When Hollywood movie directors portray authors on screen, they often stereotype us as scatter-brained creatives with messy apartments and no grasp on financial responsibility. Of course, this isn’t an absolute truth, just how many writers also don’t have an MA in creative writing or work as a restaurant server to make ends meet. The real author community is as diverse as humanity itself, including doctors, janitors, engineers, teachers and – yes – financial advisors. Despite this reality, though, there are some among us who say they aren’t “good with money” and believe they never will be because they’ve internalised the popular story about creative brains.

Anyone, including authors, can become financially literate enough to run a profitable business and pay themselves. Admittedly, knowing how to start is tricky if you’ve never done it. Laws differ between countries and even states in the US. Hence, much advice you find online won’t be relevant to your author business. However, there are some universal guidelines and options we can all refer to for inspiration. A fundamental one, for instance, is the sage advice to separate your personal and business finances into different bank accounts. This provides a clear distinction and makes accounting easier.

Assuming you’ve done that, how do you pay yourself? The answer: it depends. There’s no one right answer for your business, and this blog post is not financial advice. As everyone’s situation is different, it’s vital to investigate your options with the help of a qualified accountant or registered financial advisor. That said, this post will outline common methods you could potentially explore to pay yourselves once your books start paying for themselves.

Pay a Salary

We’ll start here because a salary is one payment method most people already understand. As a worker, you’ve possibly earned a paycheque at some point in your life and wondered what legal steps a business must take to pay one. But, while you might think there is a fancy process behind it, including joining a scheme like PAYE in the UK, it’s often simpler than many people imagine, particularly if you are the only non-freelance employee associated with your company.

As long as you’ve separated your business cashflow into a separate bank account and researched the legal salary requirements for your territory, paying yourself a salary is simple. In most territories, all you need to do is send money from your business bank account to your personal one, including a word like “Salary” in your bank payment’s reference field. Make it clear what that money represents because it simplifies the process for your accountant come tax time. Then they can handle the rest. This is a useful place to start but, while it’s the most obvious, a salary might not be the most tax-efficient way to pay yourself if you earn a high income from your writing.

Repay a Director’s Loan

If you’ve long-held an aspiration to earn income from your work, you may have once assumed that a traditional publisher would handle the expenses, payments and the accounting that went with them. Even with a trad deal, though, it would still be you running your business. Your publisher wouldn’t be your employer. They couldn’t handle your tax. They would be a trading partner to whom you’ve licensed intellectual property. Hence, you would still need to learn about setting up a legal entity to manage your money. And as an indie author, knowing your own legal entity arrangement and figures is vital.

A large portion of authors start their writing career as sole traders. However, savvier ones who plan to grow empires often incorporate due to a list of potential benefits. One major one is the ability to factor in start-up expenses when calculating profit, which you can’t do effectively when your business and personal finances are mixed. Imagine, for instance, you sank $5,000 into production and marketing in your early months without making any revenue. In many countries, you can repay the money you loan the company as a director tax free if you incorporate, even if your company doesn’t make a profit until the following financial year. This is an efficient way to start paying yourself.

Claim Back Expenses

Did you know, as an entrepreneur, you can theoretically earn a $30,000 salary but live like you earn $36,000? This sounds shady, but it’s legal and even ethical if you use the system in the way governments intend. It just means being strategic about claiming your full range of legitimate business expenses. For example, if you generate $6,000 a month in revenue, pay $3,000 to overheads like advertising costs and editing fees, then pay yourself the other $3,000 – $36,000 a year – as taxable salary, you’re probably underusing the system.

Working from home, you might not feel like you have a “real” business premises to claim as an expense. Yet, if you finance the construction of an insulated writing shed with your salary, that shed and its contents are legitimate business expenses you could have otherwise claimed. Likewise, you might not think you can claim coffee runs through your business. But what if you drink them while attending weekly author meet-ups? That’s a networking expense. If you’re savvy, you could deduct an extra $500 of legitimate expenses every month from your $6,000 pre-tax revenue and only give yourself an annual taxable salary of $30,000. You should never abuse this system, but covering as many legitimate expenses with your company account as possible is a good business practice.

Pay in Dividends

You can choose to pay yourself a dividend instead of, or in addition to, a salary if you have incorporated your author business. If you’re unfamiliar with the concept it’s because most employees never encounter this income method. Yet dividends are easy to grasp; they’re shares of a company’s profits that companies pay shareholder for owning a part of the business. As a founding director of your company, you are a shareholder and can choose to pay yourself with a dividend as it is sometimes more tax efficient than paying yourself a salary. Depending on your situation, doing so can dramatically change the amount of take-home pay you receive.

One problem with dividends, however, is that they cannot typically be dispensed if the company has not made a profit that financial year. That means, if you’re planning on paying yourself using dividends exclusively, you could run into problems if your business ever experiences a run of negative cash flow, even if it has a pile of surplus cash from a previous financial year.  That’s not the end of the world. You could still pay yourself by other means if this happened. It’s just something to consider to ensure you don’t get yourself into trouble if you ever found yourself in this situation.

Buy Assets

This idea, which relies on capital gains, is an unconventional idea for authors, but understanding it could help you save money and pay yourself twice in two different forms. If you aren’t familiar with capital gains as a concept, the phrase represents the profit you make from the sale of an asset that has appreciated in value. Companies often earn it on buildings, Wall Street investors on company stocks and individuals on gold or silver jewellery. Any asset that appreciates in value delivers capital gains. And while using appreciating assets to build a business’ value is rarely mentioned in author conversations, it’s a common practice in other industries and can be useful.

Say you have an exceptional year of book sales but don’t want to pay yourself a massive salary or extra dividends that would place you in a high tax bracket. In that case, you could buy and hold legitimate assets – for example, antique books you could use for research or a luxury company car for travelling to author events. Then you could sell your assets at an appreciated price when you experience a sales slump on another financial year. As your assets count as company expenses, buying them helps you maximise your profit on bullish years and liquidating them helps you pay yourself during prolonged sales slumps. What’s more, you can use your assets to produce content or run your business in the meantime to generate even more income.

Modern indie authors own businesses, and as an owner, you must remember that you have access to options that aren’t available to the average employee. That said, however, doesn’t mean you have to pull all the levers. If you don’t like or understand one payment method, keep it simple. After all, money is just one metric we value in life. So are sleep, mental health and free time. Operating in a way that aligns with your values and makes you happy is the most reliable way to live a rich life.

Daniel Parsons

Dan Parsons is the bestselling author of multiple series. His Creative Business books for authors and other entrepreneurs contains several international bestsellers. Meanwhile, his fantasy and horror series, published under Daniel Parsons, have topped charts around the world and been used to promote a major Hollywood movie. For more information on writing, networking, and building your creative business, check out all of Dan’s non-fiction books here.