What Writers Need to Know About Sales Tax
- Apr 9, 2016 | Jessica Sillers
When you imagine an author at work, you might think of someone burning midnight oil to pen the next great novel or signing books for delighted readers. Less often pictured: The author filling out sales tax returns or stashing receipts for office supplies. Knowing your tax responsibilities is just as important a part of being a writer as puzzling over the perfect title.
So You Want to Be a Writer
The IRS draws a distinction between writers who put words on paper (or screen) as a hobby and those who write for a livelihood. Either way, you’ll have to report and pay taxes on your income. Here are a few differences to consider:
- Do you write intending to make an income, or depend on the money you earn? Businesses turn a profit three out of five years, according to the IRS. Meet this mark, and you’ll get to claim more deductions on your tax return. You might also get more attention when it comes to audits.
- Hobbies are more limited regarding which deductions apply. The IRS is more interested in helping small businesses succeed than supporting a lucrative pastime.
Spring Fairs and Sales Tax
Outdoor book fairs pop up like tulips in the spring and summer months. Authors who self-publish or publish their books through a small press do a lot of their own promotion at these fairs. In most states, you’ll need a temporary sales tax permit.
When you know which fairs, conferences, and other book-related events you’ll attend, go to the state’s Department of Revenue website for information on how to apply for a permit. Receiving a permit can take several weeks, so set a reminder to apply at least a month before the fair.
We’ve talked before about nexus, the level of business presence that makes you responsible for paying sales tax in a state. In Pennsylvania, for example, “Performing services, managerial or research activities” is enough to establish nexus. Selling books during a two-day festival sounds a lot like performing services. Anytime you have a business reason to visit a new state, update your records to reflect where you have nexus. That way, you'll remember to charge sales tax if someone in one of those states buys your book online later in the year.
Speaking of online sales, an important term for authors to remember is click-through nexus. Selling through an affiliate partner can establish nexus in many states. So can keeping your book in an Amazon warehouse. That's why it's important to learn which Amazon Fulfillment Centers are stocking your book.
Make Way for Royalty
A major highlight in an author’s career is getting that first royalty check. Books are flying off the shelves, and your bank account gets a nice bonus. The problem is, there are two different tax forms that mention royalties: Schedule C and Schedule E 1040. What’s a writer to do?
Remember, writing is a business. Income, including royalties, that is related to the business go on Schedule C. Schedule E, Supplemental Income and Loss, generally applies to rent and royalties from property.
What Deductions Should Writers Claim?
As a business, you get to claim deductible expenses to lower the amount of tax you pay. The rule is that any expenses must be ordinary and necessary for your business.
Your home office is a major deduction. You’ll need to be able to prove that you use your office exclusively for work (no claiming the living room couch, even if you’re there with your laptop). You can either claim a flat rate per square foot of home office space, or calculate what percentage of your house it is and claim a corresponding percentage of your mortgage and utility costs.
Equipment and supplies for your business, like your desk, scanner, and sticky notes, are deductible too. You’ll need to be able to prove that you use them for work more than 50 percent of the time, so keep that in mind before automatically deducting your new computer.
Even some expenses like books and play tickets might count as “necessary” expenses to the IRS. Making a point to read the shortlisted novels for the Man Booker Prize could count as research if you make money teaching a fiction writing class. Just don’t get greedy. Uncle Sam won’t sponsor your entire reading list (I wish!).
Writers have a reputation for living in their imaginary world. It pays to come down to earth long enough to keep tax matters in order, so you can focus on the next amazing story without worry.