Updated January 13, 2018
Yay for taxes! Fun, right? Well, not super fun, but I do appreciate things like the library, roads and fire fighters, so I gladly do the tax thing.
I remember the days when I could do my taxes in about 20 minutes flat. Get the W-2, fill out the EZ form and go. But now, self-employment makes things a tad more complicated. I still wouldn’t trade it. Now that I’ve been at it a few years, here are my tips.
I am not an accountant or a lawyer. This comes from my personal experience only. Please seek the help of qualified professionals to help you with your personal situation. Also, some of the links included below are affiliate links, meaning, if you click through and make a purchase I will get a commission (at no additional cost to you).
1. Count all your income
Blogging income is not just the cash you make. It includes any compensation, such as product you receive for reviews or giveaways, Swagbucks, trips, conference sponsorships, referral credit, affiliate commission, conference swag, free stuff (appliances, clothes, household products) and more. Check out Sarah’s post for a detailed breakdown.
Related: How to Start an Online Business
2. Report all your income even if you don’t get the forms
Because my relationship status with the companies I work with is “independent contractor” or “affiliate” (not “employee”) I get a lot of 1099-MISC forms during tax time. They show how much non-employee income I received during the year.
Non-employees get a 1099. Employees get a W-2. You can read more about the difference here.
Even if I don’t get a 1099 from a company, because someone forgot or because my income didn’t meet the $600 threshold, I still must report the income. This is why it’s so important to keep track of everything that comes in during the year.
3. A word about PayPal, the 1099-K and double reporting
A few years ago I encountered a situation with PayPal. Someone else emailed me saying they encountered it as well so I thought I’d mention it here.
Here’s the situation:
I am an affiliate for some companies who pay my commission through PayPal. I then transfer that money from PayPal into my bank account. In other words, my commission travels from Company A > PayPal > my bank account. Therefore, Company A has a record of me receiving that money, but so does PayPal.
At tax time, Company A issues me a 1099-MISC (and notifies the IRS). But also, PayPal issues me a 1099-K for the same amount (and notifies the IRS).
Both do so rightly.
As explained on the IRS site, companies who pay a contractor more than $600 in a year must issue a 1099-MISC and report it to the IRS. As explained on PayPal’s site, PayPal will issue a 1099-K and is required to report it to the IRS if in one year you receive more than $20,000 and 200 or more payments.
The problem is, effectively, my income was reported to the IRS twice (once by Company A and once by PayPal) so the IRS thought I made twice as much as I did.
When this happened the first time, I didn’t catch it while doing my taxes. Several weeks after filing my taxes (actually I think it was closer to a year later), I received an official letter from the IRS telling me I had not reported all my income.
As a recovering rules girl, I panicked slightly, for I do not like being in trouble. However, they sent paperwork along with the letter allowing me to explain the situation, which I did, providing probably way too much documentation as proof. 🙂 A few weeks later I got another letter from them stating they understood and I was all clear.
Moral of the story: keep good records & pay attention!
4. Don’t do the heavy lifting yourself
While I don’t love doing my own taxes, I don’t hate it either. And our tax situation isn’t so complicated to warrant hiring someone to do it for us (plus, I’m cheap). But, doing taxes manually is not so much fun. I use Turbo Tax (the online version) and recommend it.
Update: In 2016 as our tax situation became more complicated, I decided to hire Josh Bauerle of CPA on Fire. He has been great. He helped us become an S-Corp (a significant tax benefit in our case), has been very accessible via email throughout the year (I took advantage of this a lot as Texas seemed to have a hard time grasping the change in our tax situation and kept sending letters), he knows the unique situations of bloggers and it’s great not having to worry about doing our taxes on our own. As you can see from the Services page on his site, hiring a CPA is a significant investment so I recommend waiting until you have ample revenue to justify the cost.
5. Estimate right
As a self-employed blogger or freelancer, you may have to pay quarterly estimated taxes. That is, four times a year you have to send in a chunk of money to the IRS since you don’t have an employer withholding taxes for you.
In the past, I underestimated how much I’d have to pay in taxes which meant I had to shell out extra cash when I filed my return in April. Talk about sticker shock!
These days, as I receive income, I automatically send 30% of it to my “Taxes” envelope so it’s there when I need it. It’s good to eliminate surprises.
You should also set aside enough for your self-employment tax. If you’re an employee, your employer would pay a portion of Social Security and Medicare taxes, but since you are your own employer, you have to pay both portions.
6. Don’t forget to issue the right forms to your contractors & affiliates
Chances are you are considered an independent contractor to someone else, like if you’re earning affiliate income from a company somewhere.
But do you hire independent contractors, like designers or virtual assistants? Do you pay affiliates for an ebook, a product or a service? If so, you might have to issue 1099-MISC (or other forms). Technically usually have to be sent by January 31-ish every year.
If you pay your contractors via PayPal or with a credit card, you don’t have to send a 1099 because it’s taken care of by the 1099-K (see #3 above).
Otherwise, Turbo Tax makes this super easy with their Business service.
7. Deduct what you can
8. Use this year to get ahead for next year
The first few times you wade through tax season as a blogger, no doubt you’ll realize how many pieces there are to the puzzle. And if you’re like me, they’re scattered all over the place.
My recommendation is, as you walk through to pay your taxes this year, take notes! Note categories, expenses, income sources, etc. Save your notes in a place you’ll know to look next year when tax time rolls around again. Set up your budget or accounting software accordingly and tax time next year will be much smoother.
9. Tools I use to keep track of things
If you’re not a fan of keeping all your receipts and documents in a shoebox, an app I really like is called Scannable. It works with Evernote like a dream. I can easily snap an image or PDF on my phone and save to Evernote.
Accounting or bookkeeping software – There are many options. Wave Accounting is free. QuickBooks is popular, as is FreshBooks. I personally use a little-known software application called Budget which allows me to use the envelope system easily.
Form W-9 – Reputable companies will require you to fill out this form before they pay you as a contractor or affiliate. You may also want to require your own contractors or affiliates to send one to you, especially if you know you will pay them more than $600 in a year.
Form 1099-MISC – You may need to issue this form to anyone you’ve paid through the year. If you are working with a CPA or software like Turbo Tax, you may not need this hard copy.
10. A helpful ebook
The Blogger’s Simple Guide to Taxes: A Guide to Saving Time and Money by Sarah Korhnak may be helpful if you want more in-depth help. Sarah is a former accountant and this ebook is well worth the money. She has personal experience running a blog so I appreciate her perspective.
Killer Tax Tips and What Business Type to Form – This podcast episode with Josh Bauerle on The Amazing Seller was key in helping us decide to become an S-Corp.
Get Ready for Taxes – Deductions Tips – Sales Tax – Mistake Prevention – This episode is also helpful, particularly if you sell tangible goods on Amazon. (Josh’s website is also helpful.)