This month's biz post is about tracking writing-related expenses during the year and why you should make it your business to get your receipts, expenditures and other financial ducks in a row and keep them that way.
First, the why: Most writers are paid as self-employed independent contractors by publishers. This means the publisher does not take any taxes out of the writer's check. Nor do agents if the publisher pays them whatever is owed to the writer. Filing taxes is therefore different for us than most folks, and most of us have to pay quarterly estimated taxes as well as deal with the final end-of-the-year stuff. It really pays to be meticulous about expenses and record-keeping because we need every deduction we can get.
Now, the how: most writers come up with some sort of ledger or accounting system on their own, but the one I've found that seems easiest for everyone regardless of their accounting experience is the twelve-monthly envelope/ledger notebook method. Take a 3-ring notebook and fill it with twelve standard blank ledger pages. You can make columns for the type of expenses you usually incur (office supplies, internet service, postage, etc.) or keep a chronological accounting and note the expense type in the margin (I prefer the former.) To the back of each page, staple an open 8" X 10" envelope.
During the month, record your expenses and put your receipts in the envelope on the back of the ledger page. Some people prefer to put the receipts in the envelope during the month and then record them all at once at the end of the month. Do whatever works best for you, but at the end of the month you should add up your expenses and note your totals. If you'd rather let the computer do the math, or your expenses and income get complicated, you can set up your ledger as a spreadsheet and print out a ledger page each month.
Some tricks I've learned over the years:
1. Keep one credit card reserved for writing-related expenses only; the monthly statement will help you double-check your record-keeping.
2. If you have a lot of business-related phone use, consider setting up a separate phone line for business calls, internet service, etc.
3. Print out hard copies of all online transactions with order numbers in the event you don't get a receipt when they arrive (which sometimes happens with business materials or supplies ordered from the internet.)
4. Print out hard copies of all online business-related payments using services like PayPal.
5. With any receipts for unusual and/or large expenses, keep good notes explaining what they were for. Make sure these are deductions the IRS permits you to take, too, because if you get audited, this is where they get you with back taxes.
Don't guess at what your deductions should be or take the advice of a writer friend; always talk directly to the IRS about what expenses you can or cannot deduct. It's also good to visit the IRS web site every year to read up on the tax changes and/or one-time deals such as the new telephone excise tax refund for 2006.
Tracking expenses and record-keeping is like going to the dentist, the more often you do it, the less you tend to dread it. It's nice to be prepared for April 15th instead of scrambling for a week trying to reconstruct an entire year of expenses. Set up a system that works for you, and give yourself a little peace of mind.
D. Larry Crumbley's article Tax Aspects of Authors/Writers/Screenwriters
Tara K. Harper's workshop Taxes and Finances for Writers
Cyn Mason's article Taxes for Writers
Tuesday, March 27, 2007
Posted by the author at 12:24 AM
Labels: Biz post, financial stuff, taxes
Subscribe to: Post Comments (Atom)
I love writing, but oh man. That's gonna be the bane of my existence, writer's block will be bad, but that might be the thing that blows my tiny brain to tiny bits. *shudders* besides, math and numbers give me the chills...so much...number crunching...*shudder again*ReplyDelete
On the other hand, yaye, numbers! As long as they're not negative, that tends to be good.
If it's no trouble telling us, what sort of things have you deducted as writing expenses in the past?
(One of my current projects is getting my finances figured out, so this came at the perfect time!)
Excellent, excellent, sensible, practical post.ReplyDelete
Once you're making enough money to pay estimated tax, it might also be worthwhile to talk to an accountant. Besides filling out your tax forms, he can help you figure out how to balance quarterly tax payments against randomly timed income receipts, whether an IRA is a good idea (usually it is), what is or isn't deductible, etc. His fee is a deductible business expense.ReplyDelete
If you want someone who'll be available year round, avoid the tax prep firms in favor of a general CPA practice.
Creepy. I posted on this exact topic today as well.ReplyDelete
Copied and saved. Good, substantial advice – especially considered how lousy I am with accounting, record-keeping, and all such stuff as that. Thanks.ReplyDelete
And it’s good to see you back. I’m glad life has smoothed out for you.
The bottom line (so to speak) is you're a business person, so act like one.ReplyDelete
I use two separate Excel files. One is simply five columns. Date. Source. Expense. Source. Income.
The second Excel file could be tied in to the first, but I don't because I'm a computer dummy. It's my running tax file, done because my first year of writing I forgot about my second quarter taxes until the day they were due, which, unfortunately, turned out to be the day before we were leaving for Disney World. That sucked, since DW is not a great place to go when you've just sent most of your money to George Bush.
Anyway, this is four columns. Date. Income. Fed tax. State tax. Everytime I get money, I enter the date, the amount, then calculate how much money I will probably owe the feds for it (calculated currently at around 24%) and how much I owe the state of Michigan (currently about 4%, but we've had to adjust every year). Then I add the state and federal every week and give it to my wife, who manages the household money, so she knows how much money we owe for my taxes all the time so we're not shocked (angered, annoyed, irritated, dismayed, yes, but not shocked) when each quarter is up.
Thank you so much for posting about this! I've been a bit of a loss about how to keep track of my expenses. I'd thought about the credit card, so I got one just for writing expenses only. But everything else is kind of new to me.ReplyDelete
Thanks PBW. I've been wondering about all this stuff, and I'm glad to have the info in advance, rather than trying to piece it all together later. Very eye-opening stuff from Ms. Harper too. As I will be the lesser-breadwinner in the scenario she mentioned I'm already envisioning the pinch we'll have. Best wished to you and yours.ReplyDelete
Since I do a lot of tracking and recordkeeping, let me add a few thoughts as well.ReplyDelete
1. Keep it simple. Have one process for doing this, and don't allow for exceptions (such as all bills go in the envelope except for utility and mortgage bills, they'll go in the general folder). Don't make it more complex, because a month later, chances are you'll forget the nuances of the detailed system.
2. Don't be afraid to use physical clues. In my kitchen, next to the desk, is a plastic wall-mounted box (can't remember the name, it's looks like you could put a clipboard in it). All the bills go in there. At the end of each month (per a reminder on my Time & Chaos software program), I sort the pile and file it all. It looks ugly, but it works.
3. Write notes to yourself. Lynn mentions annotating your bills, but don't be afraid to go into detail. A year from now (or six years, if you get audited), you'll thank yourself.
4. Be rigorous in sorting your paperwork. Once a month works for me, but when I let it slide and I have two months (or three ...), it gets mentally tougher. At the same time, knowing that I have forgotten to update my system weighs on my subconscious, and that affects other aspects of my life.
5. Finally, when it seems silly do have all this, remind yourself that it's part of being a professional. There's paperwork at your paying job, why not paperwork at your non-paying (soon to be remedied) job?
I honestly don't think that regarding this like going to the dentist is the best tactic... but then, I'm an accountant, so take that with a grain of salt.ReplyDelete
Here's the thing. If you make any money at all from writing, tracking your expenses can do nothing but put more cash in your pocket at the end of the year. (If you don't, or your expenses outdo your writing income, you're going to need to chat with a CPA about how to determine whether it's a hobby or a business.) Considering you have to pay *more* tax on writing income than on employment income, this is a Good Thing.
My recommendation probably wouldn't be to call the IRS with questions unless you're already pretty good at handling your own taxes. I know I'm biased, but a CPA is working for *you*, and a person working the phones at the IRS is working for the government. They're free because their goal is to get the government its money, not to save you cash with smart tax planning. Especially if numbers alarm you, get somebody you can *trust* to help you out.
This is something I've been thinking about for a while. When should we beginners start keeping track of all this? I have a spread sheet, but it's just so that I can see what I'm spending, not for tax reasons. I've made 60$ total in two years now. When should I worry?ReplyDelete
oh man, i'm so glad i kept decent track of expenses.ReplyDelete
I had to pay out the wazoo last year, but it would have been so much worse if I didn't keep track of things like mileage, postal expenses, etc.
This year wasn't so bad. I got even better. I just use a filing cabinet although I might have to try the three ring binder thing
QuickBooks and Turbo Tax Premier will get any small business or contractor through accounting problems, and make taxes a walk in the park at the end of the year. Once you have your self-contracting/small business set up in QuickBooks, it's a cinch; and the help files are unrivaled with backup web sources. I don't work for Intuit :), but I've run a business with Turbo Tax and QuickBooks from when they first came out.ReplyDelete
Thank you so much, I linked to this post on my blog!ReplyDelete
Here's another tip:ReplyDelete
Mileage often is a significant expense. Keep a cheap notepad in your car and write down your mileage when you go to the PO to mail a manuscript, or head for Staples to buy a ream of paper, or whatever. At the end of the year, you will learn that you drove a lot more business miles than you can remember off hand if you just try to reconstruct them later.