Congratulations, your books are finally beginning to sell well! Now the Tax Man looms. You'll want to get the jump on him now so that he won't haunt, or actually harm, your fledgling business in the future. The longer you ignore him, the more frightening a threat he becomes.
Let's dispatch that threat right now. You'll find it isn't so intimidating if you get acquainted with what he looks like and what he wants, in the area where your business is based.
In the USA, you're already paying IRS and state taxes, you just need to add your publishing revenue and expenses to that mix. And if you sell your books, art, etc. personally in California, not just through Amazon or ArtList, you’ll also need a State Seller’s Permit from the California Board of Equalization. (an intriguing euphemism for “taxation”!) Thankfully, they’ve made that pretty easy to get.
But if you live in a municipality that levies a business tax, you'll need to figure that out too, whether you are an independent author, editor, or small publisher. Even the local tax man can become scary if you don't keep an eye on him from the beginning, levying surprisingly large fines and even threatening you with brief stints in jail. But if you feed him the little bites he is due, he'll remain docile.
Let's take Los Angeles, for example. It is a city of more than four million residents and provides the core infrastructure for a greater metropolitan area of more than eighteen million residents. It relies on business taxes to fund between 6% and 19% of its budget.
The first thing I remember learning is what all the acronyms mean. Like, in Los Angeles a TRC is a “Tax Registration Certificate,” also known as a BTRC, a “Business Tax Registration Certificate.” It helped me to make a little glossary for myself and add that to the beginning of a document that I called “How To Do Wordsmith Taxes.” I strongly recommend you create such a document for yourself, recording everything you do to file your business taxes each quarter or each year, and amending it as you learn more (often from something like a Notice of Non-Compliance, those are always educational). In this way, you can forget about all this stuff while you live your life and do your work, but still have all the very important details at your fingertips the moment you need them.
Los Angeles offers tax exemptions for "creative artists" like authors! But not the editors of books, sadly. According to the City of Los Angeles, editing is merely a service, not a creative act, so I have to pay the city tax. Publishers do too, because they are basically product design, possibly manufacturing, marketing and distribution businesses... only the authors and the artists are the "creatives."
But most cities probably won't encourage "creatives" as strongly as Los Angeles does. They will probably follow the guidelines Los Angeles uses to determine city taxes for various different businesses, for example:
"All individuals or entities conducting business activities within the City of Los Angeles are required to apply for and obtain a Business Tax Registration Certificate with the City of Los Angeles, Office of Finance. You may also have to register with other Federal, State, and Local government agencies depending on the structure and location of your business." [BTRC]
"Most business taxes are based on gross receipts... [for example,] a specified amount per $1,000 of taxable gross receipts for each tax classification. Some business taxes are based on a flat rate per tax period. Others are based on the number of vehicles, machines, devices or equipment used, the number of employees, square footage of the area, seating capacity, or the scale of fees collected." [BTRC]
And, "If your global gross receipts are under $100,000 and you renew on time, you are eligible for the Small Business Exemption." [BTRC] Oho! Wordsmith Writing Coaches actually does not need to pay city taxes—but it must file the city tax renewal form every year, on time, carefully checking the box promising that we did not gross $100,000 or more in the past year. So far, that has not been an issue.
What has been an issue for us, and will be an issue for you, is that if you actually make money, even if you're just a dba, you need to figure out what taxes apply to you.
And pay them.
Because the only truth uglier than tangled taxes is a hostile audit by the tax man...