It's not something immediately urgent to me since I didn't receive my first payment till the end of January 2009, but does anyone have any suggestions for how to report book sales on books you self-publish? I am not a big publisher and have no other employees - my own books are the only book sales.
Are the book sales considered income?
Is there any benefit/purpose in creating a LLC (or other tax loop)? Does this cost money? I really know very little about this.
For those of you who got payments in 2008, what is type of tax form did Amazon send you?
i believe amazon will send you a 1099-misc (not sure, but i think that's it).
yes, you need to declare royalties as income.
as for declaring yourself a business, that depends. if you spend any significant amount of money (over a couple hundred dollars) on your writing, you should consider it. setting up a individual proprietorship costs almost nothing, depending on your state: you usually need a name registration from your state, and an IRS employer ID (you may not even need that). LLC is the next step up, and is a bit more expensive.
regardless, if you operate as a business, you can deduct your business expenses against your personal income taxes (unless you incorporate beyond an LLC). depending on what you do, that could be significant: everything from your web hosting fees, business cards and other promotional materials, even trips (or portions of trips) that you use for business purposes, the computer you do your writing/business on, etc.
the one thing i would caution against is that you really need to approach it as a business if you go this route: many folks try to take advantage of the tax angle, but are really operating in "hobby" mode and cook their books so they can get as much tax money back as they can, regardless of what they make in profits.
i would recommend that you do more research, but it's definitely something you should consider.
Thanks, yeah I plan to do more research, but I'd read different things about royalties. For instance, I'll be working out of the US for most of 2009 and my work income won't qualify for an IRA contribution, but I'd like to contribute as much as possible so I'm wondering if I can use the maximum profits from my Kindle sales to make some kind of IRA contribution.
What you want to do is establish your e-book royalties as a business. You do that by filing a Schedule C, and the easiest way to do that is to get TurboTax Basic for about $25 and do your taxes that way. I've been filing Sch C's for about half a century so it seems dead easy to me, but no doubt it's intimidating the first time around. You can download or get a paper copy of one of the IRS publications to help you through it. (But really, TurboTax is so much better that if you possibly can, just go ahead and plunge in.)
The important thing is to show a profit your first few years. What you want to avoid is having the IRS declare that your business is actually a hobby, in which case you must declare the income but you don't get to deduct any expenses (except beyond 2 percent of your adjusted gross income).
Let's say you have $800 in royalties. I think it's safe to find expenses up to about half your income, so say you've got $400 in expenses. That unfortunately leaves you will $400 in profit, which means you have to pay Social Security and Medicare tax, so what's ideal if you're in that range is to push it down to $399 to avoid that.
Okay, you now have a profit of $399 which goes on the front page of your form 1040 or 1040A. But yes, you can contribute that $399 to a Roth IRA (which is not deductible from your taxes) or a regular IRA (which is deductible). That's a matter of choice. You can bet that taxes are going up in the next several years to pay for the various bailout and stimulus bills and also to pay for the Democratic wishlist of new and expanded programs. So I think the wisest course is to pay today's comparatively low taxes and put the money in a Roth where it won't be taxed when you take it out in future years. But you may think that you'll be in a lower tax bracket then, and it's better to have the deduction now.
You can of course try TurboTax for free on the internet. I think but am not certain that that includes Schedule C.
There are more elaborate ways to declare business income, starting with a S Corp (corporate tax return filed as part of your personal income taxes) and ending with a C Corp (you actually incorporate in your home state and file a separate corporate tax return under a whole different set of rules).
Thanks - Yeah, I've actually been using the free version of Turbotax but may need to use a paid version if my 2009 income is too complicated (foreign income, royalties, charitable contributions, IRA contributions etc). And if anyone can recommend any tax books I'll definitely take a look (please don't link to your Kindle book though
also, when you're starting out in a business, you're actually allowed to operate at a loss for three out of five years (dan, do you remember?), or something of that nature. i can't remember off the top of my head and am too tired to check the IRS site!
but that is an expectation the IRS has that startups will actually not turn a profit right away because of capitalization expenditures and so on.
again, though, this doesn't give a person carte blanche to go crazy: you should only write off things that are true business expenses or you can get nailed.