Your hard work on your blog is paying off. You found ways to generate some income, or 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 really 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 that we often make them out to be. If you can understand some basic concepts about taxes, it makes it easier to get a feel for how your blogging income will impact your tax situation.
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, there are several articles that go into more detail. That way you can get a more complete guide for understanding taxes for your content creation business.
This is not tax advice.
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 you specific advice for your personal tax situation. For personal, legal, and tax advice related to your specific 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 as a business.
10 Important Tax concepts for bloggers
We’ll take a quick look at the main concepts, and then take a deeper look at each one.
- You’re on your own for taxes.
- Decide if your blogging is a business or a hobby.
- You pay taxes for your business through 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 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.
You’re on your own for taxes.
The first thing that new bloggers (or those who are making money for the first time) must realize: You are completely on your own for taxes.
You may be used to just having money taken out of a paycheck. You never really miss that money because you never actually had it to begin with. When tax season comes around, you may notice the numbers on your W2 form. 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 getting income for a side hustle or for being fully self-employed. Now you have to do it all. If you don’t, that filing deadline can sneak up on you.
Decide if your blogging is a business.
There are a couple of ways to think of blogging. On the one hand, it might be something you do just for the love of writing. And hey, if you get a little extra money, that’s alright. That’s an indication that it’s a hobby and not a business.
On the other hand, your intention could be entirely to make money. Whether as a side gig or something you devote full-time efforts into, it’s now a business. Any earnings and expenses are treated as such.
There are tax implications both ways. If it’s a hobby, any income is “other income” and not subject to Social Security or Medicare taxes. You do have to pay income tax on that income. The down side is, as of the 2017 Tax Cuts and Jobs Act, you can’t claim any expenses or take a loss as a hobby.
Business taxes are a bit different and a lot more involved. Whether you realize it or not you’re running a legitimate business. There’s more record keeping involved, but as a business you can write off the expenses that go with running your blog.
The IRS gets a bit touchy if you try to claim it’s a hobby when it’s a business, or to claim it as a business when it’s clearly not, just so you can save on taxes. For that reason, you want to make sure you know the differences between the two and whether you really are running a business. If you’ve decided it’s a business, you can then take the step to determine what business type you want your business to be.
The rest of this article is going to look at the perspective of blogging as a business. It doesn’t really matter if you’ve created a business entity or made it official. If your goal is to make a profit, you are in business for yourself. If you’re in business for yourself, the IRS considers you to be a sole proprietorship.
All that to say you’re running a business.
You pay taxes for your business through your personal tax return.
Calling it a business can make it really intimidating, especially when you think in terms of taxes.
What you may not realize is that for the vast majority of businesses, the money made is simply personal income for the business owner. With the exception of certain corporate designations (usually much larger businesses), there’s not an actual business or corporate tax.
The government calls it a pass through business. What that means is that the profits for the business simply pass through to the business owner as personal income. If you’re the sole owner, you’ll pay income on all the profits. If it’s a partnership or multi-owner setup, profits are distributed by what percentage of ownership each has.
In a lot of ways, that simplifies things from a tax perspective. But then again, there’s self-employment tax.
Wait a minute… we just got done saying there’s no additional business tax. So what’s with this self-employment tax?
Even if you’re self-employed, you still have to pay your version of FICA taxes (Medicare and Social Security). That’s all that self-employment tax is. We’ll talk more about that further down.
Business taxes are based on profit.
This is good news actually.
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’t claim your business expenses unless you itemize your tax deductions.
However, the great thing about running your own business is that your REAL income from your business 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 personal income taxes 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 were greater than your income, your business losses can actually be deducted from other personal income for income tax purposes. When just getting started with a content business like blogging, sometimes you’ll have expenses for awhile before you ever see money coming in.
Gross Receipts is the money you get for your business
It all starts with how much money is coming in, Keep in mind, that’s your BUSINESS income, not your personal income. Remember that last point about profit: it doesn’t become personal income until you’ve determined your profit.
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, physical products, there are a lot of ways to make money with online marketing.
At the end of the year, when a company has paid you $600 or more, they have to report that income to the IRS. When they do they’ll send you a 1099 form.
In the past, some could make significantly more than $600 without getting a 1099. That’s because they were paid through a payment processor like Square or Paypal. The rules were different and they didn’t have to report income until you made more than $20,000. However, changes to 1099-K reporting requirements lowered that threshold to $600 for the 2022 tax year.
The good news is, you’re not paying taxes only on what came into your business. Remember the previous concept – it’s all based on profit. Thus, that brings us to our next main idea:
Expenses and cost of goods sold reduce taxable business income
What exactly qualifies as a 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.IRS Publication 535
If you need to spend the money (it’s necessary) to operate your business well, and if it’s pretty normal for a similar business to spend money on the same thing (it’s ordinary), that pretty much tells you it’s a legitimate business expense.
Is there a business purpose for your expense? Will it help you operate your business or to make it better and more profitable?
There are the things you need for your blog. Hosting, domain names, plugins and themes and software. If you have space dedicated to your blogging, you may be able to claim certain home office expenses. Certain office supplies may be necessary.
Some things help you move to the next level. SEO research tools, courses and resources that help you learn. Maybe you need podcast or video equipment. If you need to drive somewhere such as to interview 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 when something is ordinary and necessary for your business. Those legitimate business expenses can be deducted from your gross income to determine your taxable profit.
Some rules about claiming expenses can be tricky.
The first rule of thumb for tracking business expenses is, if in doubt, track it.
The second rule of thumb, check with a tax pro before you actually claim it on your taxes.
That’s because some of the rules about when it’s an expense and when it’s not can be a bit involved. It’s worth getting some clarification.
If you buy something that you use personally and for business, you can only claim the percentage of that expense that relates to what percent of its use is for business.
One important thing to understand is that an expense is only an expense when you have less after spending the money. That’s important to understand when you buy something that has a lot of value. It’s not really an expense because all you’ve done is trade one asset (your money) for another (that thing of value). It doesn’t become an expense until it starts to lose value (known as depreciation).
If you sell products, you should understand Cost of Goods Sold (COGS). That’s the cost of buying or making the products that you sell. However, it’s only a cost you can claim if you’ve actually sold the items. I once bought a bunch of shirts to sell but never sold them. The inventory has value, so I couldn’t write off the purchase as an expense.
Since blogging often takes awhile before you’re actually making money, you might still claim expenses for the first year or two as a loss, or you might wait and claim expenses from previous years as startup costs.
These are just a few examples, and all of them are more involved than the simple explanations here. That’s why it can be wise to get help from a tax professional.
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.
A lot of bloggers think of forms like the 1099’s they receive as their version of an employee’s W-2. Those are actually very different things.
On a W2, your wages are added immediately to your personal income. But remember our earlier point: your income for your business is determined by profit. It’s not immediately added to your 1040 income.
That’s where Schedule C comes in. IRS form Schedule C is also called “Profit and Loss from Business.”
On that form, you add up all the money that comes into your business on the income part of the form. You subtract your cost of goods sold from that to get your company’s gross profits.
Then there’s a section where you list your expense totals by expense categories. List the total spent on supplies on one line, for your office on another, etc. Add all those up for total expenses.
Subtract expenses from gross income, and you get your net profit.
It’s that profit that gets added to your other income on your tax return. That’s why I say it’s a lot like creating your own W2 to report your business income.
And all of this happens in the income section of your tax form. What that means is 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.
You pay self-employment tax on your business profits.
I said earlier, you don’t have a separate business tax if you’re self-employed and not incorporated in a certain way. Your business income is taxed as personal income.
But if we don’t have a business tax, what’s this self-employment tax? Are we being taxed for being self-employed?
No. Self-employment tax is simply our version of FICA taxes. It’s where we pay our Social Security and Medicare taxes.
The IRS calls the social security and Medicare taxes “employment taxes.” These are taxes that are only charged against your employment income. Even though you choose to run a business instead of being an employee, you have to pay those taxes.
And that’s how they came up with calling it “Self-Employment taxes.” It’s our version of employment taxes.
When you understand it as the same tax, you realize a few things:
1. Employment AND Self-Employment taxes are paid on every dollar of income. Tax brackets or tax deductions don’t change how much you pay.
2. Employment AND Self-Employment taxes are 15.3% of your income. Here’s where there’s a difference. An employer has to pay half that, so the employee only pays 7.65%. However, when you’re both the employer AND the employee, you get to pay the whole amount.
3. We’re used to employment taxes just being taken out of our check. We don’t have to file taxes for those as employees. That’s why that part of taxes can really throw us off.
Fortunately, self-employment tax is pretty simple once you complete your Schedule C. It’s a straight 15.3% of profit.
But because it’s not offset by deductions like income tax is, it’s the 15.3% self-employment tax that can really add up on you if you’re not ready.
Business profits are only a small part of the income tax picture.
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.
The self-employment tax part is pretty easy. It’s a flat percentage of your profit (up to a certain limit).
Income tax is a whole different picture. Income from your business often only a part of the overall income picture. A lot of things outside of your business impact what your income taxes will be.
The best way to understand that is to examine how the tax process works.
The four questions of the income tax process.
You could say that all the sections of your tax form can can be summed up as Uncle Sam asking you four basic questions:
- How much did you earn?
- How much of that is taxable?
- What is your income tax bill?
- How much did you already pay in?
While that’s true of federal income taxes, a lot of states and other countries are very similar. It’s just the details that are different. We’ll look at the first three questions below:
How much did you earn? Your Schedule C profit is just one part of this answer. Did you (or your partner if filing a joint return) have wages? What about other income like royalties, investment income, pensions, etc.? All of that is added up.
How much of that is taxable? Here’s where the tax deductions come into play. You’re subtracting itemized or standard deductions and other adjustments that bring you to what the government calls your taxable income.
How much is your income tax bill? Now your taxable income lets you figure out your income tax liability. This is the part that goes to the government. Ultimately it’s a percentage of your taxable income. But it gets a bit more complicated than that when you figure in income brackets. You can look up your income tax bill using the IRS tax table.
So when all is said and done, you actually have two tax bills. One is your self-employment tax, and the other is income tax liability. Some folks have other taxes as well. Those are added up to get to your total tax.
Self-employment tax plus income tax minus payments and credits determine if you pay in or get a refund.
And now we hit question 4. How much did you already pay in?
In it’s simplest form, it’s starting with the total tax bill and subtracting your payments.
Of course, it’s not always that simple. Tax payments come in several forms.
- Income tax withholding from paychecks (and sometimes from other income)
- Estimated payments that you sent in
- Tax credits
The government actually requires that your taxes be paid up by the end of the year. That’s why they withhold money from paychecks.
So, since taxes are pay as you go, you want to look at what you already paid in. That’s where you subtract any withholding from your paychecks (or your partner’s if it’s a joint return). Also you can subtract any estimated payments you’ve made (we’ll talk more about those in a moment).
And then there are tax credits. We often confuse them with tax deductions, but they’re very different. A deduction reduces your taxable income, which in turn will reduce your income tax bill. A tax credit actually counts as a payment towards that tax bill. It’s a lot like Uncle Sam gave you money to pay down your taxes.
Some credits only pay down your income tax bill, and only to the point it’s paid off. They’re called non-refundable credits. If your non-refundable credits are more than your income tax bill, it just stops at zero. You can’t get a refund because of the difference. Other credits are refundable, meaning you can get a refund if they’re greater than what you owe.
In the end, if you paid more than you owe, you get a tax refund. If not, you have to pay the difference.
How can knowing all this help us prepare for tax time?
It all comes down to one question: What do we do with this?
The more money you make with your blog and related content, the more important it is to understand how this works. It can help you avoid some real tax issues. If you haven’t paid in enough over the year, you could have an additional cost in the form of penalties and interest.
Any profit you make with your business will have an impact on your taxes. It means either you pay in more, or you get less as a refund. When you’re just getting started, you might not notice it as much because your job withholdings or other tax credits make up the difference.
But here’s the thing about taxes. They tend to be percentage based. The more you make, the more you owe. As your blogging income (or from other aspects of your business) grows, the more you need to be prepared.
If you’re new to self-employment and accustomed to your employer taking money out of your check, you could be caught off guard. That’s when tax day can be a kind of “oh crap” moment and you have to scramble to come up with the extra pay.
Being small business owners (whether you ever thought of yourself as one or not) means there’s some additional responsibility on our shoulders. Here are some action steps that you can take in light of this.
1. Track your expenses
If you’re in a 10% tax bracket, every $100 of expenses you track can reduce your tax bill by $25 ($15 for self-employment tax and $10 for income tax). State or local taxes could drive that higher still. If in doubt, track it. Keep your receipts. Keep it organized.
2. Find a good tax professional.
Articles like this can be helpful in understanding how taxes work. Unfortunately sometimes they can create more confusion. The best thing you can do is find someone who understands taxes for self-employed individuals. If you feel overwhelmed by taxes, a good tax pro who knows your personal situation is likely to save you more than what it costs to get a tax pro on your side.
3. Decide what to save for taxes.
You don’t have an employer holding taxes out for you. That means you need to step up as your own employer and take care of business.
There are two ways you can do this. You could use a tool such as calculators that are included in expense tracking software programs like Hurdlr or Quickbooks Self-Employed. Some of them take into account all your other income and filing status and they come up with some pretty good estimates of what you should set aside.
The other way is to save a percentage of your income. I figure out my profit (income minus expenses) and then decide on a percent of that. Remember that self-employment tax is 15.3% of every dollar of profit. That means that 15% of profit may be the bare minimum you want to set aside. A lot of people go with 25 or 30% of profits.
Your numbers will vary. A tax professional can help you get a better idea what to set aside. It doesn’t hurt to set aside too much, because if you do you’ll get it back.
4. Put that money where you won’t touch it.
The best practice is to get a separate bank account to keep your tax savings. Don’t keep it in your checking account, it’s too tempting to use it for other things.
In fact, it’s a really really good idea to have a dedicated business account where all of your business income goes into it, and all expenses come out of it. I can’t recommend enough that you keep your business finances apart from personal money.
But even with a business account, get that tax money out of that account and put it somewhere that you won’t do anything other than send it in to the IRS.
5. Send your tax savings to the IRS regularly.
The IRS has a system of quarterly estimated payments, where you can send money in throughout the year. Some mistakenly call it quarterly taxes, but it’s really not an extra tax. It’s simply you pre-paying your tax bill.
If you sent in more than you need to, you’ll get the rest back as a refund. This is your way of taking care of your own tax withholding.
6. Get a tax professional.
Did I mention that one already? Seriously, as I mentioned earlier, you should never take any of this (or any other articles or tax tips on the internet) as tax advice. This article is for education, to try to make sense of how it all works. With so many moving pieces and outside factors, your tax situation is unique. Find a tax preparer or advisor or someone who can look at your unique financial situation. They can offer tax tips and advice that are far more valuable than an article written by someone who doesn’t know you.