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How to Avoid Legal Trouble, Income Tax Fines, and Penalties as a Blogger

This guest post is by Sunil of Extra Money Blog.

Making money online is no different than making money from any other type of business in that you have to abide by the same laws and regulations as any other business or citizen.

Many internet entrepreneurs fail to consider this and are later faced with severe fines and penalties from relevant governing authorities. Others face even more severe repercussions.

How do I know? I’ve had to help many get out from their terrible situations! See, I have a slight advantage. Not only am I a successful internet entrepreneur today, but I was also a CPA and financial consultant in my past life.

Tax time

Copyright Christopher Meder - Fotolia.com

Although I have no data to prove it, my theory is that many young entrepreneurs enter the online business space without fully understanding its nature and the laws and regulations one must adhere to in any for-profit activity.

The lack of awareness and knowledge is what leads most people to unforeseen unfortunate circumstances with the legal authorities.

Below are a handful of legalities to consider as you embark and progress in your journey of making money online. These are some of the most financially impactful in terms of fines, penalties, liability exposure, and money left on the table, yet they’re ones that are most commonly overlooked by bloggers and internet marketers.

Note that this post focuses on regulatory obligations under United States law.

Note: None of this should be construed as legal or tax advice. Consult your personal and paid accountants and attorneys before implementing any part of this discussion.

Legal incorporation

A business online is a business nonetheless. And any business can be sued for anything.  At the very least, it’s a good idea to ensure your personal assets are protected and “separated” from your business assets.

One way to do this by incorporating your business under a formal legalized structured such as a limited liability company (LLC).

Contractor pay compliance

In the United States, you are required to timely complete and file Internal Revenue Service (IRS) Form 1099 for each contractor hired if you paid them at least $600.

This is how the government tracks who is earning money from freelance labor. This is also how the government tracks whether expenses claimed as deductions are being claimed as income elsewhere. For example, when you claim a $600 business deduction, that is $600 less the government can tax you with. But they will expect someone else to claim the $600 so they can collect their fair share of tax revenue.

Quarterly Tax Installments

When you’re self-employed, the Government expects you to remit your anticipated self-employment taxes on a quarterly basis so that it can operate within its budget.

Rather than paying a lump sum tax amount at the end of the year, you are expected to pay taxes in four installments (one each quarter). The idea is to pay all your tax liability by the time year-end comes around.

It is always a good idea to overpay and then claim a refund rather than underpaying and having to pay fines and penalties. You don’t want to mess with rude Uncle Sam.

Business losses

If your online business generates a loss and you happen to have a full-time job and therefore get a W2 form at the end of the year, you may be able to deduct your losses from your wage income to reduce your overall tax burden.

For example, if you made $40,000 working in a job and lost $2,000 in your online business due to expenses such as paying someone to design a website, domain, hosting, email newsletters, etc., you can deduct the $2,000 from the $40,000, netting you a total of $38,000 in taxable income. This essentially reduces your effective tax rate.

Now you won’t get into trouble if you don’t do this, but it is to your benefit to claim your business losses as a deduction against your wage income. The IRS will not remind you of this, so be sure to capitalize on what you deserve.

NOL carry-forward

If you don’t have a full-time job, and your online company is all you’ve got, providing you have it incorporated appropriately, you can carry over losses from one year to another, future year, to offset your earnings.

This is called a net operating loss deduction in more technical terms. There are certain rules around how much you can deduct, when and how long you can carry over a balance in the future. Speak to your accountant for more information.

When must you consider these income tax legalities?

These legalities collectively can sound overwhelming, especially if you haven’t had to consider them before. That said, these are not prerequisites by any means to start blogging or an internet-based business.

You can wait until your online ventures become profitable before considering the legalities involved. It makes sense. Why go through all that planning, work and possible hassle for nothing? After all, a very small minority of online businesses make money and survive in the long term.

That said, it can’t hurt to meet with a tax professional and get familiarized with the law and your obligations when you decide you want to monetize your online ventures. In fact, I highly recommend that approach. At the very least, spend some time reading about the law and your responsibilities to avoid any surprises in the long term.

Subsequent to all that, it is important to stay organized and keep track of all income and expenditures from your online endeavors. Many bloggers scramble at the last minute to obtain this information when their ventures turn profitable and they have to pay taxes on those profits.

Staying prepared and organized ensures that you can comply with tax laws if and when you have to cross that line (when you become profitable).

And while the above considerations are the most impactful and commonly overlooked, the tax law is broader and varies from one jurisdiction to another. Therefore there may be nuances unique to each blogger’s home base or jurisdiction.  For these reasons collectively, it may be best for a professional blogger or internet marketer to consult with a tax accountant who is familiar with this industry when your online endeavors start turning profit.

Conclusion

Although these points specifically apply to the United States legal system, the general premise underlying this discussion is broad. In other words, every jurisdiction has its set of legalities, and it is important to understand what you are expected to comply with as an individual earning income in that jurisdiction.

Knowledge is power, so make sure you are equipped with the right information before you start any worthwhile endeavor, whether online or off, and avoid potential legal liabilities that may come your way.

You can prepare yourself by initially learning about tax laws and your responsibilities, and subsequently consulting with a tax professional when it comes time to pay Uncle Sam.

Did you think about these things before you dove into blogging for profit? What did or do you do to prepare yourself for tax compliance?

Sunil owns over a dozen profitable niche websites and is the author of “How to Go from $0 to $1,000 a month in Passive and Residual Income in Under 180 Days All in Your Spare Time“, a FREE report you can download instantly from his Extra Money Blog, where he discusses how to create multiple streams of passive and residual income, entrepreneurship, internet marketing, blogging and personal finance. In 2007, he sold his ecommerce website for $250,000 to a top Ebay Power Seller and since then has sold several niche sites for five figures each. You can read more about him and his work on his blog

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Comments

  1. Michael says:

    This is important stuff to know and be aware of!

  2. Megan Everett says:

    I have asked and asked and asked — but have yet to find advisor with experience in online businesses who are also in PA: legal, tax preparer, or insurance agent.

    All the advice I have sought either ends in: “… but I don’t practice in PA so I can’t advise you” (from online resources), or “… this is the way it works for small businesses – and some precedents you should consider – but I don’t have any experience with anyone doing what you’re doing – nor do those resources I asked for help in answering your questions” (from pros in PA).

    If anyone creates a directory of providers, by state or tax district, who have both experience with the needs of online businesses and who understand the rules and regs in their own state, I for one will subscribe in order to have a resource I can trust to give me the correct answers to the kinds of questions raised in this post.

  3. Marcos says:

    Very good text on How to Avoid Trouble legal, Income Tax Fines, Penalties and the Blogger!
    A hug!

  4. Brian says:

    The 1099 reporting requirement for small businesses mentioned above has thankfully been repealed.

    • Brian, where did you hear / read that? It has not been repealed. There have been modifications that allow immaterial activity / transactions to pass under the radar, but certainly not for dollar volume above a certain threshold. Can you shed more light on what you know about the repeal?

      • Brian says:

        “Today, President Obama signed a law that removes the expanded “1099” reporting requirement from the Affordable Care Act. This is a big win for small businesses.

        The SBA and President Obama supported repealing this provision, which would have required businesses to send 1099 forms for all purchases of goods and services over $600 annually. With this bipartisan effort, we have removed a requirement that would have been an undue barrier to small business growth.”

        http://www.sba.gov/about-sba-info/15128

        • This is good stuff Brian and thank you for providing this link. With the reporting requirement no longer there, I would think Uncle Sam has no way of knowing about blog/freelance income if bloggers do not report it on their 1040.

          How is the government willing/able to live with that? I couldn’t find additional guidance on this matter that provides an alternative limit (perhaps a higher one) after which 1099 reporting becomes necessary. It can’t just be on a purely voluntary basis can it? At some point businesses will have to report?

          What are your thoughts?

        • This is good stuff Brian and thank you for providing this link. With the reporting requirement no longer there, I would think Uncle Sam has no way of knowing about blog/freelance income if bloggers do not report it on their 1040.

          How is the government willing/able to live with that? I couldn’t find additional guidance on this matter that provides an alternative limit (perhaps a higher one) after which 1099 reporting becomes necessary. It can’t just be on a purely voluntary basis can it? At some point businesses will have to report?

          What are your thoughts???

  5. Mark says:

    Thanks!

    As a fellow CPA, I’m quite surprised about how little information is out there about taxation of blogs. By not knowing the rules, bloggers and web entrepreneurs can sometimes lose thousands of dollars worth of tax deductions, or, worse yet, get hit with thousands of dollars worth of penalties.

    By all means, if you’re profitable, hiring a good tax preparer will save you a lot of money.

    However, you should also learn the rules on your own. A good place to start is the IRS’ own website.

    • Mark, the issue with the IRS literature is that it is over complicated, intimidating and verbose, especially for a newbie. That is why there is more need for professionals like yourself. People need hand holding guidance and need to feel comfortable that they are in good hands.

  6. Imran says:

    I am new to blogging and i provided couple of cracked softwares on my blog.After reading this article i decided not to provide cracked softwares on my blog
    Thanks for the info :)

  7. Ashok says:

    No matter what business do, you should never forget the tax man. It is always advisable to comply with the tax laws fully. Good article in that direction.

  8. Drewry says:

    a very thought-provoking post. Thank you so much Darren, for sharing this valuable information with us :-)

  9. Laura says:

    I have not found any information about Canadian Laws regarding blogging. I am sure claiming the income tax is a must but do you know of any specific resource where I could find out information for Canadian Blogging laws?

  10. Carolyn says:

    I know every state is probably slightly different, but I’d love to see an article covering some of the sales tax issues if you sell an e-book on your site. Is it any different if you sell through a remote site? Different if there’s a “hard product” involved?

    • Some good questions Carolyn. State sales tax laws are based on nexus, whether the selling vendor has any relationships in the state in which the buyer buys from/where the product is shipped to. That said, there are some open ends when it comes to intangibles such as services, apps, ebooks.

  11. Geoff says:

    Hey Sunil, EMB is one of my fav’s and great to see you here at another one of my fav’s!

    Glad you pointed out that self-employed bloggers need to make payments quarterly. So many people forget about that. I actually find it useful as it makes me pay more attention and catch-up on my expenses and such.

  12. Ardorm says:

    Oh, that’s complicated. o_O

    If I do not generate ANY income from my blog and only express my opinion about news, am I safe? I mean, unless I do not infringe a copyright law. :)

    • Ardorm, I am assuming you make full time income from a full time day job? If so, since you are in a sensitive niche, you might want to consider incorporating just in case someone decides to come after you. If they do, incorporation ensures that your personal assets/wealth is protected.

  13. James Greg says:

    Well this mostly implies in the US but for bloggers who reside outside should also try to follow these points and consider this as a business, but I’ve noticed usually people from other countries have blogs as a hobby or a part time job rather than considering it as a real business.

    • James – you are correct in many ways. And although they start as part time hobbies, they may turn into full time ventures or significant enough part time ventures. Other countries, though slow, typically tend to model rules and regs after the US. It’s therefore not a bad idea to stay abreast of these developments to stay ahead of the curve at all times.

  14. Mark says:

    I just know about the legal rules and all but after reading this I am concern about this. Thanks for such nice post.

  15. Karun says:

    Hi Sunil,

    Bloggers do need to worry a little if they have no idea on tax laws and this blog post was one of rarest that any blogger could find. Thank you for the post and the advice is what every blogger has to take seriously.

  16. Tim says:

    I have a few questions…

    One, when it comes to contractor pay compliance, what are the obligations of the contractor (say, someone’s hired to write for a blog)? Can they just claim the income on their 1040, etc.?

    Second, with the world getting so small, and people working for and with each other from many different countries, how does this affect contractor pay legalities?

    Finally, and I’ve heard others ask this before as well, since many of the transactions these days are done with services like Paypal, how does the government even know money’s changing hands?

    • Tim –

      Legally a person claims all income they make. To ensure that happens, the government enforces the 1099 law, which ensures they know who works for who and who paid who what. They reconcile this with the tax returns they receive. Any anomalies are audited/looked into in detail and no one wants that to happen.

      Hope that helps? I have more information on tax law on my blog and will be publishing more closer to year-end to help prepare for tax season.

      The government has a general idea of most material transactions, but there are areas where they lag and will catch up with time. Remember, the government is always a couple steps behind the private sector :)

  17. JarrodC says:

    Very very interesting information, and yes, compliance does start with education. Thank you very much for the tax tips, they’ll definitely be handy come April. ;)

  18. lubos says:

    Hi Sunni,

    Question. You mentioned that the form 1099 must be submitted for any contractor paid over $600. Are there any other requirements when it comes to hiring and paying people? For instance, hypothetically, let’s say I wanted to hire some people for some short term projects, what are the legal requirements? I realize this is no-longer solely online related, but I guess you got the ball rolling on this one… Thanks!

    • Lubos. Hiring on a full time basis is a lot of work/administrative responsibility. I am assuming you are referring to US law. If so, you need to look into collecting W4 forms, issuing W2 tax forms, collecting and remitting social security taxes to the Government etc. For part time gigs, you need to collect info (W4) and then issue 1099 if you cross the threshold of $600.

      I have some material written on this n my blog. If you are having trouble email me I may be able to point you in the right direction.

      Hope that helps!

  19. TO EVERYONE:

    If it seems that there are questions / concerns raised by the readership that I have not addressed, please be assured that I want to address them and likely have already tried.

    There appears to be a system issue that is preventing some of my responses from timely and appropriately posting.

    I have contacted Darren and team at ProBlogger and I am hoping they can resolve this matter quickly for a better overall reader-blogger experience and interaction.

    Thank you for all your comments and questions

    Sunil

  20. Shawn says:

    Good Info. I just started a blog myself. Even though right now it is not for profit and currently its a free blog using blogspot, eventually I do plan on blogging for profit and will need to consider all of this. I figure I would get readers before I went for profit and changed to owning my own domain. I did plan on going the LLC route. Awesome information for those who don’t know. Thanks!

    • You are welcome Shawn, you might want to consider getting your own domain and hosting if you have such big long term plans. I have written extensively about why you must not spend time and effort on building someone else’s brand platform (i.e. blogspot)

  21. Simon Mackay says:

    So far this has been about dealing with the US taxmak (Uncle Sam), but another issue that is worth raising is when should you also consider other non-tax liabilities like protecting your business and personal assets when other legal crises come.

    Examples of thsi may include if someone tries to sue your blog for defamation or similar torts; you are embroiled in a family-law issue amongst other things. It should be discussed on what kind of business structure should be ideal for bloggers, whether they create their own website or work for another website.

    It can also include issues concerning, in some territories, occupational health and safety or how you protect yourself when you deal with others such as writing for someone else or having someone write content for you.

  22. Bryan says:

    You should also check with your city and county to find out if you’re required to apply for a business license and pay any associated taxes or fees.

  23. Bryan Kerr says:

    You should also check with your city and county to find out if you’re required to apply for a business license and pay any associated fees and taxes.

  24. Sunil,
    I’m curious about the tax laws concerning review samples in blogging. Before I work with a new sponsor, I typically require that I get a chance to test out their product, not as payment for an ad, but as a chance to make sure I can stand behind them genuinely. Do we need to claim such samples as income?

    Sometimes I barter product for advertising, so of course I claim that dollar amount, but the review samples question is one that seems to have many sides in the blogosphere. Thanks for your time!
    Katie

    • Hi Katie,

      I am not familiar of any law that mandates claiming such items as income. You didn’t have to do anything to earn/deserve the product. You use it as a prop which neither you paid for, nor you got paid for. You are paid for other activities that although may relate to the prop, do not directly arise from the prop.

      In fact, I’d check into your bartering activities as well. I suspect you only have to claim the value received above and over the value you provide (realizable value of the bartered goods). But that begs the question – what if you were on the losing end?

  25. Billie says:

    This is such a well written – to the point informative article. I was looking for something else on your site and this article caught my eye. Wow, glade it did!

    I am self employed and just started blogging for fun (and a little profit) and really learned something here.

    THANKS!

  26. Excellent information and well explained. The LLC idea should be considered if you are earning some $$$ from your Internet business. Thanks for the info.

  27. Ray says:

    Do not get your income taxes prepared by anyone who charges you based on the refund that you will get! That’s illegal and you will be the one paying the penalties later, while the ‘tax preparer’ is long gone.
    Ray
    irshelpftlauderdale.com