Do you have a small business or a side business? Did you get paid to write “sponsored” blog posts? Do you want to make money from blogging? Are you an affiliate for brands that you love? Are you involved in a direct selling company (i.e.: Mary Kay, DoTerra Oils, JamBerry, etc)?
If you answered “yes” to any of these questions, keep reading!
If these don’t apply to you, keep reading too! You will learn about some of the advantages having business provides on your tax return!! It’s a common misconception that if you have a business, you will pay more taxes. It all depends on how you have the business structured, but MOST people who are in business for themselves pay the same amount of tax as everyone else, if not LESS taxes. The taxes when you have a business are paid at different times, so it often feels like more. The benefits are numerous and I am going to point them out to you today.
As I shared earlier this year, my full time job is managing several large tax office (read my blog post HERE) and I have been doing personal tax returns for the last 5 years. I get many questions about this topic, and taxes can be confusing and sometimes scary. This blog post could really be a whole series, but I am going to try to condense down as much as I can in this post to give you the basics.
So, have you already filed your taxes this year? Most of you probably have considering it is April. I haven’t. People always assume that I get my taxes done early since my day job is to help people file their returns. WRONG! I am such a last minute filer because I am so busy helping other people when it comes time to do mine I procrastinate. haha!
Many people think going into business for yourself is scary because of the financial aspect. In all reality, it is scary, but there are many benefits that come with it too, one of which can be some savings on your tax return. Whether your business is your livelihood or just what you do to make some extra fun money, it affects your tax return. Many people end up paying more in tax every year because they are either unaware of the deductions they are allowed, or they are too afraid to take the deductions because they fear an audit. Here are some of the most common questions about how blogs and small businesses affect tax returns and why having a business can benefit you!
Disclaimer: This blog post is not meant to encourage people to haphazardly make tax deductions for their business or create a “business” out of something that is not a business at all.
p.s. While I normally blog about fitness and living a healthy lifestyle, I occasionally visit topics like this as well. If you are interested in more tax tips and information enter your email below! (I don’t send spam, I promise!)
Does my income need to be reported?
You may have never considered reporting the income you receive from your blog or your side business because it was a minimal amount. The IRS law states that you must report any self employment income that is over $400. They mean gross income, not just profit. So if you got paid $100 to write 6 different sponsored blog posts, then your blog income get reported on your tax return. You can write off any necessary expenses against that income which I will address a little later. It is your responsibility to keep track of income from your business. You should have a log or a bank account showing the deposits that you have from the business. For example, with personal training clients, I have invoices showing the date I trained them and how much they paid me. If you are in direct selling or doing contract work, many companies will send you a 1099-MISC form showing how much money they paid out to you if you make over a certain amount with them.
How do I report it?
The answer to this question depends on how your business is classified. Most people are sole-proprietors. That means that you are NOT a corporation or an LLC. I am writing this blog post for sole proprietors, so if you are incorporated and file a separate business return, some of what I am addressing in this post is not for you.
Sole proprietor self-employment income is reported on a Schedule C which is part of your individual return on your 1040. You start by reporting your gross revenue, then reporting expenses, and you end up with a net profit or a net loss.
What expenses can I write off?
This list could be so long! It really depends on what your business is. The short answer is anything necessary and essential to the business is a business expense. Keep it real here. This is where people tend to blow things out of proportion. For example, you cannot write off your groceries. (Yes, people have asked me that)
Let’s use the example of a blog or an online business. Obviously your internet connection is essential to your business, so you can write off what you pay for internet every month as an expense. If you purchase a new computer, you can write that off too as a business asset – that means you have to spread the expense out over several years. If you use your cell phone in your business, you can write off your portion of the cell phone bill every month.
Any supplies that you use for the business can be written off, so if you are in direct selling and you buy product to give to people as samples to try before they buy, that would be an expense.
If you use an area of your home SPECIFICALLY for the business, you can write off a portion of what you pay every month, rent, mortgage, utilities etc. The key here is has to be an area of your home only used for business – so your living room or your kitchen would not count. It would be a space in your home (such as an office) that is not used for personal use, only business use.
The list can go on and on. As tax season is coming to a close and I will soon have more time, will write more posts specific to this in the near future. In the mean time, check out “additional resources” at the bottom of this post for more about business expenses!
It looks like I’m not making any money on paper! Why?
This is where people get hung up sometimes. They think, why should I report my business if I am not making any money. There are a few reasons. First of all, it is the law: if you make over $400 you must report it. Second of all, your business is generating real income, but what often makes it look a negative is all the expenses, many of which you would be paying whether you were in business or not!!
In the example of the online business I gave earlier. In your list of expenses you have internet, cell phone, domain hosting, email provider and CRM subscription expenses along with a few other things. The internet and cell phone is something that you would be paying for whether you had a business or not – those are things that people cannot live without these days. Because you have a business, you can write those off as an expense. If you use a portion of your home exclusively for business then you can write that off too, and if you didn’t have a business you could not do that. Of course there are things like the domain hosting and email service provider that you would not be paying for if you didn’t have your business, but my point here is it allows you to take every day expenses as a tax write off that you could not do it you did not have a business. REMEMBER: this is not a license to take anything and everything as a business expense. It must be necessary to your business and you must be able to adequately justify each expense.
How does this help me?
As I said above, having a business is advantageous as it allows you to offset business income with expenses, many of which you would be paying anyway. Your business income is not taxed before you get it, so any income you have from the business is essentially “pre-tax money”. Self employment tax is paid with your tax return, and only on the amount of your profit. So all business expenses that are paid with business income are essentially paid with pre-tax money. This is cool considering the average tax rate is 25%, so that is a 25% savings right off the top!
Now, if you have more expenses than you do income and this generates a business loss, this can also be advantageous in that it reduces the amount of tax your paying on other income. For example, if you have a regular job (not self-employment) and make $30,000 and you also have a side business, but the side business had a loss of $5,000.
$30,000 – $5,000 = $25,000
Because of the loss in the business, your income is reduced by $5,000 and therefore reduces your taxable income and you pay less income tax. This means you can get a bigger refund or reduce the amount of tax that you owe.
REMEMBER: This blog post is not meant to encourage people to haphazardly make tax deductions for their business or create a “business” out of something that is not a business at all just to reduce their tax bill. If you have questions about how this works, feel free to reach out to me OR contact your accountant/tax professional.
Business VS Hobby
As I mentioned earlier, per the IRS, you must report any and all self employment income over $400. However, the IRS also says that if you consistently have a loss 3-5 years in a row, this may be a hobby and not an actual business.
What is the difference? If the IRS determines that your business is really a hobby, you will still have to claim the income, and can only write off expenses up to the amount of income, not over it.
The way the IRS classifies a business as a hobby is if the business has not turned a profit (claimed a loss) multiple years in a row, then they audit you and ask you to prove that you are really in this to make a profit.
So, what does this mean for you? Well, it means that you should keep good records of your expenses. Only claim expenses are truly for your business and necessary for you to carry on the business, don’t get extravagant. If you are doing everything you can and still have more expenses than income multiple years in a row, you can continue to claim a loss and risk the chance of an audit. If all your expenses are legit and you have records of them and why they were necessary, you should pass with flying colors! I have seen people file legitimate business losses for more than 5 years and they have not gotten audited. It just depends on the IRS. Believe it or not, the IRS is pretty good at knowing if someone is pretending to run a business or not. Don’t create losses on your tax return just to save money on taxes. It’s not worth it!
Bottom line: Don’t let this scare you. Just let it be a reminder to keep things legitimate and justified. If you have questions, consult your accountant or tax professional. They can help you know what expenses are deductible and which ones aren’t in your specific situation.
Records and Risk of Audit
Be sure to keep records! These should be the receipts from the purchases. The best way to track is to have a separate bank account or credit card and only use that to pay for business expenses and deposit business income there. That way, if you somehow misplace a receipt, you have other documentation of the expense. Depending on the size of your business and how much input/output you have, I highly recommend getting and using QuickBooks. If you keep up with this on a monthly basis it is much easier to track expenses over the course of a year. It also has a notes field so you can document what the expense was for and why it was necessary.
If you claim a mileage deduction in your business, then you should keep a mileage log that you update when you get in your car and when you get to your destination. There are also apps that help track this. Just search “mileage log” in the Apple Store of Play Store.
If you are worried about an audit, the best way to be prepared is to document every expense carefully. If you were to be audited you would have to provide proof, so records are very important. You should keep these records for at least 5 years, or even longer if you are able. The IRS audits at random, but they also look for “red flags” like tons of mileage write offs on a business that doesn’t require much driving. Keep things legit and documented and you shouldn’t have a problem.
A few final thoughts :
1) If you are last minute like me, or maybe just been avoiding it, never fear! I have good news! There is still a few days left to file. You have till April 15th to file your taxes “on time”. If there is no way that you will have your stuff together by then, you are out-of-town, or just really busy, you can still file after April 15th. If you are unable to file before the deadline, it is recommended that you file an extension, Form 4868 (paper form – HERE) before the 15th just in case.
2) If you have already filed, but read something here and you realize something was left off your return, you missed some business expenses or you think something was done incorrectly, never fear!! There is a fix for that! It is called a 1040X. You can prepare the 1040X yourself, but I recommend having a tax professional do it as they can get a little complicated if you don’t understand the form.
What You Can Deduct – a great post about expenses from
Tax Tips for Bloggers – from Turbo Tax
Tax Tips for Sole Proprietors – from Turbo Tax
Hobby VS Business – another perspective from
Business Use of Home – IRS publication
Publications for the Self Employed – DIRECTLY from IRS!
I hope this was helpful to you. Comment below with what you thought about the post and with any questions!!