So I really loved this recent video from Seanwes about why your blog isn’t a business. He’s basically saying how your blog isn’t a business because your business is about selling something (products and/or services) and your blog is actually more of a marketing tool. Mind blown. Seriously such a different and great way of looking at things and I couldn’t agree more. But my post today is actually about how your blog is actually a business, or at least could be, in the eyes of the IRS.
Yep, I just tricked you into reading a post about taxes. But don’t click away because this is really important. Knowing whether your blog is classified as a business or a hobby by the IRS can have huge monetary consequences – some that aren’t in your favor but others can save you a ton of money.
Ok hopefully I have your attention now.
Why does it matter if your blog is considered a business instead of a hobby by the IRS?
So let’s start out by assuming your blog is definitely a business. If this is the case, there is good news and there is bad news. The good news is that businesses can deduct expenses and losses from their earnings. The bad news is that businesses have to pay taxes on any profits.
As for a hobby, this is something where you aren’t earning money. So no worries about reporting anything related to your hobby on your income taxes. The bad thing about this is that if you spend money on your blog, you can’t deduct those expenses since it’s a hobby and not a business venture.
Makes sense. Let’s look at an example. If your hobby is mountain biking, the IRS isn’t going to let you deduct all your expenses related to mountain biking. But if you have a mountain biking business where you buy old bikes, fix them up and resell them, that can be your business. If, in year one of this business, you spent $1,000 buying business related stuff like extra bike racks, tools and cleaning products, but only earned $500 from selling the bikes, your bike business lost $500 in year one and you can report that on your taxes as a loss.
In contrast, if you spent $1,000 on your bike hobby in year one, you can’t report that as a loss on your taxes. Sorry, but the IRS doesn’t care if your hobby cost you money.
So, how does the IRS decide if your blog is a “business” versus a “hobby”?
The IRS will look at several different factors to determine whether your blog is a business or a hobby. These factors include some of the following (but they can look at other factors as well):
- Whether you earn a profit or not (typically if you’ve earned a profit in 3 out of the last 5 years, the IRS will consider this a business),
- The amount of time and activity you put into work on your blog,
- Whether you rely in any way on income earned from your blog, and
- Whether it is reasonable for you to expect to make profits in future years.
Regardless of the categorization, once you make at least $400 from your blog, you need to report this as business income to the IRS. However, remember that you can offset these earnings with any of your blog related expenses.
What are the consequences of having your blog classified as a “business” by the IRS?
As I mentioned above, there are good things and bad things – If you’ve made money on your blog, you need to report that income and will have to pay taxes on it. But there are lots of deductions that can offset your earnings.
The IRS knows that most businesses actually lose money the first few years (due to start up costs and just the time/work needed before you can turn a profit in a new business), so oftentimes you’ll have negative earnings for the first year or more. Negative earnings means that you spent more than you made and you had a business loss for the year. This loss can be applied against income you made in another job and can actually lower your overall tax liability.
This is how having a blog lose money in a year can actually earn you money. It’s a little weird I know. And this won’t be the case for everyone, but that’s why it’s important to track your income and losses so you can figure out if this can benefit you.
Related Post: How To Blog With A Full-Time Job
(If you’re interested in more info about blogging tax stuff, make sure you go check out my ebook about this issue and LOTS of other legal blogging issues – The Blogger’s Handbook to Keeping It Legal!)
Why would you want to classify your blog as a hobby instead of a business?
Now let’s look at the opposite scenario. You don’t want to be bothered by taxes and don’t really want your blog to a money-making venture. Your blog is just a fun hobby, even though you might’ve made a few bucks here and there.
If you are certain you don’t want your blog to be classified as a business, you might want to be careful with money-making endeavors. It can be tempting to earn a few dollars here and there from companies. But remember once you make more than $400, you need to claim that money on your taxes. If you’ve only making about $400, it might not be worth it for you to do this on your taxes. So keep this in mind before you start accepting paid sponsorships or collaborations with brands.
Whew, so we covered a lot in today’s post. I know tax stuff can be confusing and not so exciting, so thanks for sticking with me!
I’ve also created a great download for you guys – you can save it and refer back to it anytime if you want a reminder of the info in this post! Just click below to get it now.
Disclaimer: I am an attorney, but I am not your attorney. The information in this article is for general informational purposes only and is not legal advice. This article does not create an attorney-client relationship. The author is not liable for any losses or damages related to actions of failure to act related to the content in this article. If you need specific legal advice, consult with an attorney who specializes in your subject matter and jurisdiction.