Today, Dear Readers, we begin a series of posts by accounting professional and author Brigitte A. Thompson of Datamaster Accounting Service LLC. Please make her welcome as she shares her expertise with us all.
Writers work in all different genres and write for a variety of media outlets. Some of us are business writers, others create romance novels and many write articles for magazines or copy for web sites. Putting words into print is our profession, but dealing with the financial aspects of our writing business can be challenging. This series of blog posts can help!
Legal Organization for Writers
There are several forms of legal organization to choose from when establishing your business. The most common form for a writer is a sole proprietorship, but there are other options. You should understand the choices and speak to a lawyer, accountant, or tax preparer to find out which option is the best for you.
This decision will influence the taxes you pay, the extent of your liability, and the way business transactions are reported to the Internal Revenue Service (IRS).
Sole Proprietorship
The easiest business to set up is the Sole Proprietorship. This is the simplest form of business organization and is the default classification for a business owned by one person. The IRS does not require fees or special forms to set this up. You can conduct business under your name or create a business name. As a sole proprietor, you are the business and all personal as well as business assets are at risk. Despite how easy it is to be a sole proprietor, this unlimited liability is worth careful consideration.
S-Corporation
Establishing your writing business as an S-Corporation will provide you with limited liability that will create a clear line between you and your business. There are forms to be filed and fees to be paid in most states in order to obtain this status. Your business will need a name which must be registered with your Secretary of State before doing business.
Since the business owner is considered to be separate from the business itself, some additional tax forms will need to be filed to report your earnings. An S-Corporation will file Federal Form 1120S annually from which a Schedule K-1 is generated. It is important to note that the S-Corporation itself does not pay income taxes therefore double taxation is not an issue.
The information on the K-1 will become incorporated into your personal 1040 tax return and the 1120S gets mailed separately. Undistributed profits under this organization are subject to applicable federal and state taxes, but are exempt from self-employment tax which is a benefit. When you opt to incorporate your business into an S-Corporation, you are no longer subject to self-employment taxes because you are no longer self-employed. As an S-Corporation, your business is a corporate entity entirely separate from you. You would issue yourself a paycheck as an employee of the corporation. The funds left over as net profit would be distributed to you and subject to fewer taxes than if you were self-employed.
Partnership
If more than one person owns the business, it cannot be a sole proprietorship and a partnership may be worth considering. Similar to sole proprietorships, partnerships are easy to organize and maintain. A written agreement should be created between all partners called the Articles of Partnership that outlines the commencement date of the partnership, salaries, division of duties, and procedures for settling disputes.
A partnership files a Form 1065 with the IRS every year and K-1 forms are issued to the partners. As with the S-Corporation, the partnership does not pay any income tax. Partnership and S-Corporations are called pass through entities. They do file tax returns, but no money is due for income taxes to the IRS from filing these returns.
If you choose to establish your business as a partnership or S-Corporation, a separate identification number will be needed for IRS use. Form SS-4 is an Application for an Employer Identification Number and it can be ordered through the IRS Web site. In addition, each state has its own requirements surrounding business legal status. Be sure to check in with local, city, and state departments to determine what forms must be filed based on your entity choice.
© Brigitte A. Thompson, Datamaster Accounting Services, LLC
Author of Bookkeeping Basics for Freelance Writers available on Amazon
The information provided is intended to be general and based on the Federal Tax laws of the United States. As such, it is subject to change. This information is not intended to be used as a substitute for financial or legal advice. Be sure to consult your tax advisor on all tax matters.
More About Brigitte
Brigitte A. Thompson operates an accounting firm in Vermont and is the author of several recordkeeping and tax books. She is a member of the American Institute of Professional Bookkeepers and the Vermont Tax Practitioners Association. She has been in the field since 1985. Brigitte is President of Datamaster Accounting Service, LLC
http://www.DatamasterAccounting.com
Visit her Blog for Writers
Follow her on Twitter: @taxtips4writers
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Hi Allan, I tried to E-mail you earlier, and it said it didn’t go thru. I hope I’m not double sending you. If so sorry. Let’s try this again.
First of all. Thanks! It’s such a valuable gift your giving, with your time and knowledge to those new at this. We appreciate it very much and have recommended your site to several of our friends from our book club and writing group.
I enjoyed your article in “The Write Stuff” today very much. Brigitte Thompson was a wonderful guest with an abundance of wisdom and knowledge.
I’m hesitant in asking this, but how will you know unless you ask. The information was great, but it left us feeling like are heads were swimming once again. There are so many paths to take and each one, filled with vast information. You reach a point where you say, I have to come up for air! Is this normal?
I read a site, not long ago that I enjoyed very much. A lawyer who has recently been picked up and her book is being published. She said that when your querying, your told to do it one way by one agent, and another way by the other. After fifty different rec’s, your sitting there scared to submit for fear of angering the great LA. It leaves a writer to wonder. At what point did the craft become so bogged down.
There are two of us on this journey. My daughter and myself. And it takes two of us. With information about how to market properly, information on how to write better and hone your craft, information about how to query, information on how to deal with the Publlishing Co. to get yourself the best deal, information on how to handle the $$ to be able to survive, information on self publishing vs. regular. information, information, information, information………And it wouldn’t be so bad if you could nail down a direct road but each person has a different opinon so………..
As we re-educate ourselves, there is little to no time left to write! lol.
Is this normal? Or are we doing something wrong. Any feedback would be greatly appreciated. As always, we are your fans and friends, Inion N. Mathair
Yes, Inion, that’s normal. As Indie authors we have to learn to do more of the stuff publishers used to handle (or hire someone to do it for us). But when it comes to the business of writing, regardless of how our work is published, we are responsible for tracking our money and filing our taxes (unless we hire someone to do it for us). Establishing and running any sort of business takes some research and knowledge to do it right. A study done by Inc. magazine and the National Business Incubator Association (NBIA) revealed that 80 percent of new businesses fail within the first five years. This is primarily because the business was under-capitalized, the expectations of profits were too high, and/or the owner did not know enough about the business to make it work properly. Just because someone is a great cook does not mean they will be successful in opening a restaurant.
As you point out; you must not only learn to write well, but you must learn to market your work – either as an Indie or by querying agents – and you must learn to work in a self-disciplined and efficient manner. Writing for a living is very different from writing as a hobby.
It’s good to be informed. Us creatives usually forget about the nuts & bolts of business.
And us nuts tend to forget… oh, well never mind! thanks for dropping in Mary!
Thank you for the warm welcome. There are many aspects to starting a writing business and it can seem overwhelming at times. My goal is to simplify the process by sharing information and offering suggestions.
I’m sorry the Facebook link is not working, but readers can leave a question for me here or contact me by email at datamaster (at) myfairpoint (dot) net. I do my best to answer within 24 hours.
Brigitte, I checked that Facebook link. For some reason, WP is lining out the link, like it’s broken, but when I clicked on it your Facebook page opened up. It seems to be working. REVISION: Whoops, it works in Firefox, but not Internet Explorer. Looking into that. 🙁
Thanks for trying. 🙂
I noticed that Brigitte A. Thompson runs an LLC- Limited Liability Company. Why wasn’t the LLC discussed in this article?
As long as there are two or more people listed as owners in the LLC it would be a viable entity and offers many of the protections from liability and tax benefits of other corporations.
Maybe I’m wrong about all that, it would be interesting to hear some discussion on the LLC.
Thanks,
Travis
twluedke.com