If you write books for a living, there are certain rules you must follow to avoid getting into trouble with the Internal Revenue Service.
Before you make your eBook available for purchase, make sure you have an EIN or ITIN. An EIN is required for most businesses, while an ITIN is needed for individuals.
An ITIN isn’t necessary for small businesses, but it’s still recommended, especially if you want to open a business account.
The Internal Revenue Service uses the EIN to identify your business on federal income tax returns. You can use an online application form to request one.
If you don’t live in America, you’ll need either a temporary tax number (TIN), employer identification number (EIN), individual taxpayer identification number (ITIN) from the IRS, or a foreign tax credit card.
Here are some things to bear in mind if you want to join Amazon KDP (see also ‘How To See How Many Books Sold On Amazon KDP?‘).
Your Income Is Not Exempt From Taxes
The IRS considers your writing to be a business if you treat it like one. For example, if you actively seek out publishing opportunities, you are treating your writing like a business.
Usually, Amazon won’t withhold anything from your earnings if you have a valid tax ID or Social Security Number. But you still have to pay taxes on your earnings.
Each year Amazon will issue form 1099-MISC to US citizens before 31st January. If you are a non-US publisher you will be issued with form 1042-S. You can download the forms from your KDP account.
You can deduct expenses related to producing your book. These include costs such as travel, meals, lodging, printing, distribution, editing, cover design, etc. However, you cannot deduct personal items like clothing, entertainment, gifts, and subscriptions.
Keep Track Of Royalties
Royalties are payments you receive for selling copies of your book. They come in three forms: hardcover, paperback, and eBooks.
Each tax form requires you to keep track of how much you received and where it came from as they will be taxable at the end of the financial year.
The IRS has set deadlines for filing returns. For example, if you’re self-employed, you generally have until April 15th to file. The earlier you file, the better. This way you will avoid missing the deadline and incurring a charge.
Use An Accountant
If you don’t want to keep track of your profits and losses yourself, you can hire a professional accountant to do it for you.
As we’ve already mentioned you can deduct certain costs related to running your business. These include advertising, rent, supplies, travel, meals, and equipment. However, there are some limits to how much you can write off.
For instance, you cannot deduct personal living expenses such as mortgage payments, property taxes, utilities, insurance, and child care.
Also, you cannot deduct interest paid on loans used to buy inventory or purchase capital assets like buildings. If you are unsure how it all works, an accountant is a wise investment.
If You Have A Loss
If you discover after filling your tax forms for your KDP that you produced more books than they sold, you probably have a business loss. This is true even if you didn’t sell anything during the tax year.
You can deduct this loss against other sources of income, such as wages, dividends, interest, rents, royalties, capital gains, and pensions. However, you cannot deduct losses from hobbies or personal use items.
What About Kindle Singles?
If you’re publishing a book on Amazon’s Kindle platform, it’s important to understand how those books are taxed.
In fact, there are some differences between Kindle Singles and regular Kindle books.
For example, if you choose to go the traditional route, you’ll pay sales tax on the entire price of each book sold.
But if you opt for Kindle Singles, you won’t owe any state or local sales tax because the books are considered “digital publications.”
But what about the federal income taxes implications in these circumstances? Well, if you’re a freelance writer, publisher or consultant you might want to consider opting into Amazon’s Kindle Unlimited program.
Under that program, you can write short stories, novels, or articles for free and make money off of them without having to worry about paying royalties.
However, you still have to pay taxes on the earnings you receive from Kindle Unlimited.
As we’ve seen, Amazon’s Kindle Direct Publishing program gives authors the chance to sell ebooks directly to readers via the online retail giant’s storefront.
However, it’s not just about making money; it’s about maximizing profits. In fact, according to Amazon, the average author earns $0.0016 per book sold.
This figure doesn’t include taxes, royalties, shipping fees, marketing expenses, or even the cost of creating the ebook itself.
There are many factors that go into determining whether an author makes a profit or loses money, including the size of the royalty payout, the type of product being offered, and the amount of competition within the market.
The good news is that most of the costs associated with publishing a book on Amazon KDP are pretty standard across all publishers.
However, there are certain things that vary depending on the type of publisher you are.
For example, some companies charge per book sold, while others charge based on the number of books published. Still others charge a flat fee regardless of sales volume.
Here’s a breakdown of the most common costs involved in publishing a Kindle book on Amazon KDP that would be tax deductible at the end of the year.
Editing & Proofreading
This is one of the biggest expenses involved in publishing a book. Most authors spend anywhere from $1,500-$3,000 on editing and proofing.
If you don’t want to pay a company you can either edit yourself or find freelance editors online for around $25/hour.
Designing a book cover is another big expense. Depending on the size of your book, you could spend anywhere from $300-$2,000 on designing a cover.
Printing a book is another major expense. While you can print your own book, most people opt to use a printing service like IngramSpark or Lulu. These services typically charge somewhere between $5-$10 per book.
Shipping a physical copy of your book to customers is another big expense. Many people assume that shipping is free, but it isn’t. Most services charge between $4-$8 per book.
Marketing is also a big expense. It includes everything from advertising to social media posts to sending out press releases. The more you advertise, the more likely you are to make a sale.
Amazon has its own set of rules regarding taxes and royalties so it’s wise to research as much as possible to ensure you are on the right track with royalties and taxes.
Filing taxes is a necessary part of being a self publishing author and as such, it’s important to understand how taxes work before you begin selling your books so you know exactly where you stand.
Remember, you don’t have to do all the work yourself. Enlisting the help of an accountant is a great way to take the pressure off and ensure that your end of year taxes are accurate and dealt with in a professional way.