Tuesday, January 22, 2008

The Tax Man Cometh

Are you ready?

Most writers don’t realize that at some point they can become a small business, especially if they want to be a career author. As writers, we struggle for so long to become published - taking classes, attending conferences, listening to those who've made it tell us their story in the hopes that they will reveal the secret of how they 'made it' so we can follow suit.

If only it were that easy.

We often go from dreaming about becoming a pubished author to actually writing - often as a hobby - and the next thing we know we're a small business.

So, at what point are you as a writer a business?

Basically when you have a realistic expectation of earning money from your writing and intend to make a profit. And it's not something you choose. Within the context of the federal tax code you are what you are based on definitions set forth in Internal Revenue Service (IRS) publications that exist because Congress has passed laws that the IRS must enforce.

As a writer if you receive any kind of compensation - monetary or not - you are either a hobby, a business, or in rare cases receving what the IRS defines as royalties, not to be confused with the publishing industry's definition. How you report this compenstion to the IRS and other government agencies will depend on how it is recieved and structured. It is critical that writers understand this concept because reporting compensation as a hobby that should be reported as a business - and vice versa - can result in potentially significant monetary setbacks in an audit.

There are pros and cons to acting as a hobby and there are pros and cons to acting as a business. This blog is not the place to go into all the details that address these points, but a good place to start is with select IRS Publications that can be found at http://www.irs.gov/. At a minimum writers need to review IRS Publications 334 (Tax Guide for Small Business) and Publication 535 (Business Expenses). In addition, every year writers need to download a copy of Schedule C and the Schedule C instructions and review both for any changes that are reflected.

Sounds complicated - doesn't it?

So remember when writing and becoming a published author was just a dream? Remember thinking that once you were published everything would be so easy? Just like in marriage the real work begins when the honeymoon is over and the reality of the relationship sets in. It's important to start your relationship as a writer with not only an agent or a publisher or even other writers on solid ground, but also with the IRS.

Careful what you wish for!

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