If you’re an author, like it or not, you’re also a business owner. In this episode, author business consultant Joe Solari and accountant Barry Kernon offer tips for managing the business of being an author, even when you’re just starting out.

Show Notes

• On the importance of treating writing like a business

• The two big investments authors make at the beginning of their careers

• Thinking ahead to the future while setting things up in the present

• The ease of setting up business accounts with electronic banking

• Why record-keeping matters so much

• What to do with your income records as your author business scales up

• Tips for minimizing taxes paid

Resources mentioned in this episode:

PATREON: Self Publishing Formula Show’s Patreon page

CHEAT SHEET: Joe Solari has provided an exclusive PDF for SPF listeners

Transcript of interview with Joe Solari and Barry Kernon

Speaker 1: On this edition of the Self Publishing Show.

Joe Solari: The economic system is based on that relationship. Those two pieces don’t fit. The barriers to entry are lower. The cost to get that going is lower, but you need to invest and you have to find those readers. If you don’t have readers, you’re just daydreaming about being a book writer.

Speaker 1: Publishing is changing. No more gatekeepers. No more barriers. No-one standing between you and your readers.

Do you want to make a living from your writing? Join indie best-seller Mark Dawson and first-time author James Blatch as they shine a light on the secrets of self-publishing success.

Speaker 1: This is the Self Publishing Show. There’s never been a better time to be a writer.

James Blatch: Hello. Yes, it’s Mark and it’s James. Actually, I should do that thing where I say, “It’s James.”

Mark Dawson: And it’s me. It’s Mark.

James Blatch: It’s Mark. We can’t do the, “And it’s me … Hello from me and hello from him,” at the beginning as well as the end.

Mark Dawson: No, that would be ridiculous. We’d probably get sued.

James Blatch: At least one person on YouTube has spotted that it’s a Two Ronnies gag.

Mark Dawson: Well, there you go. We’re not wasted on everybody, then. Just 99.9% of people who don’t what we’re talking about.

James Blatch: We do have our Two Ronnies glasses, so that’s good. I’m in New York. You’re in Tenerife.

Mark Dawson: Yes, when this goes out we will be.

James Blatch: Yeah. I’ll be getting to the end of our week in New York. In fact, we’re traveling out to Harrisburg to interview Lucy Score and her husband. Lucy is a great writer, and a really good husband/wife team, so we’re going to do a little interview with them to delve deep. So you’ll hear that on the podcast and we’ll do a little chat with them about their success.

Hopefully, the week at ThrillerFest will have given us a bountiful amount of interviews for the podcast. We never quite know until we get there, but there’s some big names going to be there this year, so we will be there.

There’s no point in me announcing our drinks evening, because it will have gone by the time this episode goes out, but hopefully that went well as well.

Mark Dawson: Apologies to everyone who attended with James, in advance. I can say that with full confidence, that an apology will be necessary, so sorry. He didn’t mean to moon everyone, but there you go.

James Blatch: You’re the one who turns up drunk. We will have young Tom with us, and John, so we’re hoping to get to as many sessions as possible and pick out those key people.

We found J.D. last year, didn’t we? And he was a great find. He sort of found us, actually.

Mark Dawson: Found me, you mean.

James Blatch: Found you. He found you. Us. I found him. I went to his session. Although you were on the panel with him.

Mark Dawson: I was, yes.

James Blatch: To be fair. As we get into conference season on the podcast, we will talk about whether it’s worth going to these conferences. It’s not always a straightforward decision. We do have a blog post on the subject, which was done by another J.D., actually, J.D. Lasica, which is on our website.

But once we get into the season, we’ll talk a little bit more about what you can get out of them and the best way to approach them. We’ll perhaps do an episode, maybe from NINC. In fact, we’re thinking about doing a live episode from NINC. If you’re going to make it there, you could end up on the podcast.

Before we do anything else, Mark, I need to welcome to the Patreon supporters, the people who are propping up this Self-Publishing Show. We want to say a very warm welcome to them. We have Fiona White from London in the UK. We have Andrew Irving McLeod from no address. We have Den Showman or Shoeman, from Los Angeles in California. Angelia Izarari. Let me get this right.

You laugh at me, but I’m the one who has to do this. Angelia Irizarry from Pennsylvania in the USA. That’s actually a really cool name. It just took me a while to get my tongue around it.

Mark Dawson: Apologies, Angelia.

James Blatch: Kristin Schaeffer. Caroline Bayliss. Rick Hurter.

Mark Dawson: Heurter.

James Blatch: Heurter. P.A. Woodburn, and Nala Henkel-Aislinn. Have you made these up for me? Have you made these up this week?

Mark Dawson: No, I haven’t, and you’re now being very rude to people. Again.

James Blatch: Nala Henkel-Aislinn. It might be Aishlinn if it’s Irish. And Emerson Korum.

All I can say is we’re absolutely thrilled to have you with us supporting us on patreon.com.

Mark Dawson: Please don’t leave immediately after James has butchered your names. I’m very grateful. He might not be, but I am extremely grateful.

James Blatch: We are. I’m very grateful. They’re lovely names. Sometimes I do read them blind. Maybe I should just read ahead. I’m not sure that would help a lot.

Mark Dawson: How would you read them blind?

James Blatch: It’s a broadcasting expression from back in my BBC days. I won’t go into the technical details.

Anyway, you can support us too, and there’s a great benefit. There’s lots of benefits of being a supporter of the Self Publishing Show. You’re part of the SPF community, and we value that very highly. You get a shout-out on the show, and you get access-

Mark Dawson: That’s not a benefit, James. That’s embarrassing.

James Blatch: Yes it is. And you get access to the Self-Publishing Formula University series of live webinars, and we have Book Brush coming up. I think we’ve firmed a date up with them. It’s August the 28th.

We’re going to have a little gap now, because we’ve just had a very busy set of webinars, but we’re going to have a little breather. And we have PublishDrive coming up shortly after that, so we’ll have two in fairly quick succession in the autumn.

Mark Dawson: Did you say we had Basil Brush coming on?

James Blatch: We have Basil Brush coming on in September.

Mark Dawson: I wish!

James Blatch: If people don’t know who the Two Ronnies are …

Mark Dawson: I know. I’ve really thrown in a random ’70s reference. Everyone in the UK would know what I’m talking about, but everyone else, and of course most of our audience is outside of the UK, will have no idea what I’m talking about.

So between the two of us, you insulting our super fans and then me spouting nonsense, we’re off to an excellent start this week. Well done, James.

James Blatch: Yeah. It’s a good job we’re going on holiday.

Mark Dawson: Very good job.

James Blatch: You’re going on holiday. I am going on holiday when I get back from New York.

James Blatch: Okay. Good. Right. Now, we are going to be talking about the business of being an author in this episode. We actually have two interviews for you.

One is Joe Solari. He’s coming up first, and that’s a broader interview about setting yourself up in business. It’s quite American-orientated, but there’s lots to take away for those of us in other parts of the world.

After Joe, we’re going to hear from a man called Barry Kernon, who works in tax accountancy here in the UK, but I’ve just been listening back to the interview we did at the London Book Fair, and there’s lots to take away wherever you are in the world, as well as some specifics for those of us who live in the UK. So I think we’ve got all bases covered in this episode.

Mark, I suppose the broad thing we need to say, and it’s a bit of a mantra of yours, is you do need to treat this job as a business.

Mark Dawson: You do, yeah. The sooner you start that way, the easier it will be in terms of adapting to the success that you hope that you’d have.

It was quite a long time to incorporate. I was effectively a sole proprietor for a long time, and then we realized that it was more tax-efficient to incorporate. Not massively. There wasn’t a huge difference, but it did make a bit more difference to incorporate.

But then because I own the copyrights, we then had a little bit of legal juggling to do to transfer the copyrights from me to the company that we set up. So I was effectively and I am the company too. So it was a little bit more complicated than it needed to be, and it would have been easier if I had been employed by the company from the start and those books that I wrote would be owned by the company.

James Blatch: I know it might be boring to some people. Some people might love it, but it’s probably boring to a lot of people. But actually having the correct set-up at the beginning can make a positive difference to how successful you are.

Mark Dawson: Well, it saves money, for sure.

James Blatch: It saves money and makes it easier for you to be successful, if you measure success by profit.

Okay. Look, let’s get into the interviews. Let’s first hear from Joe Solari.

Joe Solari, welcome to the Self Publishing Show!

Joe Solari: Thanks for having me, James. It’s great to finally be on the show.

James Blatch: Yeah. Well, look, let’s get down to business.

Joe Solari: Okay. That’s what I’m all about.

James Blatch: Do you like what I did there?

Joe Solari: Yeah, that was good.

James Blatch: Okay, now this is something. This is a mantra that Mark preaches, which is you’ve got to take yourself seriously if you’re going to be successful. You plan for success.

You plan to be successful, and part of that, right from the beginning, is understanding that as an indie author you are a business person, right?

Joe Solari: Absolutely. What I’ve found with working with authors is the ones that really take that seriously are doing some really phenomenal things with their business.

It’s not just about writing books. It’s about understanding that they are in the content creation business, and books may be a jumping off point into other types of IP monetization.

But I think the biggest thing that I’ve seen is authors understanding where their weaknesses are, and trying to get better at that.

James Blatch: Yeah. So as well as mindset about treating it as a business, I think we’re going to go through some of the practical tips as well, of things that people should set up.

Give us a bit of a background to you, Joe, because this is an area you’ve developed in recent years, and I think you’re actually working alongside some six-figure authors now.

Joe Solari: Yeah. So, the obligatory background story … I wish there was a direct path, but there wasn’t. It was very circuitous how I got to here. My background is 25 years of owning and operating different businesses. Nothing to do with authors.

It was heavy industry, oil and gas, water treatment, pricing analytics. My exposure in those businesses was everything from just the start up, where we bootstrapped and we’ve used our own capital, to the last business. We raised 21 million bucks in 18 months. Public and private money.

I’ve had a lot of experience. I’ve got a business degree from the University of Chicago. But I always see myself as a creative person in how I use business structures and systems to create value.

So when I got done with that last business, I was looking to what I was going to do next, and I had had exposure to the indie publishing world through my wife. She had started writing non-fiction books around style and fashion, and I had actually been listening to your podcast. It was just a podcast at that time. Because I was trying to help her with her publishing and trying to understand this thing.

So when I got done with that business, I decided, well, I’m going to write a book. Everybody decides they’re going to write a book. This was my time, and I wrote a book called The Business Owner’s Compendium, and I was certain that it was going to change the small business owners’ world.

What’s interesting about when you put a book out in the world … You get busy, but it’s not how you might think. So it wasn’t small business owners that picked up my book. It was indie authors, and I started getting indie authors and artists writing to me about what they liked in the book.

One of the guys that reached out to me was Craig Martelle, and he asked if he could use some of my content in his book that he wrote about a year ago, and he asked me to start helping with the 20Books group. I think at that time there was like 6,000 people in it.

We started doing weird YouTube channel stuff, talking about business. He’s a business consultant before he was an author, and my background, so we were getting into things like the theory of constraints and really hard-core business system improvement stuff, and he was a kindred spirit.

Funny thing to happen is he’s just like, “Well, you know I’m getting ready to do this conference. Do you have an IP lawyer I could get to show up?” So I found him an IP lawyer, and I’m like, “This conference sounds kind of interesting. I think I’ll go.” So I get online to look at the schedule and figure out when I need to fly in, and I see he’s got me scheduled to speak there.

James Blatch: Huh. He hadn’t mentioned that.

Joe Solari: He was too busy. You know how he is. It’s like, there’s no way he could get around to actually telling me I need to be on an airplane in a couple weeks.

So I reached out. I’m like, “What do you want me to talk about?” He’s like, “I don’t know. We’ve never done this before. Just show up and you’ll do fine,” which … I mean, no-one likes to hear that, right?

James Blatch: Yeah.

Joe Solari: You want a structure. But what happened was I went into that world and I had my mind blown. It took us a little bit of time to get there, but that was when I got to see what was really going on in the author community, because I was meeting authors that were making five, some six figures a month, and they didn’t even have the most basic business structures in place. Some of them three, four months before that had a day job.

James Blatch: Sure.

Joe Solari: Right? So that helped me to see what the landscape was, and I started to dig into how I could help authors solve the problems that they were facing. I think the way that I kind of summarize it is trying to be a strength coach for their CEO muscles.

If you think about it, when you’re an indie author you have to be that creator, but you also have to be the CEO. You have to think like a capitalist. You have to do that and put yourself in that mindset, almost create a character like that, that you play that role. Because for you to be a good business owner and operator, there’s times where that CEO has to be in charge, and the reality is most of the time the creator’s in charge and making bad business decisions.

But then also you think about it that as the CEO, how can you do the best job if you don’t understand what your investor wants?

James Blatch: And by your investor, you mean you.

Joe Solari: You. Right. So let me talk about that a little bit. You know this, and all your listeners understand this: you make two significant capital investments in this business. One is cash, right?

When you’re getting started as an indie author, you’re pulling money from your savings or taking it off your credit card, or if it’s coming from your day job … You have to allocate that money, and making some other sacrifice.

The other big one is time. The sweat equity you put in that business. Now, if you ask me to invest in your author business and we talked about it and I said, “You know what? That’s a great idea. I’m going to give you $1,000 to put your books up.”

But here’s the thing. I expect that $1,000 plus a return, and it’s a risky proposition. I could put the same $1,000 in the S&P 500 and get almost a guaranteed return. But we know what those historical returns are of 8 to 13%. So I want a 20% return.

You might be like, “Whoa! What are you talking about? You don’t understand.” But I’m coming at it from the perspective of an investor and my capital and the risk I’m taking.

James Blatch: And you’re talking about in a more traditional business, if you like.

Joe Solari: Yeah.

James Blatch: Where VC money has been raised.

That is a relentless pressure that focuses the minds of everybody in the business to create that return, and that’s perhaps missing when an author thinks, well, I’ll do my business side this afternoon.

Joe Solari: Absolutely. And like I mentioned earlier, we had raised that money. One of the companies contributed over 80% of the capital. They were a publicly traded company, and those guys … They were in our business on a daily basis.

James Blatch: I’ll bet they were.

Joe Solari: They were good partners, but their business is making that money come back with more money, so they’re going to try and do everything they can to help us, and if they see us screw up, get us out of the way.

But the point of the story is that most small business people … This isn’t just authors. Most small business people don’t respect their capital that way. They don’t set those kind of return characteristics.

Now let’s look at it one more way, deeper, okay? Why are most authors taking a swing at this? They hope to be at some point maybe a full-time writer.

James Blatch: Sure. Quit the 9:00 to 5:00.

Joe Solari: Right. Or if they are, like some of the guys we’re working with and gals that are full-time. They’re the significant breadwinner in the family now, and they have new obligations like paying a mortgage, or maybe it’s putting kids through school. There’s different life things that are happening to you that you need to think about.

So understanding the investor’s interest in the business; this isn’t just about me getting a return, but it’s about me putting my two kids through college. Now that I think about that and I understand that that’s the needs of my investor, how I think as a CEO should be different.

Because if I was running your business and I’m the CEO and you said, “Hey, Joe, I’ve got two kids I’ve got to get through school in the next couple years,” how we would do things in your business structurally would be very different, right?

James Blatch: Sure.

Joe Solari: There would be trade-offs. It’s like, “Hey, well, you’re not going to be able to do these things and these things.” The example I use for authors is the idea of living large versus large assets.

This may be a little specific to the US, but if you’re running an author business, I could say to you, “James, how do you want to run this?” And you’re like, “Hey, I want to live on the beach, and I want to travel, and I want to do all kinds of crazy stuff.” Like, “Well, great. Well, we can do that all through the business and expense a lot of these things, okay? And that’s going to help your tax situation.” “Great.”

Now you come back, and you say, “You know what? I want to buy a beach house in Florida.” It’s like, “Well, you’re going to have to wait, because your business doesn’t show any profit because we were expensing all this stuff.”

If I knew you wanted to buy that house, what I would do is I’d structure your business in a way where we were showing you money, profit, on a salary, on a thing in the United States they call a W-2, which is kind of your record of your wages.

James Blatch: How you get a mortgage.

Joe Solari: Yeah. So you could walk into any mortgage company. That’s a formula we can look up on the internet and say, “Okay, you want to buy a half a million dollar house in Florida. This is what your wages need to be.”

James Blatch: Well, funny enough, but exactly the same problem occurs in the UK. So when you first go freelance, which I did in 2013 for the first time in years, and for tax reasons you pay yourself the minimum salary … It’s basically the tax-free allowance, the first £11,500 in the UK.

After that, you get taxed, so after that you actually take dividends from your company, which is great. It’s efficient. It’s tax-efficient, and it certainly helps when the fact your income is up and down and not reliable.

But turn up to a mortgage company after a year, and they’ll say, “But you’re on minimum wage, and you want to borrow a quarter of a million pounds to buy a house, or more than that.” So yeah, the same thing happens.

That’s why knowing at the beginning of that period, actually, in a year’s time I’m going to be applying for a mortgage, you would do things differently.

Joe Solari: Absolutely, and that’s where I work with authors, is to help them kind of understand this. It’s like, we’re trying to create wealth from your creativity.

The coolest thing about this business is it’s like you’re in an industry where what underlies the business is infinite. You may not feel that way as an author. You feel burned out and run out of your creativity sometimes, but it’s infinite.

It’s not like you’re in the oil and gas industry where there’s a finite amount of oil, and the more we drill, the more expensive it gets. You can keep tapping into that resource, and once that resource is out in the world, the ways that you can sell it just keep spinning up and spinning up.

Disney has proven that. Why would they pay Lucas Films eight billion dollars? Because that franchise has made 40 billion so far, and they’re experts at taking that and regurgitating that intellectual property over and over again. So that’s the cool part of it.

The part that gets tough is taking the time to think through that plan, and understand how to use the business structures and just kind of business basics to get the results you’re trying to in your personal life, your wealth.

James Blatch: Let’s talk about authors starting out. First couple of books. Perhaps still in a 9:00 to 5:00 job at the moment, but on the horizon is the moment they think when they’re going to be earning enough to be able to scale down their hours or go full-time.

I know some of your advice is going to be specific and some general, but what should they be putting in place at this stage to make sure they make good decisions?

Joe Solari: Sure. To get to that answer, let me kind of step back a little bit and talk again about being a good CEO-author. The data I’m using is US-based data, so when you look at being a CEO, a lot of this is … It’s your weak point, and a lot of authors get scared about this. But really, you should look at this in the format of it’s an area where you can make the biggest gains.

The analogy I use is the strength coach idea. If I was going to teach you how to do Olympic weightlifting, the first time when we sat down, if I just get your form better, you’re going to be able to lift more weight. With the same muscle mass, you lift more weight.

What happens then is your growth accelerates, because now because you know how to do the form right, you’re loading your muscles more with weight you previously couldn’t have done, so you get stronger faster. But even more importantly, what we do is with getting that form right, you have less chance of hurting yourself.

So some of this stuff is about making sure you make the right decisions, and I lay that out because one of the biggest things that is an issue for businesses is capital. A couple episodes ago you were talking with Michael Anderle in London, and you asked him a question, like, “What are you thinking about?” Do you remember what he said?

James Blatch: No, I can’t remember.

Joe Solari: Oh, you didn’t burn it into your head?

James Blatch: I can’t remember asking the question. I was drunk the whole of London Book Fair. No, I’m joking. I wasn’t.

Joe Solari: His answer was cash flow.

James Blatch: Oh, okay. Yes. Oh, in terms of 20Books. I was thinking about … Yes, in his organization.

Joe Solari: The thing he’s dealing with is cash flow. I haven’t forgotten your question, which is about the beginning author. My point is that the stuff that I think is most important is important throughout your entire business arc, and gets more important because when we talk about an author doing a launch, Michael Anderle’s situation is just times 35, right?

James Blatch: Yeah.

Joe Solari: And it becomes the issue … What does a beginning author really need to worry about? It’s capital, because the number one reason why businesses fail, all businesses … And in the United States there’s data that shows it doesn’t matter what industry you’re in. It doesn’t matter what the economic cycle is. 100 years of data show that most businesses fail because they run out of capital.

So when you think about your launch … You’re just getting started. If you haven’t allocated the money that you need to do the launch properly, it’s going to fail.

I’ll give you a perfect example because this is something that I’ve seen a lot of authors do. They’re in a genre that requires a series. Think epic fantasy. You should be putting out three books, right? They even call the first book Book One. The premise is Book One is going to make the money that’s going to pay for the covers and editing of Book Two and Book Three. And you put the book out and it fails.

It’s a good book. I’ve got some good reviews. The reason it failed is because you have a brand promise out there that you’re not meeting. In that genre, your expectation is that there’s a Book Two and a Book Three. When Book Two and Book Three come out, guess what? Those readers will read all three, and you’ll see sales spike, but because you didn’t plan this out … And this can be planned out on a Post-it Note. Like, “I need 3,000 bucks, not 1,000 bucks to launch this series.” You can get a better result out of that first launch.

James Blatch: I was just going to say, inevitably a lot of people try to do things, and you used the phrase bootstrapping earlier. Well, I’ve bootstrapped a couple of companies myself, and by bootstrapping I mean we’ve put in less than £10,000 each. It’s still not doing it for nothing, right? There’s no such thing.

But in the author world, we do come across authors who do try and do it for nothing because they simply don’t have two beans at that stage.

Have you got any advice for them?

Joe Solari: You should get that book out. You need to put money into making a product that people are going to want. It’s a product, so you need to put as much as you possibly can into the cover, into the editing, because if you don’t it’s just going to harm your launch. It’s just going to make it harder.

You’re going to have to come back and redo that stuff. You can recover from it. Important in that is get the book out. You need to find your audience.

In your opening statement of the show, you talk about it’s a good time to be an author, but you also have a really profound statement towards the end, which is something like, “There’s no-one standing between you and your reader.”

The fact that there is so little friction between the author and the reader is what is making this whole thing blow up. The economic whole system is based on that relationship. Those two pieces don’t fit. So the barriers to entry are lower.

The cost to get that going is lower, but you need to invest and you have to find those readers. If you don’t have readers, you’re just daydreaming about being a book writer, right?

James Blatch: Yeah.

Joe Solari: And they’re going to help you, because you’re going to find people that hate your work and people that love your work.

James Blatch: So you can get your book out there and then start building slowly on top of that. Really focus on finding your readers, even if making money isn’t your number one priority at that stage.

It’s building a base on which to operate.

Joe Solari: Yeah. I know this is true in the UK and Australia and the United States. In the United States, there’s 28 million business companies. Half of those are just kind of shell companies with assets, and the other half are actually operating businesses.

Then 64% of those are solopreneur businesses that are earning $500,000 or less. I’m pretty sure the demographics are probably similar worldwide, anybody that has kind of a free-market system.

But outside of that, what’s not really measured is all the sole proprietors, so people that are operating without a business structure. Most people operate that way, and as an author, operating that way is perfectly fine because when people come to me and they say, “Well, should I set up a business?” It’s like, “Yes, as soon as you can.”

But again, the CEO’s got to say, “But wait a minute. We need the capital to go make a great book cover and edit it, not to give it to the State of Illinois to set up a corporate certificate,” because they’re about the same price.

So we can get into talking about why you set up a company, but kind of the when is that you really need to get yourself to an economic point where it makes sense, that it’s not pulling away that critical capital from making the product, finding a customer, closing a sale.

James Blatch: I can remember in the bad old days of the 1980s when credit suddenly got freed up in the UK, I had a couple of friends, about my age, probably in our 20s, and they started this business. Apropos of nothing. I mean, I think one of them worked in recruitment. They suddenly decided they were going to work in recruitment together, and they went to the bank.

Next thing we knew, they both turned up in these convertible cars, which were their company cars, with these business cards.

I was just reminded of that when you were saying that, thinking you may have got ahead of yourself a little bit here in terms of making good decisions. Inevitably, within a month or two … I mean, this business was never going to … They ended up saddled with all that money to pay back.

I see the point you’re making here is make these decisions, and there’s a time and a place. There’s a point at which incorporating is the right investment.

In the early days, it’s the product.

Joe Solari: Yeah. Really, you need to find out if you’ve got a business. Can you attract customers with your product in this environment? We’ve stipulated it’s the easiest time ever to do this. Can you do it?

One of the things that is out of everyone’s control but their own is whether you’re a good storyteller or not. You can make incremental improvements on that, but the people that are great storytellers right now have an opportunity to create wealth in a way they never could before.

They can do it faster and more efficiently with using the business structures in the right way, and it’s okay that they’re uncomfortable and not feeling great about that, because those are things you can learn. They’re skill sets. What I can’t help anybody with is making you a better storyteller.

The other thing that’s great that I’ve observed … And this is none of my clients. All my clients are awesome and write great stories, and I love all their work. But there are some things that I’ve read that aren’t to my taste, but these people are making buckets of money! Right?

James Blatch: Yeah.

Joe Solari: So it’s like, there’s an audience. Don’t think there just isn’t an audience for what you want to write. And you’ve been around this for years, so you know some of the weird genres that are out there that people are making money in.

James Blatch: Yeah. I read books that I wouldn’t normally read, and I’ve really shrugged my shoulders at a couple of books I’ve read that have been really successful, big, trad-published books, thinking what do people see in this? But millions of people see everything in it, and that’s the great thing about it.

I’m shallow and read thrillers and military fiction, and so anything outside of that … Why would somebody read a whole book about a couple getting together? What’s that about?

Joe Solari: Yeah, only like most people reading books.

James Blatch: Only that three billion people a year who read those.

This is a great basis, and I like the fact that you’re talking about attitude as much as anything else, and approach to things. In practical terms, you’ve just mentioned there that incorporation … There’s a time and a place for that at some point.

But I imagine the machinery of business is something that you need to set up, so whether it’s a spreadsheet at the beginning to keep a track of everything you spend and everything that comes in. And don’t be afraid of doing that.

I’m in the process of investing in my author career at the moment, and I’m not going to shy away from listing all the money I’ve spent to this point, because I want to see that. Even if that means that six months down the line I can say, “Oh, I might have broken even … ”

I’d rather know that than do what is also tempting, which is to not do the accounts that thoroughly so that you trick yourself into thinking you’re doing better than you are.

Joe Solari: Yeah. Well, the number one reason why most authors are paying too much in taxes is because they don’t track their expenses. If you don’t tell the IRS how much money you spent to get whatever revenue you got, they don’t know, so they just have a different point.

The whole tax system is self-reporting and kind of an honesty system, or honor system. So when I talk to a lot of authors, their questions tend to be like, “Well, what can I expense and what can I not expense?” It’s like, “Well, are you writing down just the basics, like your book covers, how much revenue you make, how much you’re spending on advertising, how much you’re spending on your cost of goods to get them produced, going to conferences, if you’re taking courses?”

All of that stuff. If you don’t write it down and track it and then put it on your tax return … We haven’t even set up a company yet. We’re just talking about being tax-efficient. Those items are 100% deductible against your revenues, and it’s going to reduce your effective tax rate. That’s like the number one thing, and so you need to get going on that.

To your point, I provide spreadsheets and I’ve got all kinds of crazy stuff that I do for tracking things. When we work with our higher-end clients, we build a full-blown financial model and then we’re tracking actuals against a budget.

But you can just write it on a sheet of paper. When you’re getting started, you just need to have that notebook and write down all of these things, and remember where those things are saved.

Depending on where you’re at, before you set up a company, you can always still set up a separate bank account, at least in the United States. Set up a separate bank account, even under your own social security number, that you run your business through.

Because of the way electronic banking works, it becomes really easy to create your income statement and your balance sheet with software like Wave, which is free. You just hook it up to your bank account and you go in there and allocate the things to the different expenses. Now without even knowing how it kind of happened, you have an income statement.

James Blatch: Yeah. That’s never been easier. We use xero.com in our businesses, and it’s fantastic. Because it took me a while. When I started my business for the first time, I didn’t really know what accounts were. It’s a strange thing to say, but I didn’t quite know.

Now I know they are quite simply a record of your bank. That’s all it is. It’s a record of everything that comes in and goes out, and putting it into various pots. Then these days it’s pressing a button, then it says, “This is your profit after all the expense,” or, “This is the VAT you owe.” Sales tax, et cetera. That’s a lot easier than it used to be.

So Joe, at what point does somebody start using someone like you as a kind of business manager for them?

Joe Solari: After coming out of that first 20Books, I had a lot of people who were coming to me who were like, “Hey. I’m looking for some type of solution. Can you do this for me?” A lot of was kind of bookkeeping stuff, and I’m not a bookkeeper.

But my superpower is I’ve just got a big network and I remember what people do, and I’m always trying to think how I could help people. So I left that conference and I started doing some research, and a couple things came out of it.

First is I was like, oh! My previous job, the person that was our CPA and doing all our work, this woman, Lisa Gardina. Before she worked with us was Oprah Winfrey’s family office manager, so she managed her private assets. “I’ll ask Lisa. Maybe she wants to do this.”

So that’s how we created this kind of higher-end deal for authors, and so Lisa does the books and we do all their complete back office. We act as the financial team, so we get everything reconciled and then once a month we meet and compare things to this plan that we’ve created.

These authors are thinking big. There’s more than just books that’s being done in a lot of these businesses. But that’s a very small part of the market, because I did this research, and what I understand now is that from looking at things like author earnings and some of the surveys out there, the curve of revenue … That distribution isn’t changing.

80% of people never make more than $10,000 on a book in their whole lifetime. They want to write a book. They write it. They never write another book. So that curve, which is heavily weighted to not making more than $10,000 … I think that’s immutable. It’s not going to change.

Before everyone gets bummed out, what’s changed is the population we’re applying that to. This gets back to your statement about it’s never been a better time, because the n, the population that we apply the distribution to, is a much bigger population. Ergo, even though only 1% of the population becomes a millionaire author, we’re applying it to a bigger number, right?

James Blatch: Sure.

Joe Solari: The wind up of that whole kind of story there is this, is that we’ve also created some help for authors that are on that growth curve, so we have … Just kind of what you were talking about earlier, is when you’re a sole proprietor, we have this thing called Sole Proprietor Simplified to help people understand the basics, like how do you set up a Dropbox file system? How do you collect all the stuff together?

Because in the United States, what you do is you take all that information and you put it on a thing called a Schedule C, which is part of your tax return, which is the business piece. So we help you get that organized to do all that.

Then the other piece is helping authors to set up their company when the time comes, because I’m a big believer that paying somebody to do that for you isn’t a good investment. What you really want to do is go through that process and understand how and why you do that, so that you understand the mechanics of it in the future.

It’s a lot easier, and in the United States, setting up a company … It’s basically if you’ve got a credit card and you can get online, you can set one up in your state.

James Blatch: Yeah, it’s pretty easy in the UK as well.

This sounds like a good time to talk about the free author cheat sheet that I think you’re going to be offering us to the SPF listeners today. What’s going to be on that?

Joe Solari: That’s something that we came up with that basically gives you some ideas at different income levels what you should be looking at. It gets into more than just, “Do I set up a company now? When do I set up my bank accounts?”

Because in the United States, if you’re self-employed you have to take care of your own retirement. So when do you start implementing a 401(k) plan for your company so that you’re saving money? How do you use these different tools to be more tax efficient? So it really kind of gives you a breakdown of those levels and kind of hot points of, “Okay, these are the things that I should have on my list next to do.”

If you follow that, I think it’s a good balance of what you use your capital for and keeping the money in the business to keep it growing.

James Blatch: Okay. Well, what we’re going to do with this … I’ve got a URL here, and we’ll send an email out that will have a link directly to that cheat sheet, how you can get that.

We’re also in the same email going to give you a link to an interview for people in the UK that we’re not going to put as part of this podcast, because it’s quite specific, but very well worth listening to if you’re in the UK, about tax advice and accountancy advice if you’re an author in the United Kingdom.

So if you go to selfpublishingshow.com/business, that will yield you everything, all the goodies you’re going to get in that. For UK, watch the video as well, but you will be able to get that cheat sheet from Joe.

Joe, you’ve got fingers in a few pies, I think, over your time, your recent last couple of years. You’re working with these authors, these sort of high-net-worth authors. You also, I think, run a few workshops and stuff.

You seem to do quite a lot of teaching online.

Joe Solari: Yeah. That gets to that whole point of understanding that the demographics of the space is that it’s really easy if you’re … I’ve had authors come to us at these conferences, and a lot of that’s word-of-mouth.

I had a guy come to me. He was making $300,000 a year. He’s a well-known author, and he was doing everything as a sole proprietor. He just didn’t know what to do, so it’s like, “That’s easy. Just throw it over the wall to us. We’ll get it all cleaned up.” That’s great, because he’s got the money to do that.

But what about those authors that are looking to strengthen those CEO muscles and really make this a business. Again, the more you use these tools, the faster your business is going to grow, because again, like you were talking earlier, if you don’t apply your capital right, you get in trouble.

We have a course called Sole Proprietor Simplified that helps authors when they’re just getting started to get those basic things in place, to understand how to do these things simply to get to the point where at the end of the year they can do their tax return.

James Blatch: Would the principles apply to people in Australia and Canada and the UK as well?

Joe Solari: I would say that 90% of both of those courses are about how to operate the business structurally, and a lot of this is stuff that Lisa and I have done with businesses in the past just to keep ourselves from going crazy.

Because as the business scales up, it’s like, “Where did we put those documents?” If you have a proper file structure and you know where things are organized, and you know how to track stuff, and you should be looking at this on these certain dates, it just is smoother. It just habituates that into your life.

I used to run a business in Australia. I was over there for five years, so a lot of that stuff, other than kind of the mechanics of the business structure, is identical.

Then the other piece that I think is … It’d be interesting to actually maybe talk with the guy that you interviewed. With the last set of tax changes in the United States, there may be opportunities for high-end authors to start thinking about setting up a business in the United States. Now that the corporate tax rate is 21%, if your home country has a tax treaty that has beneficial treatment of how taxes come over, when you set up a corporation …

There’s some structures that you couldn’t own in the United States, being a UK citizen, but a corporation you can be an owner of. Once you have that company in the United States, it’s not just about the tax efficiency, but the general efficiencies of the market, because now you’re treated as a US business. Maybe some of the things that you can get from Amazon or whoever you’re selling your books from is different.

You’re certainly going to be able to have some benefit in dealing with currency exchange. I know a lot of authors that are overseas and they’re getting dinged every time they move money in for advertising, every time royalties come out. Doing that as a US company that foreign exchange gain could be profound for a bigger business.

James Blatch: I think our corporation tax rate is 19%. It’s supposed to go down, but we’re in uncertain times at the UK at the moment, so who knows what’s going to happen in the next couple of years?

But Ireland, which is our neighboring country, has a tax rate of something like 12%, and I do know a few people in business who’ve made that move, because suddenly that’s a significant difference. And luckily, I have an Irish grandparent, which is on my mind at the moment, because I might need to get a passport if we become post-apocalyptic in the UK. At least I’ll have a EU passport.

Joe Solari: That’s right.

James Blatch: Okay, well, look, this is brilliant, Joe. We’ve been chatting for 40 minutes about this. I think I was slightly worried at the beginning, I think I may have even voiced this to you, that this was going to be a very US-centric interview, but actually it hasn’t been.

It’s about the principles. It’s about the attitude you should have going into this, and it dovetails so nicely with the way that Mark says right at the beginning, “Set yourself up seriously. Treat yourself as a business. Put that different hat on. Try to think of yourself slightly removed … Well, completely removed from the content creation side of things, so it’s not your baby anymore. You’re not emotionally tied to it. It’s a product and you’re a business person.”

Joe Solari: Amen! Yeah.

James Blatch: And that is exactly what you’ve been talking about today as well, some of the nuts and bolts that will help you do that.

We should say again the URL to get everything you can from Joe, which is this cheat sheet that’s going to help you, we’ll also get some links to the courses he’s mentioned there, is selfpublishingshow.com/business.

Joe Solari: Yeah, and as far as going deep in the weeds, I’d be happy to do that with people. You see it if you observe some of the stuff I’ve done in the 20Books group and on my website. I have time scheduled where people can schedule a time with me and meet.

We first met out in Vegas. I had 32 appointments out there with people. I don’t ask them how much money they make. I don’t care. I really don’t. But what I’m looking to do is hear their personal circumstances, and then I can help them to understand what I think could help them along that path.

A lot of those authors are just getting started, and just to have somebody say to them, “Listen, get the book made. Put your money into the book. Don’t worry about spending money on ISBN numbers and setting up a company and all this stuff that you hear about. Get a product that people want to buy.” That gives them that freedom to go do that.

James Blatch: It sounds like you’re talking directly to me now, which is fine.

Joe Solari: Well, I’m getting intuitive to this, where it’s like, “This is just about you not wanting to push the publish button.”

James Blatch: Sure.

Joe Solari: You really don’t need to be a publishing company. Right?

James Blatch: Yeah.

Joe Solari: You just need to push a button.

James Blatch: Get that out there. Don’t put anymore barriers in the way. Brilliant. Joe, look, thank you so much indeed for joining us. It’s been a really great picture and a sparkling line. Did you say you were on the West Coast?

Joe Solari: No. I’m in Chicago.

James Blatch: Oh, okay.

Joe Solari: Just outside of Chicago. My wife’s from Portland and we go out there quite a bit because it’s a beautiful part of the country. Get the chance to ski and sit on the beach.

James Blatch: Sounds good. Well, summer’s coming. Joe, thank you so much indeed for joining us today, and once again, selfpublishingshow.com/business for all the goodies.

Joe Solari: All right. Thanks a lot, James. Great being on the show.

James Blatch: So, there’s Joe Solari. As I said, lots of good advice for those of us in the UK and Australia and anywhere else in the world, not just America.

We now have an interview set in the UK with Barry Kernon, who is from the accountancy firm H.W. Fisher. Now, Barry does talk some specifics about the UK, but again, really good, sober, sensible advice for those of us who are setting ourselves up as authors as a business.

Barry Kernon: I’m Barry Kernon. I run the authors and journalists team at H.W. Fisher Chartered Accountants in Central London.

James Blatch: Okay, so you are an accountant, but it is authors and journalists, did you say?

Barry Kernon: Authors and journalists, and also artists and other creative people. Preparation of accounts and tax return and tax planning.

James Blatch: Okay. So Barry, if we start rather wide in terms of principles, some people listening to this podcast will not be making money yet, and they’ll be wanting to and get to the point where they can quite their 9:00 to 5:00 job and transition into full-time work as a writer. Others will be further down that road.

What, in general, should they be thinking about in terms of their tax affairs? What decisions do they need to make?

Barry Kernon: Probably the most important decision at the outset is record keeping. It’s very important to avoid penalties later, delays in putting in tax returns. So a good system of recording income and expenses.

It can be done in all sorts of ways. It can be done digitally, which is a thing that’s coming in the future, not too far away. Or it can be done manually on pieces of paper or in an exercise book, or on a spreadsheet, or an analysis paper.

The key to it is as far as possible make sure you record all income and detail expenses under the various headings that will apply and will be going into the accounts. Once you’ve got that under control, then you’re in a position of strength arguing with an inspector of taxes who doesn’t agree with what you’ve put in your tax return.

James Blatch: So keeping records also involves, I’m assuming, receipts. A bit of a bane of everybody’s lives, but keeping all those bits and pieces of paper that may be called upon at some point?

You may be called upon to show them?

Barry Kernon: It is advisable. As a matter of fact, there’s nothing in the law that says you have to have a receipt for everything, but it’s best to keep as many as possible. If you don’t get a receipt, you can annotate a bank statement with a detail of what the expense is, or you can annotate credit card statements.

It’s also important to know what’s going into the bank account and to be able to identify things that aren’t income, because if you can’t identify anything, HMRC will assume it’s income if they inquire into your return. You can’t prove it was a gift from Uncle Henry.

James Blatch: Okay. So we’re talking UK here. Let’s take an example of somebody who’s just started writing, just started publishing their first book, and they have a smattering of income. So maybe up to 200, 300 pounds a month selling books, but they’re also in a full-time job doing PAYE.

What do they need to do? First thing we’ve already answered, which is to keep a record of the income.

Barry Kernon: Keep a record. You need to notify HMRC that you’ve got a source of income, and they will require you to put in a tax return, because in addition to being employed, you’re also self-employed. They always require a return from self-employed people.

You have a choice of claiming the actual expenses, or £1,000, whichever is higher. Sometimes it’s simpler just to claim that.

James Blatch: Okay, so this is the amount you would claim as your outgoings, which offset whether you have to pay tax on your income.

Barry Kernon: Yes. Up to £1,000 is exempt from tax, so it’s simple at that level. You don’t have to declare it. If you’ve got an income of, say, £2,000 and your expenses are £800, you can claim £1,000, because that’s permitted.

James Blatch: I didn’t know that. I’ve never heard that before.

Barry Kernon: It’s a relatively new rule.

James Blatch: Okay.

Barry Kernon: It doesn’t only apply to authors. It’s all self-employed people.

James Blatch: Sure.

Barry Kernon: It’s helpful particularly for people whose income’s declining. This may not be your audience, but people whose income is now only a thousand or two a year from past royalties or ALCS payments, or PLR. Then they just either don’t declare it because it’s under 1,000, or claim up to 1,000 expenses.

James Blatch: It seems like a decision full of common sense, because it takes all the faff out of a small amount of money.

Barry Kernon: Yes. It’s done to suit HMRC. They don’t want unnecessary tax returns.

James Blatch: Yeah. Okay. So, the tax returns, I remember in the old days you used to think once you start having to do one, you have to do them for years and years.

It’s self-assessment I guess is what we call it now, isn’t it?

Barry Kernon: Self-assessment applies, and generally HMRC will insist on a return for self-employed people as long as they’re self-employed, although occasionally you can persuade them, particularly if you do fall below that £1,000 exemption. Then you can persuade them not to issue a return on the basis that you’ll notify them if your income increases in future.

James Blatch: And if you have this extra income on top of your PAYE salary, your self-assessment covers both of those. You declare everything on your self-assessment.

Barry Kernon: Yes. You put your employment income and tax deducted on employment pages, your self-employed income, and expenses on the self-employed pages, but it’s all part of the same return. You either end up with a tax bill at the end of the year, or on the 31st of January following the end of the year, or you can have it collected through the operation of your code number by arrangement with HMRC.

James Blatch: So that is a slightly less painful way of paying tax. It spreads it out over the year.

Okay, so there’s our beginner person who’s just started to earn a little bit of extra money. Important tips for them to remember. Make a note of all your income. I mean, most of it is electronically traceable now, anyway. And second of all, inform HMRC and start filling in a self-assessment form.

Barry Kernon: Yes. It may also be important to register for National Insurance. Self-employed National Insurance applies at a figure of about £6,200 profit, so not for the absolute beginner, but once you’ve gone over that you have a liability so you should certainly notify at that stage.

James Blatch: Then at some point, hopefully, for this author’s career, they’re going to hand in their notice to their 9:00 to 5:00 job that they hate and they’re going to start working for themselves, getting up and working in their pajamas at home, writing.

What do they need to think about at that stage?

Barry Kernon: Keep the P45 handed to you on the cessation of your employment, because there’ll be a refund of tax, usually, depending on the time of year. That’ll be needed for the next tax return.

Notify HMRC that you’re now fully self-employed so that you cover the National Insurance position, and then get down to the record keeping.

James Blatch: Again, record keeping. Tracing everything.

Barry Kernon: It’s very important, because if you do have an inquiry from HMRC, the inspector of tax’s whole reason for living is to discredit your records and to be able to argue with your expenses. So as long as you’ve got good records, you’re in a position of strength.

James Blatch: So that’s interesting. You say you legally don’t need receipts, but there could come a time when it’s going to stand you in good stead to be able to say, “This is why … ”

Barry Kernon: Yes. HMRC always ask for receipts. If you haven’t got them, you’ve got a record. You’ve got a note on your bank statements, or you’ve got a diary note. You’ve written your taxi fares or your travel costs in a diary as you go along. That’s okay. That’s a contemporaneous record, which is acceptable.

James Blatch: One thing we haven’t said that people should do, that I’m going to suppose you think people should do, is get an accountant.

Barry Kernon: Well, it’s not always necessary. It may not be cost-effective at the lower levels, but a good accountant can usually save enough to cover his fees, anyway, his or her fee.

James Blatch: Can you give us an idea of what sort of fees people would be looking at for an accountant?

Barry Kernon: Probably start at four or five hundred pounds a year plus VAT, typically. The cost will go up if they’re VAT-registered or there’s a need to put in VAT returns or there’s a need to deal with digital bookkeeping, which is coming in future.

James Blatch: Yeah, so let’s just mention digital, and we’ll carry on with some of the things we need to put in place. I use xero.com, and I know there and there’s FreshBooks and QuickBooks and quite a few other packages around.

How do you view those? Are they a useful tool for people?

Barry Kernon: They seem to be rather time-consuming, I find. The world seems to divide between the younger people, who are really keen to get on with digital record keeping and have it all on their phones and so on, and people who are a little older and not used to spending so much time on their record keeping, who don’t like it so much.

At the moment, there are something near 20 software suppliers that have been registered with HMRC, and they’ll grow in number because HMRC haven’t yet decided what’s required under making tax digital, which isn’t being introduced yet for most of us.

The only making tax digital that’s in existence at the moment is for people who are compulsorily registered for VAT who have an income from UK sources of over 85,000 a year, and that applies with effect from the beginning of next month. It’s going to be compulsory digitalization.

There is a method of continuing with Excel. A lot of people like using Excel, and there is bridging software that will enable you to carry on using Excel and link digitally with your VAT returns.

James Blatch: Yeah. And we’re in the middle of a bit of a campaign from HMRC, I think, aren’t they, on VAT returns and so on moving to digital? I’ve seen some of the TV adverts.

Barry Kernon: Yeah, so it’s because it becomes compulsory from the 1st of April and lots of people don’t know that yet.

James Blatch: Yeah. Good. Well, some extra work for you, hopefully.

Barry Kernon: Yes, I think there will be.

James Blatch: So, our example author now, let’s say they’ve moved up a bracket and they’re now earning £50,000 a year, so equivalent of sort of 65-odd thousand dollars. But we are talking UK, I should say, in this interview. In terms of minimizing their tax, which is something most of us are keen to do, what steps should they be taking? I’m thinking things like PAYE and expenses.

How should they approach things?

Barry Kernon: Well, the first thing is to make sure that they claim all the expenses they can. A lot of people don’t claim enough, for example, for home costs. Most authors work from home. Many people have a room that they use as an office. Some people don’t, but nevertheless, they work there for many hours, and HMRC are quite generous in their attitude to claiming home costs.

They have a number of examples on their website where you can claim a proportion if you’ve got a dedicated room, or you can claim a proportion if you use a certain area of a room. As long as you have a reasonable rationale for the expense claim, that will be acceptable.

A lot of novelists will have location research expenses, a lot of travel and accommodation. Those are important not to lose track of. It’s a good idea to have a diary, actually, which is a non-financial record of what you were doing. It helps in an inquiry to justify sometimes the expenses that you’ve claimed, because it ties in with where you were doing your research.

So there are obviously lots of expenses that can be claimed, but you start off with home costs and then you’ve got broadband and telephone and cartridges and stationary and traditional costs. Authors can claim books and all the equipment that they use.

James Blatch: What, books they read?

Barry Kernon: The books they read by and large are claimable.

James Blatch: Did not know that. I’ve made some money from this interview.

Barry Kernon: Also, when people first start, quite a lot of your young, or authors of all ages just starting will already have a reference library. They will have been reading for years. The crime novelists will have been reading crime novels, et cetera.

That constitutes a reference library, and capital allowances can be claimed on that. That’s a form of depreciation that’s built up over the last 10 years, and we’re now starting writing. We can now claim for those books.

James Blatch: Wow! Do you know, this shows the value, Barry, of a specialist accountant, because my accountant’s not a specialist. He does lawnmower manufacturers and painters and decorators and me, so I bet he hasn’t looked into this or has knowledge of that, because that’s really interesting.

Barry Kernon: No, it’s certainly claimable. Also, people who have got a laptop they’ve been using for a couple of years, and people who’ve been writing for some time and then decide that they need to go on a creative writing course, for example. That sort of expense is allowable, unless you haven’t done any writing before.

If it’s a new skill HMRC won’t allow it, but where you’ve already got the skill of writing, you’re just improving it, the expense is claimable.

James Blatch: What’s the rationale behind that? Why if it’s a new skill?

Barry Kernon: It’s because it’s to put you in a position to start. It’s not an expense incurred wholly and exclusively in the course of the work itself. That’s the distinction. But because you have been writing already, whether you’ve been published or not, you’ve been writing, you can claim those courses and conferences costs.

James Blatch: Okay. Now, my accountant does do PAYE with me for the first £11,500 I think it is to ensure that I take advantage of that bit of … I can’t remember if it’s called now the threshold, is it? The first amount of earnings that are tax-free.

Is that a sensible thing to do?

Barry Kernon: Well, you don’t need to be PAYE to achieve that. You’re entitled to that personal allowance whatever your income is. It’s 11,850 at the moment. It’s going into 12,500 from next month. Everybody’s entitled to that.

You would only need to be PAYE if you had a limited company. If your earnings go through a limited company, then you can take a salary as part of your income, you can take dividends as part of your income, and you can reimburse yourself for the expenses that you’ve incurred on behalf of the company. Those are the three main ways of getting money out of a company.

James Blatch: Okay. Well, we should talk about that, then. So that is an option, and it’s the option I went down at the beginning. In fact, my business wasn’t writing to start off with. It was something else, so I started a private limited company of which my wife and I are the two equal shareholders.

This is the most common question we get asked. Should I start a limited company or should I be a sole trader?

Barry Kernon: Well, on that example, if you’re earning, say, £50,000 and your wife isn’t earning very much, then it would make sense for you both to have shares and you can pay yourselves dividends to spread the income between you. Use up two lots of personal allowances.

We usually recommend having two different classes of shares so that you can vary the amounts of dividend you pay. You might not want as much of a dividend as your wife, or vice versa, depending upon the income levels. That enables you to even out your incomes between you and maximize the use of lower rates and personal allowances.

James Blatch: And what are the levels now? I know it changed. Unfortunately, just after I started in self-employment, they changed the dividends rules.

You used to be able to take a lot of dividends out without paying tax.

Barry Kernon: Well, yes, because in the previous system, the dividends were deemed to have been taxed. There was a tax credit that was applied to the dividends, which was effectively the corporation tax that the company had paid.

Dear old George Osborne introduced the dividend tax, which meant that that doesn’t apply anymore. There is an exemption of £2,000. The first £2,000 worth of dividends are exempt, but above that it’s 7.5%.

From April, that is up to £50,000 total income, so you can take generally about £8,500 worth of salary, which avoids a National Insurance liability, and the remainder of the 50,000 you take as dividends. The top rate of tax is then 7.5% on dividends and 19% of the corporation tax. That corporation tax figure is due to come down before the end of this parliament to 17%, so it’ll be 24.5% top rate.

As an individual, self-employed person, you have 20% personal tax liability and 9% is the maximum Class 4 National Insurance, so there’s a bit of a saving, but there’s not a huge difference between the rates at that point.

You have to bear in mind the costs of running the company, setting it up, and additional costs because of the requirement to prepare statutory accounts and corporation tax returns and so on, which costs more in accountancy fees.

James Blatch: One of the bits of advice I got, and why I set up a limited company… We were doing video production initially. Is because of liability and because of the possibility that you’re going to cause an injury to somebody in the course of your work. A limited company protects your house and home and so on from that.

Is that still the case, that a sole trader or somebody just doing a tax return form may be exposed to a greater liability?

Barry Kernon: Well, certainly, that’s what limited companies were set up for. For protection. The limited liability is there. It is more important in some trades than others, actually.

Authors are a slight exception. We get asked this quite often. Should I set up a limited company to protect myself from libel actions? That’s one of the types of legislation you can’t protect yourself from. Type of legal action, I mean. You can’t protect, because under a libel action everybody gets sued. The author, the company, the publisher.

James Blatch: The printer.

Barry Kernon: The printer. Yes. Everyone. But otherwise, personal, public liability, injuries, people tripping over your cables and falling down the stairs and so on … Although you may be insured, it’s probably advisable to have a company as well. The insurance company might decline to pay for technical reasons, in which case you fall back on the limited liability protection.

James Blatch: Yeah. Okay, so we’ve got our person who is now earning more money. Now, they hopefully are going to get to the Mark Dawson level of earnings, and Mark’s publicly declared that he had income of over a million dollars last year for book sales on one of his platforms.

Do things change at that level?

Barry Kernon: Well, if you’re going to use a limited company, it’s quite helpful. If you’re making that sort of level, you are still paying 19 or 17% corporation tax. You can leave the money in the company and invest it within the company, and so the cash flow advantage is very substantial, but it still has to come out of the company at some point.

Some people use it for retirement planning, long-term, on the basis that they don’t draw much income out or they draw just what they require. They end up with a money box at the end from which they can draw throughout their entire retirement and still not pay any high rates of tax. So it’s quite useful to have limited companies for those larger amounts.

James Blatch: Yeah. So that becomes more of an issue than it does at the lower levels.

Barry Kernon: Yes.

James Blatch: Great. Well, I think we’ve covered quite a big area for the UK.

Are there any important areas I’ve missed?

Barry Kernon: I’ll give you just one interesting case I had the other day. A lady had a two-book deal, advances agreed of 285,000, and she said, “I want to have a company, if that’s going to work, and I want to take the money out in a couple of years’ time to buy a flat.”

I said, “That’s absolutely the wrong way to do it.” Because if you do that, take it all out in dividends in two years’ time, you’ll end up paying your 19% or 17% plus 38.1% on the dividends and some might be 32.5%.

You actually pay more tax than if you didn’t have a company and you claimed author’s averaging, because you can average fluctuating profits over adjoining years. In this particular case, I worked out that the profits could be averaged over four years and the tax would be just quite a bit lower than having that limited company. So you have to look at each individual case, actually.

James Blatch: So the author averaging; explain that concept to me.

Barry Kernon: Right. Where an author has profits that fluctuate … Obviously advances come in. Generally, authors have advances. This is not self-published authors, but traditionally published authors will have an advance on signing a contract, an advance on delivering the manuscript, an advance on publication.

So you can see they might have maybe even a signature and a delivery advance in one year, then nothing the following year, and then a publication advance the following year. So you’ve got a big profit, and then nothing, and then medium-sized profit.

The law says you can average those two years so that you make use of the allowances that would otherwise be missed. Then, having averaged those two years, you take that one and average with the next year. The only stipulation is that the earnings must fluctuate enough. So one year adjoining the next has to be 75% of the adjoining year’s profits, or around there, for it to be allowed. It’s quite effective.

James Blatch: Is this common to other professions as well? Is this exclusively for authors?

Barry Kernon: Farmers can do it.

James Blatch: For bad seasons.

Barry Kernon: And actually artists as well. I mean, it’s an artistic exemption that applies also to composers and painters and sculptors and authors.

James Blatch: Yeah. Good. Is there anything I’ve missed, Barry?

Barry Kernon: A brief mention of pensions. If you have a limited company, you can pay contributions direct from the limited company gross into a pension scheme. Overall, it’s much the same, but you don’t need a company to pay into a pension scheme. In other words, you can do it either way.

Sometimes in limited companies, there are different rules on allowable subscriptions. For example, if you’re a company director and you pay a subscription to the Society of Authors, that’s not allowable, because it’s not a permitted subscription under the PAYE rules, whereas it is claimable for self-employed people. So there are one or two differences, but not terribly major.

James Blatch: This is something where you do need your accountant’s knowledge and advice, which brings us back to one of the early points, is getting an accountant, although you say at the very early stages it may not be cost-effective.

But as soon as it looks like it is cost-effective, it’s going to pay and it’s going to cover you as well from potential mistakes.

Barry Kernon: Yes. The idea is that the accountant will get your tax return right, and then you can sleep at night not worrying about the mistakes you’ve made.

James Blatch: Good. And I’m quite excited about the couple of bits I’ve learned, and of course, you’ve reminded me that the corporation tax… I think a few years ago they set it stepping down a few points, so that happens in April. Is it 17 in April or 18 in April?

Barry Kernon: I think it’s 19 now. I think it’s 2021 it goes to 17%. I’d have to check.

James Blatch: Yeah. I think that’s about right.

Barry Kernon: I think it’s before the end of this parliament, anyway.

James Blatch: Although having said that, the way politics is as we speak today, who knows what’s going to happen.

Barry Kernon: Philip Hammond might have something to say about that.

James Blatch: Yeah, all that might be canceled. But anyway, Barry, fantastic!

Barry Kernon: Sorry about the coughing.

James Blatch: The coughing’s fine. We can deal with that.

Barry Kernon: You can edit that out.

James Blatch: We can deal with that in edit. But it’s been really illuminating talking to you. Thank you.

Barry Kernon: Good. Oh, it’s a pleasure.

James Blatch: There you go. Barry. I think he’s your accountant, isn’t he?

Mark Dawson: No. I get to know Barry. I approached him some time ago, as a painter appears to my right, so if there’s noise then everybody will know what it is.

James Blatch: Oh, which painter? Is it anyone we’ve heard of?

Mark Dawson: It’s Dave. Dave the painter.

James Blatch: Oh, it’s not Monet.

Mark Dawson: No. Yeah, so I have thought about going with Barry a few times, but I have a local accountant here, which sometimes is a little odd, given that … I don’t know. I suspect I’m not his biggest turning over client, but given that I’m effectively a one-man band, I probably aren’t far off in terms of the revenue that is being generated and the opportunity to save money through clever tax planning.

It’s possible that I would get slightly more from a firm like Barry’s, but I’m very happy with Nick. I’ve been with him since the start, really. He’s kind of like my accountant, my tax advisor, and my bookkeeper as well, so I’m quite happy to stay with him.

But Barry is excellent. His firm is skewed towards creatives, so novelists, people in the media, film and TV, that kind of stuff. They’re specialists.

They know exactly what they’re doing when it comes to this, which is often a very tricky subject and a very tricky issue. Even how royalties are treated, in terms of whether they should be VATable. I don’t know. I haven’t heard the interview yet with Barry, but I don’t know if that came up.

James is frowning, so he can’t remember.

James Blatch: I can’t remember.

Mark Dawson: But it’s an interesting issue in that this is money coming in. It’s revenue, and I am a VAT-registered company now, which means I can reclaim VAT, but I’ve got no income VAT. Output or income. I never know the difference. But I’m not actually charging VAT to anybody, because Amazon is charging the VAT to the customer, and also, the money is coming from Luxembourg, so it’s not VATable in the UK.

By the way, this is not tax advice. I am not a tax lawyer by any stretch.

Basically, the tax lawyers that accountants use when they have tricky questions. A firm called Tolley’s. Went to them for some advice a couple of years ago about how this should be treated, because it’s new. It’s a new area. Arguably, the tax system is not quite set up to account for it yet, so interesting times.

James Blatch: Yeah. We had a very similar thing with SPF with the income which comes from New York. Sort of from New York. That gets complicated as well, and the whole country borders thing starts to …

You start to realize why there’s such an issue now with companies like Amazon and Apple, who often get criticized in one country for not paying their tax. They’re always at pains to point out they do pay their tax, but they don’t necessarily pay it in that particular country.

Because they have headquarters in one country and supply and distribution in another country, ultimately they’re going to pay tax where it’s more efficient for them. So we are in new territory, and I think governments need to get their head around that as well, find an equitable system.

Now, when we move everything to the Grand Cayman Islands or some other tax haven, we might move away from Nick. Maybe then we’ll get a different accountant.

Mark Dawson: Yes. Possibly. Yes, Nick also works on SPF as well, so yes, when that comes, we’ll probably be on the beach sipping piña coladas with someone.

James Blatch: Well, our accountant will be some Italian guy from Sicily. He’ll do our accounts.

Mark Dawson: We could get John to do it. John Dyer. What could possibly go wrong?

James Blatch: We pay our tax like good citizens.

I think that’s been a useful episode. I mean, it was certainly useful for me doing the interviews, listening to that. As I alluded to at the beginning, part of it is the advice you get, nuts and bolts advice, but a lot of it is the approach that you have to it being a business.

Actually, I’ve been recording MailerLite sessions. We’re now going to put MailerLite into the 101 course and it’s a mature platform. It’s growing in popularity amongst the SPF community.

I have to say, I’ve been incredibly impressed with using it. I know some people will be cheering, because we’ve been a little bit on the fence because they had a slightly tricky first couple of years, but they’re certainly through that.

Even when I’m doing these sessions where there’s decisions to make about the address that gets shown, the advice is set yourself up properly. Right from the beginning, set yourself up as a successful business, and as we said at the beginning, you give yourself a better option of being successful.

Mark Dawson: Yeah, absolutely. Also, it enables you to make decisions that are not necessarily influenced by personal, emotional factors. So, investment. You can look at advertising in different ways and treat it slightly more analytically, and work out, how much can the company afford to invest in ads? And look at it in those kinds of ways.

All of those kinds of decisions are seen in a slightly different way when you look at it through that prism, rather than the kind of sole proprietor prism.

James Blatch: Yes. The sole proprietor prism. I got that album in the ’70s. The great progressive rock band.

Mark Dawson: The sole proprietor prism. It sounds like Lester Piggott was … That’s another ’70s reference.

James Blatch: Another reference no-one else is going to understand, Lester Piggott being a 1980s jockey who went to prison along with Ken Dodd for not paying his tax. Okay.

Mark Dawson: See what I’ve done there? I’ve linked tax and sole proprietors and everything. I’m really clever.

James Blatch: And ’80s references that no-one understands.

Mark Dawson: Exactly.

James Blatch: Look, that’s it. Do you know, by the time we reconvene, England could have won two world cups?

Mark Dawson: There’s a song about that.

James Blatch: Yeah. We’re not going to sing that song.

Mark Dawson: We’re not going to sing that. No, they could do. That’s right. We have the women’s Football World Cup semi-final tonight.

James Blatch: Against our friends in America.

Mark Dawson: Against our friends in America. May not be friends tomorrow. And then Wednesday, England are playing New Zealand and they have to win in the cricket. Well, they don’t have to win, but they probably have to win in the cricket.

James Blatch: Well, I think India are going to win today, so I think they probably do have to win.

Mark Dawson: Do you think? I’ve just seen the score.

James Blatch: They might do.

Mark Dawson: They’re probably going to get about 500 runs, so yes, they are going to win today.

James Blatch: Yeah. So what’s the betting that England haven’t won any world cups by the time we reconvene?

Mark Dawson: There’s a very good chance that’s exactly what will happen.

James Blatch: Yes. But the bookies are taking no bets.

Mark Dawson: We like semi-finals, but we don’t like finals.

James Blatch: Yeah. We can do it. We can do it. Let’s be positive. It’s all about that business attitude.

Mark Dawson: No.

James Blatch: Okay. Look, that’s it. We are going to record another episode which is going to go out on the 19th of July, and then we’ll have a little break. Hopefully, the episodes after that will be live from New York, or sort of live New York.

James Blatch: Thank you so much indeed. Just a reminder, if you want to be eligible to get invited to our live monthly trainings at Self Publishing Formula University, go to patreon.com/selfpublishingshow.

That’s it. Excellent. Almost time for holiday. One more recording to do, but until then, I’m going to say it’s goodbye from him.

Mark Dawson: And it’s goodbye from me.

Mark Dawson: Goodbye.

James Blatch: Goodbye.

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