Adjusting To Being A Full-Time Author – Part 5

Death and taxes. You know the saying. Well, I’m here to warn you that, if you’re not careful when you make the transition to writing full-time (or any other form of self-employment), one might quickly lead to the other. Figuratively speaking, of course.

Here’s what I mean. When you’re working for a company or the government, Uncle Sam and your state normally take their cut right off the top before you get your paycheck. Sure, you have to juggle standard deductions and some other stuff, but the bottom line is that most or all of what you owe gets vacuumed up first.

Not so with your book royalties, especially in what I’ll term your “breakout year”, when you go from maybe making a little to really making a lot like I did in 2011. I’ll give you a little bit of advice that sounds obvious in hindsight, but that I wish I would have had someone beat into my skull:

Find a good tax consultant who has experience with small businesses and the self-employed, and have them put a tax strategy together in the first calendar quarter when you’re paid royalties of more than a couple thousand dollars.

Ironically, it is much more important to do this right away if your royalties suddenly zoom upward.

Why? Because you will find an extremely unpleasant surprise waiting for you come tax time. Yes, you made a load of moolah, and you probably went a little gonzo spending it. “Hey, but I’ve set aside enough for taxes. No biggie!”

That’s where we get to what nature photographer John Shaw once said is Rule of Life #1: Don’t be dumb.

Remember that the retailer or distributor (Amazon, B&N, etc.) just forks over your money. They do not withhold any taxes. Zip. You’re responsible for figuring all that stuff out on your own.

In addition to federal and state or other local taxes, you’re also most likely going to be in for the good ol’ self-employment tax, which can add another 15.3% to your tax burden (with all the attendant bazillion variables that affect the exact amount and percentage that you would actually have to pay). This is a chunk of money that essentially covers your cut for Social Security and Medicare. You have to pay this as an employee of a regular company or the government, but it comes as a surprise to a lot of people who are just starting out in the self-employed realm because, like regular taxes, these deductions were taken off the top by your company before you got your paycheck.

Another factor is retirement. You’re responsible for that now. Yeah, you. There’s no company annuity, no retirement office, nobody looking out for your future but you.

Now, the good news here is that if you set up something like an LLC or other qualifying business, you can establish an SEP-IRA, which is a great vehicle tax-wise. Similar in many ways to a 401k, the money you put into it can be deducted from your gross income, and the interest grows tax-free. So check with your tax consultant to see if this is a good option for you.

And that brings me to the last item to beware of: pulling out your retirement funds. There are going to be cases when you’ll want to cash in your funds. Just make sure you get a tax consultant to give you a projection of your tax liability when you do. With many funds, if you withdraw before a certain age you’ll be hit with a large (10% seems to be common) penalty, on top of the income tax you’ll owe. If you’re pulling out a lot of money, it will likely push you into a higher tax bracket than normal. That can add up quickly, and that’s not a surprise you want to have come tax time.

Another thing about the higher tax bracket: if your royalties come flooding in, be prepared to pay more in taxes than you think, because a ton of new money could easily push you into a higher tax bracket.

Again, I cannot emphasize enough the importance of ongoing dialogue between yourself and your tax consultant. I would touch base with him or her every quarter. Why? Because, unlike a typical salaried job, your income is likely going to vary a lot (sometimes by as much as 400%, possibly more) from month to month, and your tax burden, which you’ll typically pay on a quarterly basis, is going to become a moving target. Your tax consultant can help you make sure that you’re withholding close to the right amount as the year progresses, so when the following April comes you’re not going to be slammed with an ugly surprise.

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13 thoughts on “Adjusting To Being A Full-Time Author – Part 5

  • Jonas

    This series is great, Mike. You should put this in your updated version of your self-publishing book! The harsh practicalities of “going solo” is very important to understand before you not only dip your toes in the self-publishing world but submerge yourself completely.

    Keep ’em coming!

    • John Davis

      This post hits home. Just went to have the taxes worked up a few days ago and WHAM! My royalties put me into the next tax bracket up and the government now considers my writing a small business. The only pitfall of this is that I haven’t been keeping track of expenses. In other words, I paid a lot more this year and got virtually no tax breaks from writing.
      Lesson learned. Currently in the process of gutting the back room of my home and turning it into a full-blown office. I now understand that in doing so, a slice of the home’s utilities get credited come tax time.
      I completely back you on the fact that folks should seek out a good tax person as soon as they see a decent bump in sales. I lost thousands this year, just by being uninformed and walking into it blindly. I won’t make that mistake again. Great string of blogs, Mike. Very helpful!

  • EW Greenlee

    I made the leap from full time CPA to full time author, so my path is the opposite of yours. You have stepped into the land mine that is called self-employed, the working zombie, the not so dead living dead. If you think vampires suck, just give the IRS the opportunity to prove they can get blood out of a turnip.

    But your article is spot on. For 30 years I have tried to convince clients a true tax professional is a tax planner, not a tax preparer.

      • EW Greenlee

        Here’s my biggest advice to all entrepreneurs. Never fail to fund a retirement plan, such as a SEP or IRA. This is the only tax deduction that builds wealth as well. Always compensate yourself, first. Good luck on making the transition, your posts and path to success have been fun to read.

  • Jim Franz

    This is a great series, Michael, thanks!

    I also wanted to point out that you don’t need to be incorporated or be an LLC in order to enjoy the opportunity of setting up retirement via a SEP-IRA. Anybody with self-employment income is allowed to make use of this.

    Good luck surviving the harsh awakening, and hopefully your writing will distract you from the pain of that check you’ve written to the IRS!

  • Steve Douglass

    Great post, Mike, and many thanks for sharing your experience. It took fortitiude and belief to do what you did. Those personal characteristics should enable you to make it …all the way.

    One more thing: personal and family budgeting. Do it often and don’t buy your own con. Be honest and realistic in this process. it is crucial.

    Best, Steve Douglass.

  • Tracey

    If only more “regular” people would help educate the newly self-employed!! I’m gald I had an accountant when I owned a business or I would have been up the perverbial creek without that darned paddle!!