll be no living off my writing for awhile. But is is nice to have the advice spelled out so simply.
J. S. Hawley
Author of
‘Come With Me’ & ‘If You Were Mine’
Thank you for the post. I am saving for the day I actually make money!
Thank God i’m irish, and whenever i do get published i’ll be exempt from taxation (as i’m living in ireland)but i’ve read that “I should point out that even if you are a bona fide artist living in Ireland–the Arts Council of Ireland makes the decisions on these things–you still have to pay taxes (usually) on income earned in the United States. . . you have to pay a flat 30 percent tax on royalties on books and whatnot sold in the U.S. “
Is this true? and would it be the same for every country?
http://www.straightdope.com/columns/read/358/can-artists-live-in-ireland-tax-free
Can I add that you might want to compare the SEP to the SIMPLE plan depending on where you are in your career and how much you are getting paid?
Thank you for this post. It seems like no one wants to talk taxes for writers with a 10 foot pole. It is good to have an idea for what to expect when I finally get to make money.
I’ve always wondered is an accountant would be a good idea for me when I get published. After reading your post, I will definitely consider it for myself. It never hurts to look into it, right?
Thanks for the information.
Well, these advices are really sure hit to earn from business writing since you are taking a word from professionals.
Great advice. Thanks.