What Kind of Business Is My Writing Business?

One thing for sure here at Indies Unlimited: you never know what I’m going to blog about next. As indie authors and publishers, we need to fine-tune our businesses. Everything from cover art to social media is fair game as we build our platforms and ultimately our enterprises.

Most of us in this field have jumped in with both feet. Maybe we are working a “real” job on the side or have turned a hobby into a business. It’s hard enough for us to write daily, edit, revise and build our business; we sometimes overlook the implications for the dollars that we earn.

Before I continue, let me put out a disclaimer. I am not an accountant or attorney. I have owned my own businesses for years. I have used tax professionals and prepared taxes myself at various junctures. The Internal Revenue Service (IRS) has audited me, so I speak with some experience, just not as a tax professional. Please, take whatever information you find useful, share with your tax consultant, and heed your own professional’s advice.

In the United States, as an indie author or publisher, you receive a 1099 form from payers such as Amazon or Smashwords for the royalties that you’ve earned throughout the year. Sorry, folks from around the world, I can’t help you much with this post. I hope you’ll be able to glean a couple of things that apply, but I have no idea how you do this in the UK, for example.

I realize that this is not “tax” season, but I always chuckle at the rash of tax advice tips that appear right before filing. As if you’ve been doing the right things all year long. We’re halfway into the year, so there is still time to get the right things happening if you haven’t started yet.

A couple of quick statistics. In 2011, roughly 1% of the individual tax returns filed were audited. In those audited, 31% of them claimed earned income tax credit, which is available to low-income individuals with qualifying children. These data and other bits of information from the IRS annual Data Book for 2011 suggests the following: low income tax payers claiming earned income tax credit and high earners with income exceeding $1,000,000 are the most likely to be audited.

My summary of the report suggests that most audits are conducted via correspondence letters. The numbers show that an IRS agent conducts about 25% of the audits in person at your home, their office, or a tax/attorney’s office of your choice. Very few audits result in criminal investigations; however, once an investigation is initiated, a whopping 69% result in conviction.

This doesn’t mean you stand a high chance of going to jail for your taxes. During the fiscal year 2011, the IRS assessed almost 29 million dollars in civil penalties against individual taxpayers. The breakdown of those dollars looks like this: 58.6% – failure to pay; 25.6% – underpayment of tax; and 13% – filing delinquency penalty.

These data can be rather scary. Many of us roll along merrily and just tack on the 1099 to our regular tax return and pay a good chunk of that to the IRS. There are lot of things  we can do in order to preserve the income that we earn.

Most writers do not earn huge amounts with their work, but it can still add up over the year. One question that always pops up is whether you should establish a “business” with your writing. Do you incorporate your business or create a limited liability company (LLC) with your publishing or writing business?

Here’s a quick primer on the different types.

Sole Proprietor – This is an unincorporated business, which can be called an independent contractor, consultant, or freelancer. You don’t need anything to be in “business;” you just need to report your business income and expenses on your Form 1040 Schedule C.

Limited Liability Company (LLC) – This type of set-up is used primarily to limit financial liability to only the corporate assets. In many cases, this shields yourself from financial losses to your personal savings.

S-Corporation – This type of incorporation helps you reduce the amount of self-employment tax that you pay. In essence, you pay yourself a salary and diminish the portion of your income that is “self-employed.”

Other specific breakdowns regarding corporations and what they do for you are beyond the scope of this article. As I’ve said before, consult your tax professional to see what’s best for you. My idea above is to give you a bird’s eye view of what options are available.

You’ll have to ask yourself some basic questions as to what’s appropriate for you. Do you have assets outside of your “writing business” that are at risk? As a blogger, if you post something that initiates a lawsuit, can they come after everything you own? As a self-employed independent contractor (which is the ugly way to classify most of us), you are exposed to a personal assault of your assets.

How much income do you bring in yearly? This is another consideration. It doesn’t usually pay to set up any form of incorporation unless the business is bringing in $50,000 per year or more. The additional fees of incorporating and the time associated with the process don’t outweigh the benefit of saving on self-employment taxes.

I want to reiterate the fact that I am not a tax professional. Any decisions you make should not be based on this article, but on your own consultation with a professional. The object here is to get the conversation going.

Obviously, what you decide on today may change completely after you’ve had a string of bestsellers. The bottom line is “The Bottom Line;” you want to make your writing career as protected and profitable as possible.

Next week, I’ll be going into more specifics as to how we can maximize profit. Being an “independent contractor” affords us certain advantages, so you don’t want to miss out on some of the ways to preserve those benefits.