Free eBook by John Chow - How I Went From Zero to Over $100,000 a Month
 

Blog Income And Taxes

written by John Chow on March 21, 2007

Secure Affiliate Marketing

Tax time is here and I’ve received a few questions asking me to do a post on the how income and taxes should be handle with a blog. Most of the information I’m going to present deals with Canadian tax laws and what little I know about the US tax system.

If Your Blog Earns Income, You Owe Taxes On It

It would be great not to pay income tax on money we make online. However, if your blog makes money, the IRS and CRA are going to want their share. From a legal standpoint, income from a blog is treated as business income and added to the tax player’s job income for tax purposes (unless you set up your blog as a corporation).

Unlike a job, advertisers and ad networks pay you the full amount of your advertising dollars without any withholding tax. It is up to you to remit the taxes owning at tax time. Because blog income is treated like business income for the purpose of tax, you are allow to deduct reasonable business expenses that are associated with running the blog. For example, you can deduct the cost of web hosting and advertising. If you run the blog out of a room in your house, you can deduct a portion of the rent or mortgage interest that room takes up. You can also deduct a similar portion for the heating/hydro/power and telephones.

You can get very creative with the expenses. Want to deduct the cost of a 1999 dining experience? Do a review of the restaurant and the dinner just became a business expense. There are rules for these deductions so you should check with your accountant before writing off the mistress as a cost of doing business.

How About I Just Not Report The Income?

Legally, you have to report the income you make online. However, not everyone does that because of one reason or another. US and Canada tax are done on the honor system. Both governments will accept whatever you report on your tax report as true. However, certain things will raise a red flag and that can lead to an audit.

The chance of getting an audit now is greater than it was 10 years ago. With the CRA, and I’m sure the IRS as well, automating much of the tax filing process, their workers can spend more time doing audits and less time filing tax returns.

It really all boils down to your comfort level. I wouldn’t recommend not reporting your online income. The little amount you save in taxes isn’t worth it.

How Do I Do It

This blog started as just my personal home page. I donated all of the blog’s 2006 income to charities so the tax bill wasn’t that great. For 2007, the blog is part of the online properties of TTZ Media Inc. If the blog maintains its current income level of $7,000 per month, it would owe over $22,000 in income tax if it were still in my hands. As a TTZ Media property, the tax bill would be $14,280. This is before deducting any operating cost but for me it’s better to operate the blog as a corporation than a proprietorship.

Did you enjoy this post? Get John Chow Dot Com updates via email...

Stay up to date with all of John Chow’s tips for making money online and blog posts by subscribing via email. Your email will be kept private and never shared with anyone.

{ 83 comments }

Nathan March 21, 2007 at 12:00 pm

I hope I have that problem soon :grin:

Culture Shiok! March 21, 2007 at 12:15 pm

Me too! My blog isn’t even earning. :shock:

Jason March 21, 2007 at 1:33 pm

I only wish I had to claim income … but I’m going to be a devil and not claim the 23 cents I made from AdSense last month :twisted:

Leftblank March 21, 2007 at 1:49 pm

Beware not to make sudden expenses then, you might gain the attention of the tax guys with that ;)

WesleyTech.com March 22, 2007 at 10:15 am

This is something I really need to research and dig into as a US web owner. I have multiple sites that I am now growing and are earning income and I would like to get the best possible tax situation for them.

I presume that an LLC or a corporation will be best for tax purposes, but I need to research more…

Thank you,
http://DVDRentalForums.com

Wealth Building Lessons March 22, 2007 at 10:24 am

you should def. consult a tax person in your state.

it might cost you a few hundred but a good one can save you thousands.

of course, they are not all created equal. i had to talk to 3 before the 4th one understood what i was trying to do and do a great job implementing it.

Babak March 21, 2007 at 2:28 pm

John, since you have said you will donate 50% of the blog income to charity, the smarter thing would be to keep it separate and have the tax deductions from the charity donation (which would be massive) entirely cover the other 50% that you will put in the trust fund.

Mark Shead March 21, 2007 at 6:51 pm

The audit problem? :)

rahul March 21, 2007 at 12:09 pm

John how’s that 22,000 & 14,280 $ calculation came ,explain little bit more :roll:

Bryan Baker March 21, 2007 at 2:17 pm

Yeah a little explanation would be nice on the specifics…but you’re not an accountant so no worries :-D Thanks for the tip.

Does blog revenue have to exceed a certain amount…say, $600, before needing to be reported?

Mark Shead March 21, 2007 at 6:53 pm

I don’t know about Canada, but in the US a C Corp is taxed at a lower rate for the first 50,000 of profit than an individual would be.

If you take into consideration all the deductions and business expesnses that you can take as a corporation and not as an individual the differences are much greater.

John Chow March 21, 2007 at 7:18 pm

A Canadian controlled private corporate is taxed at 17% on the first $400,000 of net income. The blog would qualified for this rate. If the blog was not incorporated, then the income would be considered part of my personal income and be taxed at my marginal tax rate, which is considerably higher than 17%.

Aris March 21, 2007 at 12:09 pm

Tax time, tax time! I just remember reading Gary Lee’s entry in his blog about how much time he spent to keep up with this blog the other night. Well, I just went to cancel tomorrow’s appointment with my accountant to go over my tax return for the second time. Why? Too much time spend on chasing the Technorati rank via the back links here. :-) May be it is time to step back. But hey John, thanks for all the information including this one. While I don’t make money here but I do have some other passive income and that was the reason I need an accountant even though I’m using a tax preparation software.

santosh p March 21, 2007 at 12:12 pm

Well, beliving the evil… I want to get taxed big amounts soon..

Big Taxes = Big earnings :D

Culture Shiok! March 21, 2007 at 12:19 pm

Will you also give to charities to lessen your taxes? :mrgreen:

santosh p March 21, 2007 at 12:27 pm

My way of charity is different. I teach poor children on weekends. I would like dontate for epuiment needed :grin:

Other than That I am a perfect Evil..

Culture Shiok! March 21, 2007 at 12:34 pm

Then you don’t get tax relief from teaching these children?

Oh well… I’m sure you have your evil ways to get tax relief… hehe…

Mark Shead March 21, 2007 at 6:54 pm

In the US I believe you can only give 10% of your profit. If you are careful your business may not have much of a profit (on paper), so this may not be much.

rahul March 21, 2007 at 12:27 pm

yea big amounts please come so do I pay tax :twisted:

Nathan Drach March 21, 2007 at 12:15 pm

I do work at an large accounting accounting company, and know one thing:

It’s if you will get audited, it’s when! Make sure you state ALL you income to be safe. Better to pay what you owe now, than much more later.

Culture Shiok! March 21, 2007 at 12:17 pm

So it’s just like be honest or pay for it? :wink:

Leftblank March 21, 2007 at 1:51 pm

Be honest or, perhaps, pay for it ;)

lyndonmaxewell March 21, 2007 at 10:39 pm

I agree..Better to be honest, than to pay a double penalty for it.

Mark Shead March 21, 2007 at 6:55 pm

At least in the US the IRS law is pretty convoluted. If you were trying to stay legal, you can probably avoid much of the hassle if you are audited just by getting a lawyer that is familiar with the IRS–preferable somone who previously worked with them.

thepaperbull March 21, 2007 at 12:20 pm

You’re quite right in that online income will continue to come under greater and greater scrutiny by CDN and US governments. Far too much $$ to go by unchecked.

Having your filing completed by a certified accountant certainly helps but you still need to declare your income honestly and maintain accurate receipts for all.

Seopher March 21, 2007 at 12:25 pm

This is a really useful article as far as I’m concerned. It’s a really hazy issue for a lot of people and I think that this post explains a lot about being “sensible” about declaring your income. Sure you can write off so many things as an expense (which I didn’t even think of) but in the end – declaring it is the only way to be sure.

Good post John, very useful.

Culture Shiok! March 21, 2007 at 12:38 pm

Still, John was able to show his softer side…

Giving to charity… Kudos! :mrgreen:

Mark Shead March 21, 2007 at 6:57 pm

In the US, Google and most affiliate companies will actually report what they paid you to the government.

Larger companies will report what they pay you either using your SSN or business EIN.

thepaperbull March 21, 2007 at 12:26 pm

Also – the international nature of blogs, their income and their expenses takes on a whole new realm of accounting hoops you need to navigate.

For example: John might receive $XX US during January but he needs to calculate its CDN equivalent at the time of receipt. Not what it’s worth on Dec 31st.

Sales tax and GST might apply to some expenses but not all.

Services he charged to a customer in BC would require him to add & declare GST / BC Sales tax. But the same services sold to someone out of the country would not require those measures.

It gets tricky.

Sabrina March 21, 2007 at 12:29 pm

I hope I have numbers like yours VERY SOON. I’d gladly owe the IRS money! :mrgreen:

Manthem March 21, 2007 at 12:35 pm

Just paid my taxes today actually. I have to give it up to TurboTax. I would recommend anyone who files their own taxes to use that software. I honestly don’t know how I managed filing everything by hand last year.

Culture Shiok! March 21, 2007 at 1:29 pm

Automated tax filing, how long does it take there?

Here in Singapore, filing can be done online, but then you’ll have to wait a couple of months before they can send you the assessment by mail. Then you can pay. :lol:

Bob March 21, 2007 at 12:45 pm

Wonder how that works here in Ireland. Not worried though with my $15 per month :D

Mubin March 21, 2007 at 12:46 pm

Hmm, Johnchow Expenses.

1) 1000 Dollar Dinners
2) Saturday Pho
3) IM Ads
4) Giveaways

Lots of things for John to declare eh?

Btw my blog has broken 31k because of John’s backlink, thanks John! I didnt think the linkback love would be good but your great.

http://www.mubinahmed.com

Culture Shiok! March 21, 2007 at 1:21 pm

Hope it’ll work for me too! :mrgreen:

Mark Shead March 21, 2007 at 6:58 pm

In the US there are certian limitations on eating expenses. If you are actually reviewing a place to eat, you might be able to get by with more, but I haven’t ever seen that in the IRS rules.

Tyler Ingram March 21, 2007 at 12:49 pm

Now what if I leave the money in the account? I have $7 in AdSense earnings (over a period of umm 8 months). Do I really need to declare that as income?

Though I like the fact I could use the room I blog in as a tax write off, which is currently the Kitchen ;)

Marc March 21, 2007 at 2:33 pm

Technically that’s not income. You might never receive that money. From what I understand, keeping in mind that I’m not an accountant, income is only income once it’s money that’s transfered to you.

Mark Shead March 21, 2007 at 7:00 pm

In the US if you’ll probably have to use the room only for blogging and nothing else to take it as a write off. (There are some ways around this)

Luis Alberto March 21, 2007 at 12:55 pm

Hey John,

What kind of papers have you filed to have JohnChow.com appear as part of TTZ accounting? How do you go about doing this?

John Chow March 21, 2007 at 7:21 pm

It’s best to let your accountant and lawyer do it for you. It’s a transfer or assets with no money changing hands, so no taxes are paid on the transfer.

Mark Shead March 21, 2007 at 7:28 pm

Technically (at least in the US) you could retain ownership of it and just rent the site to TTZ who would be responsible for monetizing it. You’d have to pay money on the rent, but you could set it to whatever you wanted.

One advantage of having your sites owned by a different entity than the one that uses them to make money is lawsuits.

If someone sues the entity that is working the sites, they wouldn’t be able to come after the entity that owns them. (Assuming everything was setup correctly.)

Mark Shead March 21, 2007 at 7:25 pm

At least in the US, he would have just needed to transfer it and make sure all the payments are now coming to TTZ instead of himself personally.

Harry L March 21, 2007 at 12:57 pm

My accountant always used to say that deducting for a home office was a red flag to the I.R.S., and drastically increased your chances of being audited. It’s probably a lot more common these days, but it may not be worth the risk unless you are making a significant amount at your home business.

Mark Shead March 21, 2007 at 7:01 pm

A better setup is to form a C Corp that rents the office space from you at a standard rate.

John Chow March 21, 2007 at 7:22 pm

It may raise a red flag but that doesn’t mean you shouldn’t claim it. My rule of thumb is to claim everything. The worst that can happen is they deny the claim.

Big Cajun Man March 21, 2007 at 1:20 pm

I declared my paltry income from Adsense on my Canadian Taxes as straight income, I didn’t have the nerve to try to deduct any expenses. Maybe next year if I can break the 1K level, but who knows.

I only dream to have John Chow Dot Com EVIL MASTER’s income level –C8j

Culture Shiok! March 21, 2007 at 1:33 pm

sigh…. I agree, all I can do is dream of it also :sad:

Erich March 21, 2007 at 1:23 pm

Tax time!!! Crap I almost forgot!

Leftblank March 21, 2007 at 1:52 pm

You’re just in time, I hope for ya ;)

Jason March 21, 2007 at 1:35 pm

Thanks for the info John. I’m miles away from needing it, but I’m aspiring enough that I was curious. :wink:

Josh Rives March 21, 2007 at 1:37 pm

In the US, they do random auditing too I think. If your income is insignificant you are less likely to be audited, but you always take a chance of being randomly selected. I could be totally off here, but this was my impression.

Mark Shead March 21, 2007 at 7:03 pm

There are a number of things that cause you to be audited. Some parts are random, but I think they are actually random from within people with certian attributes. Otherwise they would really waste their time.

People who get tips have a much higher audit rate than others.

Dave March 21, 2007 at 1:42 pm

Very good post, and to clarify the US works exactly the same way as what you mentioned (at least I hope so or I’ve been doing taxes incorrectly).

Mark Robinson March 21, 2007 at 2:10 pm

You could always move to the US to save money on your taxes.

Marc March 21, 2007 at 2:17 pm

Need more incentive than just taxes… Canada’s a wonderful place :)

Nathan Drach March 21, 2007 at 2:35 pm

I hear we are #1 at being south of Canada!

John Chow March 21, 2007 at 7:23 pm

If I was trying to save tax I wouldn’t move to the US. I would chose a place with no income tax. :twisted:

Marc March 21, 2007 at 2:19 pm

I just took care of my taxes and it was nice to speak to someone who knew what they were doing. They were able to answer all of my questions given my unique situation.

My best advice, go talk to someone if you don’t know what to do. No specific plugs here, but there are all kinds of people everywhere who know this stuff inside and out.

Mark Shead March 21, 2007 at 7:17 pm

A good accountant is very very very worth their fee. And I’m not talking about H&R Block.

Scott March 21, 2007 at 2:40 pm

John as a fellow Canadian blogger, I am very grateful that you wrote this. I have been agonising about how my tax situation is going to work out next year.

By the way, have you ever given any thought to writing an article on how how a Canadian blogger can manage their income stream when their income is largely coming from US sources? I have been thinking of setting up a US-based account through Royal Bank but I’m wondering if it’s worth the risk.

Take care,

Scott

Paul Short March 21, 2007 at 4:22 pm

Scott, over 90% of my income is US$ and I simply have a CDN$ bank acct. Your income eventually is converted to Canadian anyway, but any fees your bank charges, like their percentage for the conversion, even PayPal fees and their percentage, can be written off as the cost of doing business.

Hope this helps or gives you some ideas.

Paul Short March 21, 2007 at 4:23 pm

BTW, I’m Canadian too. I’m in Whitby which is just outside Toronto.

Mark Shead March 21, 2007 at 7:08 pm

Scott – you would probably need to form a US corporation. I’m not sure what canadian laws are like, but in the US, you can’t just setup an account in another country to avoid US taxes.

Rob Syvertsen March 22, 2007 at 7:47 am

Hi Scott;

As I understand it, US funds accounts are available at almost all Canadian banks and are used to avoid the losses due to conversion when most of your transactions are in US funds. Right now the exchange rate is riding high, but when the downturn comes, the USD you earned today will convert to a smaller sum that you can spend with your US vendors.

Rob

Secure Hosting March 21, 2007 at 2:59 pm

John,

It might make sense to look at the tax advantages of forming an offshore company and host the blog offshore and you’re simply an employee of the blog.

In this case the income is captured offshore in the corporation and taxes are owed in the country of incorporation (Bahamas, BVI, Cyprus etc.) which is generally “zero taxation”.

This approach could lower your tax bill even more.

Regards.

Mark Shead March 21, 2007 at 7:10 pm

In the US that will definitely make you target of audits. :)

Secure Hosting March 24, 2007 at 8:25 pm

Audits? You have nothing to worry about if you are being honest with the tax man and declaring your income, separate from the offshore corporation income.

Paul Short March 21, 2007 at 4:17 pm

I love how you mention getting ‘creative’, although, that sometimes doesn’t work as planned :shock:

A couple things I’d like to add are equipment expenses, like buying a cool new laptop before years-end and using it for blogging, a new printer, desk, comfy office chair, etc. Office supplies like paper for printing porn, batteries for your camera if you post photos on the blog, software purchases, blah, blah…

It all adds up and helps reduce the bill even more.

Shawn Ismail March 21, 2007 at 4:48 pm

Thanks for the info John. Great turn around time on a request :smile:

Wealth Building Lessons March 21, 2007 at 6:19 pm

yes its true you owe income on it but there are ways around it.

1. form a corporation and set it up as a revenue of your corp.
While you will still owe taxes on it, you can avail yourself to all of the deductions available to small biz owners(and large owns too).
eg: company related travel expenses (for going to vegas to attend the SEO conferences), new computer equipment (like that $2800 new laptop you’re drooling over), cellphone usage (for when you talk to other bloggers), etc.

2. if you’re making mega bucks, you could relocate to a tax haven like the bahamas(i think) or bermuda!

3. Give to charity and a deduction!

Mark Shead March 21, 2007 at 7:12 pm

Setup a C Corp and an LLC. Put all your equipment in the LLC and rent it to the C Corp. LLC allows pass through income directly to you so you don’t have to pay FICA (self employement tax).

max March 21, 2007 at 6:36 pm

you know u can use your blog as a home business…

http://zedomax.com/blog/2007/01/29/blogging-a-tax-deductable-home-business/

lyndonmaxewell March 21, 2007 at 10:29 pm

Even if it’s a home business, all the more you have to pay taxes since it’s a business right?

lyndonmaxewell March 21, 2007 at 10:27 pm

Looks like what you earn, you just got to give it back one day. :D I guess I would only have this problem to worry about, in a year’s time.. or even longer than that.

zaki March 21, 2007 at 10:55 pm

I wonder what would be the tax regulation regarding earning from blog and website in my country?!!! It’s good to know that we have to face that kind of problem because it shows that we are getting good money … :roll: :razz:

Kubiac March 22, 2007 at 2:08 pm

I could only wish to have that problem one day! But the deductions you could can offset alot of the tax bill. I have an LLC now and have my blog as property of that company.

Dave March 23, 2007 at 6:40 am

I am going to get hammered by income taxes this year. :/ Not only did we start making good money on websites at the end of the year, but I had a banner year for my main business too.

Cognoscente March 24, 2007 at 10:32 am

Great writeup John. For those of us looking to leave the rat race behind and start our own business venture, would you be so kind as to post about your views on the different types of business legal entities available (advantages/disadvantages), and why you chose a particular route? (i.e. S-corp, LLC, etc.)

I know it’s subjective and probably different in Canada, but I’m just curious to see what you (and maybe other net entrepreneurs) think.

Stuart Hannig March 24, 2007 at 3:34 pm

Ouch, I’m not looking forward to taxes.

Adam Henningsen March 29, 2007 at 12:46 am

Yep, unfortunately we have to pay the taxes on this money, but the plus side is that you are making money on your own doing what you like and not working for an employer!! Plus taxes are good anyways to a certain extent.

Hope April 4, 2007 at 9:49 am

:twisted: How do you get that much advertising income from your blog? I bet it took you years to build up a regular following.

Article Checker April 6, 2007 at 7:08 am

See, I didn’t really know all of that until I read this. Deductible business expenses — very helpful information, John!