Blogging is great. And, when you can make money, that is even better! But, once that money starts rolling in, you can’t just spend it as you like.
Unfortunately, Uncle Sam wants his share! Yep, you have to pay taxes.
That may lead you to question more things, such as what corporate structure do I need? Should I set up an LLC? When do I have to pay quarterly taxes? Is there an affordable way to track your income an expenses?
I get that it is scary when you get into accounting, especially if you have only dealt with simple personal taxes. You don’t want to get audited, because that would absolutely suck.
By the time you get to the end of this post, you will feel much better about most things taxes. But, even then, you should still reach out to your CPA to discuss your situation.
Hey everyone, I’m Eric! I’m ecstatic to be here with Tracie’s community helping to clear up some of your business and tax-related questions. Here’s a (very) brief rundown of my background for those who may be asking, “Who the heck is this guy!?”:
My degree is in accounting. 90% of my working life has been in public accounting (working for CPA firms with various business and individual clients, as opposed to working within a corporation and only dealing with its finances). I started my own accounting business in December 2014 and went full-time in July 2015. Clients I work with are predominantly bloggers (and other content creators), freelance writers, and similar online-based businesses. My advice has been featured in major publications such as Readers Digest, Forbes, The Penny Hoarder, HuffPo, Lifehacker and more.
Ok, so that’s enough about me, now let’s make the rest about you and your questions! Tracie sent me over a bunch of questions which I’m going to post verbatim and then answer directly below each one to make it easier to follow along 😎
MOST COMMON BLOG ACCOUNTING QUESTIONS ANSWERED
All about LLC and SubS corps and the type of structure you may need to use for your site. As stated previously, please seek professional legal or accounting help to determine the right setup for your business.
Q: What is an LLC vs. Sub-S?
This is a very loaded question. In terms of simply choosing a business structure, you would have to speak to an attorney–see my explanation above about selling out or adding people.
If you are talking about taxes, it depends. If you don’t net a certain amount of money–around $30-40k in many cases–you might not see much benefit in the self-employment tax savings a lot of people run on about. On the other hand, if you net in excess of around $200-250k, you can price yourself out of the majority of those savings since your Social Security tax will be capped anyway.
Then you have to consider the fact that you will have to get a payroll company, pay state and federal unemployment taxes, and most of all be required to file a separate federal (and possibly state) income tax return for the S-Corp.
There is also the personal preference of having your taxes come out via paychecks rather than dealing with quarterly estimates. Or the ability to have pay stubs and W-2s for renting/financing purposes which are easier than having to provide months of bank statements and years of tax returns.
This is something you will get more out of by speaking to an accountant. He or she can get a complete picture of what your situation is and then give you estimates of additional costs vs. possible savings.
Q: What are the advantages of an LLC? Is LLC the only option or should bloggers also consider other options? And, at one point should one consider forming an LLC (before they turn any profits at all or once they’ve reached a certain level of profits)?
This is a critical question that everyone needs to pay very close attention to because whenever I see people asking about in FB groups or anyplace else, the answers are totally wrong!
To start, incorporating (the broad term for forming an LLC, partnership, or corporation) is a legal issue. The IRS has nothing to do with it and will never tell you what structure you “need” to use. That’s why you have to go to the individual state in which you are going to register your business to do so. That said, business structures are specifically meant to create a separate legal entity to protect assets, and you should speak to an attorney, not an accountant (unless they also happen to be an attorney).
Some people toss around arbitrary figures like $30k or $40 in earnings before forming an LLC. That’s total BS. Because the purpose it asset protection, you will want to consider it if you anything in your name that you wish to keep separate from your business. Even if you lose money in your business, you still want your personal and business assets separate. Again, an attorney is the person to speak with to determine if you will actually benefit and which form of business structure will be the best for you.
Q: How much do you need to be making before you register the business and which type is ideal regarding tax purposes/benefits (sole proprietorship vs. LLC)?
Just as we went over in the 3rd question about LLCs, there is no minimum you need to be making to form a separate business entity. The primary purpose of such entities is for asset protection. As long as you have personal assets or plan to have business assets (i.e., money), you should talk to an attorney to figure out what the best way to structure your business is.
In the debate of sole prop vs. LLC (I’m assuming Single-Member LLC is what is meant) there is absolutely zero difference for federal tax purposes. In fact, the Single-Member LLC is specifically stated to be treated as a sole proprietorship for tax purposes by the IRS. Both are filed on Schedule C of the 1040 with no distinction being made–meaning that there isn’t a different version for each business structure. It’s the same Schedule C regardless.
The state-level is what you need to look into much deeper. Not all states follow the IRS, so even though a Single-Member LLC is taxed as a sole prop at the federal level, some states require the business to file a separate return. States–and cities–even require the business to pay taxes on either the gross receipts or net income separately (sometimes even both).
Q: I already have my LLC and just file $0 every quarter for my NJ Taxes (because I have not made any money yet) and file a Schedule C with my personal taxes every year. I should be ready to go by the fall. Do I start paying state taxes right when I make my first dollar? Will this affect my ability to get a refund next year? I always get one.
This is the type of question that needs to be asked of qualified tax professional with them having access to your complete history. It’s entirely too individually-specific and is missing a lot of information as it is presented. No one can tell you how anything with affecting a refund without seeing the prior tax returns for context as well as having the current year’s income and deduction figures.
I want you all to understand that when you post these types of personal questions without detailed information, you are never going to get accurate responses (unless they say what I’m saying lol). If you do get people responding with specific answers then you run away very quickly and ignore anything that was said as there is absolutely no way to discern anything and the person will most likely be trying to “prove their smarts”!
You may have questions about when and how to pay your taxes. Let’s break that down so it makes sense.
Q: What % of my income should I save to pay taxes when I’m not sure what my total annual income will be?
This is one of those “it depends” situations. It’s impossible to answer a question like this since each and every person reading will be in a totally different situation. Some will be single. Some will be married filing jointly. Others will be head of household. Some will be in no-income-tax states while others are in high-income tax states. Some will have spouses with jobs. Others will have jobs themselves in addition to their business.
Without having each person’s complete household income picture in front of them, no one with ethics would even begin to offer specific advice. I will say this, however: self-employment taxes are 15.3% right off the bat, so that plus what your estimated federal and state tax rates will be is an excellent place to start.
Blog Accounting Basics
When you are just starting out you may not be sure where to start.
Establishing any business as an “official” business is a simple as saying “I am now a business.” For me personally, I believe you should always start out treating your blog as a business from the jump. I would suggest considering forming a separate business entity and speaking to an attorney before starting just to make sure you have a solid foundation in place. At the individual level, you will want to check with your city’s laws on operating a home-based business or obtaining a business license, but there is nothing “required” to simply start.
It’s much easier to form an LLC or corporation from the start rather than starting under your own name/SSN and then have to start changing everything over at a later time.
As I mentioned above, the main reason to form a separate business entity is to protect your personal assets. It also has a lot to do with planning for the future in terms of possible selling your site(s) or taking on partners–different business structures will have different impacts on those plans.
Q: What is the best way to track income/expenses & determining how much should be set aside for taxes (I know it could vary by location)?
The best way to track your business finances is…whatever way works for you. What I mean is that you should stick with whatever method keeps you actively engaged with and on top of your money. That could mean a spreadsheet or QuickBooks Online or any other type of online program or app. Use whatever you are most comfortable with and which will help you keep a regular schedule of updating.
That also means you should do it yourself if that’s your desire. I always advocate for outsourcing tasks which you aren’t an expert in, especially if you can afford it but if you are a control freak I understand lol. Sometimes people just have a hard time giving up control, so as long as you aren’t falling behind in other areas or neglecting your books keep at it yourself!
As for tax savings, I mentioned it above: it’s a very difficult number to pin down. It’s more than just about location, although that is a factor since you have to calculate for state estimates if you are in that position. You have to consider total household income since your taxes include federal as well as self-employment taxes. The best advice I can give is to sit with an accountant to figure out what your specific savings rate should be, but if I had to put a number on it, if you can save 40-50% of your gross receipts, then you should be in a very good position.
If you want to track your income, check out Tracie’s Blogging Expense tracker (super affordable). That will get you started. However, if you need something a little more involved, you may want to sign up with Wave or Quickbooks.
Q: Do you have to pay quarterly taxes your first year as a freelancer?
If you owe more than $400 in self-employment taxes, then yes you need to pay quarterly estimates. And, yes, that’s even in your first year.
If you think about it, there’s no reason not to do it. For one, it gets you into the routine and used to paying in each period. Secondly, it’s a lot easier emotionally and psychologically for a lot of people. It’s much easier to pay, say $2,000 each quarter as opposed to having to come up with $8,000 at once when you might necessarily be prepared for it (and even if you are prepared with the savings it can still come as a shock to part with that much at once).
Q: Can you deduct business expenses even with just a DBA?
As long as you are treating your business as…well…a business, then you can deduct the expenses you incur in the pursuit of profits. It doesn’t matter if you are a sole proprietor operating under your legal name or a DBA, a Single-Member LLC, a multi-member LLC, or a corporation, legitimate business expenses are legally deductible.
The question really is: what are “business expenses”? Taken right from the IRS:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. 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.
For example, as a blogger, any of your website-related costs are both ordinary and necessary, so those are good. On the other side, if you work from home as a VA with no clients whom you visit, it’s neither ordinary nor necessary to have your business registering and paying for your car, so that’s no good.
The key thing to remember is that any expense must meet both, not either of those standards.
Q: How much money should I be making to start thinking on incorporating and putting some money aside for taxes? Right from the start?
You should be putting money away for taxes right off the bat. As long as you owe more than $400 in self-employment taxes, you are required to pay quarterly estimates.
For the decision about incorporating–whether you are referring to forming an LLC or an actual corporation–it depends on having assets to protect and potential for expansion/sale at a later time in addition to potential tax savings. Please see the many of the questions above for detailed info an all of those aspects.
Not sure about sending forms to your affiliates? Check this out.
Q: I live in the US and have an affiliate program via Sendowl. So I’m planning on filing 1099s (and in August sending out the W9s). What about those that are international. Do I send to them or only US people (above $600)?
A 1099-MISC is only required to be sent to US citizens (taxpayers). Just because someone lives abroad doesn’t automatically negate the 1099 requirement. There are a lot of US taxpayers living in other countries so you would need to make sure of their tax status along with their residency. If they are internationally-based and non-US taxpayers then you don’t have to send them a 1099-MISC.
You also want to make sure that you are not sending 1099-MISC forms to those people whose W-9s are marked as Corporations (both C and S). These entities do not get a tax form, and you will simply be wasting your time and money by doing so.
Lastly, the way you pay your affiliates will also determine the need to file a 1099-MISC. If you send the money via PayPal or other payment settlement entity (PSE), you do not send a 1099-MISC because the processing company handles that. If you use a money transfer service such as Zelle, Venmo, Cash App, or any other system that simply links banks accounts, then you have to file the forms.
So that’s it! Those are all of the questions you sent to Tracie to have answered. Hopefully, you will come away having a little better understanding of the topics and issues we went over.