Well, it's that time of year for U.S. citizens — tax time! Bloggers are kind of a special lot when it comes to taxes, which can make figuring out how to file tricky.
I've recently read some good articles about bloggers and taxes:
- Blogs and Taxes - What Bloggers Need to Report as Income from The WiC Project
- Taxes 2011: Mrs. CPA Answers Your Questions Regarding Blogging and Taxes from Mom In The City
- All About Sweepstakes Taxes (you'll see why this is relevant when we get into giveaway wins and product review items below)
- Click any link to jump to that topic.
- Business vs. hobby
- Business structure (sole proprietorship being the easiest to handle)
- Reporting goods received as income (including review products and giveaway wins)
- How to report conference swag or sponsored trips
- Doing your own recording and reporting, and minimum income required to report (unless you make a lot or are directly employed by a company, no one's sending you an easy-to-handle form such as a 1099 or W-2, so you're on your own)
- Deductions for bloggers
- Cash accounting vs. accrual and what makes sense for you
- Estimated taxes and the penalty for not paying them
- Business licensing in your local area
- Sales taxes on items you sell (such as in an Etsy shop) to supplement your blogging income
- Amending your return to include unreported income or deductions
All right, caveats out of the way, here's what I've learned:
You need to make a profit in at least three out of five years to qualify as a business — and to take business deductions.
There are other factors the IRS looks at to determine hobby vs. business, including:
- How much time do you dedicate to blogging?
- Do you depend on the income generated?
- Are you, in general, moving from loss status to profit status in your blogging business?
Keep good records, and try to turn a profit!
If you want your blogging to remain a hobby, that's fine. But keep in mind you still must report hobby income as miscellaneous income, and you can deduct hobby expenses subject to two limitations: (a) You can take them only as part of your itemized miscellaneous deductions that are, in total, greater than 2% of your adjusted gross income (this applies to only some taxpayers; you have to itemize deductions, and you have to have a lot of them) and (b) you generally cannot have expenses that are higher than income (in other words, no taking a loss).
More information on reporting as a hobby can be found in the articles I linked to up top and at IRS.gov.
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choose more complicated business structures as you need to or prefer.
For instance, if you and a friend start a website together, you're now at least a general partnership, and in some states without community property laws, even taking on board a spouse into your business will change it into a partnership.
You could also choose to "upgrade" to a limited liability company (LLC) or even incorporate. The perceived advantages of an LLC are having an easier time attracting investors (investors? for a blog?) and a limiting of personal liability (ah — it's in the name!). Say you write something inflammatory or harmful (tax advice?) and someone decides to sue you — the idea is that an LLC might help protect your personal assets. However, the IRS and lawyers are pretty good at "piercing the veil" of one-person LLCs to find the renamed sole proprietor behind them, so don't count on it.
Talk with some financial advisors if you think that upgrading your business structure is right for you. If you do nothing, you can just stay a sole proprietor and enjoy the convenience of less paperwork.
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And this is true whether your blogging is a business or a hobby. Contest wins are "other income," and products for review are goods given to you as a barter and must be reported as well. This is true, as well, if you barter with a local company to blog for them in exchange for free services, such as a natural health blogger writing an article about an acupuncture service in exchange for free appointments. You need to report the fair market value of the item or service, which you can usually determine from the company's website or online stores; record this amount and any substantiating proof (such as a screenshot of the online price).
My understanding is that if you give away the item immediately or after testing, you don't have to report it as income, but you will need to if you're taking a charitable deduction.
Since you're paying income tax on any freebies you're receiving, About.com has a good tip:
Before deciding whether or not to submit an entry for sweepstakes, ask yourself these questions:
- Would I really enjoy the prize?
- Would it make a great gift for a loved one?
- If I saw the prize offered in a store for a 70% discount, would I buy it?
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Mrs. CPA had some good advice on this topic. Conference swag is in the same boat as giveaway wins — reportable as income. (So don't scoop it up unless you really want it!)
If a company directly gives you a freebie like a plane ride (the airline) or a hotel stay (the hotel itself), it's income. However, if a PR agency is an intermediary in setting up a trip or event for bloggers, it's likely not income.
Let’s say Delta Airlines wants to foster blogger goodwill and they fly 10 bloggers somewhere in the continental US and have them report back on their experience. That’s taxable. You can figure out what the cost of that flight would be. It was free to you and the company providing the service donated it. Let’s say you are invited to the Grand Canyon. The PR agency pays the airlines for your ticket, the limo company for your ride to and from the airport, and the cost of your meals and hotel stay. The Grand Canyon pays the PR agency – a deduction and income – and the PR agency pays the vendors – a deduction and income. You just happen to be the recipient of the income and deduction circle that all gets reported by someone else. Basically if someone donates their product or service directly to you, that’s taxable. If they pay someone else to provide a service to you, that’s probably not taxable. You got value out of the transaction, but it is being reported as income somewhere.
Again, see the Mrs. CPA article for further clarification, and contact a tax expert if you need additional help figuring out your liability.
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Do I have to report income if I don't receive a report of payments made to me? Do I have to report income only over a certain amount?You have to report all income. There's no dollar minimum below which the IRS doesn't care, a piece of misinformation that is sometimes thrown around online.
Companies, such as affiliate companies, ad networks, clients for whom you've done contract writing, or online selling venues, are not required to report your particular earnings until they reach a certain dollar threshold. But you are still required to report said earnings.
This is true of giveaway wins and review products, as well — whether it's a tube of toothpaste or a dishwasher, you have to report it.
So keep good records of all your income, since no one else is likely doing it for you.
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expenses that are ordinary and necessary to your business of blogging.
Some potential deductions for bloggers and writers could include:
- Web hosting fees for your blog (deduct any fees for personal sites on the same host)
- Payments to a web designer for your blog template
- Office supplies for running your blog (notebook and pen to scribble ideas, for instance)
- Computer equipment and software (only the business portion — see below)
- Office furniture used for business (again, only the business portion. I'd be wary about deducting a dining room set just because you blog at the dining table, though — check with an accountant first)
- Home office — but only if you use it exclusively and regularly for business. If you use it for any personal activity, your deductions will be thrown out, and the IRS is very strict about this. For instance, if your children also play in there, or it's a spare bedroom that's occasionally used as a guest room, it's no longer exclusive. (Tough noogies, I know; we've never had a big enough place to justify setting aside a space exclusively for business!)
- Transportation or mileage to an alternate place of business, such as bus fare to a coffee shop to write or mileage to the library to check out books for a review you're writing (keep a mileage log)
- Meals with fellow bloggers or interview subjects (there are special rules for reporting such expenses, so keep a record of the people you were meeting with and for what business purpose)
- Conference fees
- Postage you paid to ship giveaway wins
- Business cards
- Online advertisements
- Swag you've produced, such as a t-shirt with your blog's logo you're intending to give away or sell
- Accounting fees you've paid for filing your business taxes (business portion only, so get an itemized bill)
Be sure you subtract the cost of any personal use of the items or services you're deducting. In some cases, you'll need to provide proof of business use — for a computer that's used for both personal and business use, for instance, you'll need to keep a log of your time spent on business vs. personal activity, and you can deduct only the business portion of your expenses.
Some expenses that won't hold up in IRS court?
- Jammies disguised as a work uniform (no one's making you wear such fashionable duds)
- Commuting from home to an outside office, if you do all your blogging work in an external office
- The cost of coffee in exchange for internet access at a coffee shop (sooo tempting given the rising cost of lattes, I know) — you could, however, deduct the actual amount you pay for internet access specifically, such as at a for-pay wireless hotspot
- Putting a magnetic sign or bumper sticker on your car to advertise your web address and pretending all your mileage is now for business (sad but true)
- Hiring your three-year-old to fetch a cold drink as you feverishly write — but you can employ your children as young as seven years old, if you have age-appropriate and business-related tasks for them! You'd better believe we're waiting for that magic number…
There are way too many rules to go into about how, why, and whether you can report various expenses, so be sure to do your own research or ask a professional for further advice, and keep careful records and receipts to help prove your case.
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Here's an explanation from NOLO of the differences between the two methods. Cash is probably what you would naturally gravitate toward, because it's typically a little easier to understand. You report an expense when you pay it, and you report income when you receive it. So, if you do a writing job for someone in December but don't get paid till January, you'd report it as income for the following year. If you're participating in an affiliate program but haven't met the minimum payout yet, you don't have to report the income until whenever it finally crosses into your bank account. If you win a giveaway but the prize never arrives, you don't have to count it as income at all.
Accrual accounting is for businesses that report expenses and income as they are billed, rather than as they are paid. We'll just assume that's not the method for you and move on.
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The IRS says that everyone who expects to owe $1,000 or more in taxes for the year must make estimated tax payments. This is after subtracting withholding and refundable credits. Publication 505 will walk you through it more thoroughly and give you some examples.
One problem is that you need to figure your other income, as well as your spouse's income if you're married filing jointly, into the mix, when determining whether you will owe $1,000 or more in taxes. In other words, it's not if you'll owe $1,000 in taxes on your blogging earnings, but overall.
If you do not pay estimated taxes at all, or do not pay them on time each quarter, and the IRS determines you were supposed to have, you will be hit with an underpayment penalty (currently 4%) when you file your annual return.
If in doubt, consult a professional or let tax software walk you through whether you need to file estimated payments and how much each one should be. If you or your spouse have additional employment income, I believe you can also increase your withholdings on a W-4 to cover the amount of blogging income you're bringing in. Again, check with a professional to go over your specific situation.
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In Washington state, for instance, which has no state income tax, much of the tax revenue is gleaned from our very high sales tax rate (9.5% currently in Seattle) as well as — and here's the rub for us business owners — business excise taxes. Because they need us to file our excise taxes at least annually (some businesses must file more often), they're very strict about making sure we're all licensed and registered with the state so they know where to mail our tax returns to, you see? The city of Seattle is the same way, and if someone lives in Washington but outside Seattle limits, it would be the county or another city calling the shots. So, in Washington, I have to get a master business license with the state, which among other things, registers our DBA (doing business as) name (if you plan to do business in the name of your blog, this is a good idea). I wouldn't have to file it otherwise until I grossed $12,000 or more a year (and believe me, as a blogger, I am currently not). This license doesn't expire. But then I also have to be licensed with the city of Seattle, and that must be renewed annually. The state license starts at $15, plus a $5 fee for each DBA/trade name. Seattle licenses cost $90 annually but only if you gross over a certain amount, so for most bloggers' purposes, it would be $45.
I'm just putting these out there as examples, though. I'm looking into the state licensing laws for my business partner's state for NPN, and they're completely different. In her state, only corporations and certain limited liability structures file a business license or taxes (as far as I can tell!), so the only needed registration with the state is for the DBA name. Since for NPN's purposes, we're a partnership, I'll be registering that for us. But if you're a sole proprietor, you might not need to. And I need to check with the specific local government offices (county or city) to determine what our registration requirements are there.
My point is — it depends on your state and on your business situation. The Small Business Administration has a good starting point for finding each state's requirements. You can also go to your state's Secretary of State or Department of Revenue webpage or simply run a Google search for "[Blank] state business license" and see what you find out. You can then find the contact information you need to call and speak with an actual person to confirm your responsibilities.
Now, if you're incorporating, hiring employees, or selling merchandise? That's a whole different ballgame, and you will definitely need some sort of registration then. We'll assume most bloggers are not doing the first two, but some might be doing the last. See below for more.
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Even if you don't collect the sales tax from the customer, you're still liable for reporting and remitting the sales tax amount to your state. This is where some online seller types get tripped up, thinking that if they never collect the tax because the site won't allow them to, a la Amazon, that they have no responsibility to hand over the tax to the state. The state strongly disagrees with this view. (Etsy does allow you to collect sales tax, by the by, as does eBay, so make sure you tweak your settings correctly.)
You'll also need to keep a thorough record of all your sales along with shipment addresses and postage purchases so you can prove your interstate deduction on all of your out-of-state sales. In other words, if you grossed $200 in sales but only one sale for $5 was to an in-state customer, if you're audited the state will want you to prove that the other $195 went out of state. (They would like more money from you rather than less, dontcha see.)
Now, if you're selling through a venue where you don't handle the money directly, such as through affiliate links or a book you wrote that's listed on Amazon, in that case the selling company is responsible for collecting the sales tax (in these two examples, the store giving you the affiliate links or Amazon selling the book for you). Just be absolutely sure this is true for you before you neglect to collect and file customer sales tax.
So if you're selling products, whether through your website directly or through an external venue, find out whether you're responsible for collecting sales tax, file the necessary paperwork with your state, and keep detailed records of every sale.
State sales tax issues can get complicated and are very state-particular, particularly with the new laws to recoup lost revenue on online sales, so contact your state's Department of Revenue or Secretary of State for further help on getting set up to collect and remit sales tax. Someone there can help walk you through the necessary steps. They want to help you…give them your money.
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file an amendment of your tax return.
You have to download the form and send it through snail mail (sigh), and the earlier the better to avoid interest and penalties on any amount you owe.
I am not not not going to tell you not to amend your tax return if you left off income you were supposed to have reported or whatever else. That said, maybe the information above is what will help you in future years to document your income and expenses carefully throughout the year and file correctly at tax time — and win your case if ever you're audited (heaven forfend).
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Any corrections, questions, or additions? Leave 'em in the comments. CPAs especially welcome to chime in.
Best wishes to all bloggers with your taxes and future accounting — and may your business of blogging be a profitable one so that you owe lots and lots! (Or something like that…)