The Tax Implications of Making Money Online

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There’s nothing better than generating a decent passive income online and making money online. However, with that in mind, it is equally important to understand whether you need to pay taxes on your online income.

This is why it’s imperative that you first understand the tax implications of your online business, freelance job, or any other online gig that you do to earn passive income.

In light of this, we will talk about different online income sources and how you can pay taxes on your money.

So without further ado, let’s dive right in.

1. Affiliate Marketing

When it comes to affiliate marketing, understand that you’re essentially self-employed. You’re not working for a company or are employed by a company.

But because you must create your own company to provide those affiliate services, taking care of your income tax is mandatory.

For instance, in the US, if you’re an affiliate marketer, there’s no need to pay any sales tax. Why? Well, that’s because you aren’t technically representing any company or product. Let’s take Honeygain as an example. It’s a data-sharing app that pays you for using your internet bandwidth.

However, they also have a referral program. This is where they will pay you commissions for referring their product to others. This income is not taxable.

You’re not the one selling it. It’s the other brand that you’re promoting. Similarly, no local taxes are levied on you, as you aren’t technically selling a product.

However, you must file for your state income or self-employment taxes. So, in the US, if you’re earning $600+ every month, you must pay quarterly taxes as per the IRS.

2. Selling Online Courses

Online courses are generally taxable if the materials are intended for downloading, automated, or pre-recorded.

However, there are a lot of gray areas regarding taxation throughout the US. But thanks to the SSUTA agreement (Streamlined Sales and Use Tax), some helpful guidelines exist. These are:

If the online course is presented in real-time, you won’t have to pay any taxes.
If your students connect with you in real-time to learn what’s in the course, you won’t have to pay taxes.
The online course will not be taxed if a real human evaluates the students.

However, an online course will only be subject to sales tax if it is automated, pre-recorded, and/or the evaluation process involves any software.

3. Freelancer or Gig Worker

Regardless of whether you’re an independent contractor, a gig worker, or a freelancer, you’re legally accountable for your Medicare taxes and SS (social security).

Combined, both these factors make up 15.3% of the net profit you earn from your business. In light of this, here are some vital considerations to keep in mind when filing taxes as a freelancer:

You need to declare what type of structure you fall into. Is your company an S-Corporation, C-Corporation, or is it a sole proprietorship? Each structure comes with a different tax bracket.
You are only liable to file for taxes if your monthly income, on average, is $400+. Anything below this, and you’re not liable to pay taxes.

4. Common Tax Issues You Should Avoid

Sometimes, tax issues that come up along the way can be time-consuming to fix. So, you should be vigilant and avoid them beforehand. Here are a few of them that you can easily dodge with a little bit of precaution:

Filing prematurely: You should always file for taxes when you’re certain you’ve gathered all the relevant tax reporting documents. Filing early may ensure your process is completed on time.
Misnumbering your SSN: Your social security number must be accurately written to avoid an unnecessary hassle in the future.
Misspelling your name: If you are filing the tax, you should match the name on your SSN card. Including your second name and surname.
The wrong filing status: You should ensure your filing status is correct.
Sign all the forms: Any tax form or document that isn’t correctly or accurately signed will not be deemed valid, so better keep an eye out and inspect the forms carefully.
Inexperienced tax preparers: If you’re outsourcing your tax preparation to a third party, ensure they are experienced and reputed. Any mistakes or discrepancies on your tax forms will be your fault, not the tax preparers.

Bottom Line – Making Money Online

So there you go. A brief look at the different sources of online income that fall into the tax category. Research the tax implications of your chosen niche before starting an online business and before you start making money online.

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How To Avoid Common Business Tax Mistakes