Stacy B. Miller is a guest-writer at LiveWealthyRetirment.com Connect with Stacy on Facebook and Twitter. She will also answer your questions and reply to your comments in the “Comments” field below this article. Disclaimer: Stacy has extensive experience in financial writing, but she is NOT a Certified Financial Planner or a Professional Tax Preparer. Her tips and ideas do not have the power of legal advice. In this article, Stacy answers questions frequently asked by the individual bloggers in the United States and helps them choose their general strategy in treating their online business as a legal entity, plan, pay and report their taxes. She recommends filing Sole Proprietorship Taxes rather than registering the business as the Limited Liability Company (LLC) because unless a single-member business elects to be treated as a Corporation under LLC (which adds a lot of complexity), such a business would have to be categorized as a “Disregarded Entity” and may face similar financial liability as a sole proprietor. Please contact your Tax Accountant if you need help with your business tax preparation.
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Blogging and affiliate marketing are comparatively new professions. If you look back in the past 10 years, you’ll see that many people have taken blogging and affiliate marketing as a full-fledged profession. Honestly speaking, both are lucrative professions as bloggers do make a lot of money. But what about the tax laws? How should they file tax? Are they taxed just like the traditional employees? These are a few questions often asked by individual bloggers. In this post, we will try to find out answers to these questions.
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How should individual bloggers file tax?
From the tax perspective, there is a big difference between an individual blogger and a normal employee. In case of a salaried employee, tax is withheld from his paycheck automatically.
An individual blogger has to pay estimated tax every quarter – April, June, September, and January in a year.
Anyway, let’s get straight to the main subject of discussion. Here are the steps you need to take as an individual blogger:
Count and report your income to the IRS: Calculate and report your income to the IRS. When you’re calculating your income, make sure you include all the sources of income. For instance, monetary compensation, Swagbucks, free stuff, referral credit, etc.
Calculate your expenses and deductions: Count your expenses and find out what you can deduct to reduce your taxable income. Check out the categories and note them down.
Submit the requisite forms: Once you have calculated your income, expenses, and qualified tax deductions, you can submit the requisite forms, which include 1099-MISC and 1099-K. You can hire a tax accountant to do your tax returns.
Should bloggers register as an LLC or Sole Proprietorship?
A sole proprietorship is a good option for the individual bloggers when their business is completely self-financed and there are no partners. In a sole proprietorship, individual bloggers are accountable for both the profits and losses. If their business reaps profit, they have to pay personal income tax on it. Likewise, if the business incurs a loss, then they can claim the hit on the income tax return to lower their taxable income. The entire business income goes directly to individual bloggers. And, they have to pay income tax on an individual basis.
Individual bloggers can report their income and expenses to the IRS with the form Schedule C. They have to pay their estimated tax every quarter.
What IRS forms will they receive from affiliate companies?
Online bloggers and affiliate marketers are likely to receive 1099-MISC forms from clients during the tax season. Clients and the PayPal (payment gateway) know how much an individual blogger has earned in the financial year. Clients are most likely to send a 1099-MISC form to him. On the other hand, PayPal is likely to send him a 1099-K form for the transactions done in the tax year. PayPal has a detailed record of the total amount received in the tax year. So, they send 1099-K form to both the IRS and the blogger in the current tax year.
What if a blogger’s income is below $600?
Usually, clients send the 1099-MISC form to individual bloggers and affiliate marketers when they earn more than $600. PayPal sends a 1099-K form when someone’s income is between $200 and $20000. If an individual blogger earns less than $600, then also he has to report the income to the IRS. He doesn’t need the form 1099 in this scenario.
As a blogger, one big area where you can save money is tax. Here are a few tips to do just that:
Take advantage of the tax deductions: Just like the normal employees, individual bloggers are also allowed to claim tax deductions for various kinds of necessary expenses. This includes electricity, advertising, insurance, furniture, office supplies, website fees, seminars, and anything directly associated with their business. They can deduct these expenses from their income directly. If bloggers have set up an office in their home, then also there is good news for them.
Individual bloggers can claim deductions for household expenses like utility bills and rent.
Register business in a different state: Some states don’t charge tax for S-Corps, LLC, or sole proprietorship. This is why many bloggers register their businesses in those states to get a tax advantage. But this is the wrong way to save tax. Bloggers should register their business in the state where they operate and pay tax.
You won’t qualify for any kind of deduction if you have categorized blogging as your hobby. You have to pay tax to the IRS even if you earn a few dollars from your hobby. If you wish to take advantage of tax deductions, then you have to report blogging as your business and file sole proprietorship taxes. Show that you earn a profit from your business to the IRS. And, if you have reaped profits in the last 5 years, then the IRS will regard your business as legitimate. Just keep in mind that your business must have earned profits in at least 3 years.
Do you have any questions, your own tips for self-employed bloggers and digital marketers on the proper way of planning, paying and reporting taxes, or other feedback on this article? Please use the “Comments” field below to chat with us.
Stacy B Miller is a full-time financial writer and editor with 4 years of experience in writing for law firms and other financial organizations. She has been focusing on personal finance, debt, credit, US taxation, laws, budgeting, news, industry updates, and other money management topics. Her goal is to help her readers make the most of their money.
Disclaimer: Stacy B. Miller is NOT a financial advisor.