Why Writers Get Spooked About Taxes.
A friend wanted to see me. She suffers from a variety of writer's complaints. 'Imposter Syndrome', and bouts of Writer's Block being frequent tormentors. It turned out she had met another writer friend for coffee.
The whole experience had proved such an eye opener. She had to come and tell me.
‘Great!’ I said? Her timing was good. I was due for a break. I write in increments.
Why? Well that is a subject for another article. On its way shortly. Watch this space.
It turned out that this friend worried about filing her tax return. It was getting near that time of year again.
Her friend lost sleep. suffered migraines. Worse she gained weight! Like a Sumo wrestler on steroids.
She was thinking about quitting writing all together. For the sake of her sanity. Or what little remained.
This time her friend looked better. Usually so troubled, today she was all smiles. Something had changed. Her friend got some advice.
She was going to be proactive and get herself ahead of the Taxman curve.
So what was it that caused this transformation?
Why was this year going to be different?
What were her concerns? Why was she worrying so much about what was in essence a simple matter?
Well it turns out that the 'Biggy' was that she didn't keep her receipts in order. This resulted in late filing. She got admonished by the IRS, and her Book keeper. She hated that.
Once her allowances corrected she felt worse. She felt singled her out. Never had she felt treated so badly.
Now the nightmare had returned - that time of year had come round again.
She worried about her exposure to law suits or debts.
She wanted some credibility where she felt she had none. She would like some insulation and protection against adversity.
She also didn’t want to pay more tax than was due. She wanted some respect from the IRS.
So what was she going to do to wrest the initiative from the tax man and the rest of the world.
The advice she got was to consider forming of an LLC, which is short for a Limited Liability Company.
"Did I have an opinion?" my friend asked asked.
I hastened to point out that I am not a book keeper or an accountant. So, I am in no position to offer professional advice on such matters. I am able to offer my personal opinion as a fellow writer if that would suffice.
She nodded and so I did.
It is true that an LLC does protect an individual from debts, law suits and legal claims against the company.
And the Tax man will be dealing with the company records. There are set rules for filing and the auditing of records. It is set up that way. Your contact would be with your Book keeper or Accountant. You would be unlikely to have to see anyone at the IRS again unless there were some irregularity. There is no doubt an element of Kudos to being a Company Director.
You can decide the amount of your salary each year. You can stay below the threshold assuming you should earn so much in the first place.
The rest can be for new equipment, like software. Or for the set up costs for a new Publishing enterprise, for editorial services, or staff, and so on.
So an LLC has more ways to apply the tax rules in an individuals favour. It is a complex corporate beast after all.
There may be more tax breaks and protection than for an individual writer. That doesn't mean that any individual would be able to justify taking advantage of them. The tax system doesn't work like that. So should we weld ourselves to such a corporate complexity as an LLC at all?
Let's pause here and take a quick look at that.
LLCs are a structure designed for the world of Commerce. That said it is true that our friend here does sell her work. Books and articles. Monetizes her blogs. Gets paid and pays her taxes. All stemming from a singular endeavour – Writing.
The protection that she is seeking to gain doesn’t work as well for the type of legal issues of concern to writers.. Consider for a moment the type of lawsuit that might come our way.
Plagiarism. Rarely are fiction writers faced with lawsuits at all. Unless we have plagiarised the work of another. The same holds true of Non-fiction writers.
If we were to include the names of real people in our work and in some way offend. Then we could wind up having to fund a legal defence. If we lost or failed to reach settlement.
If we set out to write exposés about people or organisations with deep pockets. Here too we may have to defend ourselves.
This falls more under concerns for journalists and the writers of exposés.
They arrange insurance for such eventualities.
Or their organisations are such that they do.
So that those who publish under their banner may enjoy the necessary protection..
Having or being an employee of an LLC would in no way protect any writer from such things. The action would be against the individual writer and not the Company. It would not be a Company issue.
As for the simple matter of Tax returns. Consider the cost of maintaining an LLC.
In some States it exceeds $800 a year.
It differs, depending where you live in the world.
There are....
Accountants fees.
Higher banking costs.
Company records to keep.
Book keeping.
Legal fees relevant to incorporation.
So in my humble opinion.... I wouldn't consider forming an LLC at all.
When I told her this the poor woman was crest fallen.
"How much did you have to pay in Tax last year?' I asked.
After a few moments hesitation she replied. 'I didn't.'
'What? You didn't pay your taxes?'
She froze looking down at her hands. I thought she was about to run. 'I didn't have to. They said I was below something called a threshold?
'Ah I see.' giving her my most encouraging smile. 'That brings me to one final but important point'.
In most countries their is something called a threshold. The amount a person can earn before they are liable for any taxation at all. It is around £12,500.00 or $16,200.00 in the UK.
The next band sets the limit for those who would need to pay the least amount of Income tax. Currently set at 20%.
These figures are the gross amounts before deductions.
Now excuse me for mentioning it but let’s say that your expenses amount to £10000 to £15000 per year.
'Oh it couldn't possibly be all that'. I don't go out much.'
'Well let take a look at what you might be allowed to set against your liability for tax. When you have a need to. Which you will... In time.'
You could claim expenses for all the following....
Book keeper fees
Accountancy fees.
Petrol.
A proportion of rent or mortgage recognised as office space.
Child Care
Books.
Courses.
Working on location to ensure authenticity.
A new state of the art computer.
Computer Security Software.
A proportion of your phone bill.
Stationary supplies
Photographic equipment.
Webinar equipment.
Travel costs.
Conferences.... and more.
Writers Workshops.
Public Transport Fares
Air Travel
Hotels
Clothes
There's more...It's a long list. Trust me. As your income grows you will be surprised how your ability to enjoy the perks of your profession will grow too. You have nothing to worry about.
Last year you were below the threshold. Ok, lets say for arguments sake that you earned £28,000.00 and your expenses were around £14,500.00. I'm guessing. ball park. We deduct the £14,500.00 expenses and the £12,500.00 you are entitled to earn free of tax. That leaves us with a balance of £1000.00 on which you would owe at minimum tax rate, 20%. You would owe the tax man the princely sum of £200.00.
Well you may not be raking in millions yet but your income is none too shabby. Not by a long shot. Wouldn’t you agree?
So look, when you’re pulling in around $36000,00 - $40000,00 a year as a writer. Let's face it you're not that far away. You may not be quite living the dream yet but you’ll be getting pretty damn close.
If this was my call. I would leave LLCs to the birds. They are for corporate commercial activity. Your circumstances may at some point lead you to where it would make sense to form one. But as a fellow writer I struggle to think of why.
Better to spend your money on some good easy to use accounting software. I could soon show you how to use mine. It's so easy. It will save every single receipt for you. Keep them in perfect order, and do your end of year. Bring your friend round some time and I'll show her too if she'd like. You can invest in a good bookkeeper to sign off on your end of year for you. She will save you time stress and money, especially if you've used the software. Her fees are deductible too. And I guarantee she won't shout at you.
That brought her first smile. She was finally beginning to relax. She gathered her things.
'So let go of your troubles. Stop worrying. Keep doing what you love best. Keep Writing. Be Happy'.