Death and taxes, the two guaranteed things in life. Let me start this post by saying that I am not a tax professional, and what I have written below should not be taken as legal or financial council(this is pretty much a disclaimer to cover my ass). For your safety, it is always best to consult a tax professional in regards to matters that involve the IRS.
What I am going to tell you is how I handle taxes every year and how you can figure out how much money you should be saving back.
2013 was not the first year that I filed self-employment taxes, but it was the first year that I had any significant amount to claim(an amount exceeding $10,000). Prior to last year, I always paid my self-employment taxes and income at the end of the year, because the amount I was making was so little that the money I made from a day job usually covered things.
I have been doing my own taxes for the past ten years. I also do the taxes of my close friends and family. I worked as a tax preparer for Jackson Hewitt for three months many moons ago, and thanks to modern technology, doing taxes isn’t as daunting as it once was. Just wanted to give a bit of background so that you guys know that even though I make a lot more money than I ever have before, I still do my own taxes. And for anyone who wants to know what software I use to do my taxes, I’ve been using H&R Block the past few years. I think it costs me about $20 to file my taxes with their software.
At the beginning of 2013, which was shortly after I quit my day job, I realized that for the first time ever, I was going to make a significant amount of money from self-employment. I went to the local H&R Block and consulted a tax professional, because I had no idea how much money to save back and no idea how to make early estimated tax payments. We sat down together, poured over my income and expenses, and came up with my estimated tax withholding. Then she gave me the link to the website where I could make estimated tax payments, which is here: EFTPS online
Below are the rules for making quarterly tax payments, which was taken from the IRS website.
For me, it’s easier to make monthly estimated tax payments. I have a folder on my computer where I save my tax payment receipts and label them with the month and year. This ensures that I have proof that I made the payments, should the IRS ever audit me. Having said that, if you qualify to make quarterly tax payments, know that you are allowed to make them more frequently, as long as you make them at least quarterly.
Another important thing to remember is that the Amazon reporting year runs late, like their payments. You’re paying taxes on what you earned (what Amazon paid you) for that month, not on the sales you made that month. This is important in helping you to correctly calculate your tax bracket. I know it sounds confusing, but don’t worry, Amazon will send you 1099s at the end of the year. Here’s a snippet from Amazon to help you better understand what I’m talking about.
With all that said, you’re probably wondering how to figure out how much you should be paying. You can read an article from the IRS about self-employment taxes here: Self-Employment Tax. There are also tons of calculators online to help you figure out how much you should be paying in self-employment taxes. But remember that you also still have to pay income tax. Income tax and self-employment tax are not the same thing. To estimate how much you’ll have to pay in both, I highly recommend using H&R Block’s Income Tax Calculator. It’s free, and it’s pretty accurate.
And also, since I talked about tax brackets quite a bit, here’s a little chart to help you understand what tax bracket you fall in. It can change from year to year, so it’s good to keep yourself updated. The chart below is courtesy of Bankrate.com
Now let’s talk about deductions. There are a lot of things you can use for deductions, but again, it’s best to consult a tax professional to get a more in depth list. Things you can use: advertising expenses, your internet bill, computer purchases, trips to conventions(hotel rooms, meals, convention costs, mileage or airfare), cover design, editing, domain name for your website, hosting, office supplies related to running your business. If there is a room in your home used specifically to write, you can deduct a portion of your rent or mortgage. I don’t personally take this deduction, because they’re really finicky about it, but if you want to try to take it, you can research it more.
Keeping records of your business expenses is important in case you do get audited. I am admittedly horrible about this. Ideally, you’ll want to save receipts throughout the year. I personally don’t do this(which is bad. Don’t use me as an example). I wait until the end of the year, then I pour through all of my credit card, debit card, bank, and Paypal transactions and separate the business expenses from the personal expenses. Doing things my way leaves you open to forgetting to take certain deductions. I almost always forget to deduct something(usually something big) by doing things this way. Having said that, next year I plan on keeping all of my business expenses on one credit card to keep things better organized. As a general rule of thumb though, you want to document everything and save your receipts, or else your end of the year taxes will be a nightmare like mine are.
If you plan to have someone else do your taxes, you can simply keep a ledger of your expenses, tally everything up at the end of the year(by category. Yes, there are different categories for expenses), and take it in to your tax professional to sort it out together.
As I mentioned earlier, all of the ebook retailers will send you 1099s at the end of the year, so keeping a record of your earned income is really only necessary so that you’ll know how much you should be paying in quarterly.
I think that covered just about everything. If I didn’t mention it, I probably don’t know the answer to it. :-p Having said that, I hope this was more helpful than confusing.
**Disclaimer: All of the links in this post are references. If you want to know more about any particular subject or the source that it was drawn from, please click on the accompanying link**
And for those of you who are super impatient, here is the TLDR version:
1.) Self-employment taxes and income taxes are not the same thing.
2.) You can calculate home much you’ll have to pay in both by going here: H&R Block’s Income Tax Calculator
3.) Pay your taxes either quarterly or monthly to avoid falling behind and underpaying. You can pay them here: EFTPS online
4.) You will pay taxes on the income paid by Amazon(and the other ebook retailers), not the income earned that has not yet been paid.
5.) All ebook retailers will send you a 1099 at the end of the year for easy tax reporting.
6.) Document your business expenses throughout the year to make things easier on yourself(and/or your tax preparer) during tax time.