Category Archives: Taxes

My friend said to get an LLC

Business Jace Killan Taxes The Writing Life 1 Comment

19389749In my work, I’ve helped many people set up new business ventures. Proper entity structure is extremely important as it will have liability and tax implications. When discussing a new entity structure, I often hear, “My friend said to get an LLC.”

Regardless of the reasons we write, money will come if we’re good. As in any venture, those that make money need concern themselves with two things:  Liability and Taxes.

Someone whose interviews were used in the novel Memoirs of a Geisha sued the author for $10M. Another author sued Dan Brown for stealing his ideas and using them in the Da Vinci Code. Penguin Publishing sued a group of authors who failed to produce anticipated manuscripts even though they had cashed their advances. Liability can exist anywhere a contract exists.  And unfortunately, lawsuits seem to follow fame and fortune.

In the US, income taxes can claim more than 50% of an author’s earnings and in certain circumstances estate taxes can claim upwards to 50% of an author’s legacy when he/she dies. Taxes were discussed earlier this month here and here so I will only touch on them briefly.

Proper entity structuring can help with both liability protection and minimizing income taxes, and can be used extensively in good estate planning (though I won’t be discussing estate planning here).

There are a few different entity structures to consider. Each has pluses and minuses, its just a matter of finding what works best for your situation.

A sole proprietorship is the simplest of entities, it basically means that the company is you and you are the company. The work could be done under your name, or maybe a DBA (doing business as). 

According to the Small Business Association, a sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

From a liability standpoint there is no protective veil between your business and your personal assets in a sole prop, meaning, if you are found liable in your business, anything you own personally can be used to satisfy that liability.

From a tax standpoint, any earnings of a sole prop are typically recognized as earned income so they are taxed at the standard income tax rates and typically require some self-employment tax as well.

A partnership is a business owned by two or more people. Often these have agreements dictating the cooperation of the partners and the shared liabilities.  I have seen businesses where a partner was held liable for the actions of another partner, however if the documents are structured appropriately, a veil can exist between the business and the individual partner. Taxes in a partnership are most often treated as they are in a sole prop.

There are a couple different types of corporations we will discuss here. A C Corporation is probably the most common. A clear veil exists between the company and the individual, though a lot of paperwork and documentation go into maintaining this veil. A downside for the C-Corp is the tax structure. A C-Corp’s earnings are taxed first at corporate income tax rates, then as the earnings are passed on to the company owners, they are taxed again at the individual level as dividends.

An S Corporation is a type of corporation designed to avoid the double taxation feature of a C-Corp. Earnings of the S-Corp are not taxed at the corporate level, instead passed on to the individual and recognized as either earned income or a combination of earned and ordinary income. An S-Corp structure may help minimize taxes when compared to a sole proprietorship or C corporation. A corporate veil exists between an S-Corp and the individual as long as proper accounting, governance, and documentation exist.

So what is an LLC? LLC stands for “limited liability company.” Each state (in the US) has its own laws regarding LLCs and how they ought to operate.

An LLC is designed to fortify the corporate veil between individual and business liabilities. The owners of an LLC are called Members, and those individuals that run the LLC business are called Managers. An LLC’s operating agreement usually limits the liabilities of the Members and the Managers, creating a shield to protect any of the individuals from being held personally liable for the company’s liabilities.

Of course in order to maintain this shield of protection, certain practices must be maintained like those discussed earlier this month here and here.

The beauty of the LLC and probably why your friend suggested to get one is that along with the liability protection, you can elect to be taxed as Sole Proprietorship, a Partnership, a C Corporation, or an S Corporation based on how the entity is established. 

In an interest of self preservation let me just add a final note. The information contained herein is for informational purposes and is not legal advice or a substitute for legal counsel. IRS CIRCULAR DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Editorial Comment:

The Fictorians are aware that many of our readers are not United States citizens, and consequently conduct their lives and businesses under statutes and regulations that are markedly different from those in the U.S.A. Most of our posters for this month are American, and the few who aren’t are Canadian, so the perspective in this month’s posts will of necessity be somewhat limited. Nonetheless, if you are one of those readers from somewhere other than North America, as you read of issues in our laws and practices, perhaps they will make you mindful of things you should be aware of in your situations as well.

Record Keeping, Part Two: . . . But Necessary

Business Contracts Legal Issues Taxes The Writing Life No Comments

Okay, now for a couple of specific issues:

Tax Records (U.S. version)

It is a commonly held belief that the IRS requires you to keep your tax records for seven years.  Actually, according to the records manager of a company I used to work for, that’s not quite the case.  According to her, the IRS regulations require you to keep your records for three years.  However, if they do decide to audit you, they can go back seven years.  And since no one would want to depend on an adversary for records concerning his or her own interests, everyone just automatically keeps seven years’ worth of records.  And just so we’re clear, that means not only your tax filings, forms, and schedules, but also all of the supporting documentation:  receipts, 1099 forms, spreadsheets, QuickBooks reports, e-mails that pertain to the taxes, and anything that would be necessary to defend deductions or interpretations, most especially any communications from the IRS.  In this area, it’s better to err on the side of caution; if you’re not certain you need to keep it, you should probably keep it in the file.

Contracts (U.S. version)

Every state in the U S has regulations that define certain types of records which businesses must keep, even self-employed businesses like writers. As long as you as a writer are a one-person shop, most of them won’t be an issue.  If you get to the point, however, where you are paying people to perform business functions for you (accountant, secretary, researcher, etc.) then you need to educate yourself on what your state requires.

There is one type of business record retention about which even the one-person writer shop needs to know, and that is your contracts and agreements.  Almost every publishing contract between an author and a publisher or a publishing platform will contain a clause that says that in the event of disagreement between the parties, the contract is to be interpreted under the laws of a certain state.  Most of the traditional publishing contracts indicate they will be interpreted under the laws of New York.

Obviously you want to keep the contract or agreement as long as it is active; in other words, as long as there are obligations between you and the other party which must be observed or performed.

But at such point in time as the contract has basically terminated—all parties no longer owe anything to anyone under its provisions—what do you do with it then?

Hint:  don’t throw it away.

Every state has statutes or regulations that stipulate how long such a terminated contract must be retained by the parties subject to it.  Here’s the summary:  if you or your publisher reside or work in Louisiana, or if the contract says it will be interpreted by the laws of Louisiana, the rule is to hold it fifteen years past termination.  All the other states have settled on a term of five years.

In states other than Louisiana, the only caveat I would raise would be if the contract had provisions that dealt with finances, you should probably keep it until the last year it operated has passed its seventh year tax retention.

And finally, the contract file should contain anything that would have a bearing on the intent of the parties in drafting the agreement, as well as anything that might bear on how it should be interpreted.  So yes, you may need to keep some letters or e-mails to support that contract.

In summary: be organized, back everything up to protect yourself, and manage your records.

Record Keeping, Part One: Not Sexy . . .

Business Contracts Legal Issues Taxes The Writing Life No Comments

Contrary to popular belief, you as a writer don’t have to keep every single piece of paper or e-mail or e-documentation that comes your way.  And you especially don’t have to keep it forever.  However, just like any business owner out there, you need to have a good idea as to what kind of records you need to keep, and you need to have some idea as to how long they should be kept.

This gets down to the nitty-gritty, detailed, organized, obsessive, and—dare I say it—boooooriiiiing part of being a writer.  Keeping your records updated, filed, and organized is a necessity; particularly in a profession that undergoes regular and sometimes heightened scrutiny from the taxing authorities, and also has to deal with contracts.

Get Organized

Yes, you absolutely need an organized filing system.  No, it doesn’t need to be very complicated, as long as it’s logical.  It can be totally paper based, or totally electronic, or both.  But it has to exist, and you have to maintain it, or the risk of you getting into trouble really escalates.

You can go totally electronic:  scan all your documents into digital memory, even your signed contracts.  There is case law now that has established that a scan of a signed contract is just as valid a record of the agreement as the signed paper original which was scanned.  And there are businesses out there that destroy their originals as soon as they are scanned.  No drawers full of paper, no clouds of paper dust.  But there are also disadvantages:  you have to stay on top of the scanning and not let it pile up, or you never get it done; you have to keep your electronic files just as organized as you would the equivalent paper files; and you have to remember to back up all the files regularly.  Daily, if you work frequently.  Definitely every time you add, change, or delete data.  More about that later.

You can go with all paper, but in the internet age, a hybrid combination of paper and electronic is more practical:  keep your most important documents in paper, but go with electronic copies of correspondence, work notes, etc.  But you still have to have an organization method, and you have to stay on top of the filing, both electronic and paper.  And make sure the electronic records are backed up.

The big thing is to have a method, to be organized in a manner that works for you and is efficient.  But make sure somebody else knows how you do things, because there are always those odd moments where you’re not at home and something needs to be found.

This is especially important when it comes to your financial records, since they will be the foundation of your tax filings.  You can use an application such as QuickBooks, or you can just build all the revenue and expense records into a (relatively) simple spreadsheet.  But you have to do it.  And while you’re at it, whatever method you use, make sure it’s backed up frequently.

Myself, I organize everything by the writing project.  Work notes, drafts, contracts, payments, mail (both e- and paper), everything except tax documentation gets put under the header of a project.  I find it a simple yet convenient structure, because 99% of the time if I need to look something up, it’s the project name I’m going to be searching under.  My tax forms and supporting documentation I organize by tax year.

Back It Up

And again I say, back everything up.  If your house or office floods, or burns, or is robbed/vandalized, or is in hurricane country or tornado alley, and you’re in the middle of an IRS audit or a litigation about contract compliance when the disaster happens, just how valuable would that back-up file be to you?

Even if you like the paper records, there is good reason to scan all the important ones, such as your contracts, your tax returns, and all your current income and expense records.  This will allow you to back them up in a cloud service such as Carbonite.  If you don’t want to trust a cloud service, then at least copy the files to flash drives or an external hard drive and store them someplace else.  That doesn’t mean in your bedroom closet, either.  I mean someplace miles away from your location.  If you or your spouse has a day job, take them there and bring the older ones back home.

In the words of the old platitude, don’t put your eggs all in one basket.  Do something to mitigate the risk.

(Be sure to come back tomorrow for the conclusion!)

U.S. Taxes: Things to Keep In Mind, Part Two

Business Guest Posts Legal Issues Taxes The Writing Life 2 Comments

A guest post by Brenda Lindsey.

SHOULD I BE MAKING QUARTERLY ES PAYMENTS?

The rule for everyone is the same. The U.S. is a pay-as-you-go tax system. As you earn income, you must pay taxes. However, a common misconception is that every self-employed individual must make quarterly estimated tax payments. If you file your income tax return and have not paid throughout the year, you will be penalized. There are some general exceptions to the penalty: if you owe less than $1,000 in taxes for the current year; if you have already paid in 90% of what is due in the current year; or if in the previous year you have already paid in 100% of the tax due for the current year. (Look at last year’s Form 1040, Line 61.)

Not all writers are full-time writers.  As a writer, if you also have a wage or salary earning job, you get an added advantage to the pay-as-you-go rule. All payments to the IRS remitted through withholding by your employer will be considered remitted equally throughout the year – even if you change your W4 at the end of the year and have large withholdings to “catch-up” on taxes for income received much earlier in the year. Also, payments to the IRS when your status is “married filing jointly” are considered joint payments and will apply to the joint taxes owed. This is why, if possible (i.e. you or your spouse have another job with an employer), you should consider simplifying the process and avoiding penalties by making all your tax payments through increased withholding by an employer.

If increasing the withholdings through an employer is not an option, you will need to make estimated tax payments on Form 1040 ES. You should estimate the taxes you need to pay (estimated self-employment income less estimated deductions multiplied by your income tax bracket + approximately 15%) and divide by 4. These payments are due on an unusual schedule – April 15, June 15, Sept. 1, and Jan. 15. You can get a refund on your income tax return and still incur ES payment penalties because you did not remit timely payments on the “pay-as-you-go” system. (You can get a waiver if you can show – via Form 2210 – the actual amounts earned by quarter. This would be used, for example, if you received a large advance in the last quarter of the year.)

CAVEAT ABOUT CLAIMING DEDUCTIONS

Be very careful about what you claim as deductible expenses.  This is one of the areas where writers can most easily find themselves in conflict with the IRS.  Remember, only your expenses as a writer can be deducted from your self-employed writer’s income.  For example, if you and your spouse travel together to another city to attend a convention, unless your spouse is also a writer, only your travel, meal, and lodging expenses are deductible.

CONSIDER HIRING A CPA

While it is wise to understand the rules involved and the records you should be keeping, the paperwork should not keep you from your first love – writing. A Certified Professional Accountant can remind you of deadlines, file forms on your behalf and help you to avoid unnecessary penalties. Keep orderly and itemized records of receipts and expenses and consider letting a CPA worry about Uncle Sam.

Good luck with your writing!

Guest Writer Bio:
Brenda is a Certified Public Accountant and has over 10 years in public accounting experience, specializing in taxes for small businesses. She is currently the Controller of New Gulf Resources, LLC in Tulsa, OK. She is not a writer, but she is a reader, and she is related to Fictorian David Carrico, so she has a connection with the writing life.