Bloggers are often sending me questions about taxes, and it is a very important topic to discuss as online business owners. However, I am not a tax expert, so I found one to help! I decided to ask my readers for their top questions about blogging and taxes, and then I handed those questions over to Josh from CPA On Fire (who graciously said yes to answering all of your common questions!).
Josh is the founder of CPA On Fire, a tax and accounting business that caters to online based businesses. CPA On Fire provides tax and accounting services for some of the biggest names in the online business space, including John Lee Dumas, Entrepreneur On Fire, and myself! Josh has appeared on several top business podcasts and national TV segments to offer tax advice to entrepreneurs.
When you're self-employed, taxes do get a little more difficult, but it's not impossible. I know people who are afraid to earn more at their day job, who are afraid to start their own business, and more, all because they are afraid of taxes.
Well, that doesn't have to be the case!
Instead, you can learn more about taxes and use that knowledge to your advantage.
I asked you, my readers, what questions I should ask him. Enjoy!
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Disclosure: This is general advice, and you should seek help from your own professional as situations can vary.
Will tax law changes benefit bloggers? How will things change with 2018 taxes?
The big tax law change that will benefit bloggers, and all other business owners, is the qualified business income deduction for pass through entities. Since every blogger’s business should be set up as a pass through entity it will benefit all of them.
The basics of it are that you will now only pay taxes on 80% of your business profits instead of the 100% you always had in previous years. So if your blog makes $100,000 net income, you only pay taxes on $80,000 of that income, even if you took all $100k as personal income!
Do you consider blogging to be a “specified service business” for purposes of the 20% QBI deduction or not?
Unfortunately, there are two vague answers here right now, “it depends” and “we still don't know.” A lot of it depends on how the blog makes money. If you make money by being a “famous” person in your industry and recommending products/services to people, it could fall under it. But, even that gets a little confusing in areas like affiliate payments.
As of now, I would say the overwhelming majority of bloggers will not fall under this (they don't want to) because people aren't visiting their blog due to their own name and fame. They are more interested in the blog itself. But, this one is definitely important to discuss with your CPA.
How should business structure be determined? When should I form an LLC? When should I switch to SCorp?
The first thing to understand with entities is that an LLC offers you no tax benefits. In fact, an LLC isn't even recognized by the IRS, it's treated the same as if you were a sole proprietor. The only thing an LLC does is potentially offer you legal protection, which you will want to discuss with an attorney.
For tax benefits, the entity you would be looking at is an S Corp, which could potentially save you big money on self-employment taxes. As a general rule, you should start considering an S Corp at around $50k a year in net income, but every business is different and there are some requirements that come with an S Corp, so be sure to talk to your CPA before making that move.
When should a person start paying quarterly taxes? How do you do quarterly taxes?
The IRS says that if you will owe at least $1,000 in taxes at year end, they expect you to pay quarterly estimated taxes to avoid penalties on underpayment.
Another thing to consider is that estimates are always based on what you owed the previous year. So if you didn't have any year end tax liability in 2017, the IRS won't penalize you for not paying estimates in 2018, even if you end up owing.
If you do need to pay estimates, it can either be done through vouchers mailed in with a check, or online at the IRS direct pay website.
How do I know if it's a hobby or a business?
It really comes down to whether or not it makes money. IRS standards say a business has to make money three out of every five years, meaning income has to be higher than expenses. If you don't meet that standard, you could be in danger of the IRS calling it a hobby and losing the ability to deduct the losses against other income.
Can you claim 100% of business internet when working from home?
My opinion is yes.
If the internet is a requirement for your business, I would be deducting 100%. I know other CPA's who make their clients use a percentage of business use vs personal, but I've never had the IRS challenge my stance on this.
What are the best tax savings hacks for bloggers and digital marketers?
My favorite thing to do here is to start turning personal expenses into deductible business expenses. So items like cell phone, internet, a room in your house, vacations, etc that you would be using anyway for personal reasons can now potentially be business deductions for you.
Vacations, especially, are a fun thing to deduct in your business, but that takes planning. For example: if you know you are taking a vacation to San Diego in six months, find a conference you can go to while there. Find influencers in your industry to meet up with while there. The more business activity you can do while there the more of your vacation you can deduct.
What are common/possible tax deductions for a blog?
With any business, anything you are spending money on to improve the bottom line of the business is almost certainly a tax deduction. For a blog, home internet, computers and anything you need to run the blog are easy deductions.
As mentioned above, you can also easily start turning things like travel into deductions with some planning. And, if your blog reviews products/services, items that you buy and review could potentially be deductions as well.
What are the rules and considerations of registering your business or LLC in your home state vs. another state? If registering in another state, what are the general rules? E.g. Is it possible to register your business out of state as long as you hire someone to be your agent? How much does that generally cost?
The first thing to note is that you always have to form your LLC in the state you are operating it from. People get confused when they have an online based business and sometimes think this means their business isn't “in” the state they live in. Unfortunately (for those who live in high expense states like California and NY) that's not the case. The simple fact that you operate the business from the state you live in means it has to be registered in that state.
Now, if you are a nomad who travels the country or world with no real home state, you can pick and choose where you register much more easily. In that case, to register in a state you don't live in, you will need a registered agent to sign docs for you. There are services who will do that for a cost of around $90 a year.
But always remember, you have to register where you live and trying to register in a tax free state you don't live in won't save you anything in taxes. You will always pay taxes where you live.
What advice do you have for bloggers who live and work abroad full-time (e.g. Americans who live/work abroad)?
If you are a US citizen living abroad, you have a potential major tax savings called the foreign earned income credit. If you live outside of the US for at least 330 days a year, you can qualify to exempt up to $104k (roughly, this changes every year) from US taxes.
So if you decide to go spend a year in Costa Rica and you make $200,000 in your blog that year, you will only pay ordinary taxes on $96k of that money. You do, however, still have to pay social security and medicare taxes on all of it. I recently started a website devoted specifically to this incredible tax opportunity which you can find at 330days.com.
How do I handle referral credits (instead of income) that I received for software I use such as Tailwind?
Technically, non-monetary compensation is taxed the same way as cash. So, you would take the market value of what you received and claim it as income. In most cases, they will send you tax documentation for this in the form of a 1099.
What is the best way to keep business finances separate from personal ones?
Two things: Form an entity, such as an LLC or S Corp, and open up separate financial accounts. So, your business should have its own bank account, credit card, PayPal, etc. with no mixing of business and personal funds. This will help you with both taxes and potential legal separation if that need ever arises.
Do I need to charge/pay sales tax on digital product sales like printables, eBooks, and courses? If we need to pay sales tax on a digital product we sell, what is the best way to go about doing that since people purchase from all over the world?
This is an incredibly challenging topic and completely dependent on where you live. Some states hit all digital products with sales tax. Some charge it on none. Some are somewhere in between, taxing some but not all digital products. So, it's very important to know the rules of your state and any states you have a physical presence in.
And with a recent supreme court ruling, you could soon be liable for sales tax in all states, not just where you operate. I highly recommend working with TaxJar for all sales tax related needs.
Do I have to pay taxes for press trips that were comped? Since I don’t know how much the trip was, do I just guesstimate a number? This is for a US business.
This would depend on how the comped trips are being reported by the people paying. If you needed to be on the trip to write on the subject, then you wouldn’t report it as income, but if they are treating it as a giveaway or something similar, then you would report that as income.
But, the key is to find out how the people giving it away plan to report it to the IRS. If it’s being reported on their side as income, you will need to do the same.
Are you afraid of your taxes? How do you handle taxes for your online business?
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