Mommies Magazine

Do You Have to Pay Tax on Your Online Income?

Posted by reviews in Career & Money

photo credit: Heroic Beer

By Kristine McKinley

Q: I just started my home based business this year and expect to just break even this year. Do I still need to report my income, even if I don’t actually make a profit?

A: You must report all income earned. It’s a common misconception that if you don’t earn over a certain amount or if you’re just doing it as a hobby that it’s not reportable or taxable. That’s not true. All income is reportable from the first dollar earned.

It doesn’t matter if you receive a 1099 or not. It also doesn’t matter if you earn less than a certain amount. Another myth is that if you earn less than $600 you don’t have to report the income. Again, it’s just not true.

All income is reportable from the first dollar earned, unless it is specifically exempt from taxes in the tax code.

However, you are allowed to deduct business expenses from your income, if they are reasonable and necessary to run your business.

So in this case, just because you have to report the income doesn’t mean you’ll have to pay any taxes. If you have expenses that are as much as or greater than your income, you won’t owe any taxes, and may even be able to use the resulting loss to reduce other taxable income.

The most common expenses that online business owners may have include:

* Inventory

* eBay fees

* PayPal fees or shopping cart fees

* Shipping fees and supplies

* Postage

* Office supplies

* Advertising

* Mileage (business mileage only)

* Phone (cell phone or second line)

* Bank charges

* Accounting and legal fees

* Computer and software (may need to be depreciated)

* Internet, website and faxing services

* Contract labor

* Furniture and office equipment (may need to be depreciated)

* Membership fees

* Continuing education

* Home office expenses

This list is not all inclusive, but these are the most common expenses that online business owners will have.

So, yes, you have to report your online income, but you only need to pay taxes on your net profit, so it’s important to keep good records and understand what expenses you can deduct so you don’t give Uncle Sam more than his fair share.

Kristine McKinley is a CPA and CFP®, and co-author of Ebiz Tax Tips – How to Minimize Your Taxes and Maximize Your Profits. She specializes in helping home based and online business owners understand and minimize their income taxes.

To learn more about reporting your online income, or tax deductions for online business owners, please visit http://www.onlinebiztaxtips.com

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Tags: Kristine McKinley, Taxes