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Nuts and Bolts of Indie Cash Flow

Or, a few things to do well before you try to go full time to build an indie business, that’ll keep you from going nuts and bolting.

1.) Set 50% of your earnings aside for taxes, in a separate account.

No, really. 50 percent. Yes, half of your gross earnings. Because you’re going to be a small business sooner or later, and are about to find out quite unpleasantly that the government takes a whole lot of your paycheck that you never even knew about when working for other folks. Because as your own business, you’re going to be paying both the business portion and the employee portion.

Incidentally, this leads to the handy rule of thumb, that an employee costs twice as much as their wages. So the folks who want $15/hr to flip burgers are, in essence, arguing that they’re worth $30/hr to their employers at a minimum. That’s why you’re seeing many low-margin businesses close, relocate, or go to robotic alternatives.

On top of federal tax, many US states slap an extra income tax on top. (This is why you see so many corporations who are incorporated in Delaware: the cost of incorporation and the taxes on Delaware business are very low, compared to many other states. But learn a lot more about the pros and cons of incorporation before you start shopping for states.)

1.a) If you don’t already have an accountant, now is the time to get one who does taxes for small businesses, freelancers, and if possible, writers. The purpose of an accountant isn’t just for filing your taxes, it’s also to help you structure your business, expenses, and deductibles in order to keep the most money and enjoy the least hassle with the IRS.

1.b.) When you are a business, the IRS demands quarterly payments instead of yearly. So that 50% of your royalties isn’t going to be sitting there as a reserve you can draw against until April – it’s going to be going out in big chunks every 3 months. And, for better or worse, you’re not paying against what you made that quarter – you’re paying against what you expect to make for the entire year, based on prior years. (Talk to your accountant for ways to mitigate this.) So your best bet is to have this in a separate account from your household (it’s better to have a separate business account anyway, for many reasons), and not count it when you’re looking at your assets and financial reserves.

2.) Figure out what you actually spend in a month, with a 3-month average.

Keep track of everything you spend. Not just the fixed expenses like rent / mortgage, or the must-pay variables like the water bill, but the entire amount of money that goes out the door in a month, from the cup of coffee you picked up while filling up your car to the 99 cent deals on Amazon, to the car repair and the vet bill after someone ate your hat decoration… again.

Why 3 months instead of 1? Because crisis happens, and three months is usually long enough for the aforementioned car repair or vet run to show up. Also, if you haven’t tracked your expenses before, seeing the totals racking up may be enough to alter your behavior for a short while, and reduce spending – but unless you stick to it with consciously for long enough that it becomes habit, you’ll revert to about the same levels as normal.

Also, this will help you start charting which of your expenses are deductible as a business.

2.a) Break out the minimum you need for surviving on a month. The “If I suddenly lost my job and had no income, how much do we need to make it through the month” figure is an important one.

3.) Figure out what health insurance will cost (for US-based authors)

If you think health insurance through an employer is bad, you MUST take some time to shop for it as a self-employed person. The true numbers, especially with the rising premiums, will both make you wince and make you revise the “when I can quit my day job” numbers.

4.) Pay off your credit cards.

Not only is this generally a wise thing to do, but when you go full time as a freelancer or small business, you’re going to need that cushion. This will also save the amount you spend in interest every month, which will let you…

5.) Save 6 months of average expenses + freelance health insurance costs in the bank. (Do not include the 50% of royalty income that’s being reserved for taxes in that total.)

The biggest problem many freelancers have is that money no longer comes in steady, measured doses, paycheck by paycheck. Money will now flow intermittently, in fits and spurts, and even if you see the sales, you won’t get the cash in hand until 2 months to 18 months later (varies from vendor to vendor as indie, as well as from publisher to publisher for trad.) So even if you’ve just released a book and it’s #52 in the kindle store, that won’t help pay this month’s rent or the emergency room bill.

Some indie authors actually form a corporation that pays them a steady paycheck, while the corporation accumulates capital; the rest of the freelance & indie world deals by having a large reserve in the bank, and drawing steadily down as the royalties and commissions pay unsteadily in. While it’d be much better to have a year’s reserve in the bank, very few people have quite that much patience.

6.) Figure out when it’s time to start looking for a job.

That figure you came up with in 2.a)? Take it, and figure out how long you think, pessimistically speaking in this economy in your area, it’s going to take you to find another job. Now, take that times the scraping-by income, and work out the bank account balance (not including the money set aside for taxes) that’s the Danger Will Robinson signal.

Many small businesses fail in their first year, for many reasons. You’re free of many of the worries of brick and mortar stores – but not all of them, and you also lack the advantages they have. You know what happens if you aren’t making enough to survive on? You keep writing, get a job, build your reserves back up, and try again. Not the end of the world, nor even the end of your world. But you need to have that line drawn in the sand before you get there, so you know when it’s time.

I have included no numbers here, because the circumstances vary wildly from author to author. Making it on your own as a family of four in Silicon Valley is going to be much, much more difficult than making it on your own as a young, healthy bachelor in rural Utah. If you’ve promised the family a vacation every summer, or you have an ailing English Mastiff whose medical bills are putting the vet’s kid through college, your own circumstances are different and your own financial requirements will be, too.

  1. Thank you very much. This kind of nuts and bolts post is precisely what people like me need and value so much about this site. Plus the occasional fisking of course.

    September 9, 2016
  2. Uncle Lar #

    As I study on the business of publishing from trad to small to indie, I cannot help but form the opinion that the trads are all crooks, so read that contract carefully, the small press are at best incompetent at worst also crooks, and indie is a crap shoot. I work with and for several writers and some of the stories of malfeasance are truly amazing. One author of my acquaintance released a book in late October just in time for the Christmas buying season. It consistently ranked in the 50s in its subgenre on Amazon. His check for all of 2015 was $200 and he has yet to see a penny for any sales in 2016 though we’re well past the mid year mark.
    Another author under contract with a publisher sent a finished manuscript in and heard nothing for almost a year. Turns out it was passed to a subeditor who sat on it because he considered it competition for a book he was about to release.
    And what I get when I ask why not go indie is always but indie is hard. Which is true. And you’re essentially at the mercy of Amazon. But seems to me that it still beats heck out of the horror stories I keep hearing from trad and small press.

    September 9, 2016
  3. slab1 #

    Wish I’d read this before leaving Big Corp to start my law practice. It would have saved me from a lot of panic and grief.

    September 9, 2016
  4. Concur with all, and another planning item is setting up the business/accountants/etc. That can run $3-4 thousand up front! Bright spot is it’s tax deductible… And KEEP RECEIPTS! Especially those you can tie to business- I write who I met with on the back of the receipt as a cue.

    September 9, 2016
  5. For health insurance, start looking early and be aware that this year is rather fraught. I just had my third carrier in as many years announce that it is leaving the individual insurance market. I’m currently looking at mutual assurance groups that the IRS allows to count as “health insurance.”

    September 9, 2016
    • What she said, in spades. If you’re over 50 and not completely poor, you will pay hideously for health insurance. US insurance firms are allowed to charge older people THREE TIMES what they charge younger people. Not 30% more. 300% more. It’s sad to consider, but having watched certain of our age cohort struggle as independent contractors, I’d advise not quitting your job if you’re over 50. You’re unlikely to ever get another, and that is due entirely to age underwriting, which applies to employer plans as much as individual plans.

      Worse, you will probably lose any plan within a year (we did, three times in a row) when the issuer cancels the product line and/or withdraws from writing individual plans in your market. And each time you buy a new policy, you will pay more for less.

      Cripes, I never thought I’d look forward to going on Medicare.

      September 9, 2016
      • Yeah. I’m coming up on 63 and hoping I can scrape by with a $6K deductible policy for another two years.

        September 9, 2016
      • RCPete #

        I just turned 64 yesterday, and next year will be interesting. (Probably in the Chinese sense…) I’ve been uninsured since the dot-com bust, but I’ve found a few things: 1) most medical outfits (doctors, clinics and even the local hospital) offer a nice discount for cash. and 2) there’s a bunch of people in my county who don’t bother with insurance. The stories I’ve read on Obomadon’tcare have focused on the younger people, but we’re not a young area.

        I’ve checked, and the costs for a Bronze plan far exceed the threshold to skip the penalty/tax for me.

        September 9, 2016
        • sabrinachase #

          Does this cash-friendliness extend once you cross the magic date line? There must be some way rich people avoid the horrors of Medicare, and I would like to do the same.

          September 9, 2016
          • It depends on the doctor. If the doc takes Medicare, he’s not supposed to take cash from Medicare patients, at least not docs in TX. If the doc doesn’t take Medicare, he might. I have to fib a little (or did, before Dear Jane Letter #3) to one doc about not having Brand X insurance. otherwise they MUST let Brand X know that they saw you and file a claim, even if you are paying cash, otherwise Brand X would penalize them.

            After I take someone else’s blood pressure meds, ask me what I think about Obamacare.

            September 9, 2016
            • Should have added – what the Insurance Co did to the doc is what Medicare does to docs, “to prevent two-tier coverage and fraud.”

              September 9, 2016
          • RCPete #

            Not sure for others, but the hospital (who run the clinic I use) said they’d have to go with Medicare. Best to ask.

            September 9, 2016
  6. Taking furious notes here.

    September 9, 2016
  7. sabrinachase #

    You can also plan for going freelance like the D-day invasion–lots of prep ahead of time, which is my plan. While the day job keeps me alive, I don’t *have* to make a profit with the writing. So if there are writing-related expenses I take them NOW, so I can cut back on my business taxes (which, reminder, also include self-employment tax, yippee). I am taking classes, getting capital equipment like the handy wand scanner to save receipts with, getting good cover art, etc. The goal being to have a really solid foundation to build from when I leave the day job, both in terms of finances and in backlist. I should have my house paid off in a few years too, so my total mandatory monthly expenses will be massively decreased.

    September 9, 2016
    • Hate to tell you, this, but between property taxes and insurance, you’ll need to plan on saving about half your current payment for those two big bills. It does, however, remove the need to have the money to pay the mortgage on the first of every single month, no matter what else happens.

      September 9, 2016
      • sabrinachase #

        Yeah, my insurance+tax is not half my monthly payment now. Believe me, I did note that down when making my calculations :D. Also, I have been making extra payments on the principal (to pay it off faster) so my total bill is higher than the minimum mortgage payment.

        September 9, 2016
  8. c4c

    September 9, 2016
  9. “Hate to tell you, this, but between property taxes and insurance, you’ll need to plan on saving about half your current payment for those two big bills.”

    Presumably he is paying those now, too, Though your tax number seems high…or your mortgage number seems low.

    September 9, 2016
    • Most mortgage companies include taxes and insurance in the monthly premium. They hold it in escrow and pay it when due. Once you’ve paid off the mortgage, you have to remember that you pay those directly and put money aside for that.

      Texas has no income tax. They pay for a lot of things through property taxes, so I wouldn’t be surprised if they were higher than other states’. And we had a small mortgage principle for the value of the house, so, yes to both your objections. Ours worked out to “Still paying half as much, but we have control over exactly when we put money aside.”

      September 9, 2016
  10. fynbospress #

    I left out a major point of “get your monthly bills as small as feasible”, because financial stability is a whole ‘nother post of its own, and can quickly wander way off into the weeds away from publishing.

    That, and I hoped between diligently tracking expenses, paying off credit cards, and saving six month’s reserve, most folks will be interested enough to research and implement what’s best for them.

    September 9, 2016
    • Albert #

      Yeah, the one good thing about my financial situation is that it’s taught me how to keep my living expenses as low as possible. (Well, aside from paying for internet – but that’s both a research tool and a source of free entertainment.)

      Now I just need to keep my writing total consistently over 12K a week and get rid of the rest of those million bad words every wannabe had.

      September 10, 2016
  11. I would say to pass on the insurance. Odds are it will cost more than you can afford, so it’s cheaper just to pay the fine. If you can’t live without insurance, than you can’t quit your job. Insurance for me is over 20K a year (and no, I’m not making that up, I’ve priced it three different times, last time was through a broker). And for that I don’t get anything worthwhile and still have to pay full price at the pharmacy.

    So I just pay the fine for no insurance at the end of the year and pay cash when I go to the doctor (which I only do when I have to, but at least they give a discount for cash).

    The rest of the advice is good, though setting aside 50 percent is rather difficult. I’d be happy with being able to reliably set aside 35 myself. And you can pay it all in April and skip the quarterly payments if you want BUT you WILL be fined. My brother is a small business man and he finds it easier to pay the fine every year, most of us however don’t make that much.

    September 10, 2016
  12. So…it’s a good thing I like my day job? 🙂

    September 10, 2016

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