Do writers as business owners pay taxes twice?
February 28th, 2023 → 10:35 am @ Carol
Would I have to pay taxes twice if checks were made out to my writing business instead of to me? Taxes paid first by the business as income and then paid by me again if I receive it from the business as personal income?
Barb
Barb,
You run your writing business as a sole proprietorship.* A sole proprietor does not get a salary (or ‘personal income’ as you called it) from her business. Instead, she gets to keep all the profit as her own. She can leave the profit in the business (literally leaving it in the business checking account) or make an Owner’s Draw of the profits out of the business and transfer the profits into her personal checking account.
Either way (left in the business or drawn out), the profits are included in the taxable income of the business owner. There is no tax deduction for any salary a sole proprietor pays to herself. So don’t think if it as a salary you pay yourself. Think of it as an Owners Draw of the profits out of the business. The Owner’s Draws do not show up on the tax return. Only the income and expenses and the net income (profit) is shown on the tax return.
So you will not pay taxes twice.
Here’s an example:
Business income for the year: $8,000
Expenses for the year: $7,000
Net Income (i.e. profit) $1,000
You will pay tax on $1,000 profit.
If you withdraw (as an Owner’s Draw) $500 of the $1,000 profit, it is not a business expense or a tax deduction. It is not a salary. It is simply taking out the profits. You still pay tax on the $1,000 profit.
We call it an “income tax” in the USA, but for businesses, it’s really a “profit tax.” You don’t pay taxes on the $8,000 of income; you only pay tax on the $1,000 of profit.
I hope that helps!
Carol Topp, CPA
*The tax rules are different if your business is a corporation. Then the owner does take a salary (and gets a W-2) from the corporation. Most writers do not organize their businesses as corporations; it’s overly complex. I cover the choice of business structures (including sole proprietorship, LLC, Corporation and partnership) in my book, Business Tips and Taxes for Writers.
Tags: author, IRS, tax, taxable income, writer, writing business
