My tax guy said I should create a business identity that the money will go to (if I ever sell a book) rather than just my name. I don’t know whether that means I have to sign the agent contract with my “business” name or not.
Generally speaking, when it comes to tax advice, I advise listening to experts, especially since they presumably know your tax situation in far more detail than I ever would. However, there are considerations besides taxes in this sort of case, and not all tax guys are familiar with the ins and outs of this particular business. There are, for instance, copyright implications under U.S. law if you register your copyrights in the name of a corporation or pen name (or transfer them to a corporation after your career is established).
I’m also not sure I know what he means by a “business identity.” Does that mean a separate bank account, a subchapter-S corporation, an LLC, a full-fledged corporation, or something else? Or does he just mean “decide on a pen name”? And exactly why does he think you need it? (Tax guys are not immune to the notion that all writers make big $$; he may well change his tune if you tell him that first-novel advance payments are still averaging only around $4,ooo-6,000, spread over three to five years.) Does he think you’re going to need a separate tax I.D.? Why?
For example, take the simplest possibility, a separate bank account for writing funds. Why would you need to segregate those funds? There may be personal reasons, like, oh, a pending divorce, but the most usual reason has to do with record-keeping. I have a couple of friends who simply cannot keep track of their writing income and expenses except by having a dedicated writing account into which all writing income goes, and from which all writing expenses (including estimated tax payments) come. They basically depend on the bank to keep their tax records for them.
Myself, I’ve never done it that way. I have a separate account for taxes, but all that goes into it is the money I think I’m going to want for estimated tax payments, and all that comes out are those payments. Juggling two different checking accounts that I’m using on a daily or weekly basis to buy groceries and notepads and computer software and yarn and cat food and research materials is just not something that works for me. When I make any given book purchase, half of them may be research and the other half reading for fun or my hobbies; I am not about to place two orders just so I can pay for each half from the right account. I also know myself well enough to know that if I am in a hurry and the only checkbook I can find is the “business” one, I will use it to pay the pizza delivery guy anyway, which kind of destroys the reasoning behind keeping separate checkbooks. Then again, I don’t have a knee-jerk negative reaction to the very concept of keeping tax records during the year. (I do get behind, but that’s a different problem.)
The really important thing is keeping good tax records, so that if the IRS decides to look at your returns, you can show that you have a business and not just a hobby. You don’t have to keep the actual money separate, as long as you have good records. If you can’t do it on your own, maybe a separate bank account is a good idea, provided you can be strict about using it just for writing expenses and nothing else.
The question of setting up a sub-S corporation (or a full-fledged corporation) is a whole ‘nother matter. Very few of the writers I have known have done this, and all of them have been at a level where their annual writing income is in the mid-six-figures. Most of them also did it back when corporate tax rates were a lot less than individual tax rates, which has not been the case for quite a few years. Absent some serious and obscure legal reasons, setting up a corporation is overkill for the rest of us, especially since it costs in money to keep it registered and in time to keep the required records and file the required paperwork. I haven’t heard of an accountant recommending it to a writer for at least six or seven years now (though of course, that doesn’t mean it hasn’t happened. Also, different rules apply outside the U.S.)
My writing business is a sole proprietorship, meaning that there is no particular “business identity” separate from mine. OK, my friends call me Pat and the name on the books is “Patricia C. Wrede,” but I consider it all still me. The checks go into my personal checking account and show up on my personal income taxes (Schedule C). My accountant charges a small amount more for doing my taxes because she has more forms to fill out, but it’s nothing compared to the pages and filings I’d have to do for a partnership, sub-S, LLC, or full-fledged corporation. I don’t need a separate tax I.D. I use Quicken to sort my expenses into writing-related and everything-else. I do not even have a separate credit card “for writing,” as it would have the same problem as a checking account (having to split purchases, and the temptation to use it for non-writing stuff).
The vast majority of writing businesses I know of are sole proprietorships.
The various alternatives to sole proprietorships are worth looking into, but there should not ever be an automatic assumption that if you are starting a writing business, you have to set up a sub-S or LLC or whatever. They are emphatically not right or useful for everyone. Also, it is a lot easier to change your mind and set up a subchapter-S corp later on if you decide it will be useful, than it is to wind one up and get out of it if you decide it’s too much of a pain to bother with.
As for signing up with an agent…that depends on what kind of business you are running. If you are a sole proprietorship, you sign the contracts and get the income under your Social Security number (that’s both the contract with the agent and the ones with a publisher). If you’ve assigned your copyrights to your corporation, which has a separate tax I.D., then I believe you have to sign the contracts in your capacity as representative of the corporation and use that tax I.D. If you’re writing under a pen name, you still sign the contract as yourself, with your own tax I.D., but the contract specifies the name that goes on the book and whether or not the copyright will get registered in your real name or as your pen name.
Thanks for all the awesome, in-depth advice- I also love your tone and no-nonsense sort of approach to the issues you set up. I wanted to ask, since you’ve been going through the legs of your business stool- what exactly does a good book contract look like? (please forgive my general ignorance, but I’m fact-hunting)
I’ve recently finished my first manuscript and this is the stage I’m at. Part of the reason I appreciate your blog posts is because you’re actually educating me in the middle of a ‘live process’.
Thanks again for sharing what you know!
-Ryan
“Tax guys are not immune to the notion that all writers make big $$; he may well change his tune if you tell him that first-novel advance payments are still averaging only around $4,ooo-6,000, spread over three to five years.”
When I sold _The Interior Life_, a guy I knew, who could probably qualify as a tax expert — he worked for the IRS — said “Hey, why don’t you go to Europe and do research, then you can deduct your expenses and not have to pay so much tax on your income.” I explained to him that my advance had been $500, minus agent’s fees. And as it turned out, that was all I ever got out of it.
Have you considered ebooking it? My somewhat tattered paperback copy could do with some archival support. 🙂
Graydon, people have been suggesting that since 2000 or so, and other people have always been saying “But Kindle doesn’t do different fonts.” I’m aware that there are other e-publishers [parenthetically, I managed to get _The March North_ via gmail, even though I don’t have a hand-held; have just read for the third time; wow], but I don’t know how to access any of them.
And the problem with any kind of e-publishing is that you have to do your own marketing — of which I am totally incapable — so it would never get bought.
But if you’ll send me your snailmail address (I’m at djheydt@hotmail.com or djheydt@gmail.com), I’ll *mail* you a new copy. I have the better part of a case-lot of them, for my late mother-in-law bought a case. God knows why, for she hated my guts.
I’ll send some other stuff via email but I think I can point out that despite my being complete pants at marketing people have bought both The March North and A Succession of Bad Days (the second book) and that the trend seems to be going the right way. Some mix of word-of-mouth and Usenet reputation and being patient can do a lot, and you’ve got at least as much of that sort of reputation as I do.
TIMELY advice, as it happens, as I’m trying to get Book 1 up there.
I would much rather have a file I throw receipts into – for anything writing-related – than go to the trouble of establishing a separate checking account. (Although… would hubby need to find out how little I make?)
In any case, we’ve been filing our taxes together forever, and I will be happy to contribute any possible income (after taxes) to our joint enjoyment and possibly children.
Until and unless I make such a huge a mount of money I have to. One can wish for that, but I don’t think you need to think about it more than once a year, right after filing the previous year’s tax return.
That sounds like what you’re advocating – so it is good to get confirmation.
I have a separate business identity and a separate business bank account. This is because I have to give out the bank account to get my payments and I prefer to keep it small.
Wow! Thank you for taking the time to answer my question. For what it’s worth – we were advised to create a Limited Partnership. Where I as the author would be the general partner and my husband would be the limited partner. It would be set up as a 70/30 split, 70% for the limited partner, my husband, and 30% for the general partner, me. By doing this I would only need to pay self employment tax on 30% of the revenue, assuming their was any, while my husband would not need to pay self employment tax on the 70%.
You mentioned that there are copyright implications for setting the copyright up under the business as opposed to the individual. In an LP, wouldn’t we be able to still register the copyright to me as the general partner instead of the LP? If so, then we wouldn’t have any negative implications on copyright if the partnership is ever disbanded?
Our tax accountant is the tax person for another international author that has a few books published and this is how she is setup. So, it’s easy for me to take his word for it, but whenever money is involved, I definitely want to take a closer look!
I can’t give you specific advice on your particular situation. You have to do your own homework. Check the U.S. government copyright page, and talk to an actual legal person. Also consider just how much money is going to be involved. Is it worth it TO YOU to pay the fees and take the time to do the paperwork on an LP in order to save 15% of whatever your net writing income ends up being? Self-employment tax is 15% of NET. Furthermore, when you avoid paying FICA this way, you are reducing your eventual take from Social Security. Is that something you really want to do? (When I was starting, I was convinced that Social Security wouldn’t be any use by the time I needed it, and I still paid attention to the effect my financial decisions would have on it. Now I’m glad I did.) There is also the question of assigning 70% of your earnings to your husband in this age of divorce. Nobody expects it to happen to them; I didn’t. But should things go wrong in five or ten or twenty years, how would this setup affect the way your assets get split? You may want to talk to a lawyer with expertise in entertainment law, and not just a tax guy.
There is no one-size-fits-all answer to these questions. If you and your husband are in a high income bracket already, the answers will be different compared to someone who is scraping by on a McDonald’s server type day job. If either or both of you are self-employed in some other field, again the answers will be different. And the answers will change over time; if your first book sells for $500, your answers are different from those you’d give in twenty years when your 15th book sells for $500,000. Not to mention the fact that they keep changing the tax rules. You need to revisit this stuff every few years.
Thanks Pat, for taking the time to answer. Don’t worry, I’m going to look into things. Luckily I still have plenty of time! 🙂
Patricia already gave some good, general advice, and I am not expert in the field either. Let me add that something done *solely* for avoiding taxes might get overturned — IIRC, Canada has this — and payments to relatives/family may also get looked at differently. Best discuss such details with your expert. If he is not doing your entire household’s tax accounting, he should, at least, be aware of what each’s general tax situation is.
Test Question: What is the difference between tax avoidance and tax evasion? (If you do not know the answer cold, you need to learn more. You may, anyway.)
Whoa, American taxes are complicated!
(Aussie ones kinda are, too; but not to this extent.) Mind you, I still have to find out if the (tiny) amount I earned this tax year on books needs any form of tax return done. When you don’t earn up to a certain point as a person here in AUS, you don’t even fill out a tax return. Now I just have to find out if that applies to me as a writer 😀