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Hobby turns into... Taxes!

 4:17 am on Aug 14, 2004 (gmt 0)

Like others I've seen post I simply had a hobby that suddenly turned itself into a profitable business the day I discovered AdSense. I've been planning on paying state and federal income taxes, and in my state I have to pay a small business tax if I make over a certain amount. But today I discovered how totally ignorant I am about running a business.

When I got my annual social security statement in the mail today, I got this sunken feeling in my stomach that I might have missed something. Turns out when I checked the social security website I learned that I have to pay an additional 15.3 percent for social security and medicare. That means that for every $100 I've thought I earned, I actually earned 15.3 percent less. I feel like I got slugged in the gut.

I had no tax liability for last year so this year I don't have to make estimated tax payments. That's why I haven't gotten tax advice yet... or Turbo Tax.

Besides state and federal income tax, state business tax (I don't live in a city), and social security/medicare, can anyone think of anything else I might be missing?

Thanks, Peter


My financial advisor always tells me I should be happy when I have to pay taxes. It means I'm making money! I agree, but this additional tax just caught me by surprise.



 5:21 am on Aug 14, 2004 (gmt 0)

if you are above a certain amount you could create a company in a country with less taxes....and also employ someone local to do the daily maintenance and administration. you can can create many companies online.....you can also outsource the accounting and taxes to professionals.

it is strange you need to pay social security and medicare.

if you have a fulltime job, you usually only need to pay income tax but no insurances as you pay for that with your fulltime job - at least in most european countries.


 6:54 am on Aug 14, 2004 (gmt 0)

Turns out when I checked the social security website I learned that I have to pay an additional 15.3 percent for social security and medicare.

It's called the Selp Employment tax. Same thing as at work where you pay Mediscare and Social Scamcurity taxes. Only difference there is you only pay half the scam and your employer pays the other half.


 2:40 pm on Aug 14, 2004 (gmt 0)

Only difference there is you only pay half the scam and your employer pays the other half.


Really, you need to hire an accountant to do your taxes. You do get nailed on the employment tax, but there are many things you can write off from TV's & DVD players to most of your vehicle expenses.


 2:44 pm on Aug 14, 2004 (gmt 0)

can anyone think of anything else I might be missing?

An accountant that can help you figure out which expenses are deductible so that you can lower your tax liability.


 6:29 pm on Aug 14, 2004 (gmt 0)

As a self-employed person there a number of things that crop up that need attention. My first year in business I did not pay my estimated taxes until my annual tax bill was due because I found my fine would be less than hiring an accountant to actually help me calculate the tax bill.

1.) You do need an accountant.
2.) The money you earn on a monthly basis is really not all your money!
3.) Buy a copy of Quick Books.

Now, every month I transfer xx.xx% of my monthly revenue into a separate business savings account that I use to pay estimated taxes: April, June, September & January.


 6:42 pm on Aug 14, 2004 (gmt 0)

You might want to look into running an S Corp or LLC - you pay yourself a salary - which is taxed just like before, but you pay the rest in distribution where you don't have employment taxes.

Talk to a decent accountant or read some books on it. It really isn't that complicated once you learn about it, but before you do it can seem overwhelming.

Taxes are almost every successful persons biggest expense - so you need to treat it as such and reduce it as much as you can.

I have read thousands and thousands of pages on tax stuff. Don't get sucked into any of the scams. You can take advatage of deductions, S Corp status, and retirement plans, but other than that - there aren't many good legal loopholes.

Keep in mind even if you don't go with the S Corp - you still don't have to pay the full 15.3% if you make over 87,000 - you pay 2.9% of the amount over that. And this is combined with your regular job if you have one.

So if you make $50K a year and pull $37K in in internet income - anything above that is 2.9 and not 15.3.

I'd hihly recommend anyoneinterested in learning more about taxes buying the following:

J.K. Lasser's Your Income Tax 2004

It doesn't really go into the different forms of businesses that much, but you will know almost everything you need to about income taxes.


 6:44 pm on Aug 14, 2004 (gmt 0)

Check with your accountant but, if you do this website setup from you house you may be able to deduct a portion of your home/apartment expenses based on square footage of your office as a percent of total home square footage. Deduct things like:
1. Rent payment/mortgage interest
2. Electricity/heading/water/other utilities
3. Furnishings for your 'office'
4. Portion of building repairs and maintenance ie redecorating costs, new roof, etc
5. And, if you aren't covered by a pension plan at your regular job you can setup one of several deferred compensation plans - I use a SEP.

And, you don't have to do anything in the way of setting up a 'company' or business - you could simply be a 'Schedule C' business.

All assumes you live in US.

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