Since 2005 I’ve been earning side income online. I’ve gotta say, it’s pretty nice to be getting that extra income each month. At times I’ve even relied on that money as my primary source of income.
While the additional money is satisfying, there is one part that you’re bound to dislike…paying taxes on that income.
When many people start making money online, they figure they can get away with not claiming taxes on that income. In my case I probably could get away with it since I’m Canadian and the majority of the companies paying me are in the US. It’s simply not connected to my tax id number.
Really though, I just wouldn’t want to take that risk and always be worried about having to suddenly pay a huge tax bill all at once. Plus there would likely be penalties for not paying the tax in the first place.
Also, I’ve always had dreams of turning my online business into a full time gig. If that were to happen, would I really want to commit to something like that knowing how susceptible it all would be to an audit? If the income would increase to that point, it would be a realistic scenario.
So like an honest tax payer, I dutifully claim all of my income and deal with a big tax bill each year. At tax time I really miss the days of actually getting a tax refund.
The solution to this big annual tax bill? Pay your taxes on that income throughout the year just like regular income tax.
I know with my taxes, I’d get apprehensive as tax time rolls around. I’d be unsure how much I’d owe and would be focused on a worst case scenario. Some years I’ve even had to resort to taking out money from my line of credit to cover a big tax bill. My big problem was that I never properly planned for taxes throughout the year.
At one point the government wanted me to start making installment tax payments throughout the year. While I didn’t like the idea since my income fluctuated too much each year, I realize it was actually in my best interests.
First of all, if the government asks you to start making tax installments throughout the year, you will have to pay a penalty if you fail to make those payments. They dinged me with that a couple years back and I had to pay an extra few hundred dollars.
Making those regular tax payments also reduces that tax time stress. When you’ve already made payments through the year, you can sleep easy knowing that if you do have to pay more tax, it will be a small amount. You might even get a refund. A lot of financial experts say you don’t want to be in a position where you get a refund, but speaking from experience I’d rather be in that position and miss out some interest I could’ve made on that money.
When you’re paying that tax through the year, you are forced to keep your accounting more organized too. That limits some of the last minute accounting that some people resort to. Those people may be natural procrastinators, but why create that extra stress?
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Have any of you had to claim online income on your taxes? Did you handle the paperwork yourself or did you pay someone to help?
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Nope, haven’t had to claim online income – haven’t really made enough yet – sigh..!
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Well I guess I’d rather be in the situation that I have to be paying those taxes due to earning the money in the first place. I’m sure it’s just a matter of time until you are making money with your blog Cat.
Oh, I HATE paying quarterly taxes! We’ve had to do it for the last two years beginning when my wife started her own business. Now that I am running it with her and have the online income it’s going to be even more of a presence in our lives. It always hurts making those payments as it’s not small change and you imagine what you can do with money like that. Taxes are taxes though and there’s no way around it. We’ve got a pretty good tax person and he figures our numbers for us so we can be in a position where we might get a little back but no huge surprise.
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The quarterly payments are annoying, but it’s better than being hit with a huge bill all at once. Then you’re scrambling to find the cash to pay that. I probably should try to find a good tax guy to help me out, but I have gone back to just using tax software. I’m pretty sure it doesn’t handle quarterly payment estimations.
When I started my business a few years ago, I always claimed my income on my taxes. When I shut down my company, I stopped, but then I started making some money on different websites I owned, so I started a business to house all of those websites. Having a business makes it easier for me during tax time, but I do not have to pay quarterly at this point. I did with my old company and it was not fun, but when tax time came around, it made it easier.
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I had considered creating an official business for my websites, but besides separating my accounting, there wasn’t really any benefit for me. If things keep growing in the next year or two I might look into it again. There might be some benefits that I hadn’t really considered.
I will be making an estimated tax payment this quarter to make sure I don’t have to pay any interest or penalties. It is going to suck but it is just part of being successful.
Lance @ Money Life and More recently posted..Debt Pay Off Update – December 2012
That’s true…it’s a small price to pay to be able to make some extra income on the side. It’s most frustrating that very first year when you might not have stopped to realize that someone else would be taking a cut of that income.
Yes, and my wife also has irregular income for half the hours she works. I’m managing it right now by jacking up the withholding on my day job, even with the fat deductions I’m taking as a result of living in California with an expensive house. 2012 – no issues expected, but maybe in 2013 I’ll light the online world on fire?
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Increasing the tax withholding sounds like an easy way to deal with it. My situation got even trickier with my latest job. They pay me as a contractor. So next time I do my taxes, it’s going to be a mess. I’ll definitely have to pay some taxes early to soften the blow.
I totally agree I hate paying quarterly estimated taxes. Typically I owe around $3000 a quarter which is a pretty big chunk but I also own half of a manufacturing business, with my blog on the side. What’s even worse is I typically will owe in at tax time as well.
Chris @ Stumble Forward recently posted..7 Christmas Scams And Mistakes You’ll Want To Avoid This Year
I meant to ask you what your other business was since I didn’t think your blog was your main business. $3000 per quarter is a pretty big chunk. That’s likely about how much I’ll have to make when my daytime job gets added in. It’ll hurt but I know from experience that I wouldn’t want to pay that all at once at tax time.
My main business builds agricultural gating for farmers. It was actually a family owned business that my father started. He retired in 2009 and me another guy who worked there for several years took it over. It’s not a bad business but it has a very high overhead and is very competitive.
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Sounds interesting. Your dad is probably proud that you kept it going. I could see why it would be competitive since farmers only need new gates every so often. Plus there probably isn’t many new farms starting up.
Yeah there really isn’t a way to avoid paying taxes on online money either. Most of the companies will issue a 1099 or some tax statement because they don’t want to claim income they PAID someone else. Plus they will report this to the government on their taxes.
Wouldn’t it be nice if it was only 10% or less?
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Well in my case the Canadian government never really gets informed about my online income other than by me. Since the companies paying me are US, they’re only reporting the income payments to the US government. I’d just be worried about them finding the income via an audit or something. And yeah, having income tax at only 10% would be pretty sweet. I gotta move to a country like that.
I’m going to pay somebody to do my taxes this year as it’s also the first time I’ve worked as a 1099 employee out of my house. I should have a TON of deductions and I’d rather not mess something up.
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That’s a good idea for at least the first year. Then if you want you can just do your own taxes the following year with the structure that the tax guy used.
Not yet. Hoping that’s the case next year though. I am self-employed though and do have the joy of that level of organization though. ugh!
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I guess when the online income picks up, you’ll at least be used to the whole tax deal. For a lot of people making money online, it would be the first time they have income where the tax isn’t automatically deducted.
I have heard it is a pain to pay quarterlies. A friend of mine also got real organized thanks to the government. Once you get used to it, I’m sure it’s not so bad. You might gain more insight to your business too.
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The government kinda forced me to get more organized too. They contacted me and I got all worried that they were auditing me. Instead they just came by for a chat and to see how my income and accounting was taken care of. It actually seemed as if they were checking to see if there was the possibility that I was making even more but not claiming it. That at least made me aware enough to keep better records of everything.
I joined the ranks of the quarterly income tax payers this year. Not only that, but I also must remit consumption taxes on a quarterly basis (GST/PST) so that adds to my joy…
However I do prefer paying it on a scheduled basis to avoid dealing with a large tax bill at once. Also it forces me to keep a tighter control over my accounting and spending. Being interested in personal finance/money management is very helpful for someone who is self-employed.
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Luckily I don’t have to pay any consumption tax quarterly. Since all of my income is coming from US companies, I don’t have to charge anyone for that tax. That does simplify things a bit for me…well other than the whole currency conversion deal. I do agree that an interest in personal finance helps a lot when you have self employment income coming in. Without proper money management, it is easy to blow all of that money when you get it and not have money set aside for taxes.
Smart Wealthy people are smart, as MJ Demarco writes in his book, and put aside money (as like a bill) for the taxes they’ll have to pay at the end of the year.
Dumb wealthy people (usually athletes & actors) don’t do this, then don’t pay taxes then get slammed for tax evasion and owe tons of back taxes.
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The ironic part of that is the athletes and actors could easily afford the taxes and still lead a very lavish lifestyle. Sometimes they get taken advantage of people giving them bad advice though. Their income is so public that they really can’t hide that kind of money.
It was just this year that I was disabused of the notion that self-employment income had to be over a certain level to be required to report it. Luckily, we are only talking about $50 of unreported income over a number of years. So I doubt the IRS is too concerned. Maybe I’ll over report by $50 this year to compensate.
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I think you’ll be fine on that $50. I wouldn’t worry about it. If they did find it, I don’t think the penalty of interest would be much to worry about.
Thanks for sharing. I would love if you could expand on this post talking more about Canadian Blogging and Tax Time.. what you can and cannot claim, newbies where to begin, cost of doing taxes, do you need a business licence.. etc.. etc. Cheers!!!
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I would, but I have no idea about some of that stuff myself. I wouldn’t want to incriminate myself with recommendations that might not be entirely true. You don’t need a business license as far as I know. Really if you’re making money online for the first time, it’s best to get professional tax help to find out about a lot of that stuff.
Ugh I’m not looking forward to tax time this year, but it’s a good thing I’ve been saving up just in case. I don’t think I’ll be getting money back this year though
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Nope I don’t think you will be. Welcome to the world of side income and having to pay extra at tax time.
I’m nowhere near having to pay taxes on blog income, but I do always make sure to do the quarterlies with my main business. The first year I owned it i did not and got hit with a huge tax bill in April. Learned pretty fast.
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I say I’ve learned my lesson, but I still haven’t got around to making any early payments this year. I really should at least pay something by the end of the year. Maybe I’ll give the tax agency a call about that.
I just received my GST/HST forms in the snail mail. Still not sure how to fill it out yet lol. Might have to find a professional to help. I plan to declare my online income this year because it’s not a whole lot so the taxes on it won’t be much either. Hopefully I’ll make more next year if my blog continues to grow. I’m actually looking forward to the upcoming tax season because I’ve put in quite a bit of money in RRSPs this year so I’m hoping for a tax refund :0)
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Oh you’ll definitely get a refund if you heavily contributed to your RRSP. I usually use those contributions to balance out any money I’d owe on taxes. It’s probably a good idea to get a professional to help with those forms. It would be easy enough to copy what he did next year and know you are doing it right.
We Americans are going to be hit harder every year. Our gov’t borrows 46 cent of every dollar it spends. Someone (I think it’s the taxpayers) will have to pay it back; the freeloaders don’t work!
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With the amount of debt the US has, do you really think they are ever going to pay that back? It seems that for the foreseeable future the government will just keep overspending and building up more debt. Leading up to an election year they might try to balance the books, but then some excuse usually comes up letting them off the hook.
This year, half of my income is from online, and my only regret is that I haven’t been paying estimated quarterly income taxes; I know a big tax bill awaits me in April. Next year, I won’t make the same mistake!
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I’m sure you will learn your lesson for next year after paying taxes for this year. It’s just downright depressing to part with so much money at once. It’s a lot easier to part with it in smaller chunks throughout the year.