Patricia C. Wrede has an important post up today about estimated tax payments. (They’re due on June 15th, which is always a bit counterintuitive to me because you’d think it’d be the 15th of the month after the end of each quarter, but it’s not.) You can check it out here. She has a few other good posts on there about the business end of things. Here’s one on cash flow and another on taxes. (I think there are others, but I’m too lazy to find them right now.)
I had also recently seen a post asking whether any authors do business plans, so I thought I would devote a post to the business side of writing. Keep in mind, I haven’t been published yet, so this is coming from the perspective of someone who has been self-employed for a couple of years now and has one of those degrees that involves creating business plans. It’s not real-life author experience.
I think PCW does a pretty solid job of covering the estimated taxes, so I’ll just reiterate a few points. If you start to make enough money at your writing, you’ll need to make estimate tax payments. Here’s the IRS website for self-employed folks.
One of the issues you have to be aware of when paying taxes on this type of income is that you’re required to pay both sides of the social security and medicare taxes. (At a normal 9-5 job your employer generally pays half of that.)
As long as the IRS gets the right amount of money, they don’t really care how they get it. So, if you pay enough in taxes through your day job to cover the extra income you earn through your writing, then the estimated payments aren’t needed.
Generally, you’re supposed to make four equal estimated tax payments throughout the year. I have yet to do so, but your life will be easier if you do. (Check out Form 2210 and you’ll understand.)
So, let me walk you through how I approach this for my real-life job. I have a spreadsheet that I maintain with the following fields (where <> means subtract):Expected Earnings <2.9% of all earnings> <10.4% of all earnings up to $110,100> +Half of SE taxes (absolute value of sum of prior two lines) =Adjusted Gross Income <Standard Deduction> <Exemptions> =Taxable Income Tax Liability on Income (use tax tables for amount of tax based on Taxable Income) +Self-Employment Tax (sum of second and third lines above — 2.9% of all and 10.4% up to $110,100) =Total Federal Tax Due
I also have a line for state taxes. (DON’T FORGET THEY REQUIRE ESTIMATED PAYMENTS, TOO.) Where I live it flows from the federal form, so it’s just a matter of x% of AGI.
(Also, keep in mind that those percentages and thresholds change, so you have to keep an eye on them year to year.)
This isn’t perfect. I over-estimate my tax liability when I do it this way. I’m not deducting any business expenses and I’m only using the standard deduction when I usually itemize, but it gets me in the ballpark and that’s all I care about. I’d rather overpay a little than deal with the government coming back to me four years later and asking for the amount I should have paid them and didn’t with a nice four years’ worth of penalties added on to the top. (Trust me, whatever the statute of limitations is for them to identify an error, they tend to wait until it’s almost up to send that letter.)
- Keep track of any income you make on an ongoing basis throughout the year. (I update my spreadsheet once a month.)
- For any income you receive (unless you’re covered through paycheck withdrawals), immediately put x% of it in a separate savings account reserved for tax payments. (Again, I overestimate this. I tend to put 45% aside. It makes for a nice year-end surprise and I don’t get caught out owing money I don’t have.)
- Keep receipts for expenses (computer, paper, stamps, etc.)
- Consider establishing a separate bank account for your business. I have both a checking and savings account for my business. When I need money for personal expenses, I “pay” myself from my business account. (I even use accounting software and treat it as a stand-alone business even though I’m a sole prop.)
Obviously, how many controls you need around your writing business will vary depending on how much you earn from writing, but it’s better to establish the framework early on rather than scramble later.
(Don’t quote me on this, but if you owe less than $1,000 in taxes you should be able to avoid the whole estimated tax payments issue.)
I don’t have a business plan per se for my writing. Partially because of the results of what I have done, which is to look at the profit potential for selling novels and stories.
I have one spreadsheet that lists the average payout for hardcover and paperback books and then calculates an estimated gross based upon number of copies sold of each. I then calculate a net based upon 15% to an agent.
An example: Let’s say I have an estimate of 10% payout on hardcovers with a list of $25 and a 6% payout for a $8 paperback. I assume that I would sell five times as many paperback as hardcover novels. If I sell 2,500 hardcovers and 12,500 paperbacks, I net $10,412.50.
For short stories, I’ve done a similar calculation and also have a spreadsheet showing what I would earn for various story lengths at different venues.
Bottom line for me was that it wasn’t worth taking it any further at this point in time. The next two years of my writing career I don’t anticipate making more than $5,000. If that changes, then I may sit down and do some projections, but right now I’m in the product development stage.
But if I were to take it further:
First, I would put more effort into confirming those numbers. What is the average payout on a hardcover? What is the average payout on a paperback? What is the average agent fee? What is the list price of an average hardcover? What is the list price of an average paperback? What percentage of sales of each go through places like Wal-Mart that have extra discounts that would affect my payout? (I’d probably model those separately.)
Second, I’d need some sort of numbers on average advances for authors at my stage of their career. I’d need some estimates of how long between submission to an agent and finding a publisher and structure of advance payments and how long to earn out an advance, etc.
You could do something similar for short stories. What is the average length of the stories I write? What is the average payout for a story of that length in the markets I’m targeting? How many rejections on average will a story take before it finds a home? What is the average timeframe between writing a story and getting it accepted somewhere?
Also, I’d probably build into the model something for rejections. What percentage of my stories will never find a home? How many novels will I write that I can’t sell? Or how long between contracts on novels?
Next I’d need to look at production. How long does it take me to write a novel? How long does it take me to write a short story? How many short stories can I write in a year? How many novels can I write in a year?
And then expenses. How often will I need a new computer? How much paper will I need? Print cartridges? Pens? Accounting fees? Travel costs? Workshop costs? Editing costs? Cover design? (Those last two would be for self-pubbers)
Basically, you figure out what you’re going to produce and when, what you can sell it for and when, and what you’re going to spend and when. And you line it up in a nice little Excel spreadsheet with columns based upon different time frames (year 1, year 2, year 3, etc.) and then you cry. And then you understand why people say if you can do anything else that you should.
Most of it will be wild-ass guesses (WAGs) and this is a tricky industry because the results can be so variable depending on who you are and how you write.
So, anyway, that’s how I would approach it. It wasn’t worth it to me to do right now, because until I see sales I’m not convinced it’s a viable venture. I guess it’s kind of like the R&D department at a big company. My other job pays for me to put some time in trying to develop this writing thing, but until it shows that it has some legs there’s no point in putting too much time into budgets and forecasts for a product that may never have an audience. Better to spend that time writing and developing the product.