This may sound like a silly topic, but it’s important to define what’s included in declarable business income on your Schedule C.
First things first. You may notice a question on line F of the Schedule C or be asked by your tax prep software about your chosen accounting method. There are two main choices for business owners, the cash method and the accrual method. As a freelance or self-employed writer, you’ll be using the cash method. Don’t even worry about accrual. When you get your C-Corp up and running then we’ll talk accrual accounting. In the meantime, mark the cash box.
When to Declare
In using the cash method, you’ll declare income when it is actually or constructively received. Actual receipts are easy to identify. Do you have the payment in hand? Good. You’ve actually got the income. Constructive receipts are slightly different. It means that even though you might not have the payment in hand, it is effectively yours and you have the ability to control or utilize the funds. The best example for a writer is if your agent receives your royalty check on December 28th, but they don’t cut a check for your percentage until January 5th. That payment is still constructively yours and you’ll have to declare it as income in the year your agent received it on your behalf.
Now let’s take a look at income types. Box 1 on the Schedule C asks for Gross Receipts or Sales. Generally, gross income means all income from whatever source derived, but it can be broken into three easy categories.
The most common and obvious form of income. Checks, cash, wire transfers, direct deposit, credit card, or PayPal—money is any payment in the form of currency.
If for some wacky reason you receive property in lieu of money, this is also income. Say you agree to speak at an event and the organizers—suffering from a cash crunch—offer you a new ipad as compensation. This is income and you would report it at the property’s fair market value, which is the amount you would have to pay to buy that same ipad at the Apple store. Always document the fair market value for your records.
Cancellation of Debt
If you receive a reduction or elimination of your own debt, this is income. Let’s say you’re hired to speak at a book festival where you also rented exhibitor space to sell your books. Instead of paying you the entire stipend, they pay you $100 and waive the $250 exhibitor fee. Now you’ve effectively received $350 in compensation and will need to report the income accordingly.
Cash and property payments valued at $600 or more during the calendar year should be reported to you (by whoever paid you) on a 1099-MISC form. Make sure to include all your 1099-MISC amounts in your gross income. If you receive a 1099-MISC that isn’t correct or doesn’t match your records, contact the company that sent it right away (read: before they file their taxes) to get it corrected.
Let’s say you visit a book club to talk about your latest novel. You don’t charge a fee for these visits because book clubs are ✨amazing✨ and have the best readers on Earth. They also have food and wine! At the end of the night, they hand you a lovely candle and a thank you card with a $25 Target gift card inside. Is the gift card actually a gift, or is it income? What about the candle?
The line between gifts and income was drawn by the Supreme Court sixty years ago. A gift is given by a detached and disinterested party with no expectation of past or future commensurate service, and most nominal gifts fall into this category. As long as you made it clear to the book club that your visit was free and the gift wasn’t intended to extract a future service from you, it’s probably safe to exclude both the gift card and the candle from your gross income.
Any royalties you earn on your work are obviously income, but it’s easy for you (or even your accountant) to report them incorrectly. Royalties come in two types according to the IRS—passive and active—and all you need to know is that royalties for writers = active income. They have to be reported along with the rest of your writing business on your Schedule C (not the passive “Rents and Royalties” on Schedule E!) What’s the difference, you say? Active royalties (i.e. our royalties) are subject to self-employment tax. If you don’t report/pay correctly, you can look forward to audits and penalties down the road.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting services. Presentation of the material does not create a tax-professional-client relationship. The material is provided on an “as is” basis and is accurate and true to the best of my knowledge, but no representation or warranties of any kind are given about the material, and there may be errors, inaccuracies or omissions.