Organizing Your Writing Business for Tax Season
Legal Organization for Writers
There are several forms of legal organization to choose from when establishing your business. The most common form for a writer is a sole proprietorship, but there are other options. You should understand the choices and speak to a lawyer, accountant, or tax preparer to find out which option is the best for you.
This decision will influence the taxes you pay, the extent of your liability, and the way business transactions are reported to the Internal Revenue Service (IRS).
Sole Proprietorship
The easiest business to set up is the Sole Proprietorship. This is the simplest form of business organization and is the default classification for a business owned by one person. The IRS does not require fees or special forms to set this up. You can conduct business under your name or create a business name. As a sole proprietor, you are the business and all personal as well as business assets are at risk. Despite how easy it is to be a sole proprietor, this unlimited liability is worth careful consideration.
S-Corporation
Establishing your writing business as an S-Corporation will provide you with limited liability that will create a clear line between you and your business. There are forms to be filed and fees to be paid in most states in order to obtain this status. Your business will need a name which must be registered with your Secretary of State before doing business.
Since the business owner is considered to be separate from the business itself, some additional tax forms will need to be filed to report your earnings. An S-Corporation will file Federal Form 1120S annually from which a Schedule K-1 is generated. It is important to note that the S-Corporation itself does not pay income taxes therefore double taxation is not an issue.
The information on the K-1 will become incorporated into your personal 1040 tax return and the 1120S gets mailed separately. Undistributed profits under this organization are subject to applicable federal and state taxes, but are exempt from self-employment tax which is a benefit. When you opt to incorporate your business into an S-Corporation, you are no longer subject to self-employment taxes because you are no longer self-employed. As an S-Corporation, your business is a corporate entity entirely separate from you. You would issue yourself a paycheck as an employee of the corporation. The funds left over as net profit would be distributed to you and subject to fewer taxes than if you were self-employed.
Partnership
If more than one person owns the business, it cannot be a sole proprietorship and a partnership may be worth considering. Similar to sole proprietorships, partnerships are easy to organize and maintain. A written agreement should be created between all partners called the Articles of Partnership that outlines the commencement date of the partnership, salaries, division of duties, and procedures for settling disputes.
A partnership files a Form 1065 with the IRS every year and K-1 forms are issued to the partners. As with the S-Corporation, the partnership does not pay any income tax. Partnership and S-Corporations are called pass through entities. They do file tax returns, but no money is due for income taxes to the IRS from filing these returns.
If you choose to establish your business as a partnership or S-Corporation, a separate identification number will be needed for IRS use. Form SS-4 is an Application for an Employer Identification Number and it can be ordered through the IRS Web site. In addition, each state has its own requirements surrounding business legal status. Be sure to check in with local, city, and state departments to determine what forms must be filed based on your entity choice.
© Brigitte A. Thompson, Datamaster Accounting Services, LLC
The information provided is intended to be general and based on the Federal Tax laws of the United States. As such, it is subject to change. This information is not intended to be used as a substitute for financial or legal advice. Be sure to consult your tax advisor on all tax matters.
