How to File Income Taxes on the Part Time Income Earned on Hub Pages and Other Internet Marketing Sites
You Need to Complete and File a Schedule C With Your Taxes
Income earned as a self employed person as opposed to wage income earned from an employer is reported on your Federal Income taxes by completing and including with your tax return a form known as Schedule C.
A copy of Schedule C for your current year tax return can be obtained from the IRS website at http://www.irs.gov/pub/irs-pdf/f1040sc.pdf and the instructions for completing Schedule C from the IRS website at http://www.irs.gov/pub/irs-pdf/i1040sc.pdf.
Both of these are PDF files which can be downloaded and saved to your computer and, in the case of the Schedule C itself, you can fill in your information directly on your computer then save and print it.
Schedule C itself is a two page document that is relatively straight forward and not that difficult to understand and complete.
While the IRS Schedule C and the other tax forms discussed here tend to remain about the same from year to year as far as their format, the instructions for completing them often include significant changes. Because both forms and instructions are subject to change from year to year you should always make sure that both the Form and Instructions you are using correspond to the tax year for which you are filing.
While Form C is fairly straightforward, especially for something like income from part-time writing, don't hesitate to seek professional help if you feel you need it. Free help is often available from sources like the IRS website and community organizations. There are also a number of reasonably priced tax preparation software packages as well as reasonably priced professional tax preparation services.
Your Business Income May be Subject to the Self Employment Tax
If you show a profit on Line 31 of Schedule C, note that the first bullet point under Line 31 states If a profit, enter on both Form 1040, line 12, and Schedule SE, line 2, which means that, in addition to entering a positive number on Line 12 of Form 1040 you may also have to complete Schedule SE a copy of which can be obtained from the IRS website by clicking on this link http://www.irs.gov/pub/irs-pdf/f1040sse.pdf.
Schedule SE is used to calculate the so called Self Employment Tax which refers to the Social Security and Medicare tax amounts deducted from wages on your regular job each payday.
In the case of employee wages, only half of the Social Security and Medicare taxes are deducted from the employee's wages with the other half being paid by the employer. Currently, the employee's portion of the Social Security and Medicare tax is 7.65% of their earnings.
However, since self employed people are both the employer and employee, they have to pay the full 15.30% tax (the employee's 7.65% and the employer's 7.65%). You do get one break in that if your total self-employment income is less than $400 (i.e., $399.99 or less) you do not have to file Schedule SE and pay the 15.30% tax.
While having a business, or a hobby that makes money for you, will cause your taxes to increase this is not a reason to abandon the activity. Whether your writing or other freelance business is a small, part-time affair or your sole source of income, there are advantages to having your own business.
Remember, that even in the case where your small business is a part-time operation that generates some extra money for you, at a minimum your after tax income will be greater than your income without the business even though you have to pay taxes on the income from the business.
While the nature of our progressive income tax system means that the extra income from your side business may be taxed at a higher rate than your primary income from wages, our politicians still haven't increased that rate to 100%. Also, you only pay taxes on your profit which is the difference between the revenue produced by the business and the expenses incurred by the business.
Schedule C Will Show if You Have a Profit or a Loss From Your Business
For a simple little business (and by earning money from your HubPage and other Internet activities you are considered a small business owner) with no inventory to sell, filling out the form is not that difficult.
Cost vs Accrual Accounting
For most people in our situation as writers, the effect of choosing either cash or accrual methods on our taxes is about the same although the accrual method requires a little more work especially since, as I recall from last year's taxes, Google and other sites reported what they actually paid me in 2007 rather than what they actually owed me.
The difference being that, since Google tracks and sums the amount due me for clicks for each day of the month and then sends me a check for the total at the end of the next month, the check I received, in January 2007 was for money earned in December 2006 and the money I earned in December 2007 wasn't paid until January 2008.
Under the accrual method I would have declared the December 2006 earnings (which I didn't receive until January 2007) on my 2006 tax return and declared what I had earned in December 2007 (which I didn't receive until January 2008) on my 2007 taxes.
As you can see, for our type of business, the net result is about the same for both methods so I take the easy way and simply report the income using the cash method which is the same way it is being reported to me.
Now, there are some businesses where there is a tax advantage to using the accrual method of accounting but this is not one of them.
At a minimum you will have to enter your name, your Social Security Number, the address of your business (for most of us it is our home address - DON'T enter the address of you current employer if you also have a regular job as your writing business is separate from that source of income), indicate your accounting method as either cash, accrual or other and the total income you received from all sources for your writing.
The easiest accounting method to choose is cash as this means that you are counting income as yours as of the date you receive the checks or automatic deposits to your bank account from HubPages, Google and other sites that pay you whereas accrual means that you are claiming the income as of the date you earn it rather than receive it. (See the Side Bar at the right, entitled Cash vs Accrual Accounting for a more detailed discussion of Cash vs Accrual Accounting.)
Enter any business expenses on the appropriate lines below then subtract the expenses from your total income to get your net income from the business which is entered on Line 31 of the form.
Depending upon your expenses, your net business income can be either positive or negative.
A positive number is considered a profit and subject to income taxes (Federal plus state if your state has an income tax and local if you are unfortunate enough to live in a city, like New York City, which has an income tax along with the state and Federal government income tax) AND Social Security and Medicare taxes.
If net income is negative you will have a business loss and be required to provide a more detailed explanation of your expenses on the lines below Line 31 and on page 2 of the form. In either case the profit or loss figure on Line 31 of Schedule C will be copied to Line 12 of your 1040 Tax form to be added to or subtracted from (if you have a loss) your other income.
IRS Form 1099-Misc
It is my understanding that, legally, everyone is supposed to report all income earned.
Realistically, when small amounts of money change hands between people there are generally not only no records of the transaction but it is also not worth the government's while to waste time trying to collect such amounts.
The job of the IRS and state revenue departments is to make money for the politicians to spend and paying tax collectors to spend hours collecting a dollar's worth of taxes here and a dollar there costs more money than it generates.
Because of the time and expense involved, businesses and individuals are not required by the IRS to report payments for labor services totaling less than $600 per year to individuals working as sole proprietors or partnerships.
Since most individuals do not know about this rule, the IRS rarely goes after individuals who fail to keep track of and report what they pay to Joe the Plumber every time they pay him to come over and unplug their sink (Joe the Plumber, however, is required to track and report the income himself).
In the case of businesses the IRS enforces a higher standard and requires them to keep track of the amounts they pay to individuals who are not employees and have not set their small business up as a corporation or LLC (Limited Liability Company).
This involves the business obtaining the Social Security or Tax ID number of the person providing the services to the business and then preparing and sending an IRS Form 1099-MISC showing the total amount paid to the individual along with their name and Social Security Number.
Those of us who publish on HubPages and run ads from Google, Amazon and eBay will receive a Form 1099-MISC from each of them that paid us $600 or more during the tax year (for some sites, including HubPages we have to get this information from our account with them online). Any of these companies that paid us less than $600 during the tax year will not send us a 1099-MISC but we should still report the income (you can go online to each of them and get a report showing both how much income has been credited to you along with the dates and amounts of payments by them to you).
If your total self employment income after expenses is less than $400 you won't have to pay the Social Security/Medicare Self Employment tax and you can usually avoid having to pay any income taxes on this small amount by depositing it into a traditional IRA account (so long as you haven't maxed out the total contribution you are allowed and make the deposit before you file your taxes - if you already contribute the maximum allowed to your IRAs - both Roth and Traditional - you can avoid income taxes next year on this income by estimating your self employment earnings and increasing your contribution to your employer's 401(k) or similar program).
Subtract Business Expenses from Revenue to Reduce Taxes
The best way to reduce the tax bite on your business income (including the Self Employment tax which cannot be reduced by contributions to your retirement accounts) is to offset your business revenue with expenses. Now generating expenses simply to offset revenue doesn't make sense as you get nothing for your time and effort.
However, having your own business, especially if you operate it out of your home, allows you to deduct from your revenue many personal type expenses that you would pay anyway but can't normally deduct them from wage income. For instance, you need a computer and an internet connection in order to write and publish your Hubs on HubPages.
Depending upon what other things and what portion of the time your computer and Internet connection are used for non-business purposes, you may be able to deduct all or part of this expense, which you are now paying anyway without any tax advantage, from your business revenue.
Keep Good Records of Expenses
There are more than likely numerous other expenses you are currently incurring which could qualify as business tax deductions. The sum of these deductions can reduce your business income substantially which means that you have more of your regular wage income available to other things since some of your regular personal expenses are now being paid for by your business.
If your business related expenses exceed your business income the resulting paper loss can be deducted from your wage income to reduce the income taxes on your wages as well thereby giving you either a bigger refund or cause you to send a smaller check to the IRS (it should be noted that there are limits to the amount of business losses you can claim and the number of years you can consecutively show a loss for your business).
Note that I only named two things that you MIGHT be able to use as business deductions and qualified the statement by saying that you might rather than could deduct these expenses.
The area of business deductions can be very complex. Some expenses are very clear and legal while the legality of others may be questionable. In some cases even if a deduction is clearly legal, it may be one that raises questions which can lead to you having to spend time, effort and possibly money for professional assistance defending yourself in an audit. Also, what might be perfectly legitimate for one type of business may be open to question in your business.
Be sure to keep good records of your business expenses. This includes receipts and other documentation to both prove you incurred the expense as well as for use as possible justification of each as a business expense.
Select a Good Tax Advisor
The U.S. tax code (the actual law governing the Federal Income, Social Security and Medicare taxes in the United States) consists of close to 100,000 pages of complex and often conflicting legalese. Every year, when not devoting time spending or wasting our tax dollars, Congress keeps itself busy by adding hundreds of more pages to the code.
The tax codes for the various states that levy income taxes are smaller than the Federal code but still complex. The result is that no one really knows or understands the entire code which has resulted in many loopholes, the meaning and legality of which are open to debate and interpretation.
For this reason, once I started making serious money from my writing, I turned to a tax professional who specializes in small business taxes to do my taxes. He knows more than I do and, since this is his business, he has the time and incentive to keep up with and understand the law as it applies to individuals and small businesses.
Before selecting this particular person I made a point of discussing taxes and his business in general (this was made easier by the fact that I knew him socially and was able to talk shop with him before engaging his services) as well as talked to others who used his services.
My goal was to first, verify that he not only knew what I knew about business and taxes but that he also knew more. I also wanted to get a feel for both his professional ethics and attitude towards risk with regard to taxes.
The fact that he had "fired" a couple of his clients when they sought to have him severely bend the tax rules for them, impressed me. I was also impressed by the fact that while he tried to keep his clients' tax liability to a minimum, he also advised against deductions that were legal but questionable enough to attract an audit.
Like many Americans, I am willing to forgo certain small, but legal, deductions and pay a few dollars more to avoid hassles from the IRS.
Treat Your Writing as a Business
For writers on HubPages and other money making activities on the Internet who are making a few hundred dollars or more per year and plan to continue and grow this income, my advice is to look upon this activity as a business as well as enjoyable and creative outlet.
As a business, you need to first have a general knowledge of financial record keeping and tax rules.
Second, keep good records of your income and any expenses that apply or might apply to your business.
Third, organize your records and bookkeeping so that it will be easier to stay on top of the business as well as quickly find if you are ever required to justify expenses or deductions you claim.
Finally, don't hesitate to seek and pay for professional help. At a minimum this means obtaining the services of a good tax preparer or utilizing a good business tax software system.
If bookkeeping and record keeping are not your forte or take too much time away from your writing, then engage the services of a professional bookkeeper - there are many freelance bookkeepers who make a living providing these services to small businesses.
Their fees, which are tax deductible as are the fees charged by your tax advisor, are generally reasonable since they only bill you for the couple of hours or so that they spend on your records each month.
The fellow that does my taxes also offers this service but, to date I still do this myself. Having good records not only keeps your business legitimate for taxes and helps to avoid hassles with the IRS and state tax authorities but can also yield good information about your business such as which articles on HubPages or which sites, if you are writing for more than one site, give you the best returns for your time and effort.
This information can not only help you with your taxes but also make you more efficient by allowing you to focus your limited time on higher yielding activities but make you richer as well.
Questions & Answers
© 2009 Chuck Nugent