Tax mistakes writers commonly make:
1. Depending on your memory, not written records
“Forgetfulness transforms every occurrence into a non-occurrence.” -Plutarch.
If you rely on your memory instead of records or receipts, you are bound to forget some important tax deductions! The IRS requires records, especially for mileage to be kept contemporaneously, meaning at the time the expense was incurred and not months later.
2. Neglecting to record mileage
You will be walking away from a huge tax deduction of you do not keep mileage records. I use Google maps and my calendar to calculate mileage amounts for trips I make.
3. Failure to set aside money to pay income tax, self-employment tax or sales tax
Not all the profit you make is yours to spend. The tax man wants his due. Tax planning with a CPA will keep you out of hot water with the government and let you sleep better at night.
4. Doing your own tax return
You are in business and should get professional assistance with your tax return. Focus on what you do best – writing and selling your book – and let the tax professionals do what they do best – tax returns.
5. Taking incorrect tax deductions
An incorrect tax deduction can mean you pay too much in taxes or face an audit by the IRS. Learn what deductions are allowed. Get my ebook Tax Deductions for Writers.
6. Failure to count inventory at least annually
It is very important that you count your inventory at the end of the year so that your cost-of-goods-sold calculation is correct. You may be paying too much in taxes if you miscalculate.
7. Poor record keeping
Studies show that business success follows good record keeping. Without good records, you will not know if you are making a profit or loss, nor will you know what sells well.
8. Failure to take a reasonable salary from an S or C corporation.
Authors or publishers that have structured their businesses as S or C corporations must take a reasonable salary. The salary is subject to income tax and employer taxes (Social Security and Medicare). There may seen to be advantages to taking a low salary and avoid self-employment tax, but the IRS expects an owner to pay himself a reasonable salary according to industry standards and the amount of work put into the business. This issue of unreasonably small salaries has become a red flag to the IRS and a subject of many audits.
Learn how to run your writing business better from my book, Business Tips and Taxes for Writers.
Carol Topp, CPA