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Author: Jake Snelson

Tax Tips for Small Business Owners

Is My Blog a Business? Tax Tips for Small Business Owners

This post was originally published on www.mothersniche.com.

Or in other words…”Do I really have to pay taxes on this?” Very common questions asked by budding bloggers and other side job Joes who start pulling in a little money on the side and wonder how much trouble they might have gotten themselves into. Well, I’m here to tell you, if you haven’t got a letter from the IRS or other State tax authority, then you’re not in trouble…yet. And really, when I refer to “trouble” I’m really just talking about a tax bill that you might not have been expecting. No one likes those surprises, ESPECIALLY the tax guy that has to inform people about them (excuse my self-pity).

In an attempt to eliminate all the cloudiness on the topic, here’s a brief rundown of the main concepts of small business taxation as it deals with a blog. Hopefully this shows you where the land mine issues are and helps you see whether they apply to you.

Is it Really a Business?

To put it straight, if a person or company is paying you for products or services, you’ve likely got a “business” on your hands. Unless you have no expectation of making a profit and don’t really spend much time and effort on it, then your blog is a business and the IRS expects you to report the activity on your tax return.

In addition to having to report the business activity on your tax return, business owners are also obligated to obtain a business license from the city or county in which they operate the business. Will a city official ever find out about the fact you are typing away on your blog to make money? Not likely…it’s certainly the “honor system” governing city and county business licenses.

report your business activity on your tax return

OK, It’s a Business, Now What?

In order to report your business activity on your tax return, you’ve got to know what happened in the business. This means knowing how much money you received from customers and how much money you paid out to vendors. Money (or products/gift certificates/etc.) received equals “income”, money paid out usually equals “expenses” and the difference between the two is your “net profit” or “net loss”.

Since people hardly use cash these days, your bank statements (including Paypal statements) are usually the most reliable, complete source of your income and expenses. This is why setting up a business bank account is usually a great first step when starting a blog business…weeding through all the transactions in a bank account and determining what relates to the business and what doesn’t can be a nightmare.

As soon as you’ve added up all your income and expenses, by category, you are ready to plop them into the tax return. In a simple, nonexistent world, your summary may look something like this:

Total Income: $5000

Expenses

Supplies: $600

Internet: $400

Software: $200

Telephone: $500

Total Expenses: $1700

These numbers just need to go in the correct forms on the tax return, and voila! You’re taxed on the net profit of the business activity, which in the example above would be $3300 ($5000 – $1700).

What if I Chance It?

Well…let’s just say the IRS’ tax enforcement methods are a little more effective than copyright enforcement methods…the risk of getting caught not properly reporting taxes is much higher than the risk of getting caught copying your mom’s Christmas song CD. This is a result of tax reporting obligations placed upon those who pay you money…you’ve likely heard of 1099s before. It’s beyond the scope of this article to go into it…but have you ever heard of the NSA before? Be afraid…be very afraid…just kidding, sort of ☺.

If you decide to take a chance and ignore reporting the business activity on your tax return, here’s what you are up against…in addition to your conscience that is. The following penalties are added to the taxes you underreported.

Late filing penalty: 5% per month

Late payment penalty: 1% per month

Negligence (meaning ignoring your obligation to understand): 20%

Fraud: 75%

Minimizing Taxes

Minimizing Taxes

There are of course tips and tricks to making sure you pay as little taxes as possible. Those revolve around legally deducting as many expenses as you possibly can. Making sure you don’t miss or forget about any expense transactions is the first step, which is most effectively accomplished by reconciling your bank statements for the whole year using accounting software, or a spreadsheet. Here is a short list of things you wouldn’t want to forget:

  • Home office deduction
  • Car and travel costs (mileage)
  • Internet service fees
  • Software
  • Telephone, fax
  • Office furniture
  • Computer equipment
  • Supplies
  • Advertising
  • Subscriptions
  • Equipment (like cameras, tools, etc)
  • Professional services
  • Contest prizes
  • And a multitude more…

Other measures to minimize taxes can be taken if your circumstances warrant them, such as forming a corporation and making yourself an employee of your own business.

What About LLCs and Stuff?

LLCs or S Corps are the two most commonly used small business entity structures. While the scope of consideration on which to choose is beyond this article’s intent, suffice it to say they both can provide you liability protection and may or may not achieve the tax benefits you are looking for. The two biggest indicators of whether you should look into forming an LLC or S Corp are probably, one, the amount of money you are making, and two, how many owners of the business there are.

If I had to throw a number out there, I would suggest investigating the idea as soon as your net profits exceed $10,000. And if there are any other owners of the business (maybe besides your spouse) it is good to consider formalizing the business with an entity structure.

You set up a business entity by filing an application with the appropriate State agency. Nothing is filed with the IRS at the time of formation, besides an application for an Employer Identification Number.

I’m a big DIY advocate…don’t pay somebody for something you can do well on your own. But safely making the decision about whether to incorporate your business or not probably requires about 50 hours of education and research. So I’m going to go with the cliché statement in this case…you really should discuss your circumstances with a lawyer or CPA before setting up one of these entities.

What About LLCs and Stuff

Conclusion

I’m a firm believer that true freedom can only be experienced by the self-employed. I hope this article has at least brushed over some the questions you’ve had about the topic of what it means to have your own business.

FAQs for Small Business Taxation: A Blogger’s Guide

1. Is my blog considered a business for tax purposes?

Yes, if you’re earning money from your blog through products or services, it’s likely considered a business by the IRS. Reporting this activity on your tax return is necessary.

2. How do I report my blog’s income and expenses for taxes?

Start by tracking your income and expenses, preferably through a dedicated business bank account. Summarize these figures and input them into the appropriate tax forms. Your net profit (income minus expenses) is what you’re taxed on.

3. What are the consequences of not reporting my blog’s income?

Ignoring tax reporting obligations can lead to penalties, including late filing and payment penalties, negligence penalties, and even fraud penalties. The risk of getting caught is high due to tax reporting obligations placed on those who pay you money.

4. How can I minimize taxes as a blogger?

Maximize deductions by ensuring you don’t miss any deductible expenses. This includes items like home office expenses, travel costs, internet fees, software, and more. Additionally, consider forming a corporation or LLC for potential tax benefits and liability protection.

5. Should I consider forming an LLC or S Corp for my blog?

LLCs and S Corps can offer liability protection and potential tax benefits, but the decision depends on factors like your income level and the number of owners involved. Consulting with a lawyer or CPA is advisable to determine the best course of action for your specific circumstances.

Corporate Formalities

Corporate Formalities

In some cases, forming a corporation is the right tax planning strategy for our clients. As we help facilitate the incorporation of their business, sometimes the importance of complying with corporate law and formalities falls through the cracks. Remember, you are creating a new legal entity, giving birth to a new “being” of sorts. Legal and tax authorities expect full compliance with certain rules before they will recognize your new creation.

Corporate Formalities

Here is a quick, yet important list of rules to follow to ensure that your corporation retains its legal status.

1. Filing Articles of Incorporation

Completing the State’s formal application and filing organization documents is the first step to setting up a separate business entity, also known as a corporation. To some of you, this may be the only step you are aware of, but it’s only the beginning.

2. Obtaining a Federal Employer Identification number (EIN)

Now that you can obtain an EIN online, through the IRS website, this is probably the simplest step in the process. Simple, yet critical to making sure the new entity is recognized for tax purposes by the IRS.

3. Board Meetings

State law usually requires at least one board meeting be convened and documented per year. It may seem odd to hold a board meeting, if you are the only owner of your corporation, yet the requirement remains. It is a good idea to get some outside perspective on your business once in a while anyway, so if you are the only owner, maybe consider appointing a good friend or family member to be on your board of directors. Take them to lunch once a year and ask for their input on your business activities. Document the discussion in a notebook and you’ve had your first board meeting!

4. Appoint Corporate Officers and Directors

First item of business at your first board meeting is to officially appoint company officers and your board of directors. You may be the only officer (Chief Executive Officer, President, etc…) and you may only have one other person be on your board of directors. The quantity is not as important as the formality and documentation.

5. Approve Corporate Bylaws

Bylaws are the legal document that defines a corporation’s purpose, how it runs things, and who does what. The articles of organization contain the basic idea, but the Bylaws take it to the next level of detail. These would be “approved” by the board of directors.

6. Capitalize the Corporation

Putting money into the corporation, and strictly segregating personal funds from corporate funds, is a critical element to the entity maintaining legal status. If the company doesn’t have any money to operate with, it would be difficult to convince the IRS or court that it is fulfilling its purpose.

7. Issue Stock Certificates to Shareholders

You can find stock certificate templates all over the internet. These serve well, as do the ones a lawyer will provide you, to document who owns the stock of the corporation.

8. Keeping Separate Books

Keeping Separate Books

As mentioned earlier, keeping corporate funds separate from personal funds is critical to keeping the corporate veil in place. A separate bank account and clean set of accounting records showing the company’s activity, demonstrate the company’s independence from its owners.

In conclusion, meeting corporate formalities is crucial for ensuring that your business is recognized as a separate legal entity by the IRS and court systems. This recognition secures the tax and legal benefits you aim for, providing you with peace of mind. However, managing tax obligations and navigating legal requirements can be overwhelming. If you find yourself confused or in need of assistance, we encourage you to reach out to Vyde. Our services can simplify this process and help you focus on growing your business. Contact us today to learn more!

Accounting Mistakes Small Businesses Make

3 Accounting Mistakes Small Businesses Make

When you’re juggling the operations of a small business, each task takes its turn at being the number one priority. As you check an item off your to-do list—order supplies, take inventory, create an advertisement, etc.—you’re that much closer to small business success. Your list, however, doesn’t seem to get any shorter.

Many small business owners who do their own accounting and small business bookkeeping find that those tasks seem to hang out at the bottom of the list and never really get done. Unfortunately (and fortunately in some regard) accounting is an ongoing task that is never complete.

Here are three of the most common accounting mistakes small business owners make and ways to avoid them and keep your finances on track.

1. Not keeping close track of money coming in. It’s always great to get paid, but often times, the money goes out as quickly as it comes in. This is especially true for businesses who are just getting established. Keeping track of which invoices have been paid seems to be one of those things that is continually pushed to the bottom of the list with the thinking, “I’ll remember who paid me and mark it off later.” When this happens and tax season approaches, you’re left with a big long list of receivables and you’re not sure who paid what and when.

The solution: There is no easy answer to this. However, there are a few ways you can make keeping track of your receivables a little easier. One is to set aside time each day to account for money coming in. That sounds fairly elementary, but you’ll be surprised at how much more accurate your records will be if you have ten or twenty minutes each day to update.

Another way to keep better track of money coming in is to accept online payments, that way the internet does the tracking for you. Programs such as PayPal are easy to set up and maintain, and they crunch the numbers for you. If you are a running a larger, more established business, you may want to invest the money in updating your website to include a payment feature that is unique to your company.

Not keeping track of expenses

2. Not keeping track of expenses—no matter how small! On the flip side of keeping track of money coming in, you’ve got to manage your money going out. Since there are often a lot more little expenses than there are payments coming in, this is perhaps the most difficult aspect of accounting to stay disciplined on, both in business and in personal finances. It’s easy to think that $20 here and $40 there isn’t much in the big picture of your business, but those small expenses can really add up and surprise you each month. Keeping track of your small business expenses will save you a lot of headache come tax season and also help you gain a better understanding of your profitability.

The solution(s): Keep your receipts! If you don’t have a record of what you spent, how will you ever know what the mysterious $50 charge is to your bank account? Even if you don’t take the time to sit down and record every receipt as you make your purchase, keep ahold of them so you know which expense is which later on. Create a separate envelope in your car to put business receipts so that they are all together in one place when you’re ready to update your records.

Keep a separate card and bank account for your small business. No matter how small your business, this is never a bad idea. Don’t charge business expenses on your personal credit card, and vice versa. If nothing else, it keeps things simpler throughout the year and at the end of the year when gathering all of your financial information.

3. Not hiring a professional. If your business is small and money is tight, hiring one more person to do something for you that you think you can do yourself just doesn’t seem logical. The truth of the matter is, if you’re not an accountant, you probably need an accountant. While you will have another bill to pay, you’ll also save yourself a lot of stress and a lot of money down the road. You need to make sure you are taking advantage of all the deductions you can, staying up to date on ever-changing tax laws, and make certain you are bringing in more than you are sending out.

The solution: Hire an accountant. If you absolutely cannot afford one more monthly bill, at least hire an accountant to do your taxes for you rather than trying to do them yourself. Vyde offers a low, flat monthly fee to clients that include tax preparation and doesn’t increase as you go. Vyde is able to handle the accounting for many small businesses for as low as $50 per month. (We know we’re kind of biased on this one, but hey, we also know how quickly things can get out of hand.)

Not hiring a professional

FAQs:

1. How can I effectively track money coming into my small business?

  • Allocate daily time for updating records.
  • Utilize online payment systems like PayPal for automated tracking.
  • Consider website upgrades for custom payment features.

2. What’s the importance of tracking small expenses for my business?

  • Small expenses accumulate and impact profitability.
  • Keep receipts and maintain separate accounts for clarity
  • Enhance understanding of financial health and ease tax preparation.

3. Is it necessary to hire a professional accountant for my small business?

  • Hiring an accountant ensures adherence to tax laws and optimization of deductions.
  • Even with a tight budget, consider hiring for tax preparation at least.
  • Services like Vyde offer affordable monthly rates for comprehensive accounting support.

Your Questions, Mazuma’s Answers, Part 1: What business expenses are tax deductible?

 

You asked and Mazuma is delivering–we’re talking business expenses today!

What business expenses are tax deductible?

The broad answer to the often asked broad question comes from IRS Publication 535 “To be deductible, business expenses must be both ordinary and necessary. An ordinary ex­pense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or busi­ness. An expense does not have to be indispensable to be considered necessary.”
So as you think about your business, ask yourself, “What do I need to pay for, in order to produce the income my business generates?” Or another way you might word it, “What do I pay for that helps my business succeed in producing income?”
The areas that get a little “gray” and confusing are the things you pay for that benefit your business AND you personally. Such as food, entertainment, or travel. For example, did you have to buy that nice steak at Ruth’s Chris Steakhouse for your client in order to keep your business doors open? Probably not, but did it benefit your business? Yes, filling a client’s belly with melt in your mouth steak increases the chances that they will stick around a little longer. Because of the nature of this “business meal” expense, in that it benefits you personally to some degree, results in the IRS saying you can deduct 50% of the business expenses on your tax return.
Another example, what about your car? Certainly if you didn’t have means of transportation, your business would not be able to operate. Therefore, the amount of your car expenses you can write off depend on the portion of time it is being used for business, versus used for personal purposes. Again, the car benefits you personally at times, so the IRS will not let you take a deduction for all of the expenses. If you drive 10,000 miles during the year, and 8,000 are used for business meetings, and necessary business travel, then 80% of the total car expenses would be for business expenses and thus deductible on the tax return. Or, in order to meet the same objective, the IRS will allow you to deduct 56 cents for each business mile traveled during the year, instead of a percentage of actual expenses.
Here is a list of some examples of deductions that might be applicable to bloggers, but any business that incurs these costs could likely deduct them:
– Advertising and promotion
– Software
– Blog templates or designs
– Books, magazines, online subscriptions
– Camera
– Cell phone
– Cell phone services
– Chairs
– Computer accessories
– Computer purchase
– Computer software
– Conference fees
– Contest prizes
– Crafts for display on blog
– Credit card fees
– Data storage
– Design services
– Desks
– Domain name registration
– Education costs
– Electricity
– Entertainment related to business
– Envelopes
– File cabinets
– Folders
– Food during business meetings
– Giveaways
– Health insurance
– Home improvements
– Home maintenance and repairs
– Hotels
– Images or stock photos
– Internet access fees
– Internet hosting fees
– Paper
-Parking fees
– PayPal fees
– PO Box
– Podcasts
– Postage
– Printer
– Printer ink
– Professional associations
– Professional services (CPA, Attorney)
-Props
– Rent
– Router
– Search Engine Optimization
– Travel
-Utilities
– Wages
– Webcam
– Webinars
– Workshops
What constitutes a “home office”? How do I factor that into my taxes?
According to the IRS, a home office is only a “home office” if the space is used “regularly” and “exclusively” for business activities. This means the are of your home needs to be segregated from other common use areas, like in a room or area separated by furniture. Primarily business activity, such as meetings with customers or working on your computer, happens in this area. The area can’t double as a play room for your kids when you are not there. It can’t be where your kids come to do their school work when you are not there. It’s a designated space used for your business activity, and if an IRS agent walked into your house unannounced, you would be able to point the area out and demonstrate that it is office space and indeed part of your business expenses.
The IRS recently issued a “safe harbor” rule that allows you to take $5 per square foot of home office space, up to 300 square feet.
If you don’t use the safe harbor method, you take the office space square footage and divide it into the whole square footage of the house to get a ratio. Then you multiply that ratio by the total utilities, maintenance, mortgage interest or rent, expenses you paid during the year to get your home office deduction.
Tax Day

A Few Useless Bits of Information You Probably Didn’t Know About Tax Day

Tax day is finally here! For some of us, that means a sigh of relief. For others, it’s the most stressful day of the year. And still others really couldn’t care less because they filed their taxes long ago and have already purchased a new lawn mower with their return. Regardless of which category you fit into, we all file them, we all pay them, we all worry about them. We’re talking about taxes, baby! And now that April 15th has come, why not read up on a few bits of rather meaningless, but totally interesting facts about TAX DAY!

1. The Gettysburg address is 269 words, the Declaration of Independence is 1,337 words, and the Bible is only 773,000 words. However, the tax law has grown from 11,400 words in 1913 to 7 million words today.

2. Nearly 300,000 trees are cut down yearly to produce the paper for all the IRS forms and instructions.

3. The IRS sends out 8 billion pages of forms and instructions each year. Laid end to end, they would stretch 28 times around the earth.

4. The IRS employs 114,000 people-twice as many as the CIA and five times more than the FBI.

5. Even Albert Einstein—sometimes referred to as the smartest man in the world—wasn’t all that wild about taxes. He once said, “The hardest thing in the world to understand is the income tax.”

6. The average number of days a person worked to pay his or her 2009 taxes was 103. (As you can imagine, that number has increased by now.)

7. Excise taxes are also called “sin taxes.” They are taxes on alcohol, tobacco, and gambling.

8. Americans spend over $27.7 billion every year doing their taxes.

9. Wealthier Americans pay higher taxes than middle- or lower-income earners. The wealthiest 1% of the population earns 19% of income but pays 37% of the income tax. The top 10% pays 68% of the tab. The bottom 50% earns 13% of the income, but pays just 3% of the taxes. This does not include payroll taxes for Social Security and Medicare.

10. American taxpayers spend over $200 billion and 5.4 billion hours working to comply with federal taxes each year, more than it takes to produce every car, truck, and van in the United States.

And there you go! Now you can share all of your brilliant tax day knowledge with friends and neighbors who are, like us, glad that April 15th has come and gone yet again.

20 Ways to Cut Business Expenses

  1. Hire Independent Contractors: An independent contractor can save you money because you aren’t paying for any employee benefits for them. They’re a great option if you don’t need a full-time person doing the work.
  2. Change Your Phone System: Phone systems can add up. See if you can simplify your system and use free options instead.
  3. Stay Virtual: If you can run your business online, do it. Opening a physical location can add a lot of expenses (think rent, insurance, utilities, etc.)
  4. Create your own forms: Instead of buying forms from a local office supply store, create your own. This will help keep them unique to your business and save you money.
  5. Renegotiate Your Rent: If you have to have a physical location talk with your landlord and see if you can renegotiate your rent. If there are a lot of empty spaces in your city, then your landlord may be more open to discussing your rent.
  6. Buy Recycled Ink Cartridges: Ink cartridges are really expensive, especially when people are frequently printing. Instead of buying brand new ones, buy recycled. It will save you money and you’re more eco friendly.
  7. Reevaluate Your Medical Insurance: Medical insurance is a big expense for businesses. Don’t leave picking a policy for the last minute. Really research your options and see if you’re getting the best bang for your buck.
  8. Hire Temporary Employees: If you know you’re going to have a busy season coming up, but won’t need employees after the busy season ends, then hire temporary employees.

What is a Dividend?

What is a Dividend?

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Vyde is a licensed accounting firm (CPA) based in Provo, Utah, and members of the AICPA. We provide professional accounting services to businesses and individuals, with a focus on small business bookkeeping and taxes.

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