Tracking Income and Expenses
Good bookkeeping is just as important as good book writing. You can use bookkeeping software to record your writing revenue and expenses; you can develop your own spreadsheet on your computer; you can even use a ledger book, available at most office supply stores. Whatever method you use, you also should keep copies of checks and receipts. When receipts aren't available, log the expense in a diary, with a note about what the expense was for.
Advances and Royalties
Whenever you receive a check for a magazine article, a book advance, or royalties, log it in your books and keep a copy of it for your files. Doing this provides some measure of encouragement, because you can see the monetary results of your writing efforts. And, at tax time, you can use your own records to double-check the year-end statements from your agent or publisher.
If you earn $600 or more from a single publishing source, you'll receive IRS Form 1099 at the end of the year. The 1099 will state all your earnings from that particular source. If you are fortunate enough to have sold articles or received advance or royalty checks for $600 or more from more than one publisher, you'll receive a 1099 from each one.
If you have an agent, she will issue one 1099 that states all the earnings you received through her office. Since many agents don't handle magazine articles, you could receive a 1099 from your agent that covers your book revenues, and other 1099s from magazine publishers to whom you sold articles.
Most beginning writers rack up expenses long before they earn any income from their writing. It's easy to get lax about your record keeping when the prospect of profits seems but a distant dream. Even if you don't end up claiming your writing expenses as deductions at tax time, it's helpful to give yourself a picture of the monetary investment you're making in your writing career. Besides, the earlier you get into the habit of tracking your expenses, the better prepared you'll be when it becomes a necessity.
Expenses you should keep track of include:
Office supplies, such as paper, ink cartridges, envelopes, and stationery
Equipment, such as computers, fax machines, and copiers
Telephone expenses, especially long-distance calls or a second line devoted solely to your writing business
Travel expenses, including mileage, tolls, and parking fees
Membership fees and dues for writers' organizations
Admission fees for writers' conferences and seminars
Book purchases related to writing or to your genre
Magazine and newsletter subscriptions related to your writing
The IRS loves a paper trail, so make sure you hang onto receipts and keep a log of your mileage, meal, entertainment, and other expenses. Most experts advise retaining these records for at least ten years in case you get audited. If space is a concern, you can store digital copies of your records on CDs.
For income tax purposes, all these expenses must be related to your writing. You can claim mileage when you drive to the post office to mail your proposal, for example, but not when you send out your Christmas gifts. If you're a budding romance novelist, your membership in Romance Writers of America is a legitimate writing-related expense; your membership in a science fiction writers' organization may not be, unless you also are trying to break into that market.
Don't cheat yourself out of potential tax savings. If you're in doubt about whether an expense will qualify as a deduction, keep a record of it anyway. When tax time comes, ask your accountant or tax preparer about it; if it doesn't qualify, you're no worse off for having logged it.