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  1. #1
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    Tax Question
    I by far had my best year doing affiliate marketing, I wanted to find out how most of you file your taxes, right now with CJ I'm listed as an individual so I'm just 1099'ed, any recommendations would be great as I"m worried about my big tax bill in april.

    Thanks!

  2. #2
    Full Member Code Monkey's Avatar
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    Depends...
    Depends how much you've made this year.. You probably should have been paying quarterly income taxes. The government likes to get its money over the course of the year, not in a lump sum payment at tax time. You might get a little pnalty for that...

    Although, if you didn't make that much LAST year, you would have only had had to pay 110% of the taxes you paid LAST year..

    Example:

    In 2006, you paid $1000 in taxes on your affiliate marketing income..

    In 2007, you would have only needed to pay $1100, over the course of the year (quarterly taxes), to keep from getting a penalty at the end of the year..

  3. #3
    Chick with Brains Tracy's Avatar
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    My business is set up as a Subchapter S Corporation. I already had a marketing business before I got into affiliate marketing so it was easy to just incorporate the affiliate business into it. It makes tracking income and expenses easier. The corporation pays me a monthly income from which taxes are taken out and deposited with IRS quarterly. Instead of making personal quarterly deposits I just make sure I have enough income tax withheld to meet the minimum requirements of IRS.

    At the end of the year, I get a K-1 for the net income of the corporation. Since it is an S Corporation, the corporation itself doesn't pay taxes. The net income just flows through to my personal income taxes, which isn't subject to double social security like Schedule C income.

    I don't get 1099s from CJ or anybody else. The law doesn't require 1099s be issued to corporations.

  4. #4
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    I am not an accountant, BUT... you can accomplish the same thing if you form an LLC and opt to be treated as an S Corp for tax purposes. For myself I've found this to be much easier (which less paperwork and maintenance time needed) in my state, and less expensive as far as yearly state fees.

    Another methodology is to pay part of your income to yourself as a salary (exposing that portion of your income to FICA/Medicare taxes), but then put as much as you can from that salary into an individual 401K or SEP-IRA or other plan. Some of these plans will let you plow up to 46K (in 2008) into a retirement plan, tax free. The rest of the money above the salary flows through the K-1 as personal income not subject to the FICA and never ending medicare tax.

    Just like sole proprietors, Partnerships don't get that treatment, as K-1 income is treated as self employment income and subjected to the full brunt of double Social Security taxes.

    Bottom line, if you start making any real money with your business, spend a few bucks and talk to a good CPA, you can save a bundle on your taxes if you do things the right way.

  5. #5
    ABW Ambassador newestuser's Avatar
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    Quote Originally Posted by TI Master
    Bottom line, if you start making any real money with your business, spend a few bucks and talk to a good CPA, you can save a bundle on your taxes if you do things the right way.
    Great advice. If you do it right now, it will make things so much easier as you continue to grow!

  6. #6
    ABW Ambassador delsol's Avatar
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    NO CPA here.
    You basically should be concerned if your un-taxed CJ revenue is:
    "...Substantial understatements of income tax (tax underpayments that exceed the greater of 10% of the correct tax liability or $5,000)..."

    in other words:

    If you made $150K in salary and paid about $35k in Fed taxes, if the generated income from CJ generates more then $5K of taxes (probably around $25K from CJ) you are subject to the IRS penalty. The penalty is not that bad since it only applies to the amount under-paid and is relatively fair since you got to enjoy the money tax-free for nearly a year. But the penalty should be SERIOUSLY avoided since you are probably wasting around 20% of that amount.

    If you make $500K in salary and paid about $150K of taxes that "Substantial understatements of income tax" raises to $15K...so the more you make the more the IRS is "tolerant" (i.e. margin of error grows).

    Now, if you are subject to the penalty you still have at least one option, I can think of: Try to increase your deductibles, so to lower the " understatements of income tax".

    One limited trick is that you have until 4/15/08 to contribute to an IRA account, up to $4k ($8 if filling with wife or/and $5K/person if over 50) for the 07 fiscal year. If married that gives you the option of reducing your taxable income (i.e. CJ revenue) by up to $8K.

    In our line of business you have to be careful with this stuff. That's why, if possible try to pay anything you need (that is tax-deductable or business expendable) at year end. Example: Pay your Credit Cards early (end of December) even before you actually receive the CC statement. Buy that laptop you know you will purchase anyway early the following year.. paid for that conference early....etc....

    Having an S Corporation does not help, in that regards, because any "profit" in the S-Corp at the end of the year is taxable that year by the owners. In other words you start an S-Corp with $0K if at the end of the year the company has $20K in the bank account. That $20K will be considered revenue by the IRS (even though you still have it in the S-Corp bank account...tricky!). But the beauty is that $20K of your S-Corp's money is "tax paid".

    But the S-Corp makes it so easy to purchase stuff Federal & State "tax-free" (i.e. you don't have to make personal deductions) that it is definitely worth it. Plus you can pay yourself some dividends (proportional to your salary to avoid the IRS Penalty) these are payroll free.

    Cheers,

    Chris


  7. #7
    Full Member GoColts's Avatar
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    Quote Originally Posted by Tracy
    My business is set up as a Subchapter S Corporation. I already had a marketing business before I got into affiliate marketing so it was easy to just incorporate the affiliate business into it. It makes tracking income and expenses easier. The corporation pays me a monthly income from which taxes are taken out and deposited with IRS quarterly. Instead of making personal quarterly deposits I just make sure I have enough income tax withheld to meet the minimum requirements of IRS.

    At the end of the year, I get a K-1 for the net income of the corporation. Since it is an S Corporation, the corporation itself doesn't pay taxes. The net income just flows through to my personal income taxes, which isn't subject to double social security like Schedule C income.

    I don't get 1099s from CJ or anybody else. The law doesn't require 1099s be issued to corporations.
    I've thought about this comment since I read it a couple of weeks ago.

    I really need to go talk to a SCORE counselor I think in person but - I will bother you with one question...

    When you said the net income just "flows through to my personal income taxes..."

    I don't understand what you mean by "flows through" - with out being subject to personal tax.

    Could you ellaborate a little on that?

    Thanks!!

  8. #8
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    I'll Bet On My Net For a Thousand....
    Quote Originally Posted by GoColts
    When you said the net income just "flows through to my personal income taxes..."

    I don't understand what you mean by "flows through" - with out being subject to personal tax.

    Could you ellaborate a little on that?

    Thanks!!
    Colt

    Flows Through ~ I think he meant w/o being subjuct to corperate taxes too. I believe that basically it is as though the irs is treating your net as a simple pay check situation.....

    Hope this Helps

    Steve

  9. #9
    Affiliate Manager Howard Gottlieb's Avatar
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    Sub S here
    I would rather live my life as if there is a God and die
    to find out there isn't, than live my life as if there
    isn't and die to find out there is.

  10. #10
    ABW Ambassador delsol's Avatar
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    Quote Originally Posted by SteveWilliams
    Colt

    Flows Through ~ I think he meant w/o being subjuct to corperate taxes too. I believe that basically it is as though the irs is treating your net as a simple pay check situation.....

    Hope this Helps

    Steve
    S-Corporations are not like the "real" corporation people think of, when you say "corporation" (like Wallmart Dell etc... those are C Corporation). S Corporations are more like pass-through entities. They do not have a specific "corporate tax".
    The earnings of an the S-corp end-up in the "income" column of the tax returns of the s-corp owners.
    For example, your s-corp makes $10K, you have 2 owners with 30% (owner-A) and 70% (owner-B) of ownership in the s-corp. Owner-A ends-up with $3K as income on his tax return and Owner-B ends-up with $7K on her tax return.

    An S Corporation never pays any taxes, it's owners do.

    This is why, with an s-corporation, as soon as you make some "real money" you have to pay quarterly taxes or use payroll to pay yourself (ie employees) to avoid having to much "dividend" and risk the "tax penalty" (see previous post).
    Last edited by delsol; January 31st, 2008 at 12:32 AM.

  11. #11
    Chick with Brains Tracy's Avatar
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    Quote Originally Posted by GoColts
    When you said the net income just "flows through to my personal income taxes..."

    I don't understand what you mean by "flows through" - with out being subject to personal tax.

    Could you ellaborate a little on that?

    Thanks!!
    I didn't mean to imply that I didn't have to pay taxes on the income. I do. I just don't have to pay FICA/Medicare on that income. Let me try this again.

    Before I delved into Affiliate Marketing, I already had a business at home operating as a Subchapter S corporation. So, when I started affiliate marketing, I just signed up for programs under the corporation's name and FEIN instead of my name and Social Security Number.

    First, I should explain the difference between an S Corp and a C Corp. Both file income tax returns. However, when a C Corp files an income tax return, it pays taxes on the income with the return. On top of that, the shareholders receive dividends, and they pay taxes on those dividends as well. That's what people mean when they talk about double-tax on C Corporations.

    An S Corporation also files a tax return; however, the Corporation does not pay income taxes on the income. Instead, it issues a K-1 to each shareholder for their share of the income. In my case, I own 60% of the shares and my husband owns 40%. So, at the end of the year we receive two K-1 forms totaling 100% of the net income of the corporation (after deducting all the allowable expenses from the gross income). On the books of the corporation that income goes in to a Retained Earnings account, and we can draw against that as previously taxed income. What I mean by that, is each year we report the net income on our personal taxes, however the actual money may still be sitting in the corporation's checking account. The corporation can just write us checks for that money, and we don't have to report it again on our income tax return.

    In addition to affiliate marketing, I still have clients of my original business that I perform services for.

    Here's how all this benefits us (which may or may not apply to you):

    1. We both receive a basic salary from the corporation, which is taxed like any other paycheck ... FICA, Medicare, Federal Income Tax Withholding.

    2. The corporation pays us rent each month for use of one room in our house set aside for the business. The corporation deducts the rent from the gross income, and we report the rent on our personal taxes, but also deduct a percentage of the utilities, mortgage interest, taxes, etc. This is reported on Schedule E of our personal taxes. And this is income we don't pay FICA/Medicare on.

    3. We both keep mileage logs in our cars. Anytime we drive somewhere on corporation business, we write down the mileage. At the end of each month, the corporation issues us a check at the going rate set by IRS, which is 50.5 cents per mile in 2008. The corporation deducts the amount as an expense; however, we just deposit the checks because technically it is an expense reimbursement for the use of our cars and therefore is not income and does not need to be reported as such on our personal return.

    4. At the end of the year, the net income the corporation earned (after deducting the rent, mileage, salaries paid to us, office supplies, advertising, depreciation on equipment because the corporation owns our computers) is also reported on Schedule E of our personal taxes. The benefit here is that while the net income is reported, we do not have to pay social security or medicare on that income.

    5. It costs $150 per year to keep the Corporation active in the state I live in, Florida.

    If I'm not mistaken, if you just receive the income personally using your social security number, you have to file Schedule C, and while you are allowed to deduct the expenses of doing business, you also have to pay double the social security and medicare taxes. What I mean by that is, when you work for an employer, an employer deducts 6.2% FICA and 1.45% Medicare from your paycheck. However, when the employer sends the money to IRS, the employer has to match those amounts and sends 12.4% and 2.9%, respectively. However, when you file using Schedule C, there is no employer to pay the other half, so you have to pay all of it. Yes, our corporation has to pay the other half of what is paid to us, however, that amount is deducted as another expense against the income.

    Here is how IRS explains S Corporations. The links at the bottom of the page provide more information about starting a business and record keeping.

    In past lives, before I started working for myself, I worked as a legal secretary and full-charge bookkeeper. So, when I started my business, I already knew how to file Articles of Incorporation. I also knew how to maintain bookkeeping records and file corporate returns. So, I've never consulted an attorney or a CPA. I fill out the Corporation's return myself, and use Turbo Tax for our personal returns. This all works for me. However, everybody's situation is different, so you may want to consult professionals before deciding what route to take for yourself.

  12. #12
    Chick with Brains Tracy's Avatar
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    Quote Originally Posted by delsol
    This is why, with an s-corporation, as soon as you make some "real money" you have to pay quarterly taxes or use payroll to pay yourself (ie employees) to avoid having to much "dividend" and risk the "tax penalty" (see previous post).
    Actually, you have to use Payroll. Technically, as officers of the corporation, you are employees of the corporation and IRS doesn't believe you're working for free. If you are making any "real money" they take a dim view of you not taking a pay check and reporting all the earnings on the K-1, also considered "dividends" or "previously taxed incomes."

    For example, my sister and her husband had an extremely successful S Corporation (which they sold last year). They were only taking a salary of $1,000 each per month. When the company really took off and they were making "real money" their CPA told them they had to pay themselves more. So, you really do need to pay yourself a reasonable salary. If you calculate well, you can have enough taken out of your salary as Federal Withholding to cover your entire personal taxes owed for the year and avoid having to also make quarterly deposits. That's what I do.

    The corporation does have to file the quarterly 941 (Employer's Tax Return to send in the FICA, Medicare and Federal withholdings), and the 940 (Federal Unemployment Compensation Tax Return) annually. Unemployment is .8% of the first $7K paid to each employee of the corporation, or $56 each per year. You also have to pay State Unemployment Compensation.

    Okay, this all seems easy to me. But I guess it does get a little complicated if you're not used to it.

  13. #13
    ABW Ambassador delsol's Avatar
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    The rule of thumb, I was told (by a CPA) is to stay well under 50% dividend versus payroll (to avoid being flagged at the IRS and get an audit). Once you make "real money" ($20K-$40K ?) the rule to avoid the "tax penalty" will kick in (ie divident < "about 10% of adjusted gross income" to avoid the tax penalty).

    I've been incorporated since 96 and initially had a CPA do my taxes but since it was costing $1K each year and the first years the company was not making money, I also started to do the taxes myself using TurboTax Business. This is really a good exercise since it forces oneself to understand many details and understand how you can try to maximize your deductions and try to lower your taxes to the legal limit.

    Tracy, I curious about the "rental charge" you charge the s-corp for using your home. If you know the answers, could you tell me:
    - How to you determine that amount (ie how far can you go...) ?
    - You then have to report rental income, right?
    - Can that rental income "receive" any kind of deduction?
    - Does this complicate the amount of deduction you can take with mortgage interest payments? If yes, how does it basically work?

    Cheers fellow s-corporators ;-)
    Last edited by delsol; January 31st, 2008 at 07:00 AM.

  14. #14
    Affiliate Manager PetsWarehouse.com's Avatar
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    The primary reason to set up an S Corp is that you pay a lower tax rate as an individual than in a C corp.

    Check with your accountant.

    If you need to set up a corp I give a high recomend to Incorporatetime
    an INC 500 company run by an attorney (as in my son)
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  15. #15
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    Great information. Thanks!

    At what point (income level) do you think it would be worth it to form a S corporation? $10,000, $50,000? Just curious as to when it would be worth it to do that.

  16. #16
    Affiliate Manager PetsWarehouse.com's Avatar
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    any level can save you $$$

    An S-Corporation is not subject to corporate tax rates. "Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income," according to the Internal Revenue Service. Instead, an S-Corporation passes-through profit (or net losses) to shareholders. The business profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through (sometimes called flow-through) nature of the income means that the corporation's profits are only taxed once – at the shareholder level. The IRS explains it this way: "On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss."

    S-Corporations therefore avoid the so-called "double taxation" of dividends.
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  17. #17
    Chick with Brains Tracy's Avatar
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    Quote Originally Posted by delsol
    Tracy, I curious about the "rental charge" you charge the s-corp for using your home. If you know the answers, could you tell me:
    - How to you determine that amount (ie how far can you go...) ?
    - You then have to report rental income, right?
    - Can that rental income "receive" any kind of deduction?
    - Does this complicate the amount of deduction you can take with mortgage interest payments? If yes, how does it basically work?
    This is another reason I'm a fan of S Corp! The rules are so strict for individuals claiming Business Use of Home:

    Where the exclusive use requirement applies, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes. For example, if you are an attorney and use the den of your home to write legal briefs and also for personal purposes, you may not deduct any business–use–of–your–home expenses. Further, under the principal-place-of-business test, you must determine that your home is the principal place of your trade or business after considering where your most important activities are performed and most of your time is spent, in order to deduct expenses for the business use of your home.
    How to you determine that amount (ie how far can you go...) ?
    How much would you reasonably expect to pay if you rented the same amount of space in an office complex in your area? Personally, I like the fact that when I roll out of bed, I'm at work and don't have to get dressed and drive somewhere to do my work.

    You then have to report rental income, right?
    Yes, on Schedule E - Supplemental Income and Loss under Part I, Rents Received.

    Can that rental income "receive" any kind of deduction?
    Yes. Determine what percentage of the square footage of your home is rented to the S Corporation. Deduct that percentage of the insurance, mortgage interest, utilities, taxes, repairs ... basically the list of items on Schedule E. Also, depreciation calculated as the same percentage of the basis of the home. However, keep in mind that if you sell your home, that depreciation is excluded. I'm not sure exactly how that works, you'd really need to ask a CPA. It has something to do with adding all the depreciation taken over the years back to the basis to figure capital gains. We're not planning to sell our home in the near future, if ever, so I really don't keep up with that.

    Does this complicate the amount of deduction you can take with mortgage interest payments? If yes, how does it basically work?
    Obviously, if you itemize and claim the mortgage interest you have reduce the amount you claim on that part of the form by the amount you claimed on Schedule E. For a lot of people, that mortgage interest is what makes it possible for them to itemize in the first place. So, if reducing the amount is going to throw you out of that category, then yes, it could complicate things.

    Please remember that I am not a licensed attorney or CPA, so I am not offering advice here. Just telling you how I do it.

  18. #18
    Full Member GoColts's Avatar
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    Quote Originally Posted by Tracy
    I didn't mean to imply that I didn't have to pay taxes on the income. I do. I just don't have to pay FICA/Medicare on that income. Let me try this again.

    Before I delved into Affiliate Marketing, I already had a business at home operating as a Subchapter S corporation. So, when I started affiliate marketing, I just signed up for programs under the corporation's name and FEIN instead of my name and Social Security Number.

    First, I should explain the difference between an S Corp and a C Corp. Both file income tax returns. However, when a C Corp files an income tax return, it pays taxes on the income with the return. On top of that, the shareholders receive dividends, and they pay taxes on those dividends as well. That's what people mean when they talk about double-tax on C Corporations.

    An S Corporation also files a tax return; however, the Corporation does not pay income taxes on the income. Instead, it issues a K-1 to each shareholder for their share of the income. In my case, I own 60% of the shares and my husband owns 40%. So, at the end of the year we receive two K-1 forms totaling 100% of the net income of the corporation (after deducting all the allowable expenses from the gross income). On the books of the corporation that income goes in to a Retained Earnings account, and we can draw against that as previously taxed income. What I mean by that, is each year we report the net income on our personal taxes, however the actual money may still be sitting in the corporation's checking account. The corporation can just write us checks for that money, and we don't have to report it again on our income tax return.

    In addition to affiliate marketing, I still have clients of my original business that I perform services for.

    Here's how all this benefits us (which may or may not apply to you):

    1. We both receive a basic salary from the corporation, which is taxed like any other paycheck ... FICA, Medicare, Federal Income Tax Withholding.

    2. The corporation pays us rent each month for use of one room in our house set aside for the business. The corporation deducts the rent from the gross income, and we report the rent on our personal taxes, but also deduct a percentage of the utilities, mortgage interest, taxes, etc. This is reported on Schedule E of our personal taxes. And this is income we don't pay FICA/Medicare on.

    3. We both keep mileage logs in our cars. Anytime we drive somewhere on corporation business, we write down the mileage. At the end of each month, the corporation issues us a check at the going rate set by IRS, which is 50.5 cents per mile in 2008. The corporation deducts the amount as an expense; however, we just deposit the checks because technically it is an expense reimbursement for the use of our cars and therefore is not income and does not need to be reported as such on our personal return.

    4. At the end of the year, the net income the corporation earned (after deducting the rent, mileage, salaries paid to us, office supplies, advertising, depreciation on equipment because the corporation owns our computers) is also reported on Schedule E of our personal taxes. The benefit here is that while the net income is reported, we do not have to pay social security or medicare on that income.

    5. It costs $150 per year to keep the Corporation active in the state I live in, Florida.

    If I'm not mistaken, if you just receive the income personally using your social security number, you have to file Schedule C, and while you are allowed to deduct the expenses of doing business, you also have to pay double the social security and medicare taxes. What I mean by that is, when you work for an employer, an employer deducts 6.2% FICA and 1.45% Medicare from your paycheck. However, when the employer sends the money to IRS, the employer has to match those amounts and sends 12.4% and 2.9%, respectively. However, when you file using Schedule C, there is no employer to pay the other half, so you have to pay all of it. Yes, our corporation has to pay the other half of what is paid to us, however, that amount is deducted as another expense against the income.

    Here is how IRS explains S Corporations. The links at the bottom of the page provide more information about starting a business and record keeping.

    In past lives, before I started working for myself, I worked as a legal secretary and full-charge bookkeeper. So, when I started my business, I already knew how to file Articles of Incorporation. I also knew how to maintain bookkeeping records and file corporate returns. So, I've never consulted an attorney or a CPA. I fill out the Corporation's return myself, and use Turbo Tax for our personal returns. This all works for me. However, everybody's situation is different, so you may want to consult professionals before deciding what route to take for yourself.

    Sorry Tracy - just getting back on here...

    THANK YOU SO MUCH!!! I think the thread should be a permanent fixture as we all will face the tax issue one way or another.

    You are such a blessing to this forum

  19. #19
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    Dont forget that you can also form an LLC and elect to be treated as a Sub S for tax purposes. In my state, this is much cheaper/simpler and a lot less strict on paperwork requirements.

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