Your Guide to Book Taxes and Royalties: Stay Out of Jail

It might not seem that serious, but understanding book taxes and royalties is crucial if your goal is to make a long-term career out of publishing books. As an author, there’s nothing more exciting than seeing your hard work pay off through book sales.

But with that income come certain responsibilities—mainly, understanding how royalties and taxes work.

Are you self-employed? Do you need to fill out a certain form for yourself? Can you deduct certain expenses (editing, cover design maybe?).

Whether you’re self-publishing or traditionally published, navigating book taxes and royalties is essential to avoid any financial headaches (or worse, potential legal trouble).

Here’s everything you need to know to keep your finances in check and stay on the right side of the law:

1. Understanding book taxes and royalties
2. Do you have to pay taxes?
3. How to report taxes
4. Quarterly estimate
5. Organizing records
6. International considerations
7. Avoiding trouble

*Note: this will be covering book taxes and royalties in the United States, with certain considerations for international circumstance.

If you want to get a head start on determining your book taxes, use this calculator to project book royalties and the below information for your taxes:

Understanding book taxes and royalties

There are a few things to keep in mind when it comes to reporting book taxes and royalties. Firstly, not all income from your books is considered royalties (though you will have to report on any income). Let’s go over royalties, types, and some calculations.

What are royalties?

Book royalties are the earnings an author receives when their book sells. The amount you receive can vary greatly depending on your publishing platform. For instance, if you’re self-publishing on platforms like Amazon KDP or IngramSpark, you typically receive a percentage of each sale after the platform deducts its fees.

In traditional publishing, royalties are also based on a percentage, often set in your contract, and might include an advance (which is recouped through future royalties). You will still have to pay taxes on an advance, in addition to any other book royalties you get.

Types of royalties

In self-publishing, royalty rates on platforms like Amazon KDP range from 35% to 70% depending on factors like book price and distribution choices. Traditional publishing royalties tend to be lower but are often supplemented with an advance.

Understanding these differences is crucial, as they impact your income. Tracking your royalty income from different sources is equally important; having a detailed record of earnings from each platform will make tax season much smoother. When you get a pay out from Amazon, for example, make sure to record the exact amount you receive in a separate place, like a spreadsheet or financial tracking software.

Tax calculations

In order to calculate your taxes, you’ll have to know what your state income tax is, as well as the federal withholding tax depending on your bracket. It’s a good idea to, each month, automatically set aside income to be paid quarterly (more on estimates below).

But as an example, here’s some math:

If you live in Colorado, your state income tax is 4.4%, and the federal income tax rate is 22% if you make more than about $44,000.

For brevity (because there are nuances based on how much of that income is taxed at that rate or other rates), you can do quick calculations each month that look like this:

Amount received / (22% + 4.4%) = total to save for taxes

With example numbers and putting the percentages in decimal format, that looks like:

$3,000 / .264 = $792

So in this example, if you earn $3,000 per month from your books, you will have to put aside roughly $792 in taxes to be paid. Keep in mind that these numbers are not perfect, and you should consult a book taxes and royalties professional in order to get more specific numbers.

In general, though, these numbers will ensure you’re paying tax minimums throughout the year.

Do you have to pay taxes on book royalties?

Yes, book royalties are considered taxable income by tax authorities such as the IRS in the United States. Whether you’re a sole proprietor, have formed an LLC, or operate under another business entity, you’ll need to pay taxes on your royalty earnings.

The way royalties are taxed can vary based on your business structure, with different income thresholds that may trigger additional taxes as well as deductions. Plus, publishing books full-time versus part time will also change how your taxes get calculated. Keeping up with these requirements ensures you avoid penalties and stay compliant.

How to report book taxes on your royalties

You have to report your taxes a certain way in order to be compliant in the United States.

Income Tax Basics

In the U.S., authors typically report royalty income on Schedule C if they’re sole proprietors, which allows them to account for both income and deductible expenses. Understanding the difference between gross and net income can significantly reduce your tax burden, as you can deduct certain expenses associated with your writing business.

If you publish through Amazon, you will be able to pull up the form 1099-MISC which Amazon submits to the IRS, reporting all of your royalty income. This means that when it comes time to file your taxes, you will be prompted to choose which type of form you have, and you can follow the instructions (if you’re doing the taxes yourself). If you’ve hired an accountant, you will provide them with the 1099-MISC from Amazon.

Common Deductions for Authors

Expenses like writing software, marketing services, editing fees, and even office supplies or a home office space may be deductible. Authors who travel for book signings or promotional events can also deduct travel-related expenses, making it possible to lower taxable income by accounting for business-related costs.

Plus, even office equipment and a portion of your wifi can be deducted, provided you actually use them for your writing business.

Quarterly estimated taxes for authors

The IRS requires individuals who expect to owe over a certain amount in taxes at the end of the year to pay estimated taxes quarterly. Authors considering book taxes and royalties should plan to pay these taxes to avoid underpayment penalties. This is why I suggested to save monthly so there are no surprise payment at the end of three months.

Calculating estimated taxes can be complex, but one option is to estimate your projected income and divide it by four for quarterly payments. The only problem with this tactic is that book sales can be really hard to predict, which is why a monthly savings approach is often the better answer, as it’s based on actual earned income.

For U.S.-based authors, estimated payments are due in April, June, September, and January. Staying on top of these deadlines and ensuring accurate payments can help you avoid surprises come tax season.

Keeping organized financial records

This is best done in a two-part system if you want to keep track of everything related to book taxes and royalties.

1. Tracking income and expenses

It’s vital to track all book-related income and expenses meticulously. Use tools like spreadsheets, accounting software like QuickBooks, or royalty-specific tracking tools. A separate bank account for book-related transactions can make this process even easier and simplify your records come tax time.

This can look like a direct deposit back account solely for book royalties (especially if it’s only a part time gig so far), as well as a savings account that will only be for book taxes and royalties. Running a report at the end of the year for these accounts only will make tracking finances a breeze.

2. Organizing receipts and documents

Maintaining receipts for deductible expenses is crucial for book taxes and royalties. Keep digital or physical copies of receipts for everything from office supplies to marketing services. Organized records make it easier to file accurately and protect you in the case of an audit.

To do this, you’ll have to work a bit harder, as we often get receipts from various places or buy things and don’t remember they could be deductible. Part of this is habit-related; get in the routine of saving receipts for online purchases related to your books to a certain folder in your email. You can also download these receipts directly and save them to a folder on your computer or Google Drive.

In addition, keep track of the total amounts paid for each item and what it was for in a spreadsheet. You can even link the item column to the receipt in your account for easier downloading should an audit arise (which is rare).

Here’s an example of what this could look like, depending on the scope of your book business:

Either way, it’s a good habit to track these expenses anyway, especially for any recurring costs related to your book business (like email list provider, professional email, or design software like Canva, as listed above).

International tax considerations

For authors earning royalties from international book sales, taxes can get a bit more complicated. Income from foreign sales (for example, through Amazon’s international markets) may be subject to international tax laws.

Many countries have tax treaties to prevent double taxation, so understanding these treaties can prevent you from paying taxes twice on the same income. This is where paying for an accountant who’s trained in this is beneficial.

If you’re a non-U.S. author selling in the U.S., you’ll likely need to complete a W8-BEN form to ensure proper tax handling. A Tax Identification Number (TIN) is typically required to complete this form, allowing you to receive U.S.-based income without complications.

How to avoid tax trouble

There’s a great deal of fear mongering around taxes in the United States, especially book taxes and royalties given that it’s such a new phenomenon. The idea that you can go to jail for not paying taxes, while accurate in certain circumstances, is very rare.

More often than not, you’ll be subjected to penalties in the form of fines rather than jail time. But nonetheless, it’s really important to pay your taxes!

The importance of reporting properly

Failing to report royalty income correctly can result in penalties, audits, and other legal consequences that cost both time and money. Not paying estimated taxes, underreporting income, or missing deductions are common mistakes that can trigger problems with tax authorities. Even if you’re not intentionally avoiding paying!

To avoid this, it’s essential to stay organized, follow tax deadlines, and consult reliable resources.

When to seek professional help

It’s highly advisable that if you have a robust author platform to pay a tax professional instead of doing them yourself on places like TurboTax. They will have more information and can save you more money while avoiding an audit. Having many forms of author income can be great for you, but make book taxes and royalties that much harder.

If you’re uncertain about tax obligations, consider consulting a tax advisor with experience in author finances. A professional can help you make sense of deductions, quarterly taxes, and reporting rules, saving you time and possibly reducing your tax burden. Hiring an accountant might seem like an investment, but it’s worth it to stay compliant and avoid potential issues.

There’s no reason to fear book taxes and royalties! You should celebrate earning enough income to need to organize your taxes. Just make sure to do your research and stay ahead of it!