Author’s note: This post is my way of saying thanks to everybody for all the great info here. I wouldn’t have much original content to contribute in terms of search strategies, so I thought it best to contribute something about a concept I know much more about, while attempting to make it helpful specifically for the YOUmoz crowd.
If you’re a newly self-employed SEM/SEO, you’ve certainly got several things on your plate right now: link building for your clients, promoting your own website and blog, worrying that your paid links are now going to get you blacklisted by Google, etc. Well, if you haven’t thought of it yet, there’s one more thing for you to worry about: Taxes.
Now that you’re working for yourself, your tax situation is significantly more complex than getting your annual W-2, typing in a few numbers on a free online-filing site, and waiting for a refund. Don’t worry though, learning and understanding a few pieces of tax law is nothing when compared to, say, trying to understand (and stay up to date with) the Google algorithm.
The first thing to know about taxation for business owners is that you’re now subject to an additional tax beyond the regular income tax. This extra tax is called the Self-Employment tax, and it’s calculated as roughly 15% of your earnings from self-employment.
Example for clarification: Let’s say you’re single and making $50,000 per year. This puts you in the 25% tax bracket. If you take on a new project, worth $3,000 in income, you’re going to be paying 40% of that money (25% income tax + 15% Self-Employment tax) to the Federal government.
Losing 40% of every additional dollar of income you make isn’t exactly fun. So what can you do to try and minimize what is suddenly your single biggest expense? Claim as many deductions/write offs as you possibly (legally) can. Any expense that would be considered “ordinary and necessary” for your business now counts for a tax deduction. What types of things would this include?
- $190 for 2 year web hosting plan through Dreamhost.
- $79 download of Aaron Wall’s SEObook.
- $399 annual subscription to SEOmoz.
As an example of how these business deductions—sometimes called “Schedule C deductions”—work, let’s look at the $399 subscription to SEOmoz. The $399 would be subtracted from your earnings from self-employment. This would reduce your Self-Employment tax by approximately $60 and your income tax by approximately $100. After subtracting your $160 in tax savings from the $399, you can see that your real out-of-pocket expense for your SEOmoz subscription is only $239.
The next thing that you’ll need to know about is making quarterly estimated tax payments. As opposed to employees, for whom taxes are automatically withheld from their paychecks, business owners have to make tax payments four times per year. Most of the IRS literature about these payments makes them seem exceedingly complex. It’s completely misleading. If you make less than $150,000 per year, all you have to do is divide the total amount of tax you paid last year by four, and the answer is your quarterly payment amount.
One final caution about taxes: the rules for deducting purchases of computers and related hardware are a bit different than the rules for other expenses. When you buy equipment that will last you more than one year, your deduction will be broken down over multiple years as well, rather than being taken entirely up-front when you pay for the item.
There is, luckily, an exception. If you buy equipment and use it more than 50% of the time for business, you can fill out a special form (Form 4562) that will allow you to deduct the business-use portion of the cost all in the first year. For example, if you spent $3,000 on a computer, and you use it 70% of the time for business, you could fill out Form 4562 and claim a deduction for $2,100 in the year you bought it, rather than having to wait to get the full amount of the deduction.
