March 25, 2013

Blog Tips: Paying Taxes on Your Blogging Income

Logo of the Internal Revenue Service
Logo of the Internal Revenue Service (Photo credit: Wikipedia)
I don't know about you, but when I first started this blog, making money at it was not something I had even considered. I had no ads, and I was writing for myself with the idea that whoever wanted to read it would be welcome to do so but would not be part of why I was writing. After some time, I began to experiment with ads (mostly Google Adsense) because I figured that it would be nice to earn enough to cover my expenses. Initially, these expenses were minimal and consisted mostly of things like my domain registration fee and little else. That was fine because I was not even coming close to earning enough money to cover them.

Fast forward to a few years later. My expenses grew to include things like software, advertising, and various fees. I realized that there were things I needed to be a more effective blogger, and few of them were free. Fortunately, my ad revenue had increased along with my expenses. For the first time ever, I was able to cover my basic expenses. I was no longer losing money in order to write this blog.

My expenses have continued to grow, but my ad revenue has grown at an even greater rate. The result is that for the past few years, I have found myself in the position of earning a small profit from this blog. Since I have been reading up on taxes lately to make sure I understand how blogging income is taxed in the U.S. and some of the options we bloggers have, I figured it would be appropriate to share with you what I have learned so far.

Blogging Income is Taxable Income

Perhaps the most important thing to know is that the IRS wants you to report all income, no matter how small it may be. This includes money made through blogging. Even if your ad revenue is small enough that the company paying you does not have to provide you with a 1099-MISC, the IRS still wants you to report it.

Blogging as Hobby or Blogging as Business

For most of us, blogging begins as a hobby. This has some important tax implications. First, it means that the money you earn from blogging is reported as hobby income. Second, it means that you can deduct expenses under hobby expenses as long as your expenses are no greater than your hobby income. As an example, a few years ago I was earning roughly $200/year from this blog and spending roughly the same on it. This meant that I reported the approximately $200 as hobby income and reported my expenses under hobby expenses. I could not count more than $200 in expenses, but I was able to count up to that amount.

Here's the catch. If the IRS decides that your blog is a business and not a hobby, the reporting requirements end up being a bit different. And how do they decide that you are a business instead of a hobby? They look at whether your involvement has resulted in a profit in previous years, and they look at whether you are treating your blog as a business. This means that if you are spending as much time as most of us spend on our blogs and you are earning more than you are spending, it can probably be considered a business.

The good news is that you gain some leeway in deducting expenses by being a business. You can even deduct more than you earn, although I've seen quite a few people saying you really shouldn't do this. But of course, the more money your blog generates for you, the more expenses you will be able to deduct.

Track Your Expenses and Keep Receipts

Every year, I tell myself that I will do a better job of keeping receipts for the following tax year. This year, I feel like I finally have a better motive for doing so: I know I forgot some of my expenses. Whenever you spend money to support your blogging, track it and save the receipt. As your blog becomes profitable, you are going to want to be able to monitor and deduct your expenses.

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