Bookkeeping for Writers
By David A. Rozansky, Author’s Business Manager
“Treat your writing like a business.” Many a freelance writer has heard this advice. And every business starts with bookkeeping.
Often, when an author asks me to help them get their writing career off the ground, I find that they have no idea of how much profit they are making on their writing, and this is usually because the author does not keep books. Most authors think that writing and business are incompatible, but nothing could be farther from the truth. Every self-employed professional has to keep books, if for no other reason than to convince the IRS that the business is not a hobby but is, indeed, a business with documented business expenses.
Now, I am a professional writer of 25 years’ experience, the publisher of Flying Pen Press, and an author’s business manager. What I am not is an accountant, and certainly not a tax attorney. It’s not the purpose of this article to give tax advice. But you don’t have to be an accountant to keep books on your business. (If you need tax advice, please consult with a licensed accountant or tax attorney.)
Rather, this article should help freelance writers keep track of what they are spending, how much they are earning, improve their income, and have all the information at hand that they need at tax time.
This article focuses on freelance writers only. Salaried writers, such as newspaper journalists and staff copywriters, will find no reason to be bookkeeping, as they only need deposit their paychecks and file their taxes based on their W-2s.
Damn it, I’m a Writer, Not a Bookkeeper!
To the freelance writer who does not believe that bookkeeping is necessary, let me present some hard-hitting reasons why it is so important:
• Writing is a business. The professional writer needs to know where she is losing money, and if she is making enough to sustain herself and those who depend on her.
• Bills must be paid, and more importantly, writing fees and royalties must be collected. The professional writer must keep her eye on the bottom line, and without good bookkeeping, there is no way to measure the bottom line.
• Professional writing is a business that starts slow and cheap. To be successful, the writer must constantly find better paying clients and reduce expenses wherever possible. Good bookkeeping is the key to increasing productivity and profitability.
• The tax man cometh. Because writers can take so many strange deductions, they incur a greater chance of audits. Any undocumented deductions can be discounted, forcing an author to cough up years of back taxes, including penalties, interest, interest on the penalties and penalties on the interest. The writer without decent bookkeeping doesn’t stand a chance, the one with solid bookkeeping often escapes unscathed.
• Losses must be documented. My understanding of the tax code is that, generally, the IRS will allow a sole proprietor to use a loss to offset personal income provided that the business doesn’t lose money more than three years out of five. Otherwise, the enterprise is ruled to be a “hobby” and all business deductions are disallowed retroactively. But writing is a funny business, especially for book authors who may not receive payment until two or three years after a project’s expenses are incurred. The alternative, the IRS says, is that if a business keeps good records of expenses such that it can prove it is a business and not a hobby, all years’ losses can be deducted. Bookkeeping equals intent to be a business, apparently.
Be a Business
In addition to bookkeeping, a writer’s business finances must be kept separate from her personal finances. This is another litmus test the IRS likes to use to determine what is a business.
If you use a credit card to pay for writing expenses, conferences, reference books and research trips, do not use that card for personal expenses like restaurant excursions, birthday gifts and trips to the convenience store.
The same goes for bank accounts. At the least, open a separate checking account to handle your writing expenses and to receive your writing income. The money in this account is the business’s money, in that the writer should not use it for personal purposes. Instead, the money should be transferred to a personal account when it is needed for personal reasons, what is noted in the checkbook as “Owner Draw.”
If the “business” needs more money for some kind of expense, the writer should transfer money from personal accounts and then write a check on the business’s account. This is noted as “Owner Investment.”
This shuffling of money for the sake of bookkeeping may seem superfluous, but the divide between business and personal finances is crucial, not only to showing the IRS your intention to be a business, but will also help you evaluate your productivity and profitability through balance sheets, profit & loss statements, and cash flow reports.
If the author is being paid under a pen name or a business name (such as an LLC), she will need to get a business license and business bank accounts. However, authors who receive checks in their own name do not need licenses or business accounts, generally speaking.
There are four general ledgers that authors can use effectively, depending on their situation:
• Account Register. Authors with less than 100 checks going out and less than 100 payments coming in each year can often simply keep notes in the check register. Simply keep detailed notes about each payment or deposit. At tax time, or whenever the author wishes to analyze the business, the entries can be sorted out by hand.
• Double-Entry Ledger. Those who know how to use this antiquated system will also know it is better to simply use a computer program. However, for starving writers who cannot yet afford the software, but have large numbers of expenses in various categories, and income from numerous clients under differing contracts (such as flat fees for one work, royalties for another, ad revenue for yet a third), this system is still useful. Ten-column paper, or three-column paper in binders, works well enough. This is called double entry, because the bookkeeper always makes two entries for each transaction: a payment from a bank account is also entered into an expense account, a deposit is paired with an income-account entry.
• Small-Business Bookkeeping Record. Dome and Adams both make simplified small-business accounting books. These are designed for home businesses and small shops, and they categorize expenses and income with the notion that there is some kind of inventory, a fairly irrelevant thing for most authors who don’t sell physical books. However, these books are designed for those with very little experience in bookkeeping, and the “materials” and “inventory” columns can easily be ignored.
• Accounting Software: There are many different accounting software packages out there, including downloads, smartphone applications and cloud applications. I do not recommend a personal-finance software package like Quicken®, as it may mingle personal and business finances. However, Intuit does make Quicken® Home & Business for $99.99 that separates these finances, and can be useful for simpler bookkeeping such as a stringer would need for article sales, but totally hopeless for an author who juggles book rights, movie rights, translation rights, merchandising rights, flat fees, subscriptions and ad revenue.
My recommendation is to go with QuickBooks Pro® or other small-business accounting software. However, for the author who can’t spare $230, Quicken Home & Business or a small-business bookkeeping record does just fine.
Record your income and expenses, your assets and liabilities, your bank accounts and credit cards. However you do it, the bookkeeping is pretty much the same thing. The key is to categorize every single transaction and tie each one to a specific writing project and client.
Sort expenses by purpose. Schedule C of the IRS Tax Form 1040 breaks out most of the common expense purposes, and each expense grouping in the author’s bookkeeping system should tie in to one of these. The author will have many expenses that will be listed in the “Other Expenses” list, yet are perfectly deductible.
These are most likely groupings for an author:
• office supplies;
• operational (i.e., writing expenses, such as editorial expenses, photocopies, trips to the library);
• marketing & networking expenses (i.e., postage for queries and review copies, travel expenses for book tours, etc);
Different types of writers will have additional expense groupings:
• association fees
• production costs
• legal and accounting fees
• costs related to speaking engagements
Sort income by type. Knowing where your money comes from is crucial, so grouping income is just as important as grouping expenses. Remember, the purpose of bookkeeping is not to fill out your tax forms, but to analyze your business for productivity and profitability.
The general income groupings for writers include the following:
• Flat fees (subgroups of sale of rights, work for hire, and commissioned work)
• Royalties (including advances)
• Blog income (subgroups of ad revenue, subscriptions, and download sales)
• Book sales (which can be subgrouped into types of publications, like books, magazines, blog content, etc.)
• Copies in kind (as in payment with copies of the magazine wherein the work is published, and yes, you do have to pay taxes on copies you receive in lieu of payment).
• Speaking fees.
• Consulting fees. (including expert fees)
• Grants and Awards
• miscellaneous income. There is always something that won’t fit elsewhere.
Sort assets by purpose. Each bank account should have a separate account. An author has very few capital assets, given the nature of the work and the ethereal presence of the product—namely, intellectual property. A writer’s asset accounts are usually limited to the following:
• Bank accounts,
• Office furniture.
These are usually fully depreciated for taxes in the year they are bought; talk to an accountant for details, or read the instructions to Form 4562.
A petty cash account can be kept if you want to keep some cash on hand to tip those anonymous sources.
Liability accounts include loans and credit cards. Sort by individual account.
Each transaction should also note which client is involved, or if it is just a general business transaction that cannot be pegged to any single client. Thus, you can track how much you made from a particular publisher or advertiser.
Each transaction should also note which project it is tied to, or if it is a general business transaction that cannot be tied to any single project. You need to track how much you spend in writing a book, and compare that to the various income streams: book rights, translation rights, movie rights, and the like.
I code my projects with the date. This article, for example, is project 120128, for Jan. 28, 2012, the day I created a file for it.
Use a time log (hours for short matter, weeks for book-length material), and word count log that includes the appropriate project in each entry. This allows the author to determine revenue and profit per hour, per week and per word.
Keep a mileage log in the car. The IRS currently allows a Schedule C deduction of 55.5 cents per business mile driven.
Again, let me state that I am not an accountant. Tax advice can only come from licensed accountants and tax attorneys. But as a taxpaying writer and publisher, I have some personal experiences I can draw upon, along with research material in the form of form instructions and information pamphlets.
Freelance writers and royalty recipients need to pay quarterly estimated taxes on a Form 1040-ES payment voucher. See the form’s instructions for the payment deadlines and calculations.
Of course, taxes must still be filed on Form 1040 with the IRS by April 15 each year (due to the anomalies of the calendar, it’s April 17 in 2012). Your income from writing needs to be calculated on a Schedule C. You will also need to fill out Schedule SE, for social security tax on your self-employment income.
There is a powerful home-office deduction that allows you to deduct a portion of your rent, mortgage interest, utilities and the like based on the percentage of square footage you use for writing as opposed to personal space. Home-office deductions are calculated and reported on IRS Form 8829. IRS Publication 587, Business Use of Your Home, is very enlightening for writers working out of their homes.
Many authors turn to an accountant to calculate and file taxes. Having a good bookkeeping system makes it easier for an accountant to determine your taxes, and more importantly, to see where you can save money or increase revenues.
Bookkeeping’s main purpose is to analyze the health of the business and find ways to increase productivity and profits. By noting the client and project of each transaction, a large number of analyses become possible:
• Can the writer cut unnecessary expenses?
• Can the writer increase revenue by increasing the pace of production, i.e., faster typing speed, fewer revisions, better understanding of software features, etc.?
• Do rush jobs with sloppier writing net more money through increased sales, or is quality too important to the clients and the readers?
• Which clients are the best clients? Which prospective clients are worth pursuing?
• Where can the author improve with regard to revenue?
• How much did the author make on each project? Which projects lost money? Which projects are worth pursuing?
• Where is the writer wasting money? Wasting time?
• Is the writer making enough to live on? To be comfortably successful?
• Can the writer fairly raise her minimum word rate? Hourly rate? Or is she charging too much?
• What opportunities is the writer missing?
• Which projects are tying the writer down without appropriate compensation?
• Which clients are in arrears?
• Which bills have not been paid?
Let me repeat, I am not an accountant. But there are things I deduct as a writer that I can tell you all about. Consult IRS publications, a tax attorney or an accountant to determine what you can deduct in your own case.
The IRS requires that business expenses, which are perfectly deductible, be separate from personal expenses, which are deducted through standard deductions or on a Schedule A. A writer is both a person and a business. As a result, the list of things that can be deducted as business expenses can be a little confused with personal deductions. This gives the IRS fits, and writers the jitters.
The hard and fast rule is that if an expense is required for you to run your business, and that you would not pay if you were not a professional writer, it is a business expense. Notes go a long way to documenting a business expense.
Here are many of the things a writer may be able to deduct:
• Writer’s conferences, writing guides, writing classes and the like.
•Travel expenses, meals and entertaining business contacts can be tricky. The IRS rule is that eight hours of every day must be spent on business, not pleasure, with documentation. Name someone who was there, the times business started and stopped. And business meals at meetings can only be deducted 50%, and again, notes of who was there and what was discussed are important to record. It’s all on the instructions for Schedule C.
• Costs for marketing, such as postage for queries, networking events, taxi fares to meet with an agent.
• Professional fees, like agent’s commissions, editors, attorneys, accountants, writing coaches and the like.
• Cost of research is deductible.
• Reference books, educational books, writing guides, and subscriptions to writer’s magazines.
• Research travel follows the eight-hours-a-day rule
• Office supplies used only in business are deductible.
If you have any doubt about an expense, so will the IRS; that’s my theory. It pays to have an accountant you can ask for an opinion, if this happens too often.
Remember, good bookkeeping and good notes are very helpful in getting the IRS to understand your legitimate deductions.
I also track non-deductible expenses in my bookkeeping, for expenses the IRS won’t recognize that I want to track nonetheless.
About David Rozansky
David Rozansky is a professional writer. He is the publisher of Flying Pen Press, and is an author’s business manager. He is currently writing a book-marketing guide, Fishnets & Platforms: The Writer’s Guide to Whoring Your Book, available September 2012. Readers can pre-order this book at 50% discount at FlyingPenPress.com/Catalog, or ask to be placed on the book’s notification list at BookOrders@FlyingPenPress.com.
David Rozansky tweets on Twitter on his account, @DavidRozansky. He moderates #SciFiChat—a science fiction discussion—on Twitter every Friday, 2-4pm ET. He monitors the hashtags #askeditor, #askpub and #askagent on Twitter continuously for questions on writing, publishing and marketing books.
Quicken® and Quickbooks Pro® are registered trademarks of Intuit, Inc. for its accounting software products. This article provides only information about bookkeeping. It is not intended to provide tax or legal advice; for tax or legal advice, please consult a certified accountant or tax attorney.