Who knew that blogging would someday become a legitimate career choice? And that a blog could be classified as a real business? Ten years ago, blogging was considered something cat lovers did in their spare time, and now it’s a bonafide business venture.
As a small business accountant during those ten years, I’ve seen it all. But the biggest thing I’ve noticed is the upswing in the amount of online ventures, such as blogging.
It’s not just a hobby that makes a little money, it’s a main source of income for many entrepreneurs — myself included. Unfortunately, there not a lot of expert advice available for organizing the financial part of running an online business.
Becoming Your Own Expert
We all know if you want any type of business to succeed, you’ve got to treat it like one! But with the lack of expertise available, we’re left to be our own financial experts — or at least have enough knowledge to stand behind our business.
It’s hard enough to tell friends and family that you’re a blogger, much less to find an accountant or financial advisor who can understand what your business does.
Even the IRS is so outdated they don’t have proper schedules and forms for income received through online ventures. So it’s up to us to research the right financial terms — and decisions — for our unconventional businesses.
- Quarterly Estimated Taxes (QET’s)
The IRS requires that taxes be paid on income as it’s earned, which is why a traditional employer withholds taxes from earnings each paycheck.
But when you have your own business, you’re responsible to pay your own taxes on a quarterly basis. Otherwise you’ll get slapped with fees, if you expect to owe more than $1,000 in taxes at the end of the year. And let’s face it, no one likes to pay extra fees to the IRS.
Whether you run an LLC business of one, are a sole-proprietor, have an ecommerce business or sell digital products, it’s all the same to the IRS. But it’s important that you file QET’s on time, in order to minimize your audit risk.
- Self-Employment Tax
As a business owner, you may not fully realize that on top of paying the normal Federal Income tax rate, you’re also responsible for your own Medicare and Social Security tax. When you work for an employer, they pay ½ of this tax, leaving you to pay the other half.
But with the privileges of being your own boss also comes the tax burden of having to pay the entire 15.3% of Self-Employment tax (SE tax). Add that to your effective tax rate and you could end up owing a lot of tax at the end of the year.
As a small business, you’re working with a tight budget, so start putting a simple plan in place now, so you don’t to get slammed with a large tax bill. For instance, I set up a separate savings account labeled “taxes”, where I set aside 30% of each month’s earnings, to be paid out each quarter.
This not only makes it easier to pay taxes once the time comes, but helps, your often irregular budget, prepare for the QET’s that need to be paid each quarter.
- Ordinary Income Versus Capital Gains
Income earned from a blog or website is often confused as investment income or even passive income. However, as any blogger will tell you, it’s far from a passive source of income, as we put in enormous amounts of time and energy into making it successful.
It’s also not considered investment income — which is generated from buying and selling other investments or assets, and is taxed in a different way than ordinary income.
There are many different types of investments that produce investment income, like stock market investing, savings accounts, and purchasing other tangible assets like art or collectibles. None of which can be used to categorize income from monetizing your blog.
However, you can get a bit of a tax break if prove that your blog is a business asset. Then it could be classified as a capital gain, versus just ordinary income.
On the other hand, if you’re in the business of buying, restoring and flipping websites, then the profits are considered ordinary income. It’s really all about intent, how long you’ve owned the website and the amount of investment you’ve poured into it that determines what kind of taxes you’ll pay once it’s sold.
Classifying Blogging Income
Classifying your blogging income correctly and keeping good records is vital for any solopreneur. Until the IRS and accounting methods catch up to the ever-changing pace of the online world, it’s your job to educate yourself on the right methods for organizing your business finances.
We all aim to pay our fair share of taxes (and no more) while making a decent income for ourselves and our families. The good news however, is that this industry is still relatively new, which means we can forge our own financial path and make our own rules — within reason of course!
With all the time, effort and money you put into your blog, you need to understand these financial terms, so you can make your business a success and pay the least amount of taxes.
Do you treat your blog like a business? How do you handle the financial part of it?