What Every Self-Published Author Needs to Know About Taxes

taxes for authors

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Note from Jane: Today’s guest post is by attorney Helen Sedwick (@helensedwick), an attorney licensed to practice in California only. She just released the Self-Publisher’s Legal Handbook, now available in ebook and paperback formats.

This information is general in nature and should not be used as a substitute for the advice of an attorney authorized to practice in your jurisdiction.


Most writers don’t realize that their memoir, short story collection, children’s book, or novel could mean money in their pockets, even if sales are disappointing.

Suppose you spend $5,000 hiring editors, designers, and other freelancers to publish your book. At the end of the year, you’ve made $2,000 in sales, which you offset with $2,000 of expenses. Can you deduct the remaining $3,000 from your “day job” income and reduce your income taxes?

Yes, if you treat your writing as a business and not a hobby.

U.S. tax code encourages new businesses by permitting entrepreneurs to offset losses from one business from other income as long as the owner has a serious intent to operate the business at a profit. The IRS wants you to succeed, so they can tax your income later.

For a long time, the IRS followed the rule that an income-producing activity was considered a hobby unless it showed a net profit during three out of five years. (If your writing is a hobby, then you may deduct book-related expenses only from book-related income.)

In practice, the hobby rule is not that strict. If you have a serious intent to make a profit from your writing (and quit your day job), a little advanced planning and discipline will help convince the IRS you’re an entrepreneur.

Treat your venture as a business.

Set up a website and advertise. Print business cards and bookmarks. Promote yourself and your book on social media and other venues. Hire experts to advise you. If you don’t treat your writing as a business, no one else will.

There is no need to incorporate or form a business entity. Your business is just as legitimate as a sole proprietorship. Maintaining an entity is simply too expensive, unless you are making $5,000 or more in net income. In that case, don’t worry about hobby rules, but discuss forming an entity with a tax professional to save on self-employment taxes.

Give your business a name.

Having a name helps you and others separate the business from your personal activities. File a Fictitious Business Name Statement (also called a DBA, doing business as, filing) with your local county. I suggest using a service, such as the DBA Store.

Obtain a Federal Employer Identification Number (EIN).

Even if your business is a sole proprietorship and you never have employees, get a separate EIN, the equivalent to a Social Security Number for your business. Be sure you go directly to the IRS website. Sham sites that look like the IRS site are popping up every day. They ask for your Social Security Number, mother’s maiden name, birthday—all the tools for stealing your identity. Don’t use them!

Apply for a resale certificate.

Unless you live in a state that does not charge sales tax, obtain a resale certificate, sometimes called a seller’s permit. Put the certificate in the name of your company and use your new EIN.

Find out if you need a local business license.

Many cities and counties require some businesses to obtain a business license. Search for “business license” and the city and county where your business is located. The Small Business Administration website has helpful links.

Invest time and effort into making a profit.

Attend conferences, and even better, speak at them. Join and host readings. Arrange school visits. Keep working on new books. Pitch new projects.

Follow tax rules.

  • If in any calendar year you pay an independent contractor (other than a corporation) $600 or more for services or $10 or more in royalties, ask the freelancer for a W-9 and report the payments on a 1099-MISC and the equivalent state form. This does not apply to payments to a corporation such as BookBaby, CreateSpace, or Lightning Source.
  • Report your business income and expenses on a Schedule C. If you have kept separate financial records, this is easy.
  • If your net income (gross revenues less deductions) from writing and self-publishing is $400 or more in any year, you may be required to pay self-employment tax on that income. If taxes on that income exceed $1,000 per year, you may be required to pay quarterly estimated taxes. Once you have reached this level of success, it’s time to consult a tax professional.

Separate personal finances from business finances.

Set up separate bank accounts and credit cards to cover business income and expenses.

Don’t jump the gun.

Wait until you have reasonable writing income before “launching” the business for tax purposes. Limit your deductions to those related to your self-published book or freelancing efforts. If you try to deduct ten years of writing conferences, you are inviting IRS scrutiny.

Maintain good business records.

In tax audits, more people are nailed for losing receipts than for cheating. If you don’t have a file cabinet (real or virtual) dedicated to your writing and self-publishing business, then get one. Invest in a simple business accounting software program.

Keep all records for seven years. Some people say three, but I suggest seven years to support your position that writing is your business.

What records to keep:

  • receipts
  • royalty statements
  • sales slips for direct sales (the ones you make at conferences and readings)
  • appointment books
  • brochures, business cards and handouts from conferences
  • manuscript critiques
  • thank-you notes from libraries or schools after readings
  • fan email
  • contest entries and notifications
  • correspondence with freelancers, whether or not you hire them
  • letters from agents and publishers, including rejections
  • bank and credit card records
  • printouts of PayPal summaries
  • W-9s and 1099s
  • sales tax returns

Final note

This tactic won’t work forever. If you have too many years of losses, the IRS is likely to question you or audit your returns. So don’t go overboard.

This nitty-gritty is the unromantic side of writing. But take the time to do it right, and you could save enough taxes to enjoy several lovely, romantic dinners, if not a wonderfully passionate vacation.

Disclaimer: Helen Sedwick is an attorney licensed to practice in California only. This information is general in nature and should not be used as a substitute for the advice of an attorney authorized to practice in your jurisdiction.


Self Publisher's Legal HandbookNote from Jane: I highly recommend the Self-Publisher’s Legal Handbook. I received an advance copy and found the information useful and essential for just about any author. Click here to learn more and download a sample. 

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Helen Sedwick
Helen Sedwick is a business lawyer with 30 years of experience assisting clients in setting up and running their businesses, legally and successfully. Her clients include entrepreneurs such as wineries, green toy makers, software engineers, and writers. She is the author of the forthcoming Self-Publisher's Legal Handbook.
Helen Sedwick

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59 Comments

  1. Helen, this is very helpful. Might I ask a question? I’ve declared myself as a self-employed fiction author and also I am a copy editor. Is it true that if your self-employment does not make a profit in 5 years the IRS will not allow you to declare your expenses against income any more? Is there a limit on how long you can run your business at a loss? Thanks!

    • Paula, The is no set rule on how long you may deduct losses from your writing endeavors from other income. The longer you claim the deduction and the more you deduct, the greater the likelihood the IRS will question whether your writing is a business. If you can demonstrate serious intent to make a profit from writing, you should be able to go past 5 years. But it’s important to treat your writing as a business and to keep records. If you are also copy editing (and can claim that your writing efforts and expenses are important for giving you credibility as a copy editor), then I think you have an easier case. IRS is on the look-out for activities which are traditionally seen as hobbies, such as writing, arts and crafts, and music. The big hobby loss spenders (and the ones the IRS really watches) are horse breeders and race car drivers. Copy editing is not typically a hobby.

  2. terrific post, Helen. Even as a UK-based author, I found this very useful. I wonder if there is such a book/resource for UK authors?

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  4. Thank you, Helen! I suspect I’m not the only author whose income is cobbled together from many sources. Definitely will have to look further into this.

    • Heather, If you ask an attorney a question, her favorite answer is “it depends.” This is one of those cases. It depends.
      Some people suggest that a writer making significant net income set up an S-corp or an LLC taxed as a S-corp to save on self-employment taxes. I don’t think it makes sense unless the writer is confident he or she will be netting at least $20,000 a year, and even then, it’s a controversial approach. A writer making that level of income should consult an accountant or attorney. It’s a problem of success, which is a good problem to have.

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  6. hm, my tax professional highly recommended the exact opposite, stating the IRS deems you a business for any royalty over $10 and therefore you cannot claim to be a hobby as there is the ‘intent to sell.’
    Now I have started the legal business

    • Your tax professional may mean as soon as you make royalties over $10, your are deemed a business for purposes of taxing that income. But the rules for deducting expenses as if you were a business are different and tougher to meet.

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  8. There is another angle to consider: municipal taxes. Where I live, the city taxes businesses, but there is no tax on royalties. So going the business route would save money with Uncle, but cost you with the city. You’d have to figure out which number was bigger.

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  12. Excellent article. The principals are the same in the UK for legal process differs. Would be good to see similar guidance written for authors in the UK.

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  16. Do you recommend incorporation for self-published authors as a liability shield against fradulent claims/ claims against title name, or content? Do most self-published authors do this?

  17. Eric, In my experience, most self-publishers do not incorporate or form a limited liability company when they start their self-publishing businesses. They operate as a sole proprietorship. That is how I operate.
    Forming and maintaining an entity costs money, and that money is better spent buying business liability insurance. If someone were to make a claim arising from a book, such as an infringement, privacy or publicity claim, then they are likely to sue both the author and the company. After all, the alleged wrongdoing would be an individual act, not a corporate act. Insurance provides better protection and coverage.
    If you start making a profit in the tens of thousands a year, then it may make sense to incorporate or form an LLC for tax reasons. That’s a nice problem to have.

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  21. Dean, I assume you mean business liability insurance? If you have purchased other insurance through an agent or broker, start by asking them for a quote. If not, I bought my policy from Travelers Insurance. You might be able to apply on their website, depending on what state you are in.

  22. Thanks for this great article. I have been considering the LLC route for future publishing and found this article while googling for tips. This has been very helpful! I’m going to link to it on my blog.

  23. This is a real basic question, sorry. If you spent money on a manuscript over the last five years (on developmental editors, conference stuff etc.) but don’t earn any money until years later… can you still count all those previous years’ expenses as deductions in the year that you begin making money? Is there a place I can go on the IRS website to read instructions for such a scenario?

    I haven’t sold an ebook yet but I’m about to launch one. I’ve always filed 1040ez and 1040A with standard deduction. This will be quite a change for me.

  24. Yes, you may include start-up expenses going back several years as long as they were “paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business.” (This is quoting from the IRS site, Publication 535.)

    Also from the IRS Site: “Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004.” Translation = you may deduct from current income up to $5000 of business start-up costs and an additional $5,000 in organizational costs if you set up your business as a corporation or LLC. Any expenses above that amount must be amortized and spread out over several years.

    Every taxpayer’s situation is different, so it makes sense to consult with a professional tax preparer in the first tax year of your business. You’re likely to save money (and certainly frustration) with some professional help.

  25. Hi Helen,
    Why do you say wait until you have reasonable writing income before “launching” the business for tax purposes?
    Thanks!
    Ryan

  26. You should have some revenue coming in before you decide to treat your writing as a business and include a Schedule C with your tax return. You don’t need to have net income, but at least some money coming in. Otherwise your return is much more likely to be questioned by the IRS.

  27. Hi Helen,
    I guess the advice I got was wrong and I incorporated my self-publishing business as an LLC. I got $350 in royalties from Amazon for the first year. But I am not sure how to file or declare this as I have never had an LLC before. Any help is much appreciated!

  28. Roy, If your LLC is a single member LLC (you or you and your spouse are the only members), then you may use IRS Form Schedule C to report income and expenses for the LLC’s business.
    Forming an LLC is not a mistake. It’s an extra expense many writers don’t need to take. In some states, such as California, maintaining an LLC is quite expensive. If you have one set up, good for you. You are planning for success.

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  30. Helen, I know you said there is no reason to create an entity. But I’ve told that an LLC will protect a ‘business owner’ against legal issues if they’re ever sued. As in it would protect their personal assets. Is that true?

  31. C.L., Taking advantage of the liability protection of operating as a corporation or LLC is not as simple as it sounds. In order for it to work, you would have to leave enough assets (money) in the entity to cover potential liabilities. I also have doubts that forming an entity would do much to protect a writer from claims of infringement, defamation or disclosure of private facts because those claims are based upon the writer’s actions as a writer and individual, not as a business entity. Most writers are better off spending the same money buying business liability insurance. Of course, most writers are not working on projects that involve significant risk of a lawsuit, but if you are, then consult with an insurance agent on what policies are available.

  32. Hi Helen,
    I have asked three different accountants this question and I get a different answer every time. When I give away an e-book copy during a contest or when I give away an ARC, is that deductible? If I run a promotion on Amazon and give away my book for free during a set time period, is that deductible?

    Thank you

  33. Theresa, I would love to hear what the accountants had to say.
    For my giveaways, I treated my giveaway books as “sold” for purposes of deducting cost-of-goods-sold. (This is an accounting concept which takes into account the cost per copy plus your design, editing and other costs allocated across your inventory.) Did any of the accountants come up with that treatment?
    I suppose you could also treat the cost of each book as an advertising expense.
    Most likely, your deductions will be small enough that the IRS is unlikely to care.
    Any accountants out there have a suggestion?

  34. Helen,
    I’ve been told I can’t deduct any of it. I’ve been told I could only deduct the copies that were given away during a takeover. The last guy said deducting any of it would send up a red flag to get audited.

  35. Oh my, that sounds onerous and non-intuitive. But much of our tax code is. Let me ask around and I’ll post what I find out.

  36. Theresa, I consulted with Carol Topp. She’s a CPA and the author of Business Tips and Taxes for Writers (a book I highly recommend, http://amzn.to/1Jxamys ) She said, “an author can deduct the cost of the books she gives away (it’s called cost of goods sold on the tax return), but not the full retail price of the book.”
    I see you are asking about e-books. Were you thinking of deducting the price of the e-book? I can see that as a problem since e-books are not part of inventory the way a print book is. But for print books, you may deduct your cost of that print book, but not the retail price.

  37. Hello Helen,
    Sorry for the delay I was doing a book signing. Yes, I am talking about e-books. I know if I gift the book through Amazon, I can deduct it. What happens if I give a reader the e-book myself or an ARC (Advanced readers copy)?

  38. Sending the ebook costs you nothing, so there is no expense to deduct. You can’t deduct the price at which the ebook would have sold. That’s income you didn’t receive, not a expense to deduct. Make sense?

  39. I am in the process of self publishing a book now. So I need to have a new TAX ID Number in order to proceed? I bought a Square card reader and wanted to just charge people by that, but to register it is asking me if I have an EIN. I will receive below $10 in royalites.

  40. Jane is correct. You may use your SSN. Obtaining an EIN is optional. I prefer to use my EIN whenever I can so I don’t have to give out my SSN. It’s free too.

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  45. A partner and I are working on some materials as co-authors, which we are going to be publishing through Amazon and Smashwords. Neither of those companies will split the royalties to the authors upon payment, which leaves us wondering how we should go about getting things legally taken care of tax-wise. If one author is the only one to get paid (splitting the royalties after the fact to the other author), this makes only one of us responsible for taxes, making things a little weird and imbalanced there. Should we start an LLC with and EIN before publishing, and use that for payments and tax purposes? Should we pull a Wesley Snipes and just never pay taxes and flee the country?

    Thanks!

  46. LR, You could start an LLC with its own EIN, but it’s not necessary. If you have a written agreement between you that designates one of you to collect royalties and then split them, you can show that agreement to the IRS if they ever ask why you are reporting only half the income shown on your 1099s. To add to the paper trail, you could give your partner a 1099 reflecting his or her share of payments received.

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