It's writing post time again, and I have another question via Facebook about managing your writing as a business. I'm going to have to say up front that I am not a lawyer, I'm not an accountant, and I'm not particularly good at being businesslike. But here are some things you will want to keep in mind and learn about for yourself if you have plans to make money doing this. This is all based on the United States, so other countries may have different rules for stuff like taxes.
If you make money from your writing, that's considered a business, and the IRS will want its cut of it. You'll have to file a tax return for your business (a Schedule C, most likely) that lists the money you've made. The nice thing is, you can write off expenses related to your business, so you're only taxed on the profit. This can include stuff like office supplies, equipment, agent commissions, postage, advertising expenses, and business-related travel for things like writing conferences and research. Consult a professional or read the IRS publications for details on what you can and can't deduct. The important thing is that the government considers it a business once you earn any income from it, even if you're not making a profit yet, so you'll need to keep records like you would for a business, tracking the amount of money you make and any expenses you plan to write off. Tax time is so much easier if you do this along the way. Create a spreadsheet and add to it every time you have an expense or get paid. Get a copy of a Schedule C from the IRS web site so you can see the categories and sort your expenses into those categories. I am not a hyper organized person, especially when numbers are involved, but this one little thing of tracking income and expenses as I go has been a life saver. You can start deducting expenses before you have income while you're trying to get your business off the ground, but there are rules about how long you can get away with doing that, so you'll definitely want to research that.
The really nasty thing about writing as a business is self-employment taxes. When you work for someone else, that deduction for Social Security, etc., from your paycheck is only about half of what's paid. Your employer pays the other half. When you're self-employed, you pay the whole thing. Your taxes are a lot higher when you're working for yourself.
Then there's the fun of estimated quarterly taxes. When you have a job with a regular paycheck, part of it is withheld and sent to the IRS every month, so by the time you file your tax return, all your taxes have probably been paid for the year, and you may even get a refund. When you're working for yourself, you make a payment four times a year of a quarter of what you estimate that year's taxes will be. Since you don't know what your income will be, you have to guess based on last year's income. This means that when you get an advance or a royalty check, you need to put money aside for your taxes. If you still have a day job or file jointly with someone who has a day job, you can avoid this by increasing your withholding at work to cover your extra income. I used to do this before I went full-time freelance.
As with any business, you have to spend some money to make money, but you need to be prudent in doing so. For instance, it's easy to go crazy with promotion because you need to get your name out there and it's good for your ego to see all kinds of shiny stuff with your name on it. But rather than throw money around on stuff that seems cool, you need to come up with some kind of marketing plan and think about it. Consider how many additional copies of your book you'd need to sell to make up for the cost of the promotion. Is that likely to happen? If a promotional item for a book costs more than the royalty you'd earn on selling a copy of the book, how likely is it that the promo would really pay off? It might if that particular promotion is focused on people that might have a multiplier effect -- someone who can sell lots of copies for you, like a bookseller or popular blogger. There's also brand promotion -- your name as a writer in general -- vs. product promotion -- a particular book. I could probably write dozens of posts on promo (my day job was in marketing communications), but for now, let's leave it at the fact that you need to think about what you're doing and have a plan. That applies to other business expenses, as well. How necessary is that item or trip to your business, and how does it affect your bottom line? If writing is a side job, then go ahead and spend your writing income on writing-related activities like going to conferences. If it's the way you make your living, you'll need to earn enough profit to live on.
Another aspect of treating your writing like a business is the time you devote to it. This will vary depending on where you are in your career and what your primary sources of income are. There's nothing wrong with treating writing as a hobby that more or less pays for itself, where you write when you're inspired and don't when you aren't and it isn't a focus of your life. You probably won't build a career that way, but if that isn't your goal, that's okay. Once you have contracts and deadlines, you'll need a lot more discipline and will need to treat writing like a job. Your "boss" may let you take off in the middle of the day to go to a movie, but will that allow you to meet the "company" goals and be successful? It helps to come up with some kind of schedule or plan for your production -- a goal for amount of time spent writing or number of pages or words produced.
Continuing education is important for any career. You probably need more training in the early years and may shift the kinds of things you need to learn as you go. When you first start, your focus may be on how to write, then it may shift to learning about the business of selling your work, and then it may shift to marketing and career development. Just don't confuse learning with actual work. Going to writing organization meetings and chatting on message boards for writers isn't the same thing as writing, and it's an easy way to trick yourself into thinking you're devoting more time to your work than you really are.
Depending on your circumstances and personality, making yourself think like a business owner or entrepreneur may be more or less necessary. Creative types often find this way of thinking to be foreign, but it's important if you really want to make a career out of it.