This is tax weekend for us. I spent the two days gathering up and cleaning up the information we’ll need before we file. Here are some things that bloggers (or other freelancers) should be sure to get lined-up before doing taxes: (please note, this is not professional tax advice, just my thoughts from my experience)
1. W-2s and 1099s
Besides the W-2 forms we got from employers, I received a number of 1099 forms from advertisers such as BlogHer, Linkworth, etc. As a rule, I believe you have to earn more than $600 from a company before they need to send you a 1099 form.
2. Bank and Investing Statements
Banks also send 1099 forms letting you know how much interest you’ve earned in the last year. One thing to note if you’ve been using ING Direct’s own referral links (vs. using the ones you can get through programs like Commission Junction), that’ll show up on the 1099 form you get from them. So if you’ve also noted it down in your blog earning spreadsheet (see below), then you’ll want to remove that line.
(Edit: The following two sections have been modified, thanks to some commenters and some of my own experiences filing.)
3. Your Blog Earnings Spreadsheet
Want a free copy of the blog/freelance earnings spreadsheets I use? You can download: [download#3#nohits] [download#5#nohits] [download#4#nohits].
Hopefully you already tracked your blog earnings from ads, affiliates, and the like. I spent some time looking over my spreadsheet this week, making everything look a neat and making sure it all added up correctly at the end. Because I had to add up blogging income and freelancing income, I added a third sheet to the spreadsheet I use (the combo one) where I added together each month’s blogging and consulting income, tallying them at the bottom.
I also added in all income pre-paid toward 2009. I know that’s annoying, but unless you’re keeping the money somewhere like PayPal where you can’t access it (without their debit card, and even then you might just want to report it anyway) you have to report what you received in 2008 that was meant for adspace or prepaid services in 2009. If you’re keeping all the money in PayPal and withdrawing each month’s “real” blog earnings…I don’t think that’s a great plan for other reasons, but you can ask a tax professional as to whether or not you’d need to pay taxes on that yet. I don’t like taking chances.
The Money You’ve Earned from PayPal
Most of us get paid primarily through PayPal, and for most of us, PayPal takes a percentage of all the money we receive. It’s important to keep track of this so you don’t end up reporting more income than you got. There are two ways to do this. One is just to write down the amount actually received when recording PayPal transactions in your spreadsheet.
But if you get a 1099 from someone who paid you through PayPal, it’ll show the amount sent to PayPal. In that case, you have to make sure you add up the PayPal fees for those transactions and enter them into the appropriate section of your return (see Business Expenses, Fees below).
The other method is to record for every transaction the amount paid, the fee, and the amount received. You’d then enter the paid amount into your earnings and the fees into your Business Expenses, Fees section. The earnings represented on 1099s would be entered separately, but the fees would all be entered together. Either way, your tax return should end up balancing out the same.
The second option is the technically correct one, so while it’s more work I recommend taking it.
If you didn’t track your blog earnings, don’t despair. It’s going to be annoying, but you can get your PayPal transactions from the last year, copy them into a spreadsheet, and sort through them. Going through the hassle is much better than being audited, especially if you’re audited and don’t have the spreadsheet.
4. Your Deductions
This is the part that I’m most nervous to write about for fear of getting something wrong. Let’s just say that you want to have the deductions on hand, because even if you’re not declaring a home office you can still use some. And I’m going to talk about what I did.
Returns and Allowances
According to the copy of TaxCut that I ended up using (after talking to some other sole proprietors and a friend who’s a financial adviser), this includes:
- Refunds to customers
- Discounts to customers
- Rebates to customers
How does this apply to bloggers? In private ad sales, I have certain discount policies based on the length of time people buy adspace for and the number of ads they’re buying. Fortunately, I have a consistent policy. So I articulated it in part of my spreadsheet and then went through looking at every ad over the last year that had qualified. I found quite a number.
And for freelancers, if you give discounts to customers based on buying package deals, etc, make sure you write those down. I found several places where I’d done that, or thrown in something as a freebie. I carefully recorded it next to the job in my spreadsheet, including the exact nature of the discount and the cost to me. I was careful to be precise and only to claim discounts given when I’d actually given them, because I want to be able to defend each one if asked.
I chose not to claim a home office, because it would be too much of a headache with little that I’d feel comfortable claiming and greater risk of auditing. However, I was able to take deductions for straight-out business expenses and fees.
Things bloggers can claim as business expenses may include computers bought for blogging (though perhaps only part, if you use it for other things too), premium themes, webhosting, domain name costs, anything that you wouldn’t have to have bought if you weren’t running this little blogging business, as long as you use it almost exclusively for said blogging business.
I deducted things that I have receipts for, namely domain name costs and hosting costs. I have invoices to back them up and I was careful to subtract the cost of a few domains bought for private use from the cost on the invoice.
I’m not an expert on deductions, so if you’re trying to figure out whether or not to deduct something, ask a professional or a professional source. Make sure you can defend what you deduct–if you don’t have receipts of some sort, you probably shouldn’t claim it. Fortunately, most big things like webhosting, themes, will send you invoices and/or receipts which you can save to your computer and possibly print. Keep these around.
If you’re interested in organizing your deductions, check out my handy [download#6#nohits]. It’s just a potential deduction spreadsheet, so it won’t tell you what you can or can’t deduct, but it’ll help you keep those deductions in a row (too far a pun stretch?)
So as of this updated rewrite, my taxes are filed. It wasn’t that hard, using software and having my forms and spreadsheets. Once you’ve started them, don’t be afraid to take time out if you think you see something else you can deduct. I saved my work and took a few breaks to calculate things I’d forgotten about (like discounts) and it was well-worth it.