Does the author have to collect sales tax when they directly sell their books?
How do they report royalty income on their federal and state income tax returns?
Does the author have to get a business license or state tax ID number in order to collect sales taxes?
Can I "write-off" my expenditures as business expenses?
The short answer to all of this is this: I am in no way qualified to give anyone tax advice. I'm not an accountant, and after taking two accounting courses in college, I decided I would never want to be an accountant.
However, smarter people than I have already written about this subject. I'll condense some of the info here, and include links to the complete articles so you can look them over yourself.
1. Does the author have to collect sales taxes when they directly resell their books? This really depends upon the state in which you are selling your books. Each state is different, and in fact, different counties within those states can have differing sales tax rates. The short answer is "yes, if your state has a sales tax, you'll need to pay the tax for the books you sell." You can either add that cost to the sales price of your books, or just take a smaller portion of the sale and pay the sales tax yourself.
2. How do I report royalty income on my income tax returns? Basically, royalties are treated like income. Whenever I have done some freelance work in the past, I always had to report that as self-employment income, and there is a form for that. If your royalty income is very small there are certain conditions under which you can claim your writing is a "hobby," but for the most part, Uncle Sam wants his cut of your royalties.
3. Does the author have to get a business license or state tax ID number to collect sales taxes?
Again, depending upon the state where you are located, you may need to get some type of license to collect the sales tax, and you might event realize some tax advantages to treating your writing like your own small business and get a business license. This is something which you will REALLY want to run by an accountant (again, that is so not me).
4. Can I write-off my writing expenditures as business expenses? There may be some expenses that you can write-off, especially if you are working out of a home office and your book is providing you with income. As long as you can prove you are actively pursuing writing as a career, you may have some deductions at your disposal.
Disclaimer: Did I mention I'm not an accountant? OK, good! Seriously, this article is for informational purposes only, and should not be construed as actual tax advice. If you are serious about being a professional author and pursuing writing as a career, find yourself a great accountant!
Other articles I recommend (seriously, you should really read these):
Simple Record Keeping and Tax Deductions for Authors
The Issue of Sales Tax on Books
Taxes and Finances for Writers