Now that you are spending money on producing your book and making sales, it’s time to start thinking about recordkeeping for your book business. Even if your writing is a part-time job, it is still a business; you need to report your income and take advantage of expenses related to your writing. You know the tax man wants his share. Clean recordkeeping makes compliance with the tax laws a lot easier.
If you operate your business under a name different from your personal name, consider setting up as a sole proprietor Limited Liability Corporation referred to as a “single member LLC.” Obtain a Federal ID number for your writing business and begin tracking the income and expenses of your business. The state registration fee to set up a new LLC is about $125, plus an annual registration fee ($50 in Georgia). The incorporation documents are filed with your State Secretary of State. An incorporated entity limits personal liability, which could protect you and your assets in case of legal action. The LLC has the option to be treated as a corporation, which requires filing a separate corporate income tax return. The LLC uses the “Check the Box” IRS form to make the election. Otherwise the LLC is treated as a single member LLC with your entity considered “a disregarded entity” for income tax purposes. The LLC is a pass through with your income reported on Schedule C of your personal tax return and the self-employment tax is reported on Schedule SE. You may be required to pay quarterly estimated taxes when you start making a profit.
If you choose not to incorporate and act as a dba “doing business as”, how do you report all this stuff on your tax return? Your income and deductible expenses are reported on a Schedule C on your personal tax return. The primary difference between an LLC and a dba is the incorporation protects your personal assets from creditors or potential law suits that is not available for a dba.
Whether you incorporate your business or not, it is vital to open a separate business bank account and designate a credit card for business use to substantiate valid business expenses. Quality recordkeeping (keeping your personal and business expenses and income separate) will pay for itself if there is an audit by the IRS or state Department of Revenue. If your personal and business finances are co-mingled, the IRS can look at your personal records when auditing your business. Another obvious perk of separating business expenses is being able to deduct legitimate business-related expenses from your income.
Set up a system for your recordkeeping and regularly keep it up to date. Even if you have few transactions to start with, a system set up in the beginning will save headaches later on.
- Record expenses on a spreadsheet or use an accounting software such as QuickBooks
- Use an envelope to file all receipts by the month or tape each receipt to a piece of paper and file in hanging folders or in a 3-ring binder. Make notes with the receipts as to the type of expense and the business reason.
There are pros and cons for the various ways to set up your business. A consultation with a small business accountant will be money well spent to get you started on the right track. Organized records will save you money at tax time with your accountant and help you take full advantage of deductible expenses. Look out for the next financial blog for learning which expenses are deductible.
|Photo by Byron Small|