Essential Small Business Tax Tips
Last Updated on January 13, 2023 by Carolyn
Small Business Tax Tips for Bloggers and Side Hustlers
Though this post is directed at US taxpayers, It still should be useful to non-US taxpayers but keep in mind that form references such as 1099’s, Schedule C and US tax rates may not apply. This post may contain affiliate links. Full disclosure here. Investment advice published here is of a general nature only as disclosed here.
Congratulations bloggers and side hustlers, you have your first year of blogging or business operations under your belt. What an accomplishment! If you’re like me you had no idea what you were getting into; SEO, plugins, social networking strategies, marketing, branding. And now the worst part is looming ahead of you: The dreaded income tax filing. What should you do?
No worries, while not blogging, I’m a licensed CPA so taxes are MY forte, and this post is for you! I’m going to answer the questions I hear most frequently in my practice and provide small business tax tips that should make this task a little easier and I also will dispel some fallacies that I’ve seen circulating around the internet.
So the number one question I hear is:
“Do I have to file income taxes for my side hustle/blog? I haven’t made any money.”
And I always preface my reply with “It depends.” How about that for a nice ambivalent, useless answer! But it’s true. Let’s dive a little deeper. To answer this question properly I need more information.
Have you earned any revenue? Many confuse revenue with profit. If you listed an item on Etsy and sold it, you have revenue and that means you should be filing income taxes and reporting the income. And if you didn’t earn any revenue, you’re now clapping your hands with glee thinking you’re off the hook and don’t have to read the rest of this post; not so fast, read on.
If you opened your doors (be they virtual or real) for business but have only expenses and no revenue you’ll probably WANT to file a tax return for your business. I know you’re thinking ” Why would I want to go through that exercise if I don’t have to?” The answer is simple: If you’re in business and have incurred expenses but haven’t earned any revenue you have a loss and that loss may be deductible and lower your taxable income resulting in a refund or a lesser amount owed. Also once, you’re open for business, you can deduct up to $5000 in start-up costs incurred in prior years. Do I have your attention now?
Another frequent question is:
“What expenses can I deduct?”
To answer this question, I go to the IRS definition of a business expense: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
I bet you’re scratching your head going “say that in English please” Not to worry, it’s really not that complicated. Ordinary expenses are the expenses you incur day to day in the operations of your business, things like web hosting, memberships, hired labor, advertising, courses, supplies, professional fees etc. A good place to find a list of deductible expenses is the IRS form Schedule C that is used to report sole proprietor business income and expenses, Part 2 is the expense section. Note you’re not limited to the expenses that are prelabelled on Schedule C, you’ll find that there is a line “Other expenses” this is where you’ll list expenses incurred for your business that just don’t fit in one of the designated lines.
“I’m not sure if I’m considered open for business or not?“
This sounds like a silly question but really isn’t. For example, You’ve opened an eBay store and are in the process of buying items to sell on eBay. You haven’t actually listed anything on eBay yet but you’ve incurred expenses traveling to various stores, garage sales, etc. You’ve bought a computer and taken a course on making money on eBay. Are you in business?
The answer is no.
This is because you haven’t actually listed anything for sale yet. Once you have active listings you’d be considered in business, even if you haven’t actually sold anything yet. The same applies to bloggers. If you are building your blog following so that you can successfully apply to affiliate and advertising programs but haven’t actually monetized your blog, you’re not in business.
I recently invited some fellow bloggers to ask me questions on tax issues related to blogging, so that I could offer them some small business tax tips and advice. Here are the questions asked and my answers.
Blogger, Kayla Butcher of Motivation for Mom asks:
I have a virtual assistant, which tax forms do I need to provide her with? Is there anything else to know or be careful about with an assistant? She’s not a hired employee, just works on the side but claims the income and I write off what I pay her.
And here’s my response:
Kayla, thanks for the good question. You need to issue her a form 1099-NEC. This is due by Jan 31. You’ll also need to file a copy with the IRS. Google “1099 efile” and you should find many low-cost services which make filing the forms simple. One thing you need to be careful about when hiring assistants is that they truly are contractors and not employees. Here is a link to an article on the IRS website that discusses the criteria.https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
An anonymous reader asks:
“Do we need to actually save 30% of our 1099 income right off the top? Does it come out to less at the end of the year, or is it totally dependent on our overall tax bracket?“
To clarify this question for other readers: It’s often recommended to put aside 30% of your business income for the payment of your income taxes. However, this is a VERY general guideline and a small business owner’s tax liability could very well be more or less than 30% depending on what state they live in and what other earnings they have. Also, it should be noted that this is 30% of net business income after deducting expenses. I recommend putting 30% of the net monthly income into a savings account.
Reader Jenny Biller asks:
“How to organize your finances as an extra small business. Organizing business vs personal expenses is difficult when part of your rent/utilities/etc can be deductions but my business income isn’t enough to cover all of those big expenses.“
Jenny, it is often difficult to segregate business and personal expenses as many are part business and part personal expenses just like you say. I recommend paying strictly business expenses out of the business account and then paying expenses like rent and utilities from your personal account. Keep track of expenses that are partially deductible like rent, utilities, and internet on a spreadsheet, and at the end of the year calculate the deductible percentage based on use. If you’re a sole proprietor, remember that you are taxed on your net business income and not what you draw out of the business so whether or not you reimburse yourself from the business for these expenses, has no correlation with taxable income.
Allison jean, small business and Airbnb owner asks:
“I have an Airbnb and a business. Can I count my Airbnb money as part of my business profits? I want to put as much as possible into my Sep ira.”
I would report your Airbnb income separately from your other business unless the two businesses are related. Where you report your Airbnb income depends on your level of involvement and whether or not you materially participate. Do you manage the rental yourselves, deal with guest inquiries, provision the Airbnb, etc? If so you’d file it on Schedule C and would increase your allowable SEP contribution, if not you’d file on Schedule E. Be aware that reporting on Schedule C will increase your self-employment income.
More Resources for Small Business Taxes
Here are a couple of more blog posts for small businesses.
7 Steps to Making Your Blog (Side Hustle) A Business
I had no idea about the start up costs can be covered in taxes! Thank you for this golden piece of information!!!! I needed this!!
I’m glad to help, that’s the whole point of this blog!
Thank you for this helpful insight on taxes. I’m in my blogging stage where I need to start looking into this.
It’s so much better to start off on the right foot than fix mistakes.
This is a very helpful post. I am in my first year of blogging, so I haven’t made any money yet. However, I am going to talk to my CPA because I am in affiliate groups and should be able to deduct my hosting, etc. Thanks for the tips!
Yes if this is a business, you can deduct your expenses of operation including hosting.