Wednesday, December 9, 2009

Death and Taxes

Ah yes, the only two things that are certain in life are death and taxes. While I hate to harsh anyone's holiday season mellow, this is something to which we U.S.-taxpaying authors need to pay attention, especially at this time of year.

Let me open by saying I am not a tax professional and nothing in this blog should be construed as professional tax advice. For that, you must consult a professional tax preparer.

I just want to share some information and get my readers thinking about tax issues now, before the end of the year, when there's still a possibility of making some changes to alter your tax situation and when the deadline for paying your personal income tax is still about four months off.

Is Your Royalty Income Being Reported to Tax Authorities?
By U.S. tax law, as of this writing (see Guide to Information Returns section), if you've earned $600 or more in income in a given tax year from a given source (e.g., employer, Createspace, Lulu, Amazon), the company or person who paid you that money must report it to state and federal tax authorities so the authorities can tax it as income. The minimum threshold for reporting at the state level may vary from state to state, so that's something you'll need to look up for your specific state of residence, and/or the state in which you do business as an author.

At the federal (IRS) level, if the amount of money from a given source is less than $600, neither you nor the payor MUST report it to taxation authorities, but those authorities prefer that ALL income is reported regardless of the amount. Again, we're talking "as of this writing"; since tax regulations are subject to change, this is something you'll need to verify on the IRS site or with a tax preparation professional if you're reading this post months after it was published.

Amazon, Createspace & Booksurge Reporting Policies: Here's The Scoop
Based on my experience with Amazon and Createspace in prior years, I've previously reported that neither entity will report the proceeds of your book sales on the Amazon or Createspace site(s) unless you've earned at least $600. Since Booksurge is now merged with Createspace, and Amazon has stepped up other reporting requirements and seems to be generally getting its federal reporting ducks in a row, I decided I should look into the matter once again.

I just spoke to a Createspace representative, and an Amazon representative, regarding their IRS reporting policies. If you sell your books on the Createspace site or on Amazon's U.S. site, this information is applicable to you. If you sell through other outlets, such as the Lulu store, or another bookseller, you will need to contact that outlet directly to get clarification on their tax reporting policies. Here's what I was told:

Amazon and Createspace (which now includes Booksurge) will both report ALL your earnings on book sales through their online stores to the IRS as income, regardless of whether you meet the $600 minimum reporting threshold or not. They are within their rights to do this, and the IRS prefers that payors report ALL payee income regardless of the amount, so don't go hating on them for it. They will report this income on a Form 1099, also known as 1099-misc (for miscellaneous income). 1099 income is income that has not had any tax withheld, so you must be prepared to pay tax on this income when you report it on your annual tax return (both state and federal).

What If They've Reported Less Than $600?
There's a bit of a wrinkle here though, in that if the income shown on a given 1099 is less than $600, as of this writing IRS rules don't require you to report it on your tax return. This puts anyone with a 1099 form for less than $600 in a tax quandary. Theoretically, by law, you are not required to report it. But the tax authorities will learn about it when they get their copies of the 1099. You have two options here: either report the income on your return and pay the income tax on it (the safest, most conservative route), or consult a tax preparer for further, expert guidance.

I've always reported all my 1099 income, regardless of the amount, because I'm terrified of getting into trouble with the IRS and when in doubt where such matters are concerned, I always go the most conservative route. I may very well be paying taxes I don't have to, but this is just the way I've chosen to handle things. In discussing the matter with my CPA, he's agreed with me that while I'm not strictly required to report the income on a 1099 if it's less than $600, doing so helps to validate any write-offs I wish to take for writing-related activity in a given year.

Why Report A 1099 That Shows Less Than $600?
If you've got one or more 1099s that each show something less than $600 and opt not to report any of them on your tax return, but you're attempting to write off expenses related to your authorial activities, this may well raise a red flag in the tax authorities' analyses because you're writing off expenses without reporting any income. This makes it harder for you to prove you're running a legitimate business and are entitled to expense write-offs, and generally makes you look suspicious in the eyes of tax authorities. Red flags can lead them take a closer look at your return. And at your prior returns. This is why I choose to report everything, but your tax preparer may advise you to handle your situation differently.

Improving Your 2009 Tax Picture
As to the matter of changing your tax situation before the end of the year, there are two major things to think about here: maximizing your legitimate expense claims, and minimizing your reportable income (where it's both possible and legal to do so).

Maximize Expenses
Maximizing your legitimate expense claims just means that if you're intending to invest in some goods or services that constitute legitimate tax writeoffs for you as an author (check with the IRS or a tax preparer for guidance on what constitutes a legitimate tax writeoff), doing so before the end of the year will increase your reportable expenses, thereby decreasing your net income and the tax you must pay on that income.

So if you plan to hire a professional editor, buy more promo copies of your book, book travel or pay registration fees for a writer's event you'll be attending next year (like the Author Workshop Cruise - shameless plug!), or something similar in the near future, you might want to consider paying for those things by December 31 in order to include the expenses in your 2009 tax return. It's generally a good idea to book travel and pay event registration fees as early as possible anyway, since doing so usually gets you a discounted rate.

Minimize Income
Options for legally, legitimately minimizing your reportable royalty income are not as numerous, as you don't have total control over how many people buy your books or when. However, you do have some degree of control, at least where promotion and marketing campaigns are concerned.

If you've been planning a big launch for new book, or a renewed promo push for an existing book, delaying your plans till after January 1 will put all the income you earn as a result of such activity solidly into your 2010 tax year. Of course, you must balance the desirability of minimizing your 2009 reportable income against the desirability of jumping on the holiday shopping gravy train at a time when you know lots of people are doing lots of shopping. If it looks to you like you can sell a lot more copies before December 31 than after, you may elect to just take the income tax hit.

Also, if you're in a position to receive any other author-related income (e.g., advance on a book or manuscript you've sold to a publisher, speaker fees, etc.), if you can afford it, you may want to consider asking till after January 1 to have those checks cut.

Bottom line: be prepared, plan ahead, and when in doubt, consult a tax pro.


Julie said...

This is not quite right.

You are Required to report all your income to the IRS, whether or not the payer is required to give you a 1099.

If the gross income on your Sch C is less than the total of your forms 1099, you will be audited.

Note that I said GROSS income, not net. You can still claim your expenses.

Where this gets complicated is where hobby loss rules apply, because your 1099 will go on line 21, and IRS may audit you anyway, expecting a Sch C.

If you would not otherwise be required to file a tax return, you must file one if you received gross income of more than $400. This is because Self-Employment tax kicks in at $400.

April L. Hamilton said...

Julie -

Per my CPA, IRS rules have changed recently but you do not have to file a US federal tax return at all if your total earnings for the year were less than $400. Therefore, you do not have to report total income for the year of less than $400.

However, since many people who self-publish also have day jobs, most of them *do* earn more than $400 total income in a given year.

My accountant acknowledges that the IRS *says* it wants everyone to report every cent of income every year, but since you don't have to file a federal return at all if your total earnings were less than $400, this isn't strictly required.

April L. Hamilton said...

...and again, I've stated here that I report all income and pay taxes on it, and anyone who's considering doing otherwise should consult a tax professional first.