Death, Taxes, and the Writer
From issue 41 of Marion Zimmer Bradley's FANTASY Magazine. Copyright 1998 by Elisabeth Waters. Revised version copyright 2011 by Elisabeth Waters.
(While I, as a writer, am most familiar with the rules for writers, much of this applies to artists and other self-employed independent contractors as well. Bear in mind that I am neither an accountant nor a lawyer, and if you have questions, by all means consult the appropriate
Someone once said that the worst thing that can happen to a small business is success. In a way, that's true. When you sell your first story - even before you get the dents out of the kitchen ceiling where your head hit it while you were jumping for joy - you have just become a small business. Failure to realize this can have serious adverse consequences, both for yourself and your loved ones (or your heirs, at any rate, regardless of the degree of affection you bear them).
There are two basic ways to treat writing income, and Mrs. Bradley used both. If you sold a story to her magazine, you were paid a one-time fee for the rights. This is non-employee compensation, and is reported in Box 7 of Form 1099-Misc if it's $600 or more in any year (or on Form 1042-S if you don't reside in the US).
If you sell a story to SWORD & SORCERESS or any of the other anthologies, you are paid an initial amount as an advance against royalties. Then, after the book earns out its original advance, or when it sells overseas, or whatever, you get royalties. All of this, including the advance, is considered to be non-employee compensation as long as it is being paid to the original author. Non-Employee Compensation always goes on Schedule C. This has the advantage that you can deduct expenses such as paper, envelopes, postage, books, travel to conventions to promote your work, etc. When the authors die and royalites go to their heirs, the money is considered to be royalty income, and is reported in Box 2 of Form 1099-Misc (or on Form 1042-S) if it's $10 or more in any year.
Non-Employee Compensation has one major disadvantage, however, which often comes as a nasty shock on April 15 (for those of us who don't file our taxes in February to get the job over with). When your net earnings are $400 or more in any year, Self-Employment Tax (Schedule SE) kicks in. Basically, this is both halves of Social Security/Medicare. If you weren't expecting this and didn't set aside money for it; you've got a problem. But, even if you don't have the money, FILE THE RETURN! The penalty for failure to pay is 0.5% per month of the tax due to a maximum of 25%. The penalty for failure to file is 5% per month of the tax due to a maximum of 25%. This is 10 times as much, and it gets bad fast. And that's just penalty; there's interest as well. So file your return. You can negotiate an installment plan with the IRS, using Form 9465 (Installment Agreement Request). I know of one case where a family tried to ignore the whole situation; they almost lost their house to the US government.
If you are making a lot of income from writing and you have a day job, you can have extra tax withheld from your salary. If you don't have a day job, you need to make Quarterly Estimated Tax Payments (Federal Form 1040-ES; check your state and local requirements as well). The form comes with instructions, including instructions on how to avoid penalties, but it does rather assume you can predict what your income is going to be. There's not much you can do besides (a) use your best guess, or (b) use a figure higher than you can imagine earning and get a refund when you file your taxes. There are some "safe harbor" provisions, but if your taxes are that complicated, I'd get an accountant.
So much for taxes; now let's consider death. Whether you've sold to the magazine or an anthology, you still own the copyright to your work, and this copyright and any income it generates are part of your estate. You should have a will specifying where this money should go. We have many cases where we are paying royalties to the heirs of the person who wrote the original story. We also had one ghastly case where the writer had no will, a wife from whom he was legally separated but to whom he was still legally married, several children, only one of whom was his wife's, and not all of whom had reached the age of majority. It's been over 13 years since his death, and we're still sorting out the mess.
If you don't have a will, please make one, and have it include instructions for your executor to get in touch with us. This is like notifying us when you move; if we can't find you, we can't pay you; and if we don't know who is supposed to get your royalties when you're no longer around - well, what do you expect us to do with them? This may seem silly if you're young and healthy, but accidents can happen at any age.
Writing (or drawing, painting, photography, music, or any other creative endeavor) may be an art and a joy, but as soon as you're paid for it, it's a business. You - and your heirs - will be much better off if you realize that.
Marion Zimmer Bradley's home page