A while back I wrote pretty extensively about how I had taken my small insignificant personal finance blog, and turned it into an income producing asset for my family. By writing about the right topics, performing the right types of promotion, performing SEO for the site and networking with the right people, I was able to make my site a success. If you want to read a bit more about how I was able to do it, I'd suggest checking out my ebook, Blueprint For How To Make Money With A Blog. In the e-book I walk you through the process I followed to take my blog to the point where it was able to replace the income from my wife's day job, so she could stay home with our son. (click on the banner below for more details)
While I have been blessed in that my site has done well since it launched in January of 2008, I haven't done everything perfect. I've made my fair share of mistakes. One of the mistakes that I made that I regretted later on was not tracking the income and expenses for the blog better.
Why You Should Keep Close Track On Income And Expenses: Taxes
When you start making any kind of income for your blog, it's important to start tracking the income that's coming in, and the expenses you're incurring to keep the site operational. The reason? You're going to need to pay taxes on your income when tax time comes around. In fact, if you're making enough money on the side, you'll need to be making regular estimated tax payments during the year as well. Our tax system is a pay as you go system, so you need to pay your taxes throughout the year either through withholding or estimated tax payments. If you don't, you could face penalties when tax time comes.
So who should be making estimated tax payments? If you're making any kind of regular income from your blog, you will most likely need to pay estimated taxes.
To avoid penalties at tax time you will need to make sure that you make your estimated tax payments, and at the very least meet one of the following safe harbor requirements so that you don't have to pay during the year. Different rules may apply for some taxpayers.
Safe Harbor Requirements (To Avoid Tax Penalties)
- Owe less than $1,000 for this year’s taxes.
- Withhold 100% of last year’s tax liability. (We are doing this safe harbor requirement this year because it’s easiest to calculate)
- Withhold 90% of this year’s tax liability.
So as you can see – as always, taxes are going to be a complicated mess, especially if you're making income on the side that doesn't have taxes withheld. For a more detailed discussion of paying estimated taxes, check out this post: Estimated Tax Payments
Ways To Track Your Income And Expenses
When it comes to tracking your income and expenses for your blog, there are a lot of ways to do it. Today I just thought I'd talk about what has worked for me.
Consistency Is Key
Tracking income and expenses isn't that hard to do. For me the problem usually happens when I don't stay on top of things, and my income statements and expense reports start to pile up on me. So for me, consistency and entering things as they happen are key. If I don't do that I usually find that tax time creeps up on me and I end up having to pull an all-nighter trying to enter all my income and expenses in order to figure out estimated tax payments. Trust me, you don't want to be there.
Tools For Tracking Income And Expenses
At our house I use 3 separate tools to track our income and expenses for the blog.
- Personal finance software: I use Microsoft Money to manage our household budget. You don't have to use Money, but any budgeting software will do. (Check out our list of 75 Budgeting And Personal Finance Software). We enter all of our income from day jobs, and income from sideline pursuits. We also enter every cent that leaves our bank accounts be it for regular monthly expenses, or blog expenses. In order to track blog income and expenses effectively I've set up special categories for all blog income, and expense types. Money also downloads all transactions from my banks, so it double checks everything I've entered. This makes things easier because when it comes time to pay taxes and I need to know how much was made or spent, i can just run a report on those blog income and expense categories.
- Income and expenses spreadsheet (download it here): I also use a google docs spreadsheet for all blog income and expenses. In fact, I use this as my main source for this information just because I can enter it on the fly anywhere and anytime. I get paid for an ad banner sale? I enter it on the correct line in my spreadsheet on the “income” tab. I have to pay for hosting, or pay one of my staff writers? I go to the “expenses” tab and enter it there. Since I enter everything as it happens, I always have an accurate accounting for everything coming in and going out for my side incomes. Download a copy of my spreadsheet here:
- Small business software Outright.com: Within the past 2 months I've also started using a small business software/website called Outright.com. Basically the software automatically downloads transactions from accounts you tell it to, categorizes your Schedule C income and expenses, and prepares reports for you on your estimated taxes and other things. I've only started using the software, but so far, it looks like it should be pretty helpful. Read a full review of Outright.com here.
So those are the three ways that we track all of our income and expenses that are coming in during the year. Because we're doing it in more than one way, it also adds in a layer of confidence that the numbers we're coming up with are correct.
Have your own favorite ways to track income and expenses? I'd like to hear them, tell us in the comments!
What Things Should I Track?
One thing I hear from people is that they're not sure what types of things they should be keeping track of when they do make note of income and expenses.
On the income side of the equation I would just say to keep track of pretty much everything.
On the expense side, it will usually only make sense to track things that are going to reduce your tax bill, or count to reduce your taxable income. To be safe, I track just about everything just in case.
As a blogger or freelancer, here are some expenses and deductions you can track for use at tax time (As always consult a tax professional to confirm they can be claimed in your situation):
- Web hosting: Your website hosting fees can be claimed as a deduction on your taxes, so print out an invoice and keep it in your “expenses” folder.
- Premium themes: Premium WordPress themes like Thesis, Frugal and Headway themes can be claimed as deductions.
- Advertising, promotion and design: If you had a custom theme designed or a banner created for use on other sites, you can claim it as a deduction. Used adwords to push traffic to your site? Claim it!
- Domain names: If you bought or renewed domain names, you can claim them on your taxes.
- Staff writer fees: If you pay writers to create content like I do, you can claim their fees as a business expense.
- Internet access fees: You can deduct internet access fees.
- Software and blogging tools: Use a video editing software to create videos for your site? Bought a custom plugin to use on your blog? Claim them!
- Home office space: This one is a bit hazy for me, but if you have a well defined space used only for work in your home, you can deduct a portion of your home mortgage. Consult a professional for details on this one.
- Computer equipment: If you bought a new laptop or digital camera to use mainly for work, you can claim it.
- Paid stock photos for posts: Pay for a stock photo service to use their photos on your site? You can claim the membership fees.
- Supplies and stationary: Business cards, stationary, pens, etc can be claimed.
- Refunds and discounts to customers: If you give discounts on ad sales or give special pricing for package deals, you may be able to claim them as a deduction. Just be sure to carefully document it. Also, if you've given a refund on something, you can claim that as well.
- Post office box: If you have a post office box for use on your blog or email newsletter, you can claim it as an expense on your taxes.
- Tax software & tax preparation: They're deductible!
For even more deductions for bloggers, check out Darren Rowse's list at problogger: 46 Tax Deductions that Bloggers Often Overlook
When you start a side business whether it be a blog or other small business, it's important to make sure you're tracking everything that's coming in, and going out. When it comes time to do your taxes, you want to make sure that you properly report everything, and at the same time, that you take advantage of all the deductions that are available to you. If you setup a system and follow it throughout the year, you'll be far ahead of the game when it comes time to pay the tax man.
Have your own tips, tricks and hints for tracking blog income and expenses? Have software that you use to help make it easier? Tell us your thoughts in the comments!