[Week 6] Tracking your expenses and earnings (start early)


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Week 6: Tracking your expenses and earnings (start early)

One of my biggest business regrets is that I did little or nothing to organize or formalize my business as a writer until the day I desperately needed formality. I was on the verge of buying a home, and as a full-time freelancer, I needed to show financial documentation that I had a stable income. Most of what I needed to supply was fragmented across multiple Excel spreadsheets, paper files, and cloud storage. It was obviously time to make a change.

I was several years into a profitable business by this point, so why hadn’t I done it?

It was a combination of factors: not having knowledge or exposure to business structures, believing that my income would always be too inconsequential to bother with such formality, and not taking myself seriously as a businessperson.

What I can now say, without hesitation, is that even if you’re earning little to nothing from your writing, you can benefit from creating structures and formality around it. Even if you don’t need to assemble documentation for a mortgage, you will appreciate having consistent, reliable records that offer a clear picture of your business. By taking your work seriously, and seeing it as a venture intended to produce a profit, you’re shifting your mindset from “aspirational writer” to “working writer.”

Start-up businesses often go for years without producing a profit. So do writers—you’re a kind of start-up, too. Don’t feel like you’re “lesser than,” or undercut the professional nature of your work, just because the balance sheet isn’t impressive.


Exercise

Taking your writing business seriously starts with a few simple steps. (Note: This is geared for US residents.)

  • Set up a system for tracking your writing income and expenses. As soon as you pay submission fees to a literary journal, you have expenses. As soon as you attend a writing conference, you have expenses. As soon as you’re paid for your writing, sell a book, or win a contest with a cash prize, you have income. Etc. If you don’t currently use accounting software to track your income and expenses, start. Not sure what software to use? Then sign up for a free account at Wave. Wave is a cloud-based accounting system for small business owners. As a writer, that means you. Even if accounting software seems unnecessary right now, it’s never too early to start good habits. If you’re willing to pay a monthly fee, Wave will allow you to connect your bank accounts and credit cards. If you remain on a free plan, you’ll have to manually import such transactions. Take time to add and reconcile your transactions every month; this will make tax time exceptionally easy and low-stress whether you’re filing on your own or with the help of an accountant. As your income increases, you should establish a separate business banking account and/or business credit cards for your writing business. This also makes tax time easier.
  • Consider securing an EIN. If you’re a freelancer often filling out W9s, or receiving writing income via PayPal or Stripe, then it may be time to secure a free EIN or Employer Identification Number from the Internal Revenue Service. You will use this on your W9s instead of your Social Security number. All income and expenses related to that EIN will be part of your usual income tax return; you do not file a tax return separately for your writing business as long as you remain a sole proprietor—which brings us to business formation.
  • Consider establishing an LLC if you’re earning a part-time or full-time living from your writing. Most writers start out by operating as sole proprietorships, where all assets are owned by you, a single individual. Sole proprietorships are a type of pass-through business entity, which means your profits and losses “pass through” onto your individual income tax return. The business itself is not taxed; rather, the income is taxed on the individual level. In the United States, this setup keeps things simple and straightforward at tax time and holds true whether you use your Social Security number or if you have an Employer Identification Number (EIN) from the IRS. Another favored pass-through business entity that offers some advantages is the Limited Liability Company (LLC). As its name indicates, this type of entity provides limited liability protection in addition to pass-through taxation, which means that your personal assets can be protected from business debts and liabilities. Having an LLC also creates a dividing line between your personal and business finances. If you want to expand your business or collaborate with others, having an LLC can be helpful for growth. Having an LLC can also be beneficial if you’re entering into numerous contracts and agreements, whether with publishers or clients, since the business is a distinct legal entity. And an LLC is a useful tool for estate planning because it can be transferred to other people if the need arises. (Your intellectual property may still earn money or need to be managed after you die; who should receive that money or be responsible for it?) There are many variables as to how advantageous an LLC might be for your situation, not least of which is the state where you live. In some states, it might not make any sense to set up this business structure, so it’s imperative to do your research and visit a small business resource center if possible.

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