Your hard work on your blog is paying off. You found ways to generate income, or perhaps you have plans for monetization.
But how does that work for taxes? How much more will you have to pay in, or can you still get a tax refund?
There are so many different moving pieces involved in blogger taxes that it's almost impossible to give a one size fits all answer in a single blog post.
At the same time, taxes don't have to be the big mystery we often make them out to be. It's easier to get a feel for how your blogging impact impacts your tax situation when you understand some basic concepts.
We'll walk through these tax ideas. More than that, if you're looking for more than a 10,000-foot overview of blogger taxes, we have several articles that go into more detail. That way, you can get a complete guide for understanding taxes for your content creation business. We'll take a quick look at ten main concepts and then take a deeper look at many of these in additional articles.
- You're on your own for taxes.
- You file taxes for your blog as a small business
- Your business taxes are paid on your personal tax return
- Business taxes are based on profit.
- Gross Income is the money you get for your business
- Expenses and cost of goods sold reduce taxable business income
- Think of Schedule C as your business's version of a W-2
- Self-Employment tax is based on a percentage of your business profits.
- Business profits are only a small part of the income tax picture.
- Self-employment tax plus income tax minus payments and credits determine if you pay in or get a refund.
This is not tax advice.
Finally, we'll wrap up with 3 steps to use this information to prepare for tax time.
The purpose of this and other articles in this series is to be educational. The idea here is to help you understand how taxes work. It is NOT meant to give specific advice for your personal tax situation. For personal, legal, and tax advice and tax tips related to your particular situation, you should seek out a professional tax expert who can give you customized advice and guidance.
It's important to understand that this covers taxes for bloggers in the United States. While many concepts are similar in other countries, each nation has its own tax laws. We also don't get into state or local taxes or other taxes like sales tax. This is primarily an overview of Federal taxes related to one's income as an individual or business.
1. You're on your own for taxes.
New bloggers (or those making money for the first time) must first realize that they are entirely on their own for tax purposes.
You may be used to just having money taken out of a paycheck. Since you never really had that money to begin with, you usually don't miss it. You may notice the numbers on your W2 form when tax season comes around. But at that point, it's just a number you input, and don't pay that much attention to it.
It's a different world when you're self-employed. Now you have to do it all. If you don't, that filing deadline can sneak up on you.
2. You pay taxes for your blog as a small business.
An individual who earns money outside of employment is self-employed. The IRS calls it a sole proprietorship. The exception is if you created an LLC for your blogging business or other business entity like a corporation.
Technically, you are operating a business. Your taxes are, therefore, small business taxes.
Taxes may be different if your blog is a hobby than if it's a business. However, a hobby blogger cannot write off business expenses and should not be actively seeking income opportunities.
3. Your business taxes are paid on your individual income tax return.
Calling it a business can make it really intimidating, especially when you think in terms of taxes. Fortunately, it's not all that bad. You do not pay a different tax because you're running a business.
Business taxes for sole proprietors and many LLCs (such as a single-member LLC) are known as pass-through taxes. That means that the taxes for the business are paid as part of the owner's personal income tax return.
In a lot of ways, that simplifies things from a tax perspective. You don't have to worry about corporate tax returns. You'll have a couple of tax forms where you report your business's income and business deductions. And then, the profit from your business becomes another form of income on your personal return.
4. Business taxes are based on profit.
This is actually good news.
When I first started writing about taxes, it was for independent contractors in the gig economy. There's a common misconception among people who are self-employed that you can only claim your business expenses if you itemize your tax deductions.
However, the great thing about running your own business is that your REAL self-employed income is your profit. In other words, it's what's left over AFTER your expenses are taken out.
It doesn't matter whether you take the standard tax deduction on your Federal income tax or if you itemize. Personal tax deductions are entirely different from business expenses and are handled in a different part of the tax return.
In fact, if your expenses are greater than your income, your business losses may be subtracted from other personal income on your return as a loss.
5. Gross income is the money your business earns
It all starts with how much money is coming in. Keep in mind that it's your BUSINESS's income, not your personal income. Remember that last point about profit: it only counts as personal income after you've deducted your expenses.
There are so many ways you can monetize your blog. A lot of us have multiple sources of income. Between advertising, guest posts, sponsorships, affiliate marketing, online courses, digital products, and physical products, there are many ways to make money with online marketing.
Your customers (or revenue sources) must report to the IRS any payments exceeding $600. If they do so, they'll also send you a 1099 form that reports your blog income. There are several types of 1099 forms you will receive.
However, those forms are not reporting your personal income. They report your business's gross receipts. There's a lot that happens after that. As we said before, it's all based on profit. This brings us to our next point:
6. Expenses and cost of goods sold reduce taxable business income
You subtract business expenses from gross income to determine your business's profit. If you sold products, you'd also deduct what's known as “cost of goods sold.”
What exactly qualifies as a tax deductible business expense? The best rule of thumb is what the IRS says.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. QUOTE from IRS Publication 535
If you need to spend the money to operate your business well, it's necessary. When it's normal for your type of business to spend money on that type of item, it's ordinary.
Is there a business purpose for your expense? Will it help you operate your business or make it better and more profitable?
There are the things you need for your blog. Hosting, domain names, plugins, website themes, and software. You may claim some home office expenses if you meet certain conditions. Certain office supplies may be necessary.
Some things help you move to the next level, such as SEO research tools, courses, and resources that help you learn. You may need podcasting or video equipment. If you need to drive somewhere, such as to interview someone or get necessary supplies, the cost of driving is an expense. Travel to conferences for networking and education may help you advance your business.
It's not about searching for a list of write-offs. It's about understanding if business purposes are ordinary and necessary. Those legitimate business expenses can be deducted from your gross income to determine your taxable profit.
7. Think of Schedule C as your business version of a W-2
Here's where we dig into how all that income and those expenses go together.
Many bloggers think 1099 forms are their version of an employee's W-2. Those are actually very different things.
You add your W2 wages immediately to your personal income. However, your 1099 income does not do the same thing. Remember how your profit, not gross revenue, is your taxable income.
That's where Schedule C comes in. IRS form Schedule C is entitled “Profit and Loss from Business.”
Schedule C has an income section where you add up all the money your business brought in. Then there's an expense section listing your costs by expense type. Subtract the costs from the revenue to get your profit.
Profit from your Schedule C gets added to your other income on your tax return, like wages on a W-2. That's why I say it's like creating your version of a W2.
And all of this happens in the income section of your tax form. That means you can claim those business expenses regardless of whether you itemize or take the standard deduction. It's all done on a different part of the tax return than your personal deductions.
8. You pay self-employment tax on your business profits.
I know I said earlier that you don't have a separate business tax. So what's this self-employment tax?
Self-employment tax is how we pay Social Security and Medicare taxes. Since no one is withholding taxes for us, those taxes aren't taken out either.
The IRS calls Medicare and Social Security taxes “employment taxes.” These are only charged against your employment income. Even though your income is from running a business, you must pay those taxes. Since they're the self-employed version of employment taxes, it makes sense that they're called self-employment taxes.
Here are a few points to understand about self-employment tax:
- Employment AND Self-Employment taxes are paid on every dollar of income. Tax brackets or tax deductions don't change how much you pay.
- Employment AND Self-Employment taxes are 15.3% of your income.
- An employer pays half of their employee's FICA taxes, leaving the employee to pay only 7.65%. However, you're technically both employer and employee, meaning you are responsible for the entire 15.3%.
- Employees are accustomed to FICA taxes just coming out of their checks and don't have to file any forms. That tends to keep Social Security and Medicare taxes “out of mind.” That can throw first-time business owners for a loop: you're just not expecting to file these taxes.
- The good news is that self-employment tax is pretty simple. It's a flat rate charged against your profits. There's not much more to it than that.
9. Business profits make only a small piece of the income tax puzzle.
While self-employment tax is pretty cut and dried (15.3% of profits), income tax is a different story.
If you came to me and said, “I made this much money and had this much in expenses, how much will I owe in taxes?” I wouldn't even try to answer that question. There are too many factors that go into figuring it out.
Income from your business is often only a part of the overall income picture. You or your partner may have wages, interest, retirement, or investment income.
A lot of things outside of your business impact what your income taxes will be. Your itemized or standard tax deduction, income adjustments, filing status, and tax credits all enter the picture.
The best way to understand that is to examine how the income tax process works. It boils down to three questions:
- How much did you earn?
- How much of that is taxable?
- What is your income tax bill?
You start with your different forms of income for the last year. Then, you subtract tax deductions and income adjustments to determine taxable income. Then you compare that to the IRS tax charts to determine your income tax liability.
10. Self-employment tax plus income tax minus payments and credits determine if you pay in or get a refund.
The over-simplified process looks like this:
- Add your income tax bill to your self-employment tax bill to determine your total tax bill.
- Subtract your payments to determine what you owe or if you get a refund.
Of course, the IRS likes to add its complexity. There's a precise order to how they do things, each with its reasons. But the bigger picture is you have your tax bill and your payments.
Tax payments come in several forms:
- Income tax withholding from paychecks (and sometimes from other income)
- Estimated payments you made through quarterly filing
- Tax credits
Uncle Sam requires that your taxes be paid up by the end of the year. That's why they withhold money from paychecks. They want your taxes to be pay-as-you-go.
The IRS may charge penalties and interest if you owe more than $1,000 on tax day. This is why many a self-employed content creator will often make quarterly estimated tax payments.
And then there are tax credits. We often confuse them with tax deductions, though they're very different. A deduction reduces your taxable income, whereas a tax credit counts as a payment towards your tax bill. It's a lot like Uncle Sam giving you money to apply to your taxes. Some credits are refundable, meaning that if the credits are more than your tax bill, you can get a refund. Non-refundable credits will only pay an outstanding income tax bill but will not lead to a refund.
How to use this knowledge to prepare for taxes
We chose not to go into every detail we could on each topic. We decided instead to create a series that focuses on each part of the tax picture.
With all of this information, I believe three critical takeaways can help you prepare for tax day:
- Know when you need help
- Track your expenses
- Set aside money for tax time.
All this tax talk can be overwhelming. If it seems like too much, that's a sign that you may want to avoid trying and doing this on your own. I can't overemphasize how valuable a good tax professional can be in protecting you from expensive tax mistakes.
Remember that you can claim your expenses regardless of whether you itemize your tax deductions. Keep a record of every business transaction related to your blog. It's best to keep a separate bank account for your business, which makes this easier.
Finally, get into a habit of saving money for taxes. You might use a tax tool like Hurdlr to estimate your tax savings or simply set aside a percentage. There's no one correct way to do it. I recommend you create a separate savings account that isn't tied to your checking account. That makes it less tempting to spend the money. Then, once a quarter, send that money to the IRS.
Doing these three things will keep you far better prepared for tax filing season. Taxes don't have to be a nightmare or overly complicated. Understand the basic concepts, track your expenses, and get help when you need it. You'll be amazed at how much better you feel about taxes when you do this.