If you happen to be in the affiliate marketing space or run any type of home-based business whether it be online, or offline, then this quite possibly could be 1 of the most important articles you EVER read in your entire career.
When it comes to paying taxes as a self employed entrepreneur there is a grey area that most people fail to understand and they would rather not talk about this subject.
This is due to the many misconceptions and false information that is out there when it comes to this subject.
However, paying taxes and abiding by Uncle Sam’s rules is, unfortunately, something that every online business owner needs to do if you’re looking to remain in business and be around long term.
Before we get any further into this article, I want to put out my own personal disclaimer and let you know that I’m no type of an experienced tax accountant.
I’m simply passing this information on with you guys based on my personal experience that I’ve had filing my taxes as an online business owner.
Let’s Get Started, OK?
How to Pay Income Taxes On A Home Business
Running a home-based business can be an amazing experience—until it comes to paying income taxes.
The tax issue is never really an interesting one and it gets a little more complicated with a home business because of the uniqueness of the situation.
The good news is, running a business from home can save you a significant amount of money as relates to taxes.
Besides being able to take all the deductions that other businesses take, there are other deductions that are accessible exclusively to home business owners only hence lower taxes on your business income.
Home Business Tax Obligations
If you run a home-based business or work for yourself, you fall in the self-employed category. The general rule that applies to a self-employed person is that you need to pay estimated tax quarterly and file an annual return.
Each self-employed person is required by the IRS to pay income tax and self-employment tax. Self-employment tax should not scare you as it is simply Social Security and Medicare taxes—nothing more.
How Do You Know If You Are Subject To The Income and Self-Employment Tax?
Determine the net profit or loss of your business. The difference between your business’s income and expenses is the profit or loss. If the expenses exceed the income, it is a net loss but if the income exceeds the expenses it is a net profit.
The net profit is a part of your income. The loss can be deducted from the gross income. See form 1040, page 1.
If you made at least $600 or more worth of net earnings, you need to file an income tax return.
If you made less, you should refer to Form 1040 to see if there is any filing requirement that you meet.
How To File Taxes For A Home-Based Business
Making Quarterly Payments
According to the IRS, since you do not have an employer, you use the Estimated tax method to pay your income and self-employed tax.
These taxes are figured using a worksheet in Form 1040-ES, Estimated Tax For Individuals. To fill the form, you must have your previous year’s annual tax return.
If it is your first year operating a home-based business, you are required to estimate your expected income for the year, in case the estimated amount turns out to be too high or too low, fill out another Form 1040-ES and recalculate estimated taxes for the following quarter.
Filing The Annual Return
For the annual tax return, use Schedule C-EZ or Schedule C to report any losses or income for your home business. If your business’s expenses were $5,000 or less, you can file Schedule C-EZ as opposed to Schedule C.
Again, you must file Schedule SE (Form 1040), Self-Employment Tax to report Social Security and Medicare taxes.
For any payment made or received in your home business, the IRS requires you to file an information return.
Benefits Of Filing As A Business: Tax Deductions
First, the space used for your home business should qualify for these deductions.
Ensure that you prove to the IRS that your home business space is either your main area of business or you use it regularly and exclusively for business.
Regular and exclusive use simply means that a part of your home is used exclusively to conduct business.
The main area of your business (or principal place of business) means that your home is the central location of your business.
Home Office Space Deduction
For a home-based business, you are allowed to deduct the expenses of your home that were used for business.
Small business owners can now use a simplified method of calculating their home office deductions instead of the regular one which is a little bit complex.
With this method, you can deduct $5 per square foot for your home office space. The maximum is 300 square feet, that is, a limit of $1,500 in a year.
This simple method saves you the headache that comes with cumbersome record-keeping and tons of calculations. Its downside is that you cannot take a depreciation deduction.
The regular method entails using Form 8829 to calculate home business expenses. It is more complicated and requires accurate calculations of the actual expenses of your home-based business.
These expenses are such as utilities, repairs, depreciation, insurance and mortgage interest. The deductions depend on the portion of your home dedicated to the running of your business.
The following are the steps to follow while using the Form 8829
Step 1- Determine the percentage of your home used for the business. It is wise to have a specific area set aside for your business.
To get the percentage, figure out the square feet of your work area and divide it by the total square feet of the area covered by your home.
Step 2- To get the allowable deduction, enter the net profit from Line 29 in Schedule C and then enter the direct and indirect expenses.
Step 3- Calculate depreciation
Step 4- Carryover expenses for another year
What Expenses Are Deductible?
The following expenses are deductible regardless of whether or not your business is home-based;
- Home mortgage interest
- Real estate taxes
- Casualty losses
- Qualified mortgage insurance premiums
These others can only be written-off for home-based businesses;
- Security system
Generally, anything in your home that you use in for your business can be written off if you also use it for business.
However, deduct just the percentage that is used for running the business.
You may be tempted to keep your income information private and not pay taxes, especially if you do affiliate marketing or any other online freelancing job.
Nevertheless, the IRS is not the kind of visitor you need in your home. However tedious the process may be, try and file all your taxes as required.
Keep a business journal so that you are prepared when the IRS decides to visit. Reduce your taxes as much as possible by maximizing the deductions—just do not do anything that is not within the rules.
If you cannot justify it, do not write it off!!
Our Top Recommendations For Tax Software For Home Business Owners
There are many options when it comes to filing taxes as a home business.
If you’re more of a DIY type of person that enjoys more of a hands-on experience then I have some awesome news for you.
What’s that, Scott?
Did you guys know that you can save a ton of money by doing your taxes yourself than if you had a professional tax place do them like H& R Block or Jackson Hewitt?
You’ll need to pay for the software to do this but this is a drop in the bucket compared to what you would pay a tax professional to do your taxes for you.
Well, this happens to be the way that I’ve been doing my taxes since I started out in the online world back in 2014.
Listed below are my top recommendations for the best tax software for online/ work from home business owners.
Turbo Tax- Self Employed
H & R Block- Premium Tax Software
These are the 2 tax software programs that I’ve been using for the past 4 years to file my taxes and I wouldn’t know what to do without them.
Like I said before, I’m in NO way a CPA or any type of tax expert by any means and I was able to file my taxes in only a couple of hours with their step by step easy to understand instructions.
If you can follow directions and know how to read to write then there is NO reason why you can’t file your taxes yourself and save a ton of money while doing so.
What are your thoughts on taxes as an online business owner?
I would love to hear all about it in the comments below!!
~Your Friend, Scott~