I never thought I'd be using my degree quite like this...but here we are. Let's talk about your accounting systems, including tracking your income and expenses, handling your annual income tax filing, and if you end up selling anything direct, how to handle sales tax.
If you're skipping around and haven't checked out my legal entities post yet, please go start there. Like before, this post is based on US tax law. If you're in another country, I'm very sorry, but this is likely not going to help you.
We're just jumping right in, because if I keep putting this off with sweet platitudes, we're gonna be here all day. This is gonna suck. Just embrace it. You gotta do it.
Accounting for Income and Expenses
As soon as you've decided you're going to make a go of things, and you're determined to make it successful, I highly recommend setting up a separate bank account for your business stuff. As with all of my recommendations, you don't have to, but it will make things easier in the long run.
But, how do I start a business bank account if I haven't made any money yet? That's okay, just set it up, maybe put like $50 in it and let it chill for a bit. We'll get there.
Unless you're planning to self-publish for free, you're going to spend some money. Track all of it. Keep receipts. Keep contracts. Make a folder in your email and stick everything in it. If you're an analog girlie (note: girlie is a gender-neutral term in this instance), print them out and stick them in a folder. But you better keep it all.
If you're able to, and your bank doesn't charge you fees, transfer the money to pay for these from your personal account to your brand spanking new business account and then pay it from your business account.
"But why? That's time consuming."
Yes, it is, but it will keep things neat and all your transactions related to your book will be into and out of your business account. Because if you get audited (I'm a worst case scenario girlie, it helps my anxiety to plan for everything), and your finances are what's called "co-mingled" meaning you're mixing business and personal assets, it's going to be a loooooong audit.
So what does that look like, in practice? Let me show you.
Hiring a Cover Designer: Designer sends invoice for $100 > Transfer $100 from your personal bank account to your business bank account > Pay designer from your business bank account
This way, the designer fee shows up on your business bank account statement as that designer's name. If you're planning to put your business expenses on a credit card (I don't recommend going into debt for your books, but if you're one of those people who put everything on a credit card to get the points and then pay it off later, go you!), then I recommend setting up a separate business credit card and doing the same process. you can pay it off with your personal bank account, that's fine, we just want all our expenses to show up on our business accounts, not our personal ones.
Clear as mud? Cool.
Here's an excel template to track your income and expenses
Once you start getting a bit more established, especially if you start selling direct or doing conventions (we'll talk about both of those later), you might consider getting an accounting software like Quickbooks to help keep track of things. However, you do it, you do you babes, but you better track it all!
I'm going to preface this section with: I know enough about taxes to 1) pass my tax class in college and 2) file my own taxes until my partner joined the military and moving multiple times in one year messed my brain up.
I do not know everything, nor do I claim to. But I can get you started. Please consult a tax professional if you need help, and for the love of the legal gods "disclaimer: this is not tax advice."
Okay, now that's out of the way. If you kept good records, this step should be pretty easy, so I'm going to yell at you again to keep really good records of everything you spend money on and everything you make money from.
Assuming you have a day job, go ahead and get your tax forms from that (W-2, 1099, etc.) like you would for your personal tax returns. While you're at it, grab a copy of the Schedule C from the IRS. This is the schedule you want to use if you're either a sole proprietor or a single-member LLC.
Using your well-kept records (I'll keep saying it), we're going to fill out the schedule. The proprietor name is your name, the Business Name is either the name of your LLC or the name of your publishing imprint, or your pen name, or blank if you didn't do either of those.
Nearly all self-employed peeps use cash accounting for their accounting basis, meaning you track your expenses and income as you get the cash in hand. If you're going to pick accrual basis, you should 1) already know what that means and 2) maybe you should be making this lesson...
Continue filling out the form with your records. I'm not going to be able to explain every item on the form, but the IRS has excellent instructions, so please refer to them.
Okay, income! Gross receipts or sales should be pretty easy, it's how much money you received in hand. Next, cost of goods sold. This is all the costs that allowed you to sell the things used to get business.
Typically for authors, this includes editing, cover design, formatting, and anything else that went into physically producing the book for you to hold/look at. It does not include administrative fees, legal fees (LLC set up), website fees, advertising and marketing costs, commissioning artwork, etc. Subtract these to get your gross profit.
Then, do your deductions. This is where you can put all those other expenses I mentioned, like admin fees, website set up fees, legal fees, advertising, etc. I highly recommend that when you set up your accounting system, you categorize your expenses into these categories on the Schedule C as you go. Don't make up your own categories and then try to force them into these when you're filing. Just start with these categories at the beginning.
Do more math as instructed, and viola! Put your net profit (or loss) over onto your 1040 for your personal return. If you have a loss, you might want to consult a tax professional, because depending on your personal circumstances, it might get complicated. If you didn't make more than $400 gross, you might not even need to fill out the form at all...again, depending on your personal circumstances.
If you have questions, talk to a tax professional, because that is NOT me.
Okay, I have a headache, but I promise we're almost done.
If you end up selling your books, or merch like shirts, bookmarks, art prints, or anything else directly to your readers from your website, you're going to have to think about sales tax. We'll talk about how to handle the actual selling part in a later post, but for now, we're going to talk about sales tax.
Sales tax complexity will depend on: where you're selling from, if you're selling online only, where you're selling to, and how much you're selling.
If you plan to sell direct, I highly recommend having Quickbooks and selling through a site that integrates with Quickbooks (Wix, Shopify, WooCommerce, Squarespace) and allow Quickbooks to track your sales tax and tell you which states you owe sales tax to.
(If you want to do it manually, you can, but I'm going to tell you to hire an accountant)
Typically, if you're only doing online sales, you will owe sales tax in the state your LLC is registered in, or the state you live in. Most states have a decently high threshold to establish an "economic nexus" that requires you to register to pay them sales tax from sales to customers in those states.
This is very simplified, mostly because I am still learning this part. But if you want to sell direct, you need to keep this in mind from the very beginning and set it up correctly.