Six impossible things

The Business of Writing: Finance

4. Finance – This has to do with all the monetary aspects of a business.

The financial end of the writing business needs and deserves a lot more attention than many writers give it absent emergencies. Especially the taxes part. I’ve said before that editors don’t do house-to-house searches …but the IRS does, and they’re not nice about it, either. Finances include a lot of record-keeping, starting with the must-do stuff for the IRS. They still like paper trails, so keeping receipts and printed records of income and expenses is vital.

However, Finance for writers isn’t only about keeping good records for your taxes and making your estimated tax payments on time. This is easy for a lot of writers to overlook, because writers don’t need a lot of cash flow to maintain the business – paper and pens don’t cost much, and once you’ve gotten over the initial outlay for a computer and software, you’re set for years. Really, the main thing writers need money for is their own income, and most think of that as a personal thing, not a business matter.

The trouble is that if you don’t pay attention to where the money is coming from – which titles and formats are selling, which publishers pay more and on time, etc. – you can easily end up missing opportunities and/or find yourself suddenly unable to pay your bills.

It is also perilously easy to live in the moment if you don’t have a reality check. Publishing tends to have a much longer pipeline than most jobs, and if you aren’t shoving stuff in now, you can easily run out of cash three or five years down the road and have to scramble – or start hunting for a day job – to cover day-to-day expenses. Paying attention to one’s projected future income lets you know that this was the last of the advance payments, and you only have until it runs out to sell a new proposal to someone.

Expenses are another problem area. I cannot tell you how many people have said to me “But you’re a writer, so that’s tax deductable; why aren’t you buying it?” What they don’t get is that “tax deductable” does not mean “free.” It means it’s an offset to whatever I made; if I didn’t make money (or if I’ve already accumulated enough expenses this year), the benefit is zero this year and maybe a loss carryforward next year…IF I make enough money next year to cover it. And you don’t want to pile up too many losses in a row, or the IRS gets interested and you may lose all your business deductions for several years.

The rule of thumb I use is “If I wouldn’t buy it on sale for 20% off, I shouldn’t buy it just because it’s tax deductable.” This is a little conservative, because as a self-employed person in the US, I pay both halves of the FICA (that’s Social Security tax), which adds up to 15%, and on top of that goes whatever my marginal tax rate is likely to be that year. So really, the “buy it if it’s on sale” rate should be a bit more than 20% off, but I prefer being conservative. Writers in countries other than the U.S., of course, have to work out their own percentages based on their particular tax situations.

If you’re self-publishing or hand-selling your own books, you have a lot more record-keeping because you’ll need to track inventory (unless you’re only doing e-books) and sales. I know more than one writer who’s gotten caught at tax time because for some reason they thought that as long as they spent all their sales income on more inventory, it wouldn’t count as income. If you are one of these, run, do not walk, to a reliable accountant and get them to explain to you what you can and cannot do and how to do it, or you will end up paying a whole lot more than you have to in taxes.

There also seems to be an unfortunate tendency for writers to underestimate how much they’re going to need to live on. They overlook things like insurance and emergency funds and retirement savings when they’re figuring out how much income they need to generate. But if you only include the expenses that come around weekly or monthly, and you spend your entire advance on them, you’re in for a nasty surprise when the car, homeowners’, or health insurance bill arrives, or when you have to spring for Christmas presents, or when the car breaks down. If you aren’t making enough from writing to cover this stuff, then you need a day job, and you’re far better off admitting it than pretending that the car will never break, you’ll never get sick or have an accident, and that Scrooge was right about the whole “bah, humbug” thing.

Cash flow is a particular concern for most writers, because either you know how much money you’re going to get (advance payments), but not when you’re going to get it, or else you know pretty much when you’re going to get it (semi-annual royalty payments), but not how much they’re going to be. What this means is that a) you shouldn’t count on having money to spend unless it’s actually in the bank (I know writers who’ve had trouble making rent or mortgage payments because they charged a large purchase, figuring the advance would come in time to pay for it…and then the advance took another three months to arrive), and b) you need to budget what’s in the bank to last for however many months it’ll be until the next payment is likely to arrive. Getting a $5,000 advance check doesn’t mean you can spend half of it on a new laptop if you aren’t likely to get any more income for the next ten months (unless you really can live on $250/month – do the math).

An especially vital aspect of cash flow management is putting aside enough to pay the taxes. I generally dump half my incoming checks straight into the tax account (which I keep in a separate bank from my regular checking account, to make extra-sure that I’m not likely to tap it for day-to-day expenses and then end up owing the IRS hundreds or, in a good year, thousands of dollars, and being caught short). It’s hard to do, but boy, does it make quarterly estimated tax payments less painful…and if I’m going to have to live on beans and rice for three months in order to make those payments, I know it right away, instead of having it come as a nasty surprise.

And then there’s the other stuff: checking royalty statements, keeping track of advances and subrights sales so you can bug the publisher if the payments are taking too long, watching sales trends so you can tell which of your publicity efforts are having an effect and/or figure out when it’s time to ask for new covers, a reprint, or a new push for a title (or do some of that yourself). A lot of writers consider this optional, mainly because they don’t want to bother with all the record-keeping and reviewing.

I don’t consider any of this optional. Especially checking royalty statements; over the years, I’ve found something like $5,000 worth of errors (all of which the various publishers corrected promptly and without argument when they were pointed out). And the unexplained discrepancy that looked at first glance as if I owed the publisher $300 turned out to be a more complicated error that meant they actually owed me $1,000, so yes, I report everything I find, whether it looks as if it’s good for me or for them. Computerization has eliminated errors in addition and subtraction, but it has resulted in a lot more data entry problems, so the checking still needs to be done.

Keeping good records allows you to know how your business is doing financially – and quite often why, which can give you an idea what to do about it. It also provides essential input into lots of decisions, from whether to attend a bookstore event/autographing, to whether to change publishers or agents, to which of two equally tempting ideas might be better to work on next.

Note that I didn’t imply that all of these decisions should be made strictly on financial grounds. You may be well aware that the autographing at a local bookstore will take three hours (what with driving time), and you’re only likely to sell two hardcovers to folks who wouldn’t have bought them anyway (meaning you’re working for around $1.30 per hour, less gas money), so financially it’d be a dead loss. But you may want to do it anyway, for the publicity, for contact with your fans/readers, for goodwill with the bookstore and its employees (who may be more willing to hand-sell your book once they’ve met you), or just because you get such a lift out of doing this kind of thing that you always come home and write six times as much for the next three days.

On the other hand, if you’re paying $300 to fly to another city for a similar autographing, the expense is so much greater than any goodwill generated that it’s probably not worth doing. On the third hand, if you’re going to be in some other town anyway, it may well be worth the good publicity to set up a couple of local autographings or unpaid library appearances (especially if you can do enough of them to justify deducting some of the travel expenses).

Crunching the numbers is something many would-be writers think of as boring and uninteresting, but it is surprising how fascinating all those figures can be when it’s your book, your sales, and your money.

Next: Administration

  1. Thank you so much for doing this series. It could not be more timely for me. My remaining open question on finance is: for the newbie writer (yours truly) who has a day job and small amounts of writing income, at what point it is necessary to pay quarterly taxes? At the moment your truly’s W-2 tax dependent deductions are more than that income requires so there is overpaying on the day job taxes to cover the underpaying (read not paying) of writing taxes. It seems that there must surely be a point at which that work around becomes too clunky. I’m asking a CPA, but for any writerly types who have personal experience with the situation, I would appreciate you input as well.

  2. Yes! This isn’t the boring stuff to me (I’m an accountant in my day job), but I’m constantly amazed at the number of people who think that “It’s tax-deductible” somehow means “It’s free.” May I steal your “Would I buy it if it were on sale?” test?

    • J.P. – Whether it’s withholding or estimated taxes, the U.S. government requires you to cover some high percentage – I think it’s 90% – of your tax liability in withholding OR estimated tax payments; OR you can cover 100% of your prior year’s tax liability. This means that if you get a huge advance payment on Dec. 21, you won’t get socked with underwithholding penalties IF you paid at least as much estimated taxes and/or withholding as you paid in taxes the previous year. Of course, it also means you’ll have a big bill on April 15, because you do still owe taxes on the advance in the year you got it. Hmm…I think I will do a post on this later on, maybe when Estimated Tax Payment time rolls around. Oh, and if you are over-withholding at the office, you can submit a form to the office that claims extra deductions (and thus reduces the withholding)…at least, that used to be the case. It’s been quite a while since I had to pay attention to that end of things.

      Shannon – Sister! (I was an accountant for a while before I quit my day job, back when.) Of course you can use the “if it were on sale” line – I came up with it because it’s something that’s easy for most non-writers to understand without a whole lot of extra explanation.

  3. I think so many writers want to live the dream of quitting their day job and living solely on their writing income that they forget the mechanics of making it happen. They just start spending that money without analyzing everything.

    I think I’m going to be overly careful once I get published. I’m so careful with my money now that people often wonder why I choose to live the way I do, and getting published won’t change that.

  4. Something that might be worth a whole post of its own someday is retirement savings for writers — SEPs and IRAs. I always bundled those contributions right next to my taxes in the money I set aside for the quarterly estimated payments (once I finally learned, and learned how, to do this), my own personal social security tax — saving off the top works way better than saving out of the residue. The “set aside 50% rule” always seemed to cover them both — taxes and SEP/IRA — pretty well. And, of course, the latter also provide deductions, so they are well interlocked.

    Health insurance is another whole ‘nother rant. It could be worth a separate post, or be bundled with the SEP/IRA stuff… “crocheting your own safety net” or some such.

    Ta, Lois.

  5. “…mainly because they don’t want to bother with all the record-keeping and reviewing.”

    It’s not just writers; I know a lot of people who pay utility and credit card bills without checking them, never balance their checkbooks, etc., and I think it’s much the same mentality. And these same people, who will sneer at me for balancing my checkbook or keeping a personal budget — “Oh, I never do *that*,” as though ignorance of one’s own money is some kind of superior status — are invariably hurt and bewildered when they turn out to be in a financial mess. Add in the complexities of self-employment and the vagaries of the publishing industry, and it’s no wonder a lot of writers get themselves into trouble.

  6. Thank you, Patricia!

    Thanks for reminding me of the 90%-of-what-you-owe-now or 100%-of-what-you-owed-last-year tax rule. I knew that rule and set up my deductions for the 100% of past year’s income taxes mark, but then I forgot why I did it. It makes perfect sense that complying with the 90-100 rule to handle irregular bonuses in a day job could also be used quite effectively to handle irregular writing income. Thank you for pointing that out.

    I can now proceed to talk intelligently with my CPA about how to adjust tax withholdings for the next year.

    (Since this has been a series on the writing business, I feel the need to explain that my husband and I broke down and got a CPA for tax help based on tax complications from our regular day jobs. If there were no writing happening at all, we would still need this guy. Based on that, I am not considering it a writing expense. Laugh at me if you like. I have a masters in Applied Math. But, when the TurboTax help desk said doing my taxes correctly required preparing a federal return, two dummy federal returns, and then the two state returns… I did it. It took a long time. I filed. I am not sure I did it right. I read about our dear Treasury Secretary and his past tax issues. We decided to hire a professional.)

    • Tiana – There’s also the fact that writing income tends to arrive in large chunks that LOOK like way more than you’re going to need, so, as you said, people don’t think about them carefully.

      Lois – Yeah, I can see where doing this whole set of posts over, only focusing on the practical aspects and specific tasks for each area, might not be a bad idea. Not right away, though!

      LizV – I don’t understand it, either. You can get away with minimizing the records and reviewing, but there is that irreducible minimum below which you really can’t go without ending up in a swamp eventually.

      J.P. – It’s not about the math. I have an MBA, and I’ve had a CPA since about thirty seconds after I could afford one. And she’s been worth every penny; she’s saved me her fees ten times over in things she’s caught that I wouldn’t have had a clue about.

  7. JP: One of these days, I’m hiring myself a CPA to do my taxes. Doesn’t matter that I am one, personal taxes aren’t my area. 🙂

    And I think a post on retirement saving for writers would be very interesting. I know some very basic info for self-employed folks, but not enough to be comfortable. Right now, I just tell my employer how much to withhold, and poof! There it goes, into my 401(k). Which I very carefully don’t look at when the stock market is making a dive for the floor.

  8. I’m putting in a bid for the post or series on in retirement savings for writers and any other writerly practical advice. That’s a whole mess of things that I am not even aware of existing, but that I really ought to figure out somehow.

    To date, my retirement dreams (and thus plans and savings) have been focused on squirreling enough away that my savings could provide enough passive income for me to stop paid employment and write full-time with no income. My brain doesn’t have room right now for the idea of wanting to someday stop writing and retire. I have not at all experienced a writers day-to-day life though, so I can imagine wanting to one day not deal with, say, aggressive deadlines and demanding travel schedules. I can also imagine being too sick to get much done. I hope Patricia has time to write up that advice series too at some point.

    • OK, I’ll do something on retirement savings and my view of it after this series is done.

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