When it comes to your IRS tax documentation, you’ll need to know your IRS Business Activity Code. What in the world is that?

It’s a string of numbers that exists for nearly every specific business type out there.

I use 516110 which is for “Internet Publishing.”

You can look up other codes by searching their database here:
http://www.naicscode.com

As I mentioned in Tax Tip 5, estimated taxes are an issue you’ll need to consider.

So, what are “Estimated Taxes” anyways?

Well, according to the IRS, you should never owe more than $1,000 in income, social security, or Medicare taxes at one time. This is called a “pay as you go” system.

When you work for “the man,” your taxes are automatically taken out of your check and remitted to the IRS every quarter, if not more often. But when you’re making commissions, Adsense, etc., taxes haven’t been taken out or remitted. And adding up all of the various taxes you’ll owe, the $1,000 limit can come rather fast.

That’s where Form 1040-ES comes in handy. What that worksheet allows you to do is to estimate in the most conservative sense what your taxes will be for 2006. Once you’ve calculated an amount, you can either pay it all at once or make 4 equal amount payments throughout the year of 2006 using the vouchers included with Form 1040-ES.

Then, when you file your regular 1040 for 2006 before April of 2007, you’ll reduce the tax amount you owe by the payments you’ve already made. Make sense?

Speaking of taxes - Who still needs to finish them from 2005? (me)

Yes, I know we all like to put our taxes off to the last moment, even when Uncle Sam owes us a fat refund. So, I doubt you’re ready to file if you owe taxes from your online business earnings.

But what I recommend is this: Start filling out the appropriate forms today or input your information into good tax software. By time you’re done with this process you’ll know if you’ve got a refund coming your way or you, gulp, owe some taxes.

If you’ve had a good year online, then don’t be surprised if you owe income, social security, and Medicare taxes, as they aren’t withheld from your checks from merchants.

The main reason I start mine early is that I give myself a few months to set aside the money to pay my tax bill. Generally my funds are earmarked for regular expenses and projects, so I give myself a head start when saving.

Another very important note: If your tax bill is over $1,000, you may owe penalties to the IRS. Taxes are considered pay-as-you-go and the IRS doesn’t like it if they don’t get their hands on it ASAP.

So, if you have a year where you owe close to $1,000, consider filing a 1040-ES for the following tax year and remit taxes quarterly to avoid penalties. If you feel like you’ll be in this situation, I highly recommend that you contact an accountant or tax professional.

When I’m filing my taxes (personal and company) the best tool I’ll have will be a software program. While there are plenty of free online versions that allow you to manually input the data and submit it, I find the best versions ask you questions step-by-step and automatically fill in the data in the correct fields for you.

Here are some of the top used tax applications, in no particular order:

• Turbo Tax
• TaxACT
• Tax Cut

While I don’t like doing my taxes like the next guy (or gal) I do make sure I do them right. Running my online business is important to me and keeping in good terms with the federal government is essential.

The main reason I’m advocating using software like this is simple: I don’t like wasting my time if it doesn’t involve building my sites. Tax software helps me get my taxes done quickly and lessens my chances of getting an audit or penalty which would take even more time to deal with.

My advice: do it right the first time and forget about it!

If you need to file Schedule C come tax time, have you looked at the requirments to file Schedule C-EZ instead?

There are a couple rules you’ll need to meet, which are documented in the flow chart on the top of Schedule C-EZ. Probably the biggest two requirements would be that your expenses are less than $5,000 and your not deducting business use of your home.

The biggest advantage of Schedule C-EZ (besides being shorter) is that it only requires you to write in your total revenue and total expenses. You won’t need to classify them into different categories; you can simply lump them all together.

That alone will save you a ton of time when you’re filling out the paperwork.

But as I mentioned again, make sure you meet the requirments on Schedule C-EZ before you begin it instead of Schedule C.

It’s easy to purchase things on a daily, weekly, or monthly business and not realize that you’re purchasing them FOR your business.

And many of these purchases are perfectly acceptable to deduct as a business expense; just make sure you have proper documentation incase you’re faced with an audit.

The safest way to keep records is to purchase items with a credit card rather than cash, and also have receipts on your computer for online purchases and paper ones for in store purchases. (It also wouldn’t hurt to print out your online receipts.)

Here are some examples of expenses you should be able to deduct: (more…)

With tax crunch time from now until April, I decided it would be relevant to feature 30 days of tax tips. If you have any International tax advice, I’ll gladly post your advice, too.

Let’s get right to the first tip, shall we?

The IRS reports that this is one of the most often overlooked deductions.

When you run your affiliate business as a sole proprietor, you’ll generally need to fill out Form 1040 Schedule C and Schedule SE.

On Schedule SE, many people overlook the instructions to deduct 50% of your SE tax on line 27 of the 2005 version of Form 1040. It’s the easiest way I know of to save a bundle come tax time.

From Alan: “When hiring authors at Elance or Rentacoder, do I need to worry about a 1099 or anything for them? ”

Good question. The simplest answer is “It depends.”

Probably the two biggest providers of content writers that I know of (and use) are Elance and Rentacoder. After digging into their help sections, it can be discovered that they have two different policies when it comes to 1099-MISC filing. (more…)

One of the main reasons I decided to incorporate my business was to decrease my taxable income. No, not illegally!

The most surprising change I didn’t see coming was that I’d be responsible for paying unemployment taxes.

“My state doesn’t require unemployment taxes for my company,” so you say. But you’re not out of the woods yet. If the state coffers don’t get you, the feds will.

Here’s the deal: (more…)

From Dean: “If I don’t make a profit do I still have to pay Self employment tax? Federal or State?”

I’m assuming your talking about operating as a sole proprietorship, as that’s the structure that requires the dreaded Self Employment tax.

The short answer is “no,” you shouldn’t have any tax to pay. For your business structure, you should be filing Schedule C for Form 1040. For the 2005 version of this form, line 31 states:

If a profit, enter on Form 1040, line 12, and also on Schedule SE, line 2 (statutory employees, see page C-6). Estates and trusts, enter on Form 1041, line 3.

If you don’t have a profit, then according to IRS documentation, then you shouldn’t need to file Schedule SE for Form 1040 which determines the amount of self employment tax you owe. Even if you did file Schedule SE with no profit, if you run your numbers correctly you’ll calculate no tax is needed to be paid.

These are references to the federal forms, so your states forms may be slightly different.