We’re heading into the end of January, which can only mean one thing — it’s officially tax season. Before you yawn, groan inwardly, or close this page in the hope of avoiding it, fear not! I synced up with Helena Swyter, The B Bar’s resident accounting expert (and author of our Accounting 101 book), to break down the basics of what you need to know about paying tax on your blog income (for starters, do you even know if you owe any tax?). Check out our short interview below, and don’t forget that you can get lots more info in her cocktail. And, if you really need professional help, she’s available for hire this tax season (on a personal note, this will be my second year using Helena and it’s made tax season immensely less stressful for me!).
1. As a blogger, how do you know when your blog is actually a business, and when will you have to declare income and pay taxes on it?
You should begin to start treating your blog as a business – rather than a hobby – as soon as you start receiving money. There are rumors about not having to pay taxes on income below a certain threshold but let me assure you, the IRS wants to know about all income coming into your household! Regardless of how much money you make from your blog, you do have to report that amount and will owe federal and state (if applicable) taxes on it. Where the confusion happens is you won’t owe self-employment tax on that amount until it hits $400.
2. What are some of the common items bloggers forget count as income?
Blogger income gets fuzzy when we consider all the ways in which a blogger can be paid. The biggest overlooked item is compensation in the form of goods or services.
For example, let’s say you have an arrangement with a local flower store. They will give you all the flowers you need if you feature them in your popular series about floral arrangement. Those flowers are compensation and should be recorded at market value (the amount you’d pay for them if you weren’t getting them for free). More on that here.
3. If you didn’t pay estimated (quarterly) taxes throughout the year, how will that affect your annual return? Will you be in “trouble” with the IRS?
First, fear not! Forgetting to pay (or not even knowing you should be paying) quarterly estimated taxes is very common. When your annual taxes are calculated, you may be subject to a penalty on the underpayment. This penalty, however, is on the low side, so don’t lose any sleep.
Going forward, however, make sure your accountant helps you prepare for 2014′s estimated tax schedule. He or she should be able to give you vouchers listing the amount you owe and the due date for the upcoming year.
4. What are common items that bloggers can deduct from their tax return? Can you deduct these items even if you made less than $400 per year from the blog?
All businesses, regardless of the amount of total income they bring in, can deduct expenses. The biggest ones that bloggers forget are the cost of using cell phones, cameras, and computers for business. As these are business assets (i.e., items you use for your business) you must take depreciation on them when you file your annual tax return.
I also advise all my clients to add a category to their bookkeeping system called “Education” – all the classes you take online (or drinks you buy at a certain bar) are business expenses as they educate you on how to improve your blog business.
One of the benefits of being a business (versus a hobby, as discussed above) is that you can “go negative”. If your costs exceed your income – very common in the first year in business – you can take a loss on your tax return.
5. What are the major tax forms bloggers should remember to fill out, if they made more than $400 in 2013 from their blog?
While these answers will change slightly depending on the legal structure of your business, the most common forms are as follows:
Schedule C – This schedule shows the profit and loss from a business and is most-commonly used by sole proprietors and single-member LLCs. The Schedule starts with your income for the year and then subtracts the various expenses you had to arrive at a net profit. This profit carries over to the first page of your Tax Return and is combined with any other income your household may have had for the year.
Schedule SE – This schedule is used to calculate your self-employment taxes. You are required to start paying self-employment taxes once you earn $400 from self-employment.
Don’t forget that if you pay someone else – an assistant, a contractor, or another type of co-conspirator – more than $600 in 2013 you may be required to issue them a Form 1099-MISC. Those forms are due on January 31, so talk to you tax adviser if you are unsure.
6. Finally, just to clarify, why is it that brands/companies won’t send you a 1099-MISC until they’ve paid you $600 or more, but you have to report income of $400 or more for self-employment tax to the IRS? It’s so confusing!
Yeah, you’ve discovered one of the odd bits of taxes that proves to you that the code was written by a committee!
Suppose a brand pays you $500, and that’s the only money you make for the year on your blog. You still have to pay taxes on it, it’s just that whoever paid you that amount is not required to issue a Form 1099-MISC. It’s slightly more clear when you think about the purpose of each form:
Schedule SE (the $400 limit) is so self-employed people pay into the social security and medicare system. As people historically under-report self-employment income, the limit is low to make people start coughing up money (and make sure they will get SS benefits when they retire).
1099-MISC is purely informational for the IRS. Money changes hands all the time and unless you are working for some company and they issue you (and the IRS) a Form W-2 listing the amount. So, the threshold is $600 because the IRS decided that at that level things should be reported so there is some accountability – people who earn money as contractors actually have to pay taxes on it and the IRS has a way of knowing how much they should be paying! While you should pay taxes on all income, it’s not worth it to the IRS to track down smaller amounts.