Blogging and Taxes
Are Taxes Due on Blogging Income?
A fairly new profession, blogging is becoming more and more popular. So much so, that many individuals are making a full time living at it, while others earn minimal amounts. And there are some who just blog because they like to.
Those who have been in the business for a while know that the same tax laws that apply to other occupations apply here also. The purpose of this article is to inform those who are new to blogging and not familiar with the requirements of the tax code.
What form of organization to use for blogging
One of the first decisions to be made is the type of business formation.
The usual types are a corporation, partnership, LLC, or a sole proprietorship (single owner). If you’re just starting out, the best choice is a sole proprietorship, and it is the cheapest. You can change it later on if your income is substantial.
If the blogger chooses to operate the business as a single owner as most do, there may be various taxes that must be paid. A single owner business that is not incorporated can’t pay himself a salary and withhold taxes. The business operation is reported on a Schedule C on the personal tax return, and taxes are paid on the net profit.
When a profit is generated from blogging, there are federal and state income taxes due. Plus the owner must pay self-employment taxes. This is basically the FICA and Medicare tax that one sees on a W-2, but the owner must pay the full amount, employee and employer portions.
To arrive at the net profit number, the self-employed blogger is permitted to deduct various expenses that are ordinary and necessary to this type of business. These would include, but are not all inclusive, expenses such as office supplies, costs of maintaining a web site, and possibly a home office arrangement. The Schedule C also lists other various types of possible expenses as a guideline.
If the business generates a profit, it’s possible that you may be required to pay estimated taxes. A calculation needs to be made once the net profit exceeds $1,000.00. Some part time bloggers that have W-2 income, and normally receive large refunds, may not have to pay estimated taxes. Others may be required to pay the income and self-employment taxes in during the year in four installments.
Do I Have a Business or a Hobby?
Another area to be aware of is whether your blogging venture is classified as a bona fide business or a hobby. To be classified as a business, there must be a clear motive to make a profit. Books and records must be maintained, and a separate checking account for the venture helps as well.
The IRS uses various tests to determine whether you have a business or a hobby. Showing a profit for three out of five years is a basic test. Another is the time spent in the venture.
As an example, I had a client a few years ago that had several race horses. Books and records were properly maintained, but the operation hadn’t shown a profit in six years. The IRS challenged the large losses and classified it as an expensive hobby.
We demonstrated to the IRS that the owner had spent a significant amount of time in the operation (records of appointment books, etc.), and was doing all that he could to make a profit. He was hiring expensive trainers and vets, but the horses just weren’t star material.
We wrote a lengthy memorandum, addressing all relevant issues as to how it was a legitimate business. Our information was later accepted by the IRS and the client was able to deduct the large losses.
If you enjoy blogging and are able to generate a source of income from it, we highly recommend that you set it up properly from day one. Keep accurate books and records with receipts, and be sure to report all income that you receive. Some individuals make the mistake of listening to friends or associates who advise them that there is no need to report cash as it’s too difficult to trace. Don’t do it. It’s definitely not worth it.
You can file those taxes here at our online tax filing website at very low cost.