The Webmaster and Taxes
Tax time is just around the corner and soon the forums will be full of misleading and inaccurate posts about the subject of taxes. So much of what is posted is just plain wrong. Well intentioned but wrong. So wrong that I decided to prepare this well documented guide to the Webmasters and income taxes in the US.
This educational guide should not be construed as professional legal or accounting advice as I am not a lawyer or accountant. I have prepared my own taxes for over 42 years. Thirty of those 42 years involved filing a business return along with my form 1040. For the last 12 years or so I have used Taxcut, a PC based tax preparation program mainly because it makes the otherwise complicated Schedule D much easier to do.
Let's take a look at some of the most common misinformation that is posted.
-If you don't earn at least $600 you don't need to report it!
This is usually in response to earning from Google or another affiliate program. That is plain wrong. When you sign up for any affiliate program you become an independent contractor and as such you are a business. The IRS Publication-334 clearly states on page 6* (see foot note about page numbers) "You have to file an income tax return for 2008 if your net earnings from self-employment were $400 or more".
That is what the publication says but when one crunches the numbers you will find a slightly different result. Your actual FICA and Medicare taxes will be 15.3% of 92.35% of your net income but you don't pay anything if the 92.35% amount is less than $400. So, the real number is something like $432.00 of net earnings. $432 * .9235 = $398.95 ($399). If you want to split hairs it is $432 and some change.
If you see yourself netting over $400 for the year, you should set aside 15.3% of your gross earnings to pay your FICA at the end of the year even if you don't think you will owe any other taxes.
It is important to note that says "net earnings" not gross. Gross (gross receipts) is the amount you received. As a business you may be entitled to certain deductions which are subtracted from your gross income to arrive at your net income. Examples of allowable deductions may include such expenses as part or all of your hosting fees, the purchase of content for your site, advertising expenses, local business licenses or any other expense that is ordinary to the business. In the absence of professional advice I strongly suggest you stay away from risky deductions like home office expense or depreciation of computer equipment as the record keeping for exclusive use or prorated portion are quite burdensome.
You must file the return and report the income even if you are not otherwise required to file a return. You may not owe any taxes but you may need to pay into the great Ponzi scheme known as Social Security and to Mediscare.
-If they don't mail you a 1099, you don't need to report the income.
This is just a variation of the post above. Businesses are not required to mail a 1099 unless your earnings from them exceeded $599.50 ($600). They are excused from the process and expense of mailing them. And while it is true that no written record of your earnings exist, you are still obligated to report them.
-How much taxes will I owe?
Whether you will pay taxes or not will be based on all of your income combined. Your net earning from self-employment will be added to your wages, dividends, interest, other investment income and income from any other source to arrive at your total gross income. There are different rules for different filing classes. Table 1-1 reproduced below from page 5* of Publication 17 shows the various income levels at which taxes are owed for individuals who may not be claimed by another person.
Please note that net self employment income of more than $400 negates the last column which states you do not even need to file. You won't owe any taxes but you may owe some FICA tax and you are required to file because of your self employment income.
Now the situation is slightly different if you can be claimed by someone else as a dependent. Mostly this applies to young webmasters who could rightfully be claimed on a parent's return because they provided more than 50% of the support for that individual. For this you need to take a look at table 1-2 which is on page 7* of Publication-17.
We are only showing a snippet from that table. The snippet we consider most germane to this article. Note that the wording of that table is confusing as it offers several possibilities. The bottom line is that if your earnings from all sources as mentioned above are greater than $5450 and you were claimed on someone else's return you may owe some taxes. As mentioned above net earnings from self employment greater than $400 requires you to file even if you owe no taxes.
This article posted Jan 3, 2009.
*All page numbers refer to the page number as printed not the PDF count. The PDF counts the cover page and index page. Add 2 to the number referenced to find either table using the pdf page count.