The Business End of Writing, part II
By Mike Briggs
A Tale of Taxes and a Plea for Panic
So, you're an author. You've published a handful of books, and your annual income is more than four digits. It's time to quit the day job and go pro. Congratulations, by the way, on making it this far. Of course, success brings a different set of problems.
If you're like most people, you've worked for an employer most of your life. You work, they write a check every couple of weeks, which you use to pay the bills. If you overspend one week, there's another check coming next week. The company takes your estimated taxes out of your check for you, and they probably provide a nice health care package and maybe even a retirement plan. When you file your taxes, it's about a five page form. If you use a tax program, everything fits neatly into the expected columns. Life is simple, but stultifying. Hang on, because it's about to get much more interesting.
First, authors get paid on an irregular schedule. For most authors, checks arrive at fairly random intervals, and vary from under a hundred to maybe a hundred thousand. Sounds great, until you try to work up a budget. We have no idea how much money we're going to earn next year. With our current expenses, it takes about 50K to keep the lights on. Maybe we'll make 50, maybe we'll make 500. Or maybe we'll only make 20. It's a guessing game. Spend a little too freely, and you can bet it's going to come back to bite you.
Oh, and that variable, irregular income? Loan departments hate it. Buy the house before you quit the day job, or be prepared to pay cash. Same thing with cars, and even credit card companies can get jumpy. It doesn't matter if you've missed payments, you're risky. Speaking of being risky, you'll need to buy your own health insurance plan. Be prepared for sticker shock. Before you decide to do without, remember that America has no effective universal health care, and our system is incredibly expensive. If you get sick without insurance, prepare to go bankrupt.
If you're not panicked yet, you haven't been paying attention. We've been doing this for years, and I still have white-knuckle moments. With a little planning and a modicum of luck you'll do fine.
As a self-employed worker, you'll find a few new taxes waiting for you. The biggest problem is the unemployment tax. You've seen the chunk your employer takes out of your check? Well, the employer is paying a matching amount. Since you're self employed, you get to pay both halves, which means you'll trim about 12% off your gross. There's quite a few other little "gotcha's" for self employed workers; enough that you may want to take evasive action.
Remember, on the previous page, one of our rules was "you're not an expert in everything"? Taxes are incredibly complicated, and depending your your income and state laws, you may find you're better off forming one or more corporations and making all sorts of little tweaks to ameliorate your tax liability. You're almost certainly going to want a good CPA in your corner. It's their job to know the laws and help you navigate the myriad snares of our tax code. Hiring a CPA is much like hiring a publisher, or a home builder, or anything else. There are some companies that want to do everything from bookkeeping to final filing, and others that offer services á la carte. Prices vary from quite reasonable to several hundred an hour (ask me how I know!). Take your time, and find someone you can work with. Writing is a strange business, and your taxes probably won't look like a generic business filing. Get someone who will take some time. Depending on the plan your CPA comes up with, you may find you need to file quarterly taxes, which means you'll be getting to know your accountant very well.
If you are self-employed, you don't have much bargaining power for health insurance. Since going without can be catastrophic, you may want to look at a major-medical, high deductible plan to keep the premiums down. Of course, that leaves you paying the bulk of your medical costs. If your tax accountant had you form a company, you might be able form a group health plan for as little as two members. My wife and I are both employees of Hurog.inc, and we were able to get greatly reduced rates by buying a group health plan for the company. It's kind of silly, but to get good insurance for a reduced price, it's worth jumping through a few hoops.
Remember, your income is not dependable, so you'll need to try to keep some back. We usually try to keep at least six months of expenses stashed in savings. More is better, if you've got it. We also try to keep a few supplies at the house (extra food, clothes etc.) so we can weather the lean times more easily.
An author's life can be grand. There's no safety net, and all manner of uncertainty, but you're caption of your own soul, master of your own destiny. Once the terror wears off, it's a great feeling. You may find, in talking with your CPA, that you'd be better off building, or leasing an office. You may find you can save money by traveling to Europe for inspiration. These strange opportunities are usually caused by some loophole or tweak in the tax code. Be alert, and plan as far ahead as possible.
Writers also need to accept that they won't be flavor of the week forever. Careers tend to follow an arc, just like stories. If you're banging out bestsellers now, you might not be in five years. The only constant, as Hereclitus said, is change. If times are good, pay things off and put a little back for a rainy day, or an early retirement.
Stay on Top
Doubtless, even on this page, there are a half-dozen errors and false assumptions. Free advice is worth what you pay for it. Part of running a company is being alert to changing conditions, and keeping a sharp eye out for unexpected danger. Read a few books on business, finance and marketing. Understand the basics of economic theory. Learn a little about the internet, copyright, and law. You may not be an expert in any of these areas, but the more you know, the better your decisions will be.Back to Part I