Expert: Cathy Clamp - 7/10/2008

Question


Dear Cathy,

My concern is about freelance writing and taxes. At this time, my writing career has evolved from hobby to career. Which means, I do not just enjoy writing, but a really earn a healthy amount from it. Now, should I register this passion-turned-moneymaker as business? You know, establish an LLC, sounds like a great idea. But as I see it, I will be double taxed if I do this. I.e., the publisher will deduct witholding tax from payment and royalties, and the IRS will extract witholding tax from the LLC.

What should I do?

Sincerely,
Sirius

Answer
Hi, Sirius!

Actually, I don't know of any publishers or magazines that withhold taxes. Everything I get is on a 1099-M (Miscellaneous) and I have to withhold quarterly taxes from the money I get to deposit with the IRS.

My co-author and I started a partnership to manage the money and expenses of our books and articles, but discovered it was much better to simply do it as a Schedule C small business on our personal taxes, for a couple of reasons.

First, it's generally a good idea to start to involve a professional tax preparer in your life, AND to be certain that they've taken a special class the IRS gives CPAs on "entertainment accounting." The entertainment industry has all sorts of weird little things that could cause you tax concerns in later years. But, then you've got the cost of TWO returns, and they have to tie together. So, if you use a CPA for your business, and H&R Block or TurboTax for your personal, you'll wind up with problems (trust me!)

Second, either you have to enter into contracts with both your personal and business name, or you're going to have to shunt money received personally into the business through voluntary contributions or keep two sets of books. It turned out to be a real headache, and I couldn't really find any true benefit to the situation. Granted, you will have to pay self-employment tax when doing it as an individual small business---but that's not much money by comparison to a separate business address, a separate bank account (and the cost of checks) a Taxpayer ID number and maintenance of the business on a state level (registration fees and such), etc. You'll need a separate agreement with your publisher and/or agent so that funds are directed to the business account (which is why you'll need the EIN from the IRS. They'll have to direct the 1099 to the correct entity.)

I don't want to dissuade you if you've got good reasons to start the LLC or S-Corp., but I just found it to be a headache. If you decide to, sit down and talk with BOTH an entertainment attorney as well as a CPA so you do it right. You want the paperwork in place that won't be affected by changes in publisher management or tax audits. The more "loose" you choose to make your deductions, the more likely an audit---they just LOVE authors and entertainers for looking for more money and penalties. Sigh...

If you have any other questions, feel free to ask. Good luck on the writing and don't hesitate to start the business if you want to. Just do it with your eyes open. :)

Cathy