Uncle Sam Wants You! … To Pay Your Taxes
Posted on March 19, 2008
Filed Under Earnings
I just got back from visiting my tax person, and boy does my ass hurt. Seriously though - having an online business that rakes-in the gross earnings can really come back and bite you if you don’t plan ahead.
My online gross income for 2007 came in at just slightly under $80,000. Net income after all was said and done was about $72,000. Total taxes (state and federal) that needed to be paid was in the neighborhood of $18,000 (hard to tell exactly because the total tax is munged in with my day-job income as well as my wife’s). Because no taxes are withheld on any of my online income it would have been very easy to blow it all on fast cars, stereos, and other krap, and be left with $18k bill come April 15. Luckily last year I read a blog post somewhere (sorry, can’t remember who’s or i’d give you a link) that recommended planning ahead and how not to get stuck with a big tax bill. Since I didn’t follow all of that advice, I still have to write a check for about $10k, but since I was planning for it and have that cash set aside it doesn’t hurt quite so much.
If you know that you’re going to have a significant “additional income” (Schedule C) you should file quarterly estimated taxes. This is what I’ll be doing beginning THIS year. Had I done that last year I’d probably be getting a refund right now instead of having to send a $10k check. Instead of filing estimated quarterly taxes, I choose to have my current employer withhold an additional amount in each paycheck. Having additional taxes withheld is as easy as filling out a new W-4, and specifying the amount on line-6. Had I not done this I would have had to pay some serious under-payment penalties in addition to that $18k or so in tax.
Here’s a few other tips for anyone making money online for the first time:
- Report ALL of your “additional” income. If you made over a few hundred dollars from any particular advertiser they will send you a 1099 - they also send a copy to the IRS
- Report ALL of your PayPal income. It might be tempting to think that the IRS wont find out about your little PayPal empire, but if/when you get that audit letter you’ll be wishing you had reported it if you didn’t
- File quarterly estimated taxes if your earnings are up there with the big-boys
- If you aren’t sure you will be earning enough to file quarterly estimated taxes, at least submit a new W4 form and have your employer deducted an additional amount from each paycheck. My employer was deducting about $900/month, but it wasn’t enough
- Dont forget your deductions! I was able to write-off (legitimate) things such as the home office-space I use, a portion of my internet bill, home electric bill, and even my iPhone and bills (which really are for ‘the business’). Don’t get greedy or make stuff up - it’s not worth the risk
- If you aren’t sure of what you will need to pay, start setting aside some cash toward the end of the year - We had an extra $20k set aside because we knew we were going to have a big tax bill.
- Have an expert help you with your taxes. In the past we always did our taxes with TurboTax, but because of the significant online income in 2007 this year we decided to have an expert help. The cost of $250 was well worth it.
Paying taxes on your online earnings is part of the fun of making money online - but if you don’t plan ahead you could screw yourself. It might be too late for your 2007 earnings, but now is the time to start thinking and planning for 2008’s income.
Disclaimer: I am not a tax expert and I don’t even play one on the internet. I just got bored this afternoon after having my taxes done and decided to make a post about it. If you have questions or concerns about your tax shituation, please consult someone that knows what they’re talking about.
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