What kind of business are you?
My tax guy said I should create a business identity that the money will go to (if I ever sell a book) rather than just my name. I don’t know whether that means I have to sign the agent contract with my “business” name or not.
Generally speaking, when it comes to tax advice, I advise listening to experts, especially since they presumably know your tax situation in far more detail than I ever would. However, there are considerations besides taxes in this sort of case, and not all tax guys are familiar with the ins and outs of this particular business. There are, for instance, copyright implications under U.S. law if you register your copyrights in the name of a corporation or pen name (or transfer them to a corporation after your career is established).
I’m also not sure I know what he means by a “business identity.” Does that mean a separate bank account, a subchapter-S corporation, an LLC, a full-fledged corporation, or something else? Or does he just mean “decide on a pen name”? And exactly why does he think you need it? (Tax guys are not immune to the notion that all writers make big $$; he may well change his tune if you tell him that first-novel advance payments are still averaging only around $4,ooo-6,000, spread over three to five years.) Does he think you’re going to need a separate tax I.D.? Why?
For example, take the simplest possibility, a separate bank account for writing funds. Why would you need to segregate those funds? There may be personal reasons, like, oh, a pending divorce, but the most usual reason has to do with record-keeping. I have a couple of friends who simply cannot keep track of their writing income and expenses except by having a dedicated writing account into which all writing income goes, and from which all writing expenses (including estimated tax payments) come. They basically depend on the bank to keep their tax records for them.
Myself, I’ve never done it that way. I have a separate account for taxes, but all that goes into it is the money I think I’m going to want for estimated tax payments, and all that comes out are those payments. Juggling two different checking accounts that I’m using on a daily or weekly basis to buy groceries and notepads and computer software and yarn and cat food and research materials is just not something that works for me. When I make any given book purchase, half of them may be research and the other half reading for fun or my hobbies; I am not about to place two orders just so I can pay for each half from the right account. I also know myself well enough to know that if I am in a hurry and the only checkbook I can find is the “business” one, I will use it to pay the pizza delivery guy anyway, which kind of destroys the reasoning behind keeping separate checkbooks. Then again, I don’t have a knee-jerk negative reaction to the very concept of keeping tax records during the year. (I do get behind, but that’s a different problem.)
The really important thing is keeping good tax records, so that if the IRS decides to look at your returns, you can show that you have a business and not just a hobby. You don’t have to keep the actual money separate, as long as you have good records. If you can’t do it on your own, maybe a separate bank account is a good idea, provided you can be strict about using it just for writing expenses and nothing else.
The question of setting up a sub-S corporation (or a full-fledged corporation) is a whole ‘nother matter. Very few of the writers I have known have done this, and all of them have been at a level where their annual writing income is in the mid-six-figures. Most of them also did it back when corporate tax rates were a lot less than individual tax rates, which has not been the case for quite a few years. Absent some serious and obscure legal reasons, setting up a corporation is overkill for the rest of us, especially since it costs in money to keep it registered and in time to keep the required records and file the required paperwork. I haven’t heard of an accountant recommending it to a writer for at least six or seven years now (though of course, that doesn’t mean it hasn’t happened. Also, different rules apply outside the U.S.)
My writing business is a sole proprietorship, meaning that there is no particular “business identity” separate from mine. OK, my friends call me Pat and the name on the books is “Patricia C. Wrede,” but I consider it all still me. The checks go into my personal checking account and show up on my personal income taxes (Schedule C). My accountant charges a small amount more for doing my taxes because she has more forms to fill out, but it’s nothing compared to the pages and filings I’d have to do for a partnership, sub-S, LLC, or full-fledged corporation. I don’t need a separate tax I.D. I use Quicken to sort my expenses into writing-related and everything-else. I do not even have a separate credit card “for writing,” as it would have the same problem as a checking account (having to split purchases, and the temptation to use it for non-writing stuff).
The vast majority of writing businesses I know of are sole proprietorships.
The various alternatives to sole proprietorships are worth looking into, but there should not ever be an automatic assumption that if you are starting a writing business, you have to set up a sub-S or LLC or whatever. They are emphatically not right or useful for everyone. Also, it is a lot easier to change your mind and set up a subchapter-S corp later on if you decide it will be useful, than it is to wind one up and get out of it if you decide it’s too much of a pain to bother with.
As for signing up with an agent…that depends on what kind of business you are running. If you are a sole proprietorship, you sign the contracts and get the income under your Social Security number (that’s both the contract with the agent and the ones with a publisher). If you’ve assigned your copyrights to your corporation, which has a separate tax I.D., then I believe you have to sign the contracts in your capacity as representative of the corporation and use that tax I.D. If you’re writing under a pen name, you still sign the contract as yourself, with your own tax I.D., but the contract specifies the name that goes on the book and whether or not the copyright will get registered in your real name or as your pen name.
