Bloggers frequently ask me questions about taxes, which is a crucial topic for anyone running an online business. I’m not a tax expert, so I invited a specialist to help answer the most common questions. I asked my readers for their top tax questions related to blogging and handed them over to Josh from CPA On Fire, who kindly agreed to respond.
Josh is the founder of CPA On Fire, a tax and accounting firm that focuses on online businesses. CPA On Fire handles tax and accounting needs for many well-known entrepreneurs in the online space. Josh has been a guest on major business podcasts and national TV segments to provide tax guidance to entrepreneurs.
Taxes are more complex when you’re self-employed, but they’re manageable. I know people who hesitate to earn more or start their own business because they’re worried about tax obligations. That fear doesn’t have to hold you back. Learning how taxes work and applying that knowledge strategically can help you make better decisions and keep more of what you earn. Below are the reader-submitted questions and Josh’s answers.
Disclosure: This is general information and not personalized tax advice. Consult your own tax professional for guidance specific to your situation.
How should business structure be determined? When should I form an LLC? When should I switch to S Corp?
An LLC provides limited liability protection in many states, but it does not offer tax advantages by itself. For federal tax purposes, a single-member LLC is generally treated like a sole proprietorship unless you elect a different tax classification. The main reason to form an LLC is legal protection, so consult an attorney about liability concerns.
If you want tax savings related to self-employment taxes, consider electing S corporation status. An S Corp can potentially reduce self-employment taxes by allowing the owner to take part of the income as salary and the rest as distributions. As a rough guideline, many CPAs start to consider an S Corp election when net income reaches around $50,000 per year, but the right time varies by business. S Corps come with payroll, compliance, and administrative requirements, so discuss the specifics with your CPA before making a change.
When should a person start paying quarterly taxes? How do you do quarterly taxes?
The IRS expects you to pay estimated quarterly taxes if you will owe $1,000 or more in tax when you file your return, to avoid underpayment penalties. Estimated payments are generally based on your prior year’s tax liability or on projected current-year income. If you had no year-end tax liability in the prior year, the IRS typically won’t penalize you for not making estimated payments in the current year even if you end up owing.
Quarterly taxes can be paid by mailing vouchers with a check or, more conveniently, using the IRS Direct Pay or Electronic Federal Tax Payment System (EFTPS) online.
How do I know if it’s a hobby or a business?
The IRS looks at whether an activity is carried on for profit. A common guideline is that a business should show a profit in at least three of five consecutive years. If you don’t meet that standard, the IRS could classify the activity as a hobby, which limits your ability to deduct losses against other income. Keep records showing your intent to make a profit, such as business plans, marketing efforts, and efforts to improve profitability.
Can you claim 100% of business internet when working from home?
If internet access is required for your business, you can reasonably deduct the cost. Some tax professionals recommend allocating a business-use percentage when internet is used for both personal and business purposes, but others — including Josh — take the position that if the internet is essential to business operations, deducting the full cost is acceptable. As always, maintain documentation and be prepared to justify the deduction if questioned.
What are the best tax savings strategies for bloggers and digital marketers?
One effective approach is converting personal expenses that are legitimately used for business into deductible business expenses. Examples include your cell phone, internet, a dedicated home office space, and trips that incorporate business activities. Vacations can sometimes be partially deductible if you combine them with conferences, client meetings, or other clear business purposes. Plan ahead and document the business activities to support deductions.
What are common/possible tax deductions for a blog?
Generally, any ordinary and necessary expense you incur to run and grow your blog may be deductible. Typical deductions for bloggers include computer equipment, web hosting, domain fees, software, advertising, subscriptions, home office, and internet. If you purchase products to review, those costs may also be deductible. Keep clear records and receipts to substantiate your expenses.
What are the rules and considerations of registering your business or LLC in your home state vs. another state? If registering in another state, what are the general rules? E.g. Is it possible to register your business out of state as long as you hire someone to be your agent? How much does that generally cost?
You generally must register your business in the state where you operate it. Many online business owners mistakenly think an internet-based business isn’t tied to their home state, but if you run the business from your residence, you typically need to register there. If you genuinely have no fixed residence and are traveling full-time, you may be able to choose a state to register in, and you would need a registered agent in that state to receive legal documents. Registered agent services commonly cost around $90 per year or more.
Trying to register in a low-tax state while living and working in another state does not usually avoid tax obligations; taxes are paid where you live and where you have nexus. Always confirm state filing and tax requirements for your specific circumstances.
What advice do you have for bloggers who live and work abroad full-time (e.g. Americans who live/work abroad)?
U.S. citizens living abroad may qualify for the foreign earned income exclusion if they meet physical presence or bona fide residence tests. Under the physical presence test, living outside the U.S. for at least 330 full days in a 12-month period can allow you to exclude a significant amount of foreign earned income from U.S. taxation (the exclusion amount is adjusted annually). Note that self-employment taxes (Social Security and Medicare) still apply to U.S. citizens’ earnings unless covered by a totalization agreement or other exemption. For detailed planning, consult a specialist in expatriate tax rules.
How do I handle referral credits (instead of income) that I received for software I use such as Tailwind?
Non-cash compensation is generally taxable and should be reported at its fair market value. If a company provides you with credits, services, or products in exchange for promotion or referrals, count the market value as income. Often the provider will issue tax documentation such as a 1099 for these amounts.
What is the best way to keep business finances separate from personal ones?
Form an entity like an LLC or S Corp if appropriate, and maintain separate financial accounts for the business: a business bank account, business credit card, and separate PayPal or merchant accounts. Avoid commingling personal and business funds. Clear separation simplifies bookkeeping, protects liability, and makes tax preparation and financial reporting easier.
Do I need to charge/pay sales tax on digital product sales like printables, eBooks, and courses? If we need to pay sales tax on a digital product we sell, what is the best way to go about doing that since people purchase from all over the world?
Sales tax rules for digital products vary widely by state and sometimes by product type. Some states tax all digital goods, some tax none, and others apply tax to specific categories. Additionally, changes in nexus standards mean you may become responsible for sales tax in states where you have customers even without a physical presence. Because of the complexity, consider using a sales tax automation service, and work with a tax professional to determine your obligations based on where you and your customers are located.
Do I have to pay taxes for press trips that were comped? Since I don’t know how much the trip was, do I just guesstimate a number? This is for a US business.
Whether a comped press trip is taxable depends on how the provider treats it and the purpose of the trip. If the trip is provided so you can perform business activities (for example, you’re required to be there to cover a topic), it may not be reportable as income. If the trip is given as a gift, prize, or promotion, it’s likely taxable. Ask the provider how they will report the value to the IRS and retain documentation. If they report it as income on their end or provide a form such as a 1099, you should report it as income as well. When in doubt, document the business purpose and consult your tax advisor.
Are you afraid of your taxes? How do you handle taxes for your online business?