When you choose to become an author who makes money from what they publish, you are choosing to start a business. When you choose to start a business, the IRS will expect you to start acting like a business and can penalize you at tax time if you don’t. The following steps are the simplest way to start your writing business as the simplest tax structure available-the sole proprietorship.
Most Authors Run Their Business as a Sole Proprietorship
The business you are setting up with these step is considered a sole proprietorship. It’s quick to start, easy to understand, there are minimal filing requirements on your taxes, you don’t need a lawyer to start and you can keep the profits your business earns while deducting your qualifying business expenses on your annual tax return.
Because I am an avid reader and researcher, I recommend doing your own research on the different business structures you could use to set up your writing business-like a partnership, a corporation or a limited liability company (LLC), but as soon as you see how easy it is to set up your business as a sole proprietorship you’ll understand why most authors choose this option.
Step #1: Give Your Business a Name
You can simply use your name as your business name, and in most cases this is probably best.
Step #2: Get a Free Tax Identification Number for Your Business
You can always use your Social Security number on any financial paperwork involved with receiving money for your book sales, but accountant and author Carol Topp recommends getting a free Employer Identification Number (EIN) from the IRS to help protect yourself from identity theft by keeping your social security number private.
Step #3: Open a Free Business Checking Account for Your Business Income and Expenses
Yes, you can keep the profits from your business and spend them anyway you would like, but it is wise to open a separate checking account to make it easier to track all the money that comes into and out of your business. You will greatly appreciate this at tax time when you need to account for all the money your business earned and spent over the last tax year.
It is also a great idea to hold onto all of your receipts for business-related purchases so that you and your tax preparer or accountant will know which business expenses you can claim.
There are several more steps involved in my post entitled “The Author’s Guide to Starting A Publishing Company,” but if you are partnering with a traditional publishing company, you need a quick way to start your writing business before your book is published, or your book is already published and you’re trying to prioritize the steps you want to go back and complete, than these three steps are all you’ll need.
This tips are inspired by Carol Topp, CPA’s book “Business Tips and Taxes for Writers,” and I highly recommend that you get a copy to learn more valuable tips.