At WestSky, we help authors navigate more than just publishing, we help with the business side too. Things like taxes, royalties, and ownership can get confusing fast. This guide breaks it all down in plain language so you can feel confident about how your book is set up and how to manage the money that comes in.
Table of Contents
- Understanding Royalties and Taxes
- Setting Aside Taxes for Royalties
- Who Pays Taxes vs Who Owns The Book?
- Print-on-Demand Platforms and Tax Withholding
- Best Practices for Financial Management
- Frequently Asked Questions (FAQ)
- Wrap Up
Disclaimer:
This guide is for general educational purposes and reflects common practices for self-published authors. WestSky Studio LLC is not a law firm or tax practice, and this article is not legal, tax, or financial advice. Every author’s situation is different, so please consult a qualified tax professional or accountant before making decisions about your specific setup.
Understanding Royalties and Taxes
What Are Royalties?
Royalties are the payments you receive when your book sells. Whether it’s through online retailers, speaking events, or bulk orders, those earnings are considered taxable income by the IRS. Most royalty payments don’t come with any taxes withheld, which means it’s your responsibility to report them properly and pay what you owe.
How Royalties Are Reported
How you report royalties depends on your role in the publishing process. If you’re actively involved (writing, promoting, managing the book) your royalties likely get reported on Schedule C (Form 1040) as business income. If you’re a passive owner (for example, you own rights to the book but don’t actively manage it), you might report them on Schedule E. In most cases, authors who are self-publishing or working closely with a publisher will use Schedule C.
Setting Aside Taxes for Royalties
Why You Should Set Money Aside
A lot of authors are surprised come tax season when they realize they owe hundreds or even thousands of dollars… money they’ve already spent. I don’t want that to be you!
How Much to Set Aside
A safe rule of thumb is to set aside 25–30% of all royalties. This covers federal income tax, self-employment tax, and possibly state taxes, depending on where you live.
How to Do It Easily
- Step 1: Open a checking account for all royalty payments in.
- Step 2: Open a separate account just for taxes.
- Step 3: Every time a royalty deposit comes in, immediately transfer 25–30% into that tax savings account. (these can come in monthly or quarterly depending on the set up)
- Step 4: Make quarterly estimated tax payments to the IRS if you expect to owe more than $1,000 in taxes for the year. You can also make your tax payment annually, although it can sometimes cost a small fee to do it that way. (Personally, I paid annually when operating as self-employed).
This rhythm → platform deposits, you set aside, repeat ← keeps your taxes clean and stress-free.
Who Pays Taxes vs Who Owns The Book?
When it comes to taxes, “ownership” is really about one thing:
Which name is receiving the royalty payments?
That’s the entity the IRS considers responsible for reporting and paying taxes on the income.
Copyright ownership matters for creative control and legal rights, but tax liability follows the payee listed on your publishing accounts. Below are the three most common setups for authors.
If You Publish as an Individual
If your KDP, IngramSpark, or Draft2Digital accounts are set up in your personal name, then:
- The royalties are paid to you
- You report the income on your personal tax return
- You pay the taxes on that income
This is the most common arrangement for self-published authors.
Even if you outsourced the self-publishing, the IRS cares only about whose account the money was deposited into.
If a Nonprofit Receives the Royalties
If your book was created to support a nonprofit and the publishing accounts are set up under the nonprofit’s name, then:
- The nonprofit receives the royalties
- The nonprofit reports the income (if applicable, depending on its tax-exempt status)
- You are not taxed on those royalty payments
Important clarification:
A nonprofit does not automatically own your copyright just because it paid for editing, design, or printing. Copyright stays with the author unless it is formally transferred in writing. But for taxes, the deciding factor is simply:
Which entity is listed as the payee on the royalty platforms? If the nonprofit is the payee, the nonprofit handles the income and tax reporting.
If a Business or LLC Receives the Royalties
If you want your writing to operate as a business, you can set up your publishing accounts under an LLC, S-Corp, or other business entity. When you do that:
- The business receives the royalties
- The business reports the income
- The business pays the related taxes
This structure helps if you want clean financial separation, better liability protection, or the ability to take deductions and pay yourself through payroll or distributions.
Changing Ownership or the Payee Later
You can shift royalty ownership later by:
- Assigning rights to a business or nonprofit
- Updating the payee on your publishing accounts
- Drafting a simple copyright or royalty assignment agreement
After the change, future royalties are taxed to the new payee.
Past royalties still belong to and are taxable to the original payee.
Basically…
Copyright determines creative control.
Taxes follow the money.
Whoever receives the royalties is the one responsible for reporting the income and paying the taxes.
Print-on-Demand Platforms and Tax Withholding
What These Platforms Ask
When you sign up for a print-on-demand service they will ask if you want them to withhold taxes before they pay you royalties. This is especially true if you’re outside the U.S., but it can come up for domestic authors too.
If you’re a WestSky Publishing author, we handle all of the set up for you. This includes the optimal royalty and withholding settings.
The Best Answer: Don’t Withhold
For most US-based authors, we recommend you set withholding to $0. Let them pay you the full royalty amount, and handle taxes on your end. Here’s why:
- It keeps all your income centralized
- You’ll have more visibility and control
- You can set aside the right amount for taxes yourself
- It simplifies your bookkeeping
Withholding sounds helpful, but it can actually make tracking more confusing in the long run—especially if you’re earning from multiple platforms.
What to Do Instead
- Funnel all royalties into one dedicated account
- Follow your set-aside plan every time royalties come in
- Make quarterly estimated tax payments on your terms
This gives you a cleaner, more professional approach to handling your book income.
Best Practices for Financial Management
Keep Clean Records
Use a spreadsheet or accounting tool to track every dollar that comes in or goes out for your writing. This includes:
- Royalties
- Advertising spend
- Software subscriptions
- Editor or illustrator payments
- ISBN and registration fees
Good records make tax time a breeze and help you understand how your book is performing financially.
Use Accounting Software
If you want to go beyond spreadsheets, tools like QuickBooks, Wave (free), or FreshBooks are great for authors. They can automatically import transactions, generate reports, and help you prep for taxes.
Talk to a Tax Pro
Especially if you’re earning more than a few hundred dollars per month, it’s worth sitting down with a CPA or tax advisor, ideally one who’s worked with authors or creatives before. They can help you:
- Choose the right reporting method
- Understand deductions
- Avoid penalties
- Create a long-term strategy
Don’t try to figure it all out on your own. A one-time consultation can save you thousands in mistakes.
Frequently Asked Questions
Do I need to form an LLC to publish a book?
No, you don’t need an LLC to publish or earn royalties from a book. Most authors operate as sole proprietors, especially in the beginning. However, if your writing becomes a full-time business (or you want liability protection, a business bank account, or to separate your finances) it might be worth forming an LLC. It’s not required, but it can be a smart move depending on your goals and income.
If I sign a publishing contract, do I still own my book?
It depends on the contract. In many traditional or hybrid publishing deals, the publisher may own certain rights to your book like: print, ebook, or audio rights for a set number of years. Always read the fine print. Just because you wrote it doesn’t mean you automatically retain full control if you’ve signed something.
If you’re a WestSky Studio client, we let our authors retain 100% of the rights and royalties to their work.
Can I deduct writing expenses on my taxes?
Yes. If you’re treating your writing like a business (not just a hobby), many of your related expenses can be deducted. This includes things like:
- Editing and design services
- Software like Scrivener or Microsoft Word
- Marketing and advertising
- Travel for book events
- ISBNs and distribution fees
- Home office space (if used exclusively for your work)
Keep receipts and track everything. It can significantly lower your taxable income.
What about sales tax if I sell books myself?
If you’re selling books directly (at events, book fairs, or even your own website) you may need to collect and remit sales tax depending on your state’s laws. Some states require a seller’s permit for this. Check with your state’s department of revenue to be sure.
Do I need to worry about foreign taxes if I sell internationally?
Possibly. If you’re earning royalties from international platforms (like Amazon in the UK, Canada, or Australia), some countries may withhold a percentage for taxes unless you’ve submitted the proper forms (like a W-8BEN or a W-9, depending on your status). This gets more complex for non-U.S. authors. When in doubt, consult a tax professional who understands cross-border royalties.
What if I funded the book personally but now want my organization to manage taxes on royalties?
You can transfer ownership and change the payee to the organization (for or non-for profit), but it needs to be documented properly, usually through a written agreement or rights assignment. It’s best to do this before the book starts generating royalties or getting distributed. Otherwise, the IRS may still consider the income personal, even if the organization later controls the book. Talk to an CPA or attorney first.
Do I have to pay taxes even if I only made a few hundred dollars from royalties?
Short answer: I would. All income is technically taxable even if it’s a small amount. Even a couple hundred dollars in royalties means you’re a working author in the eyes of the IRS… and it’s not worth the hassle to deal with them. I recommend familiarizing yourself with the most up-to-date IRS self-employment rules first here. It’s a few minutes of learning that can save yourself a major headache down the road.