It’s tax season again, and on Wednesday I shaved an additional 15 minutes off of last year’s time for a new record of four hours, of which only an hour and a half was spent inputting numbers into TurboTax.
The other two and a half hours was bookkeeping for IO, so that if I get audited I can prove my earnings and expenses.
Today I thought I’d share what that entails, for those of who you are thinking of making money from a blog someday. Record keeping isn’t fun, but getting in trouble with the IRS would be even less fun. Luckily a blog is not a terribly complicated business, those 2.5 hours covered the whole year’s worth of transactions.
Disclaimer: By no stretch of the imagination am I certified to give legal advice. This is just my personal experience, your mileage may vary. Please seek assistance from an accountant if you’re confused or unsure about any aspect of your own tax or business situation.
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There’s a lot of software (and apps) out there these days to help small business owners manage their books. For most people that’s money well spent, but I prefer to do it myself and that’s what I’m going to be talking about here.
The crux of my record keeping revolves around a single spreadsheet. The beauty of designing your own spreadsheet is that it has exactly everything you need, and nothing that you don’t. You can also expand on it as your business grows. Here’s a mockup of my IO spreadsheet for 2017, it has changed quite a bit since its inception in 2013. This is the actual form I use, but the numbers are just examples to show how it looks filled out:
Likewise, I keep several other supporting documents with the financial spreadsheet as proof of my numbers. Here’s a look at my folder for the 2016 tax year:
You’re probably pretty confused by now as most of this stuff is not intuitive. It makes perfect sense to me (you’ll want to configure yours so that it makes sense to you), but let’s shed some light on these two pictures.
IO brings in money five different ways: through book sales, the Amazon affiliate program, PayPal donations, Google Adsense ads, and the occasional magazine royalty.
Amazon direct-deposits two payments into my bank account once a month, at the end of the month – one for affiliate income, and one for book royalties. This makes for easy record keeping as you don’t need to keep track of every item sold on Amazon or Kindle book purchased (as a sole proprietorship you can choose to use the method of record keeping where you keep track of money received, not earned).
In January of the following year, Amazon sends out a 1099-MISC form which lists total affiliate income and book royalties for the previous year, when filing it’s easy to input the numbers from this form. Because Amazon sends a 1099-MISC I probably would not need to keep track of my monthly earnings from Amazon in my spreadsheet, but it’s good to do so that you know the amount that landed in your bank account equals what Amazon thinks you made.
In the second picture, you’ll notice documents that say ‘AmazonAffiliateQ1’ etc., and documents that say ‘kdp-report-1-2016’ etc. These are reports downloaded from the Amazon Associates and Kindle Direct Publishing websites that list all transactions. Again, kind of overkill, but it’s better to have too much documentation than not enough.
To download Amazon Affiliate reports:
- On the Amazon Associates homepage, mouse over ‘Reports’ on the top bar and select ‘Earnings Reports’
- Under the ‘2. Choose date range’ header scroll down to Q1 and select
- Click the ‘Download Report’ button in whichever format you prefer – TSV or XML (or both)
- Repeat steps 2 and 3 for Q2, etc.
To download Kindle Direct Publishing (KDP) reports:
- On the KDP homepage, click ‘Reports’ at the top of the page
- Click the ‘Prior Months’ Royalties’ option on the right side of the page
- This generates a list of monthly Microsoft Excel (XLS format) reports that can be downloaded
Like Amazon, Google pays directly into my bank account on a monthly basis, but only after I’ve passed a $100 threshold. IO is not a high traffic website, so I literally earn pennies a day from Google ads and it takes a while to reach $100, last year it happened twice.
Google did not send me a 1099-MISC, I’m not sure if this is because my earnings were below a certain level or because they just don’t send them out. I just noted when payments dropped into my bank account and will show bank statements for the year if I need proof.
Oh, PayPal. This is more complicated, as should be evidenced by the busier chart under the PayPal heading in the first photo. For starters, if you’re going to use PayPal to receive money from a blog, make yourself a business account dedicated to the task, that’ll make life much easier to keep track of everything.
I have two different income streams that feed into PayPal, donations that come in from a button on my blog and PDF book sales, also referred from IO. Early on in the history of IO when I was just getting donations, I kept track of every single transaction on my financial spreadsheet. If I did that today, it’d long and unwieldy. Luckily, PayPal has a very comprehensive monthly report that lists them all (these are the ‘MSR’ files in the second picture).
To download PayPal reports:
- Click ‘Reports’ on top bar
- You’re presented with two options, choose ‘Monthly’
- There will be a list presented by month in PDF format, download to your heart’s content
That takes care of the individual transactions, but still doesn’t answer how to total up this income for tax reporting. I decided to track things on my financial spreadsheet by month, and add up all those months for my final number. You can double-check your totals for the month on page 3 of your PayPal report. The page will look something like this:
A few comments on this picture:
PayPal charges a payment fee for all payments coming in, whether on donations or for goods and services. You’ll want to total up these fees and make sure you report them on your taxes as a business expense.
E-Junkie handles the shopping cart and delivery of PDF books sold directly on IO. They charge a monthly fee for this service. MailChimp handles the IO e-mail list, they also charge a monthly fee. I have these subscriptions set to deduct directly from my PayPal account and also report these transactions on my taxes as business expenses.
An explanation on the PayPal website talks about donations being tax-exempt, which might tempt some bloggers not to report this income on their taxes. But donations are only tax-exempt if you’re a non-profit entity. So yes, as a blogger who is running their blog as a for-profit business, you should report donations.
- The ‘Misc. Payments’ section on the spreadsheet is for one-off type stuff, like occasional magazine articles (if you’re an Escapees member, look for the May-June issue this year…)
- The ‘Expenses’ section is pretty self-explanatory. Blog-related expenses go there and get reported on my taxes. These expenses are not deducted from my PayPay business account, which is why they’re here and not under the PayPal heading.
- Once you have a spreadsheet format that works for you, save a blank copy of it before you fill it in, that way you don’t need to worry about duplicating it next year.
- When I say I did all my bookkeeping in 2.5 hours, I mean downloading all the reports, looking up the numbers, and filling out the spreadsheet from nothing all in one fell swoop. If you keep up your records throughout the year though instead of trying to do it all when taxes come do, it’ll be much easier.
- When you start working for yourself, it can be tempting to under-report your income to the IRS as there’s less chance of getting caught compared to working for an employer. But even if you’re willing to take the risk, think of this: it’ll come back to bite you later in life with lower Social Security payments. I report every single dollar I make.
- This method has worked very well for my simple sole proprietorship, but would likely not be ideal for more complicated businesses.
I was hesitant even to share this much because I’m not an expert and would hate to steer people wrong on such an important matter, but more and more new bloggers are adding affiliate links and donate buttons to their blogs and I’ve gotten questions on it before. So, I hope this helps, and really do seek qualified help if your situation warrants it. Happy blogging!