The Writer and U.S. Taxes - Help!

Guest starring my financial advisor! Some plain English explanations of tax stuff.

This week, a reader asks:

Hi, great column and love your books and short stories. Looking forward to reading The Vela finale today.

As an aspiring author, I have multiple questions about self-employment as a writer. I know that in order to attain success as an author, I am going to need to eventually give up my day job to free up time and energy to write. 

Since I have only ever been a W-2 employee, I am lost when it comes to the concept of paying these "estimated taxes" as you spoke of. What are estimated taxes? 

I have only sold a few random short stories to magazines, for which I have earned about $500 last year. I did not receive any tax documents for some reason. I gave these cash figures to my accountant, but I cannot interpret from the tax return how she handled it.

My accountant did mention something about paying higher taxes with this income because of the "self-employment tax." She said that is in addition to having to pay federal and state taxes on the extra income. I have no idea what she meant by this additional tax.

My accountant also mentioned something else that has me totally confused. She said the $500 was so little additional income and I did not give her any expenses. So she did not bother with a something called a "Schedule C" as part of the 1040. She said as I make more writing income, I need to consider giving her data to generate a "Schedule C."

I have no idea what all this is, and my CPA charges a lot to give advice. But googling all of this just leaves me more dumbfounded than ever. I am more the creative type and have no interest nor aptitude for wrapping my brain around finances and taxes.

What I do realize is that a mere $500 in writing income caused a sharp increase in my taxes, and the tax withholding on my W-2 was not enough to cover it all. Why would this happen?

As I concentrate more and more on my writing career, I will be earning more and so will need to better understand how the income affects my taxes. Would you please explain what is going on in simple and concise language that won't cause me to instantly zone out?

Thanks. I eagerly look forward to your next advice column.

Thanks for your kind words, Reader! So first of all, for everyone following along at home, it’s clear to me from the question that this reader is in the United States, which is lucky as that’s also where I am. But less useful for people not in the U.S..

Despite not being a financial professional, I think I’m a good person to answer this question — because I, too, tend to glaze over at this stuff, so I think I can successfully give you the plain English definitions I’ve learned to be the meanings of all of these terms! I’ve also run this post by my financial adviser, because I’m lucky enough to be related to her, and she also helped me with one part of your question.

Before we get started, the big disclaimer: I am not, myself, a lawyer or accountant, and have no professional credentials in either area. My financial adviser does, but neither of us know your particular situation or the laws in your local jurisdiction, and she is not acting here as your financial professional. You should always listen to your trusted professional over a random person on the Internet.

Now, on to the question! Let’s take this one bit at a time. I’m going to go for shorter answers as we’re concentrating on simple language here — if anyone has more questions, feel free to write in again.

Since I have only ever been a W-2 employee, I am lost when it comes to the concept of paying these "estimated taxes" as you spoke of. What are estimated taxes? 

The U.S. government doesn’t let you keep your money for the whole year and then pay your taxes all at the end. If you’re paid on a W-2, you have tax withholding done, which means you’re having your taxes withheld every paycheck, and then any difference with what you actually owe is reconciled at tax time (in the form of a refund check or you paying additional taxes).

Writing work is almost always paid on 1099s instead of W-2s — and what that means, for the purposes of this question, is that you’re not having any tax withheld and sent to the government. You’re getting the whole shebang.

But you’re still not allowed to keep it till tax time. The government requires that those of us who have significant income without taxes being withheld on it pay in “estimated taxes” every quarter. This is based on the estimate of how much in taxes you’ll owe for the entire year. (The number people use to estimate is often based on your previous year’s taxes, but it doesn’t have to be.)

Think about it this way: You always have to pay taxes throughout the year. If they’re getting taken out of your paycheck, that’s fine! If not, you have to pay them quarterly yourself. Either way, you generally want to try to get close to what you expect your real tax number to be and then it’ll get reconciled at tax time, when you’ll either get a refund or have to pay extra.

I have only sold a few random short stories to magazines, for which I have earned about $500 last year. I did not receive any tax documents for some reason. I gave these cash figures to my accountant, but I cannot interpret from the tax return how she handled it.

Congratulations on your sales! And you did the right thing giving your cash figures to your accountant. That’s exactly what you should do for sales where you don’t receive a tax document.

For amounts under $600, the publisher is actually not required to send any tax documents anyway, and you can just report it as cash. But even if it’s over $600, if you have good records, there’s no need to request any tax documents and you don’t need to freak out if you don’t get one. Just give the correct amounts to your tax professional, as you did. Your end of things will be totally okay without having the tax documents as long as you still self-report the amounts.

My accountant did mention something about paying higher taxes with this income because of the "self-employment tax." She said that is in addition to having to pay federal and state taxes on the extra income. I have no idea what she meant by this additional tax.

Ugh, I HATE this, and I sympathize! What this is: employers and employees in the U.S. both pay taxes. When you’re paid on a 1099, you’re your own employer. (You’re not an employee of the magazine — you’re an independent contractor working for yourself and contracting out your services.)

Since you’re your own employer, you have to pay both the employer AND employee share of payroll taxes, which is mostly made up of social security and Medicare. (These are different taxes from income taxes.) Personally, I hate this part of my taxes and I always feel like paying double here totally sucks. I’m sure some economist out there could explain to me why the rule exists, but from my viewpoint it always feels very unfair! It means we freelancers have to make more than we’d have to on a W-2 salary for the same take-home pay.

(My financial adviser disagrees with me and said she thinks this is not unfair at all, and then she laughed at me. But she says my answer here is otherwise right!)

My accountant also mentioned something else that has me totally confused. She said the $500 was so little additional income and I did not give her any expenses. So she did not bother with a something called a "Schedule C" as part of the 1040. She said as I make more writing income, I need to consider giving her data to generate a "Schedule C."

Being your own business means you pay more in employer taxes, but the nice thing about being your own business is that you can deduct all sorts of expenses related to running that business from your taxes. These expenses go on a document called a Schedule C.

For instance, my Schedule C includes things like my website costs, business cards, meals with publishing contacts, author photos, any book-related travel that my publisher didn’t cover, etc. These expenses really add up, and it makes a huge difference to be able to deduct them from my taxes every year.

Ask your accountant if it makes sense for you to start tracking business expenses to put on a Schedule C.

What I do realize is that a mere $500 in writing income caused a sharp increase in my taxes, and the tax withholding on my W-2 was not enough to cover it all. Why would this happen?

Hmm! When I was working in movies in LA, I did exactly what you’re describing — my movie work was sometimes paid on W-2s and sometimes not, so I withheld on my W-2 pay at the highest level, didn’t worry about estimated taxes, and every year my W-2 withholding covered what I owed on the other income as well.

So I didn’t know what could be causing this — I asked my financial adviser what could be going on here, and here’s what she said:

They had additional income piled on with no payroll taxes and no income taxes withheld, so they had to pay income taxes, state taxes, and self-employment taxes on that $500 all at once. And if you’re in a high enough tax bracket, that’s going to be a good part of that $500, especially if you don’t have expenses to offset it.

That can indeed be painful! My financial adviser said to maybe consider increasing your withholding, like I did in LA, because she says that was what kept me from having rude surprises there was that I always kept my withholding at the highest level. And that can prevent you from owing a chunk at tax time if you have additional income and you don’t want to deal with estimated taxes.

It can also help reduce tax burden on that additional money if you do that Schedule C we talked about and deduct expenses. But my adviser says if you’re not making at least a few thousand dollars, a Schedule C is probably not worth it, as it means a greater chance of being audited, a more expensive tax return, and more record keeping. (As always, though, listen to your own tax professional’s advice when it comes to your specific situation!)

As an aspiring author, I have multiple questions about self-employment as a writer. I know that in order to attain success as an author, I am going to need to eventually give up my day job to free up time and energy to write.

I’ve finished up your tax questions, but I wanted to address one more thing from the beginning of your question, which is you saying that you know you need to give up your day job to attain success as a writer. It’s not clear to me whether you know that this is true for you personally — in which case, I wish you the best of luck in achieving that! But just in case you were assuming this is a truism for everyone, that you must do this to attain success as an author — that’s actually not true.

Plenty of successful authors also have day jobs. Some prefer having a day job, whether for outside stimulation, or because it makes their writing time more productive, or because they want a more reliable source of income or health insurance or some other important benefit. It sounds like you might be putting a lot of pressure on yourself to be able to quit your day job, so I just wanted to put that in your mind, that it’s not at all necessary for everyone.

It is true for some people, though — I have enough health issues that it would be really hard for me to hold down a day job and also meet all my publishing deadlines. Figuring out how to navigate a creative life, and how best to structure that, can be quite a difficult and personal thing. I just wanted to make sure you know that there isn’t only one way to do that!

And best of luck with your career.