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how to avoid high tax for adsense income
newbies




msg:1424071
 6:06 pm on Apr 7, 2004 (gmt 0)

Hi,

I use adsense on my personal site and have made a decent income which will reported to IRS as self employment income out of which Uncle Sam will take almost 50%. How can I avoid such high tax? set up some type of company? or ...?

Thanks in advance for your input.

Newbies.

 

Pikin_It_Up




msg:1424072
 6:09 pm on Apr 7, 2004 (gmt 0)

Set up a company and pay the funds into the company account.

Then Get paid by the Company for your services.

I'm not an accountant and I don't live in the US so don't quote me.

mcguffin




msg:1424073
 6:25 pm on Apr 7, 2004 (gmt 0)

In the U.S. there are few ways to get around the 15.3% self-employment tax that goes to Social Security and Medicare.

However, this amount is the same as if you were an employee of a company. If you were an employee, your employer would pay a 7.65% tax on your wages and you would have 7.65% deducted from your wages.

When you're self-employed, the tax seems big because you're paying both the employer and the employee parts of the tax.

Generally, as a self-employed individual, you can expect to pay that 15.3% tax on your self-employment earnings. There are few deductions that will reduce this tax liability.

If you're looking to incorporate, you have several choices of corporate structure, including (but not limited to):

  • C corporation (shares)
  • Limited Liability Corporation
  • Limited Liability Partnership

C corporations are companies that issue stock to their owners. LLPs and LLCs can make sense for individuals who have small, closely-held businesses and seek to limit personal financial liability.

A C corp will have to pay tax on profits, and it issues dividends to the owners. The owners will then have to pay income tax on the dividends.

Some partnerships "pass through" the profits from the partnership without taxation. Thus, you only pay personal income and self-employment tax on profits.

If you're interested in incorporation, I would strongly recommend finding a lawyer who specializes in corporate structure for your state.

Note: I am neither a lawyer nor a tax advisor, and my statements here do not constitute professional counsel. For legal or tax advice, please see a licensed professional.

JohnKelly




msg:1424074
 6:35 pm on Apr 7, 2004 (gmt 0)

For a small business, "S" corp is the way to go, in my personal opinion. "C" corp income is taxed twice: once ad the corporation and once when the employee is paid. "S" corp income is passed down to the employee.

From what I've read the LLC tax advantages are now diminished somewhat -- but as always consult a tax lawyer/accountant before proceeding.

surfer67




msg:1424075
 7:42 pm on Apr 7, 2004 (gmt 0)

If you're working out of a home office you can deduct a percentage of your home expenses as business expenses. Home expenses you can deduct include, rent, utility, insurance, and any other expense that is required to run your business.

Of course, you can't deduct all of your home expenses as business expenses. You can only deduct a percentage based on the percentage of space in your home that is allocated to your business. For example, if you live in a 4 room apartment, and you have assigned one of the 4 rooms as your home office, you can then deduct 1/4=25% of you total home expenses.

satrina




msg:1424076
 11:09 pm on Apr 7, 2004 (gmt 0)

I just started Adsense this year so nothing to report until next tax season, but I did talk to my tax lady about it, as I didn't want to suddenly be stuck with a lot of taxes next year.

Now I don't make a ton, a good little chunk but not a ton, think hobbiest not business for me.

She told me I would have enough stuff to write off for my website now since it was making money, and google provides the correct tax forms that the taxes would be almost nothing if anything when I was done. So I would be able to write off things like part of our DSL bill, "meeting" that I have in regards to my websites business, even part of the rent since we have a home office, and some other things she mentioned.

And I could do this without having to do anything special, like creating an official business etc..

Sorry my answer isn't very tax technical, that was just the brief chat I had with her while she did our taxes a few weeks ago.

-Marie

Broadway




msg:1424077
 12:23 am on Apr 8, 2004 (gmt 0)

Of course I'm no expert but....Setting up an S Corporation can be good. You end up paying yourself a salary. On this salaray you end up paying income tax and medicare and social security, that's no different probably than what you do now.

The strategy is to pay yourself as low a salary as possible (but by IRS standards it has to be a reasonable compensation comparable in level to what others doing your job would be paid). Any profits you have left over can be taken out as "distributions" from the corporation. You pay income tax on the amount of the distributions you recieve but you do not have to pay medicare or social security on them (you save that 15.3% or whatever it is).

Broadway




msg:1424078
 12:37 am on Apr 8, 2004 (gmt 0)

Once again, I'm not an expert but....I think the other strategey is to create a C corporation. In this case you pay yourself as high a salary as possible because you don't want to take money out as dividends (that double taxation thing).

I think the benefit of the C corporation is that there are possibly many things the corporation can provide for you (health insurance, disability insurance, maybe a health club membership or such), things that are deductible expenses for the corporation (and things that aren't deductible for S corporations).

Instead of paying dividends I think there is a tendency for the corporation to "retain earnings". This is money that you could end up buying equipment with later, or may be a building, or just put in a bank account so to add value to your corporation's stock.

I would read a book about corporations, choose, and then have a professional explain it to you again and then set it up.

natto




msg:1424079
 1:52 pm on Apr 8, 2004 (gmt 0)

Some great info here.

Anyone know what the situation is in the UK with regards to paying tax on AdSense earnings?

alika




msg:1424080
 2:10 pm on Apr 8, 2004 (gmt 0)

Not C Corp -- you'd be taxed twice.

As stated above, S corp is the way to go. The reason for this is simple: The net income from an S corporation is NOT subject to the self-employment tax. Even if you factor in additional costs such as workman's comp insurance, incorporation costs, professional fees and incidentals, the savings is still more than adequate.

If structured and implemented properly, an S corporation could save you thousands of tax dollars per year. As an employee-shareholder of your S corporation, you pay yourself wages just like you would any other employee. But instead of taking profits out through payroll, you take cash distributions called "nontaxable dividends".

Nontaxable dividends are called nontaxable, because they aren't double taxed like the dividends paid to shareholders in a regular C corporation. You're still paying taxes on the net income of your S corporation when you file your personal tax return, but the tax is federal tax and not the self-employment tax.

The key to the whole scenario is that your salary must be reasonable under the circumstances surrounding your business. It's also much better for salary justification purposes if your business is not limited to the delivery of personal services by you.

Additionally, if you have children aged 14 or older, you can save even more taxes by giving them shares in your S corporation and having them pay the tax at their lower tax rates. By giving away shares you also reduce your estate tax obligation.

Of course, it is best to consult a tax man. It is hard to mess up with IRS, especially if Adsense is now bringing you boatloads of money :o)

mikep




msg:1424081
 2:41 pm on Apr 8, 2004 (gmt 0)

Put your self employment income back into your business, e.g., more domains, server space, adwords, a digital camera, advertisements in PC Magazine, a trip to webmasterworld's shindig, etc.

Fiver




msg:1424082
 3:09 pm on Apr 8, 2004 (gmt 0)

man, I'd love a thread like this from a Canadian perspective. Or an international affiliates one... you know, if you don't reeeally live anywhere in particular, where do you pay your income taxes to?

mquarles




msg:1424083
 1:49 pm on Apr 9, 2004 (gmt 0)

Fiver, you have a huge advantage. If you don't reside in Canada, you won't have to worry about taxes like a U.S. person. The U.S. is one of only two countries in the world that feels the need to tax its citizens regardless of where they live (the Phillippines is the other).

MQ

buckworks




msg:1424084
 2:09 pm on Apr 9, 2004 (gmt 0)

Keep a good paper trail! If you're claiming expenses for a home office, keep your receipts for EVERYTHING you're claiming.

Someone who worked for Revenue Canada once told me that the most common reason for home office expenses being disallowed was that they were not properly documented.

I expect that's true in other countries as well.

nakulgoyal




msg:1424085
 3:56 am on Apr 11, 2004 (gmt 0)

This is one of the best threads here. Interesting info for FREE :-)

blaze




msg:1424086
 4:10 pm on Apr 11, 2004 (gmt 0)

I've been told that credit card statements are sufficient for Canada Revenue.

Here's a good ref for canadain taxes:
[ccra-adrc.gc.ca...]

Fiver




msg:1424087
 7:07 pm on Apr 13, 2004 (gmt 0)

Thanks for the links/tips.

Seems as though I can learn all I want to about running my own corporation and the wonderful tax loopholes that exist, in the U.S. - from the interweb.

My real question though, is, if I'm nomadic, with no real home address, who do I pay taxes to? I'm picturing my brother, a citizen of more than one country, hasn't had a home in over ten years, is currently teaching english in Siberia. If he had an adsense account... who the heck should he be paying his taxes to?

methinks meneeds a basic course in international corporate wisdom.

/so-undereducated-in-areas-previously-though-unaffective

If you don't reside in Canada, you won't have to worry about taxes like a U.S. person.

As in... I don't have to pay tax? Naaa, can't be that easy. Someone told me I could simply not declare it, and the only way to get caught is to have the parent company audited, and the paper trail leads to me. But, it's a company in a different country, so the Canadian government can't audit them. And I don't want to simply not declare it, while I'm in Canada driving on her roads, I kind of feel like my income should be.. *cough*, halved, for the greater good. But when I'm in Africa for six months straight, and then leave to go to Hawaii for four... umm, for some silly reason I don't feel like paying Canada almost as well as I pay myself.

so confused. I only want to pay as little tax as possible while not breaking the law, just like everyone else wants :)

Fiver




msg:1424088
 9:42 pm on Apr 13, 2004 (gmt 0)

the answers are, of course, complicated:

[ccra-adrc.gc.ca...]

golocal




msg:1424089
 11:24 pm on Apr 13, 2004 (gmt 0)

To make a complicated answer simple:
You will only have to pay tax on the profit you make,
But you have to report all the revenue and expenses.
So let say you make $5000.00
What did is cost you to make the $5000.00?
InterNic fees - Domain Registration -
Internet connection and Hosting fee -
Travel (Milage) to the Post Office to pick up Checks
Post Office Box Fees
New Laptop
Ethernet wiring and Network Card, Wireless Router Etc
Adwords Cost to Advertise your Web Site.
Latest Software for your Web Site
Ok, you get the picture...
Bottom line for the first 5 years you can actually show a loss, but lets just say you had 4900.00 in expenses. You will pay tax on $100.00

But just to make sure I don't go to IRS Hell, I got a tax advisor to make sure.

ControlEngineer




msg:1424090
 2:19 am on Apr 14, 2004 (gmt 0)

Newbies,

If Uncle will take 50% of your additional income, count yourself lucky. You have to have a pretty decent income to be at that level on Federal tax. After all, almost all of the social security tax (self employement tax) cuts off somewhere between $80-90K (Medicare, a small parts, applies to all income).

Of course, state tax is another problem, if you live in a high tax state.

I wouldn't worry about incorporation--that involves additional expenses. Just be sure to deduct all your computer and internet related expenses, and have a good tax preparer (CPA or lawyer) help you. They have a good handle on deductable expenses. If your self employeement income is high compared to salary with taxes withheld, you may have to pay quarterly estimated taxes. You should see a tax professional about this soon.

gopi




msg:1424091
 1:09 pm on Apr 14, 2004 (gmt 0)

S-Corp is the way to go ...you save a good deal of money in SE tax ...

For the bold and brave here is a strategy ...
Form two or more C-corps all with different fiscal years and just shuffle the income between them (in the name of marketing/development costs!) - You can do this for ever and keep your money without paying any taxes for long ...But its a bid edgy and i am too timid to use it :)

For canadians with sufficient online income ( >200k) i will suggest to get out of the country atleast temporarily for a few years - get a parttime job in a low/no tax country - have short visits and stay not greater than 3 months of a year in canada

Fiver




msg:1424092
 2:37 pm on Apr 14, 2004 (gmt 0)

For canadians with sufficient online income ( >200k) i will suggest to get out of the country atleast temporarily for a few years - get a parttime job in a low/no tax country - have short visits and stay not greater than 3 months of a year in canada

I'm not sure that would help. I haven't talked to my tax man yet, but from the link I posted last, they would likely look at this as still remaining a 'factual resident' of Canada - three months a year is probably plenty to be considered that, especially if you have any other 'residential ties'. In which case I have to declare all International income, and be taxed regularly (at this point, I think at the same rate - though I'm sure there must be some loopholes somewhere).

If I do leave and end up in a country that has a tax agreement with Canada, I can file normally and not be double taxed - but otherwise I may get caught in a situation where both governments want a cut of my money. Not neither government, like I want :)

My problem is that I want to keep a summer home in Canada. Not a house really, just a place on the water that I go to when the weather is nice. But since my family and friends are here, I would certainly be seen as having residential ties, and so I would remain a factual resident and keep paying taxes. Not so bad, since I'd certainly want to use the health care in Canada if I were ill.

Anywho, if I find anything interesting I'll post here, or if anyone knows more casual info about this, pls let me know. I'd like to go to a professional with as much background knowledge as possible.

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