Tax Tips for Bloggers

Tax tips for bloggers was originally posted on Clarks Condensed. 

Disclaimer: This information is provided on an information basis only. Katie is not a tax expert, and even though Bruce Barker is, this is general advice about blogging and taxes. Do not consider this as a consultation on your individual needs. Pleas consult a tax professional to discuss your individual situation.)

Tax Tracking Form at bottom of page

It’s that time of year that most people dread — tax season. If you are self-employed, it can be a tricky process…and if you’re a blogger? Even more so!   I’m a part of many blogger support groups on Facebook, and one of the most frequently asked question is about taxes. After observing these conversations, I discovered that they are many misconceptions about taxes and blogging — what you have to report, when you have to report, and more.
Lucky for me, I happen to have an experienced tax preparer in my family — my dad. He has over 30 years experience in the tax field, and he knows quite a bit. When I was home over the holidays, we discussed some of the topics related to taxes and blogging, and my dad offered to write a post about tax tips for bloggers. I hope that this post will help you better prepare your taxes this year. While my dad is very qualified as an enrolled agent, please consult your own accountant or tax adviser while doing your taxes.
What are some basic things beginning bloggers should know ?

Each taxpayer’s situation is different and there could be different answers based on each individual’s special circumstance.
 
What are the advantages of, and when should you become, an LLC, Inc, or sole proprietorship?
 An LLC (Limited Liability Company) is not an IRS entity.   Each state has their own rules regarding LLCs and you should review your particular state’s rules.  They were initially formed to provide some liability protection to business owners. If you are seeking liability protection, you should consult with an attorney.   You can form an LLC that is reported as a proprietorship on your federal income tax return.  An LLC can also be filed as a partnership or corporation.  The advantages to the various entities is an extensive explanation.   The IRS does not require all businesses to be an LLC.    You can be a proprietorship and simply use your name to report the income and expenses.   If you want to have a business name you may need to register that with your state.   It is a good idea to use a different name for your business than your name because you may want to protect your personal name and social security number for your customers and vendors.   If you are setting up a business checking account or will be receiving money from a lot of customers, you may want to get a Federal ID number.   
Should you have a separate bank account set up for business expenses/income? 

This is not required.  You can keep track of your income and expenses inside of your personal checking or savings accounts.   It is a practice to have a separate bank account and credit card that you use for business.  This will allow you to keep your income and expenses separate from your personal funds.   Trying to sort out your expense from your personal checking account can be very confusing.

Receipts and invoices from your purchases should be kept, documented and filed by expense category.  You should also be able to support those expenditures through your bank statements and credit card statements.  If you are audited by the IRS, they may not accept only a receipt, they want to make sure you aren’t just borrowing someone else’s receipts.
What are the rules for reporting/writing off products that were received for review?

I’m still trying to get a good handle on this.   Each item would have to be considered separately.   Receiving a $20,000 car versus a $20 white board is completely different.  In most cases you are just receiving a sample of something to try and are writing about it and there is no further continued use of the item.   If you had to purchase the item to sample it, you would most likely be able to claim it as a business expense.   If you receive a gift card or cash, you may want to claim that as income, but then you could also deduct the item as a business expense if you are using the cash to purchase a product that you are writing about.  If you do this, you will want to keep your receipts to prove that is what you spent the designated money for.  If you give the gift card away, then you may not be able to use that as a deduction, unless it was considered advertising for your business.
In general, if you are sent a product for the purpose of you reviewing it, you should report it on your taxes. This post has some good advice about free products you get.
When do you need to report income?

Many people believe that if they make under $600 from one person or business, for services performed, that it does not have to be included as income on their tax return.  If the companies issuing the 1099s are telling your friends that they don’t have to claim income under $600, they are absolutely incorrect (source).  These companies will not backup their claims in tax court.  They should not be giving tax advice.
Generally all income is reportable unless specifically stated as tax exempt.  Many people have the misconception that if they get paid under $600 they do not have to claim it as income.  This $600 threshold is referring to those that are required to issue a 1099MISC for goods or services, not those receiving the money.  For example, I do over 450 tax returns and received very few 1099s.  So if I average $300 a tax return I would make $135,000, then according to your friends I don’t have to claim $135,000 as income.   What great concept!   I wish it was true!
The other issue of taxes under $400 not being taxable is another misconception.   This refers to the self-employment taxes.  If your income after expenses is under $400 then you don’t have to pay self-employment taxes on that income.   Self-employment taxes are the same as Social Security and Medicare taxes, some people call them FICA.  Although you don’t have to pay self-employment taxes on this level of income, you still need to pay federal and state INCOME TAXES.

You can deduct a portion of your household expenses if you have a room that is used regularly and exclusively as the principal place of business for your business.  You cannot use this expense to show a loss on your tax return.   If your business is showing a loss the office in home expenses can be carried over to another year.   You first need to determine what percentage of your home is business use.   You can do this by measuring your office space and comparing that to the total square footage of your home.  You multiply this expense against your rent, insurance, utilities, mortgage interest, real estate taxes, HOA fees, repairs, maintenance, depreciation on your home, etc.   To me, the best advantage of an office in home is that you can deduct more business miles on your car, because you do not need to subtract the commuting miles from your business travel.  Other issues to consider are the storage space used for business in your home, the capital gain you may have to pay when you sell your home, not being able to deduct all your office in home expenses as an S Corporation, Child Care businesses use a different percentage based on number of hours used, yard and landscaping are not allowed, etc.

Of course I believe you should use an accountant to prepare a tax return, especially when you have a rental property, business, investments and other complicated issues.  Your tax preparer generally does many returns and takes classes every year to stay up on the law.  The IRS code is very complicated and it is to your advantage to consult a professional.

You can deduct the cost of meals and entertainment that have a business purpose.  You need to document this by keeping receipts and writing on the receipt who you had the meal with and the business purpose.  These types of expenses are only 50% deductible.   You can also deduct meals if you travel over-night on a business trip.  If you have a business meeting and you provide a meal or refreshments, you can deduct these expenses 100%.   If you are sampling recipes and writing about them, you can also deduct the cost of those meals   As with all business expenses, you have to have a profit motive for your business. If you are not generating any income, I wouldn’t suggest deducting these expenses.

Is there a problem with negative income?

Some businesses need time to grow before their income exceeds their expense.   It is okay to have a negative income on your tax return, but the IRS may consider it a hobby instead of a business and there are different rules for hobbies.  You generally have to show a profit in three out of five years.    It is not healthy financially to go very many years without showing a profit.  In all cases you need to treat your business like a business.  That is, to keep books for your business, advertise, have profit motivated expenses, invoice customers, pay sales taxes, etc.

When does blogging no longer become a hobby income?

When you are not showing a profit and do not have any hopes of a profit.   You still need to claim the income, but you have to deduct these expenses on Schedule A (Itemized Deductions).

When should I become an LLC?This is a legal question and I am not a lawyer.  If you are vulnerable to a law suit then you may want to consult with an attorney.

You can pay taxes quarterly to the IRS and your state, by filing out a Form 1040ES (Federal) and sending in a payment.   You will need to project your taxes in order to know how much money to pay.   If your income is higher in the current year than the prior year, then you can use the prior year tax return to project your taxes and either pay 100% or 110% of the prior year tax liability.   This only helps you avoid a penalty, you still may owe more taxes when you file your tax return.   If you are self-employed and make a lot of money you should consult your tax professional to help you determine how much to pay quarterly and how much to save for when you file your taxes.(side note from Katie: I’ve made an effort to set aside 30% of all money I make so I don’t get slammed at the end of the year.)

Bartering is taxable.  You  need to determine the value of services and goods and report the amount you receive as income on your tax return.  If you are bartering for a business service, then you may be able to deduct the expense.  If you barter for a personal service like the dentist or painting your home, then you will not be able to deduct that expense.

Can I deduct supplies for projects I blog about?
Yes.  But you should consider the amount of personal use involved and the magnitude of the supplies.

Can I deduct expenses for products I had to pay out of pocket for a sponsored post, that won’t be reimbursed? 
Yes, if the post brings you other revenues based on hits to your website.  There must be a business purpose.

I answered office in home questions above.  You can deduct internet and phone usage, but you can only deduct the percentage that applies to the business use.   You will need to have a way to prove your percentage to the IRS.

 Free product or products won in a giveaway — do we need to claim and how?
If these products are being used as a subject  in a blog post (such as for a review), you can deduct them.  Otherwise they would be taxable and have to be reported. If you receive a product for free (such as in a giveaway) that values over $600, the person or company who supplies it must send you at 1099. On a similar subject, if you giveaway a product worth more than $600, you must send the winner a 1099, so it’s in your best interest to make sure products in giveaways don’t value over $600.

There is not a lot in the IRS code about this.  It all comes done to if you are actually in business to make money and how successful you are.  If the product review brings you revenue, then I would deduct it.

A tax ID number is valuable when setting up a business account in a name other than your personal name.   Also, if you have employees you will need this ID number to report the payroll taxes.  It is also better to avoid using your name and social security number in your business.  There are a lot of issues of fraud and identity theft.

I would suggest you get an EIN and not use your SSN on your business, because of identity theft issues. 

Yes, but you may have to depreciate the item over more than one year and only deduct the business portion of these items.
 If we agree to take a product to try, but we’re not agreeing to review it (so, essentially a PR gift) do we claim those? 

Depends.  You don’t always have to give a good review. If you review an item and don’t like it, I would claim it as a deduction.   You are in the business of sampling things and writing about them.   Again, the magnitude of the item may be an issue.   Like, if you receive a $1000 gift card to Macy’s,  I don’t think I’d write off the full amount.
Here is a great list of legitimate tax deductions for bloggers, and this site lists even more!

If you have any other questions, feel free to leave them in the comment section!
If you need a way to track your taxes this year, here is the form I use to track everything and anything for taxes. If you want to use it, click file, and then make a copy, to save it to your own files!