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Writing is Taxing

 

 

Putting your
Spouse to Work

Although the process of writing a novel is a solitary activity, the running of an author’s writing business often falls upon both the writer and his or her spouse.

For federal income tax purposes, the relationship between spouses who operate a business together will fall into one of three categories:

  1. employer-employee,
  2. partnership, or
  3. qualified joint venture.

Employer-Employee.

An author’s spouse is considered to be an employee of the author if the author substantially controls the business in terms of management decisions and the spouse is under the direction and control of the author.

In such cases, the spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding on his or her wages. The spouse is not subject to FUTA (federal unemployment tax).

The upside of treating a spouse as an employee is that the spouse will get credit toward Social Security for his or her wages. The downside is that filing payroll tax reports and remitting the withheld taxes to the IRS takes time and adds another task to the couple’s “to do” list. Depending on the rules of the state in which the couple resides, the spouse’s wages could be subject to state unemployment tax. The couple will also pay more in Social Security taxes if the author’s net profits and the spouse’s wages together exceed the annual per-person wage base limit for the Old-age, Survivors, and Disability Insurance (OASDI) portion of Social Security ($113,700 for 2013).

To illustrate, let’s assume a writing business earned $150,000 in net profits in 2013. If the profits were allocated entirely to the writer, only the first $113,700 of the author’s net earnings would be subject to the 12.4% OASDI portion of social security. The OASDI tax would total $14,098.80 ($113,700 x .124). However, if half of the net profits were allocated to the writer as sole proprietorship income and half were paid to the spouse as wages, each spouse would pay OASDI tax of $9,300 ($75,000 x .124), for total OASDI tax of $18,600. As a final example, let’s assume that the author reports 80% of the net earnings ($120,000) as sole proprietorship income and pays the spouse the remaining 20% ( $30,000) as wages. The total Social Security taxes paid by the couple would be $17,818.80 ($14,098.80 assessed on the author’s first $113,700 of net profits plus $3,720 assessed on the spouse’s wages).

Partnership.

If the spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital (money or property) to the business, then a partnership relationship exists. Note that in providing “equal” services, the services do not have to be identical services, they simply have to be of relatively equal significance. For instance, services could arguably be considered equal if the author provides writing services while the spouse takes care of the majority of time-consuming and critical businessrelated matters, such as technical issues, website updates, promotion, advertising, scheduling, mailings, giveaways, financial record-keeping, proofreading, interacting with cover artists and other contractors, etc.    

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