Travis here. There's no writing wednesday today as Rachel is writing the last inches of No Good Dragon Goes Unpunished. As such, she's sealed herself into the writing chamber. Woe be to me or any other mere mortal who seeks to breach that line.
Normally, I'd try to have a fun business or numbers post too keep things rolling but, well, its tax season. Which means that I'm spending all my time getting our taxes ready for the accountant. That's right, I'm not even actually doing taxes, just doing the questionnaire for someone else to do our taxes.
So, in the spirit of the season, here's a little window into what tax time looks like for us and, probably, other authors. USA based ones at least. I know nothing about other country's taxes.
Now, I can't give tax advice, so I'm just going to talk about Rachel and I. Hopefully you will benefit from our experiences.
The Dragon of Taxes
This tax thing is no joke. I spend a lot of time and effort to manage it. Why? Well, historically 90% of our income has no withholding on it. That means we have to pay all our owed taxes at tax time. I.e. April the following year of earning it.
Until last June, Rachel operated as an implicit sole proprietorship. That's what most authors are as its the default status if you do business, aren't an employee, and haven't formally created a business entity for your author stuff.
Sole Prop sucks a lot tax wise. Basically, all our income is personal income but we also have to pay self employment taxes too (15.5% roughly at time of writing). If someone is earning a middle-class living in America off book money, not impossible at all with self pub, then they are probably paying about 35% or more of their earnings in taxes when we add up every tax. (I'm aggregating a LOT for that number btw. Ad velorum, property, state, etc..)
I've seen studies that add up all the taxes paid by someone of our income bracket and it can be north of 40%. Now, before anyone thinks I'm anti-taxes, I'm not. I love police, fire departments, roads, the FDA, and so on. Big fan of civilization here. However, I think that 40% is an unfairly high level, hence my complaining. I mean, look at the social services they get in those 50% Scandinavian countries! We're kinda wasteful with our money in America.. but I digress..
What's important for authors here is the size of the tax bill that comes due in April. We'll have to shell out a single check that covers something like 25% of our income from the last year for this. If you make any real money selling books, this'll be you too most likely.
Lemme put a number on that to drill this point home. Say you're books do great and you make $60,000 in a year. Depending on your tax situation, that might result in a $10,000 to $15,000 tax bill.
I'm sure those of you starting out are like, "I'm not going to have to worry about this for years!". Just keep in mind that any tax bill can be a real shocker if you are used to a normal job with normal withholding and you usually get a refund from the govt at tax time. Earning even a couple thousand from an ebook will likely reverse this situation.
Given that most Americans (forgive me everyone else) have less that $1,000 in savings, this can be a big gotcha I feel and worth warning people about.
Prepare for Taxes or Death by Taxes
A LOT of what I do for Rachel and I is financial. A lot of the financial work is making sure that we pass through the tax time window like an arrow instead of hitting it like a bird.
How I do this is both simple and complicated.
- I track our earnings on a monthly basis
- I estimate our tax burden as we go using a worst-case-scenario method
- I make sure we save up enough money to meet our tax burden
Ideally I do this as the money is earned. We have a special savings account that I move income into to cover for taxes. This way the money doesn't show up in checking. Money in checking is always at danger of either (A) getting eaten on accident or (B) providing a false sense of security and wealth.
A real example that happened - one time I had to tell Rachel that we couldn't afford something we wanted. I forget what it was, a modest vacation probably. At the time though, we had $25,000 in the bank. Why was I putting on the brakes? Well, because I knew how much we'd earn and spend and owe over the next 6 months and, basically, that $25,000 was already spent as most of it was to go to taxes in April the next year. In the end, I was right and we did need it.
Typically in December, I'll get together with my accountant over email and get a quick estimate on our likely taxes, just to make sure I haven't totally messed up. If I have, well, its December and there's 4 months to try and fix it.
How is this complicated? Well, item #1 is complicated once you start getting into deductions, business expenses, non-writing income, and so on. Again, this isn't me giving tax advice, so if you want to do this, you'll have to go educate yourself, talk to professionals, and get the tools to do this tracking yourself.
My weapons of choice are a yearly tax guide on deductions, mint.com, and MS Excel. Mint is invaluable as I'm able to review transactions monthly and tag things as taxes, taxable, business expenses, deductions and so on. This is a huge time saver when March arrives and I have to start answering questions like, "how much did I spend on non-federal taxes in 2015?"
How the Business Changes Things
Everything I've been talking about up till now is how Rachel as a Sole Proprietorship (that I file jointly with) have handled things. This year though, things are changed both for the more complicated and the better.
In 2015 we became Aaron/Bach, LLC. (with the S-Corp tax status)
Sadly it was mid-2015, so I have half a year of Sole Prop taxes combined with the new overhead of half a year of business taxes. This is the pain year, but next year's taxes should be a LOT easier for me to handle because of this division.
What are the benefits of being an LLC like this? There's a LOT, too many to go over here really. If you are interested, go read up, there's endless resources on the web.
As relates to this post, taxes, there's three big advantages to forming a company like this,
- We have company accounts and a ledger. This nicely puts all our business transactions in one place and divides business from personal most excellently. Its SO much easier to hit up QuickBooks for our financial reports than it is to build them by hand in excel using Mint.com data.
- 100% of our revenue is no longer subject to self-employment tax. This is the TL;DR version but businesses only pay employment taxes on payroll. LLCs and S-Corps can distribute money to employees and members in more ways that just payroll. *
- We can do withholding on our payroll, which off loads a lot of tracking and money management chores from me.
*clarification - I'm just talking about self employment taxes here. This setup helps with limiting self employment taxes but not income taxes.
By setting reasonable salaries for Rachel and I, we only have to pay those extra taxes on our salaried income. This is a very big savings and it'll get bigger as we get bigger.
That said, there's a ton of benefits that I'm not talking about here. One of them that does need to be talked about is my own salary.
Protecting Your Partner
I spent all of 2014 working for Rachel and not anyone else. I work easily 80 hours a week being her marketing guy, financial guy, story helper, alpha reader, sounding board, secretary, IT guy, researcher, house husband, and general leg work person. If its not writing-related or Rachel-only, I try to take it on so she doesn't have to.
According to the IRS I made basically $0 in 2014. This was a HUGE problem for us as banks and certain desirable tax deductions thought that I was basically unemployed for that year. The problem goes well beyond that legally and socially but its too much for today.
Now though, as part owner of Aaron/Bach, LLC, I have a real job again and real salary again. This protects me and our family in many ways. As Rachel's partner, it protects my economic value both for myself and for her.
Lastly, its more fair to me. I work hard for Rachel's and my dream. I may not write the actual books, but I have put a lot of time and effort into them here in the background.
If this stuff interests you, and I hope it does, you need to look before you leap. Go read up in detail on how LLCs and S-Corps work. At least talk to an accountant before you do anything. Preferably also a banker and a lawyer. LLCs are not simple and there's a lot you can mess up through ignorance.
I read through LLCs for Dummies after starting ours and I wish I'd done so beforehand. Fortunately, we have a wonderful accountant who's helped keep us from making any regrettable mistakes so far.
A short post today, yeah right
If you read this far.... thanks! I know this isn't the most exciting Writing Wednesday material. Its important stuff to know though and I hope that you can benefit from hearing about our experiences.
In the end, surviving taxes as an author comes down to being prepared. That's the whole point of this post really. Know what's coming and prepare yourself for it. The methods I use work for me, but they aren't the best or only methods out there. Find something that'll work for you.
We have more posts on managing author money and taxes on the blog, so please check them out if you want to read more on the different topics that I touched on today.
Lastly, would anyone be interested in an in-depth post about LLCs and such? I brushed by a lot of material today and am curious if you all want to hear more on this from Rachel and I.
As usual, if you like the post, please share it around.