Now that you have a book and a platform, it’s time to make sure you are prepared to handle the money you earn and still pay Uncle Sam. It’s time to build a business.
First, we need lay a foundation for what makes your writing a business instead of a hobby. According to the IRS, a business makes a profit (or intends to make a profit) above expenses while a hobby is done for sport or recreation without the intention to make a profit. In order to justify yourself as a business, you have to demonstrate the intention to make a profit, that you or your advisers have the knowledge to do this as a business, have actually made money doing something similar in the past, and show that you can make a profit at least three out of five years.
For writers, the IRS knows that sometimes years of work are invested before you ever get a contract, let alone make a profit above your expenses. However, if you’re going to claim a business loss on your personal taxes several years in a row, you’ll need to prove that you are engaging in writing activity on a regular basis and taking steps toward a long-term career plan. That proof comes in the form of detailed records like many we will discuss later.
When I started out, I simply kept a dollar store planner on my desk and I recorded anything writing related that I did each day. How many words did I write? Had I queried an agent or researched publishing houses? Had I submitted an article or had one accepted for publication? Had I received yet another rejection? Had I read a chapter in a craft book and did the exercises? Did I attend a writing group meeting? At the end of the year, I had plenty of evidence that I was making measurable progress toward a book, getting training, and contacting professionals in the industry. Now that I’m actually turning a net profit on my business, I still have a writing planner in addition to my other records.
So, are you writing as an occasional weekend hobby or are you ready to build a business?
While many authors claim to only want to share their ideas with the world and “if I can change one life, it will be enough,” the reality is we would love to make a little money doing this. Ideally, we’d like enough to cover all of the expenses and maybe go out to dinner a few times or even on a nice vacation. While we may dream of some day quitting the day job, most authors will usually have additional income from a different source to cover their household budget.
That said, if we’re in a business, that business should make a profit. And a profit is only gained by getting paid for your work.
Let’s get a few myths out of the way first. Wanting to get paid is not greedy. It’s not selfish to ask friends to pay for a copy of your book. Being a creative person does not automatically mean you should be a “starving artist” and price your books in the bargain basement.
Imagine for a moment that you own a restaurant where delicious meals are prepared. It takes time, a place, equipment, skill, and raw ingredients to create those meals. Wanting customers to pay for the food they ordered is not greedy; it’s expected because there is a cost involved in the running of a restaurant. Having a featured sale item—even a loss leader—while everything else is full price is also normal. And while you might be able to give or “comp” a meal to a friend or upset customer occasionally, they understand that you still have to pay the restaurant staff and the electric bill.
The same expectation of getting paid should also be true for your writing once you start thinking of it as a business. So, let’s start getting ready to handle the money you will earn.
Tool #1: Open a separate checking account for your business. You don’t have to start an LLC or anything formal or fancy as a sole proprietorship. Just open an account separate from your regular household money and nickname it “the business account.”
Everything related to your business will go through that account (even if you need to supplement or “seed” the bank balance when you’re just starting out). Pay all business-related expenses from this account, but absolutely nothing else. Use that account’s debit card to set up any automatic memberships related to your writing.
By having all of your business income and expenses flowing through one account, you automatically have easy records for the IRS thanks to the bank statements. I hole punch and save those statements in a three-ring binder with the rest of my business records, then file them away at the end of the year with a copy of my tax return. (More about record keeping later.)
However, with a separate bank account, it’s also easy for you to see at a glance if your business is making a profit and if you have enough to buy that new computer or not. Theoretically the bank balance is your net profit because it’s what’s left after you deducted your expenses from your income (unless you’ve had to personally add money to the account to avoid overdraft charges in those first few years).
The IRS allows you to deduct the “cost of goods sold” from your income and considers miles driven on your car for business-related activities (like attending your critique group meeting) as an additional expense. This means that the official profit from your business according to the government will be different from your bank balance but the basic principle is the same.
Keep all of your business income and expenses in one place for both convenience and documentation. And if you’re anything like me, the existence of my “business account” made me feel like a professional…and motivated me to sit down and write like I meant it.
Tool #2: Open a business related PayPal account. Some publishers (like Amazon’s Kindle Direct Publishing) don’t pay royalties unless the accumulated balance reaches a threshold amount…or unless they can deposit directly to your PayPal account. With the popularity of PayPal as a secure payment method on many online sites, having an account will make it convenient to pay a few of your expenses and also later to collect payment from private individuals.
First, like that separate banking account, you’ll want to create a separate PayPal account from the personal one you use on eBay. I use an email address associated with my website for everything business related, including PayPal.
Having an account for only business-related transactions allows you to print out the occasional receipt or monthly activity reports as part of your financial record keeping. Once you link the PayPal account to your business checking account, PayPal acts like a business debit card…and you can easily transfer deposited earnings back over to your bank. I also added a business-only credit card to PayPal as a backup payment method.
Inside PayPal it’s easy to send invoices to private individuals for things like coaching services or a book sale and then see who has paid. While you can request money from a friend for free, a true invoice through PayPal is charged a processing fee of 2.9% to offset a credit card’s bank charges plus $.30 to PayPal for their services. It cuts into profits a bit, but I think the convenience and peace of mind to know a customer’s check is not going to bounce is worth it.
Tool #3: If you’re going to set up book tables at fairs, craft shows, or speaking events, consider getting a credit card swiping device to collect payments other than cash or a risky check that could bounce. Especially at craft or book fairs, customers quickly spend their available cash and if you can’t accept a card payment, you’ll miss out on a potential sale.
Many banks will offer this service for a fee that generally coincides with the standard transaction cost to process a credit card payment. There is also either a deposit or rental fee for the sometimes clunky equipment.
Outside of a bank, there are other mobile banking services. If you go to multiple shows, you might consider Clover.com. Several of their devices resemble a tablet on a stand and act like a portable cash register of sorts.
However, if you upgrade your PayPal account to a business account you can collect mobile payments in exchange for a flat 2.7% fee if you swipe the card or a 3.5% fee plus $.15 if you manually enter the card information. They will send you a free “swiper” triangle to plug into the earphone jack on your smart phone. (This is similar to Square.com’s square-shaped device.)
Then, using the PayPal app you can swipe (or manually enter) credit or debit card information from customers and email or text them a receipt. Inside the app, you can also pre-populate your inventory with titles of books or bundles, assign specific prices to each, and change the settings to calculate sales tax making checkout quick and easy for the customer as you tap the items they are buying, swipe their payment, have them sign the screen with their finger, then tap to send a receipt.
Once you’ve got a way to handle the income, it’s time to turn our attention to the recordkeeping side of a business.