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When you run an online business, you’re essentially self-employed. And if you’re fortunate enough to generate revenue from your website, and you live in the United States, there are several tax considerations to be aware of.
From paying self-employment taxes to taking advantage of business deductions, here’s what you need to know about online business tax filing.
If you sell a product or service online, or if you bring in money from advertising or sponsorships on your website, you’ll need to pay income tax on these earnings.
Unlike a traditional job, where you get a W-2 and your employer takes taxes out of your paycheck, you’ll need to set aside money to pay estimated federal income taxes (and state income taxes, if applicable) on your business income.
A good rule of thumb is to set aside 30 percent of your earnings to pay taxes, which are due quarterly — generally on January 15, April 15, June 15, and September 15. The IRS has more details on where you can set up quarterly payments.
In addition to income tax, you’ll also have to pay self-employment tax.
If you’re self-employed, you’ll have to pay both the employee and employer share of Social Security and Medicare tax, which amounts to 15.3 percent of your business income. Factor this amount into whatever you set aside to pay your taxes every quarter, so that you aren’t hit with a hefty tax bill when you file your return.
If you have your own business, you can take advantage of several deductions, like the home office deduction as well as deductions for other business expenses. Fortunately, tax reform hasn’t changed whether you can claim these deductions — even if you take the standard deduction.
If you use part of your home exclusively for work, you can deduct that percentage from your household expenses. For example, if your home office takes up 10 percent of your house, you can deduct 10 percent of your mortgage for rent and utilities.
A big bonus of having an online business is that because of the new tax reform, you can now claim a 20 percent tax deduction on qualified business income if you’re the sole proprietor or if your business is structured as an S Corporation. In addition to this, you can deduct qualifying business expenses, such as web hosting and domain fees, office supplies, and even the cost of hiring someone to redesign your website.
Depending on how your business is structured, you can use IRS Form Schedule C or Form 1120 to report your business income and claim any deductions.
If you hire a designer, that person will likely be classified as a 1099 independent contractor if you pay them more than $600 during the year and they aren’t an employee to whom you pay benefits or deduct taxes from their income.
The same goes for any external resource you hire, whether it’s a web or graphic designer, an SEO specialist, or someone to run your business’s social media pages.
If you pay them, make sure to deduct this business expense and to work with an accountant to create a 1099 form for them so that they can file their tax return.
Online business tax filing can be tricky if you’ve never owned a business before. That’s why it’s important to get advice from a tax professional who can make sure you pay taxes on the money you earn from your business. One of the joys of working for yourself is the flexibility and income potential, so just make sure you’re prepared from a tax perspective to avoid any surprises from the IRS come April 15.
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