How to Gain Tax Exemption on Your Online E-Book Income

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One of the most lucrative ways for freelance writers to make money online is to publish and sell e-books. There are many online publishing platforms that publish and sell e-books but two of the most popular are Amazon (www.amazon.com) and Smashwords (www.smashwords.com).

However, if you donโ€™t reside in the US, you are at a huge disadvantage. This is because Amazon and Smashwords withhold 30% of your e-book royalties as tax and remit it to the US Internal Revenue Service (IRS). However, if your country has a tax treaty with the US, you can claim exemption from this tax. To check whether your country has a tax treaty with the US, see page 37 of this online IRS publication (www.irs.gov/pub/irs-pdf/p901.pdf).

To qualify for exemption from deduction of tax, follow this seven-step procedure:

1. Obtain a hand-signed letter on paper from Smashwords written on its letterhead, requesting an ITIN (Individual Tax Identification Number). To obtain this letter, you must first earn $10 from Smashwords. Then go to your Payee Profile (www.smashwords.com/account/payee) and click on the link to request your letter. Smashwords will supply your letter within three to six weeks.

2. Once you receive the letter from Smashwords, fill in and sign form W-7 (Application for IRS Individual Taxpayer Identification Number). You can download this application (www.irs.gov/pub/irs-pdf/fw7.pdf) and instructions (www.irs.gov/instructions/iw7/ar01.html) from the IRS website.

3. Next, get a copy of your passport signed by a notary. Passport Canada provides a notarized copy of Canadian passports free of cost. However, you may have to pay the notary an extra charge in other countries.

4. Mail the signed letter from Amazon or Smashwords, the W-7 form and the notarized copy of your passport to the IRS in the US.

Another option is to send these documents as well as your passport to the US embassy in your country. The embassy will return your passport within a few days and forward your application to the IRS in the US. The IRS will process your application and send your ITIN to you within 60 to 90 days.

5. Once you receive a letter from the IRS with your ITIN, download form W-8BEN, (www.irs.gov/pub/irs-pdf/fw8ben.pdf) and instructions (www.irs.gov/pub/irs-pdf/iw8ben.pdf) from the IRS website.

6. Fill in the form and print a copy for Smashwords, Amazon and any other US companies from whom you receive payment. Also enter your user name or email address under the “reference numbers” line.

7. Print the form and sign it and mail a paper copy to each company.

Once Smashwords receives this form, it will reimburse any tax it may have deducted for the present tax year. However, since it has already remitted the tax for previous years to the IRS, you will have to reclaim it from the IRS yourself. You can reclaim the tax deducted for the past three years.

The good news is that once you get your IITN number from the IRS, you donโ€™t have to apply for it again. However, you have to mail the W-8BEN form to Smashwords and Amazon every three years.

The application process for exemption of tax can take about three to six months. If you are already selling e-books online and being taxed by the IRS, apply for your IITN number as soon as possible to avoid losing 30% of your income.

Bonus tip:

If you are a new author on Smashwords, consider buying copies of your own e-book so that you reach the minimum $10 balance. You can then request the signed ITIN letter from Smashwords and initiate the application process for tax exemption.

(6 February 2013)


Rohi Shetty is a medical doctor, Vipassana meditator, writer, editor, translator and blogger. His short stories and articles have been published online and in print.

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