Tax Tips To Maximize Your Tax Return From Website Income
It is that time of year again. Tax season. The annual time when people across the nation gather their receipts and cobble together their financial records to pay their due to Uncle Sam. If you are a webmaster that: runs advertisements on their website, are an affiliate of a company, or receive direct payments for services rendered into your business bank account (you should have one of those BTW) or Paypal account, you have to submit your profits and losses to the state and federal government.
Employer Identification Number
To submit your income taxes to the state and federal government as a small business (you run a website with ads i.e. a small business), you will need to register for and receive from the Internal Revenue Services (IRS) an Employer Identification Number (EIN). This number is also referred to as a Federal Employer Identification Number (FEIN). An EIN is a “nine-digit numeric code that must accompany all tax forms and information submitted to the government on behalf of a business.”
Most webmasters are classified as sole proprietors. If you as a webmaster wish to pay your taxes as a sole proprietor, you will have to obtain an EIN to do so.
If you do not already have an EIN, you can obtain one here.
Business & Personal Bank Accounts / Credit Cards
Organizing your business records from the fiscal year will make filling your own taxes, having a CPA do it, or visiting a VITA (Volunteer Income Tax Assistance Program) site for free tax preparation far quicker and efficient. The best way is to first separate your personal fiscal records from your business fiscal records.
I have found the easiest way to do this is with two credit cards (one for personal purchases and one for business purchases) and two bank accounts (one for personal income and debt payments and one for business).
Having a business credit card connected to a bank account makes doing your business taxes easy. You don’t have to look though an entire year of credit card deposits and payments to ferret out your business deposits and payments. They’re all in one neat file for you, ordered by date, and can be printed out or download onto your computer as a PDF.
Organizing Your Fiscal Records
The best way to organize your fiscal records before you file them, take them somewhere or to someone to be filed, is via the categories (more or less) found on your tax forms (for Connecticut, that is tax form CT-1040).
Make a .DOC on your computer containing your business records for the fiscal year.
For your website small business, you can separate your taxes like this (if applicable) in your .DOC. For Expenses: Office, Supplies, Home Office Rent (if your office work space is in an apartment that you rent), Home Office Utilities, Contract Labor (if you paid for services i.e. an alteration to your WP theme), Bank Charges, and Other. Total it at the end.
For Income, you can place all of your income into one column then just total it. You can itemize the list (Amazon, Complex, etc.) to make your calculations easier and more transparent if you wish.
When you organize your records like this, you or a tax professional will be able to simply plug in the numbers from your document into the appropriate slots when the tax program asks for them.
Write-offs – Tax Deduction
Discussed here in a cursory way, the purchases that you make for organization as a webmaster, like a new computer, printer, etc. are deductible business expenses on your taxes. They can be written-off (“write-offs reduce the amount of taxable income you have. For example, if you make $100,000 a year and have $10,000 in write-offs, you would be taxed on only $90,000 in income”).
You can be broad and deduct the entire price of the new computer that your purchased (for example – if you are using it 100% of the time for business purposes) the tax year that you bought it or you an capitalize your purchases (“capitalize is an accounting method used to delay the recognition of expenses by recording the expense as a long-term asset. In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost”). A capitalized cost is recognized over a period of time via depreciation or amortization.
When you add in a specific purchase, like a computer, the tax program you or your tax profession is using will prompt you (or them) about depreciation. If you choose to go that route follow the on-screen instructions.
Do you travel to film festivals or conventions and cover them on your website? You can write off your travel expenses: plane ticket, hotel accommodations, food, and taxi costs when you do your taxes. Depending upon the state of your taxes, an expensive trip to a film festival or convention could cost you zero dollars if you calculate everything correctly.
Earned Income Tax Credit for Self-Employed
Earned Income Credit (EIC) or Earned Income Tax Credit (EITC) is a tax benefit for self-employed individuals (sole proprietors). As a webmaster, you are self-employed. As a webmaster, you should ask for or apply for EITC when doing your taxes. EITC “is a refundable tax credit for low-to-moderate-income working individuals.” EITC is available for state (type in your state + Earned Income Tax Credit into Google) and federal income taxes.
If you qualify for EITC, you may only receive a few hundred dollars more in your refund, but why leave money on the table? Apply for it.
By taking a few extra steps before and after tax season begins, webmasters can maximize their returns each year.