Extras: Record Keeping for Writers
KEEP GOOD RECORDS (and how to do that)
Let’s talk Record Keeping. (I can hear the groans from here J)
Actually, record keeping is very, very necessary and not very difficult. If you can write a novel, create characters out of thin air, concoct an intriguing plot – you can keep track of revenues and expenses without a problem. An added benefit is that if you have a handle on your expenses, you can face doing a tax return with only a minimum amount of panic.
Let’s start with manually keeping track of your revenues and expenses and then move into automated methods.
I mentioned in an earlier lecture that’s it’s important to keep a separate checking account and a credit card dedicated to business purposes. This will keep your business transactions separate from your household or personal finances. You’ll know what expenses to include on the Schedule C (or 1120S) and should a question arise about your business receipts and deductions, the isolation of business income may keep the auditor from looking at your personal stuff. So let’s get started.
Before you can pay any bills out of your business checking account, you’ll need to put money into the account. Unfortunately, for a beginning writer, the need to pay bills like dues, contest entry fees, workshop fees, etc. will probably come before the income needed to finance those expenses. That’s the writer’s life. Eventually, you’ll be generating income but at the very beginning you may need to advance some money to your business account. Let’s say you write a check on your household or joint checking account for $200 and put it in your business checking account. That $200 is not income. It’s just moving the money from one pocket to another. We call this kind of a deposit a “capital contribution.” Let me repeat: This is NOT taxable income. So be sure to identify it in your checkbook register as such. If the $200 is not sufficient, then any money you add to the checkbook from your personal funds should also be flagged as a capital contribution.
Now that you have some money in your account, you can start to spend it on expenses. Be sure to note in your checkbook register (or software program) who you are paying, but also what the expenditure is for. We writers have some strange, not-so-obvious, sort of expenditures. For example, I give away peacock feathers with my books. It’s a branding, promotional sort of thing. An expenditure to Wholesale Florists might appear to be a personal sort of expense – which is why I note “peacock feathers” next to it.
I find that my check register is a good place to note my cash expenditures as well. I write “cash” in the column for check number with a note what the expenditure was for.
So now you have a list of checks written, cash payments, and charge card expenditures (that you’ve also notated as to purpose) – now what?
Well, you have to group your expenses. Just as we have to take various scenes and group them into appropriate chapters, so too do you need to group your expenses under appropriate categories. I would group my expenditure for my RWA dues in a category called “Dues and Subscriptions.” My peacock feather expenditures would be grouped under “Promotion – Misc.”
If you download a copy of the Schedule C form from the IRS http://www.irs.gov/pub/irs-pdf/f1040sc.pdf, you can see the sort of groupings you’ll need for your tax return. I’ve included a list of basic categories at the end of this lesson.
Fortunately, most authors these days use a computer for their writing. Thus it’s convenient to use the computer as well to keep track of receipts and expenditures. This can be easily handled on a spreadsheet. Set up columns across the top of your excel or numbers spreadsheet, and list your expenditures down the left hand side. The information for the expenditures should look something like this:
Date Paid to Source Check # Amount Dues Meals Promo
The “source” in my example is for a code to say where the information is coming from –
“ck” – check
“cc” – credit card
“pp” – paypal
“cash” – cash
Then carry that amount to the appropriate grouping (I’ve shown Dues, Meals, Promo but the columns would be as numerous as needed. Each would have it’s own column and each would have a total at the bottom.
Don’t forget to include one very important expense column called “Personal draws”. This is where you record money you took out of the business for your own personal needs. Maybe you bought yourself a special dress for the RITA/Golden Heart ceremony. Sorry – that’s not a deductible expense, but it is a personal one. It goes in “personal draws.” Maybe you bought your husband a Christmas gift using your business credit card because you didn’t want him to see the charge on the household card. That’s okay. That expense is a “personal draw.” Perhaps you’ve decided to pay yourself a certain amount of money every month (gross amount – no deductions), that’s okay. That’s recorded as a “personal draw.” Basically these are expenses that will not appear on your tax return as business expenses. PERSONAL DRAWS ARE NOT YOUR BUSINESS INCOME, NOR DO THEY REDUCE YOUR BUSINESS INCOME. Your taxable profit is not how much you take out of the business. Your taxable profit is the excess of your income (royalties, speaking fees, etc.) over your deductible expenses. It doesn’t matter if you’ve already withdrawn it or not.
Actually, if the thought of creating a spreadsheet is a scary proposition, there are a number of free templates for check register software on the internet. Just make sure your virus software is up-to-date before you download anything “free.” Just saying…
The problems with capturing everything on a spreadsheet include:
- The spreadsheet isn’t the best vehicle for reconciling your bank account because of the mixed types of expenditures. You can maintain a separate spreadsheet for credit cards and another for paypal, etc. But that seems overly cumbersome to me.
- I have seen spreadsheets that don’t add up correctly because the formulas didn’t include all the lines necessary.
- This spreadsheet would be HUGE. A bear to print out and a challenge to read at times.
4) Gathering intelligence from such a report would be difficult. If you wanted to see what exactly you spent for research books and periodicals, you’d have to scroll and scroll and would probably have to make a separate report summarizing those particular payments.
So let’s talk about a different method to track expenditures, using computerized record keeping software. You don’t really need a lot of hoops and whistles. As writers, we don’t have payroll or Inventory Control or the need to generate invoices and record receivables. We really just need to track receipts and expenditures from a variety of sources. If you google small business accounting software, you’ll find a number of programs, some expensive, some free. (Same warning as above when using free software). I haven’t tried these so I can’t make a recommendation.
What I have tried is using Intuit’s Quicken, which is a check register program. I add expense categories to meet my business needs to the ones that come preloaded in the program. Quicken is fairly easy to work with and it does allow for multiple bank accounts (I keep my household account, my business account, plus one other all in same program). It takes a little finagling to get the reports I want from the system, but the capability is there. The program allows for automated credit card download and/or an automated bank interface so your checks can transfer into the program. This doesn’t necessarily eliminate the need to assign various expenditures to categories.
The advantages of this kind of program are:
- Once you purchase an accounting program, even something basic like Quicken, you probably won’t need to upgrade it until your computer crashes and your replacement computer has a such an advanced operating system that the old software just won’t work anymore. (and yes, this has happened to me).
- The program does all the math so you don’t have to worry about formulas.
- There’s generally a bank account reconciliation program incorporated into the software to make this necessary function easier to perform.
- You’ll be able to print out reports to suit your needs.
The disadvantage of this sort of program – While it’s possible to keep track of paypal and cash expenditures on these programs, you really have to know what you’re doing. If you need to know how to do this, give me a yell. I don’t want to bore everyone else with the technicalities.
About Paypal – I love it for a number of reasons. One of which is that they provide great reports that show all of your activity. The information is easy to include in your tax return.
Finally, I’ve noticed a number of infomercials for a scanner that allows you to categorize expenditures while maintaining a photographic image of each paper receipt. I’ve not used this but I have a CPA friend who has. She says this really isn’t a time saver as you still have to categorize everything. Not sure of the cost, I’m just passing the info along.
Speaking of receipts – what do you do with all the invoices and receipts that support the expenditures? Must they be meticulously filed? Well, if you are ever audited and documentation is required to support the deduction, then yes – you’ll need to be able to retrieve those invoices and receipts. However, the odds of being audited in most cases is very, very slim. I save all those receipts and invoices throughout the year, then put them in a big manila envelope with the date marked on the outside. If ever I’m audited, I’ll go through and put those things in order but not till then. To be honest, as long as you have complete computer reports of your receipts and expenditures that can be tied to your bank reconciliations – you should be good to go.
As promised, here’s a list of expense categories you might want to use to get started. You can add other expense categories as needed.
Royalty Income (traditional publishing)
Royalty Income (Independent publishing)
Speaker Fees Earned
Mileage Reimbursement (from speaking engagements)
Books purchased for resale
Contest entry fees
Cover Design Expense
Dues and Subscriptions
Promotion – giveaways
Promotion – reader events
Promotion – Facebook ads
Research books and videos
Seminars and Workshops
Travel and Lodging
This is a small sample. Make sure your categories are sufficient to meet your needs. Maybe you want to keep track of your royalty income by the vendors paying you (ie. Traditional publisher, Amazon, Kobo, Barnes & Noble, etc.), then set up your income accounts accordingly. Same thing with expenses.