Blog Income And Taxes
written by John Chow
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.
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I hope I have that problem soon
Me too! My blog isn’t even earning.
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
Beware not to make sudden expenses then, you might gain the attention of the tax guys with that
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
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.
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.
The audit problem?
John how’s that 22,000 & 14,280 $ calculation came ,explain little bit more
Yeah a little explanation would be nice on the specifics…but you’re not an accountant so no worries
Thanks for the tip.
Does blog revenue have to exceed a certain amount…say, $600, before needing to be reported?
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.
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%.
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.
Well, beliving the evil… I want to get taxed big amounts soon..
Big Taxes = Big earnings
Will you also give to charities to lessen your taxes?
My way of charity is different. I teach poor children on weekends. I would like dontate for epuiment needed
Other than That I am a perfect Evil..
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…
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.
yea big amounts please come so do I pay tax
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.
So it’s just like be honest or pay for it?
Be honest or, perhaps, pay for it
I agree..Better to be honest, than to pay a double penalty for it.
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.
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.
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.
Still, John was able to show his softer side…
Giving to charity… Kudos!
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.
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.
I hope I have numbers like yours VERY SOON. I’d gladly owe the IRS money!
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.
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.
Wonder how that works here in Ireland. Not worried though with my $15 per month
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
Hope it’ll work for me too!
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.
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
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.
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)
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?
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.
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.)
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.
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.
A better setup is to form a C Corp that rents the office space from you at a standard rate.
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.
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
sigh…. I agree, all I can do is dream of it also
Tax time!!! Crap I almost forgot!
You’re just in time, I hope for ya
Thanks for the info John. I’m miles away from needing it, but I’m aspiring enough that I was curious.
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.
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.