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.
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.
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.
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.
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.
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