Paying Taxes on Adsense Earnings

Do I have to pay taxes on moneys earned through Google Adsense?

That’s probably one of the most common tax questions asked by webmasters, and unfortunately as much as we all hate paying taxes, the answer to that question is yes, Adsense earnings count as “income”, which means you’ll have to show it as income on your tax return. Depending your total income and where you live, the actual percentage you’ll have to pay in taxes can vary quite a bit. As a Webmaster in the U.S., you’ll need to pay Federal Income Tax, State Income Tax, Self Employment Tax, Local taxes (if applicable) on profits made online with Adsense. Adsense earnings, as well as any and all income generated through other ad networks and affiliate programs are subject to the same taxes that Adsense earnings are.

Federal Income Taxes on Adsense Earnings:
For those earning a substantial amount of money through adsense, the federal income tax will likely take a big chunk out of your adsense earnings. Keep in mind, unlike a regular paycheck, Google does not “withhold” your estimated income taxes, so don’t spend all of your profits right away, as you’ll need to cut the IRS a check at the end of the year if your website makes a profit.

Self Employment Taxes on Adsense Earnings:
Aside from federal income taxes, moneys earned through Adsense are also subject to the Self Employment Tax (which covers Social Security and Medicare taxes for those who work for themselves). Normally if you work for someone else, Social Security, Medicare, and other payroll taxes are automatically taken out of your paycheck. Since you’re self-employed and earning money online, you’re responsible for paying Self-Employment taxes yourself. The Self-Employment tax rate is 13.3% for 2011, but it’s normally 15.3% (12.4% for Social Security and 2.9% for Medicare). Sole Proprietorships, partnerships, and even LLCs are subject to the Self Employment Tax. Savvy webmasters can legally minimize the amount they pay into Social Security and Medicare by forming an S-Corp or C-Corp, but this isn’t even worth looking into unless you’re earning over 50K/year through adsense or a similar ad network. Learn more about this on our Avoid paying Self Employment Tax page.

To learn more about the Self Employment Tax visit the IRS page on the Self Employment Tax:
http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

Other Taxes on Adsense Earnings
Depending on where you live, you may have to pay additional taxes on top of the Federal Income Tax and the Self Employment Tax. Most States in the United States for example have their own Income Taxes. I live in Las Vegas, NV and Nevada is one of the few states in the U.S. without a state income tax, so this is something I don’t need to worry about. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming are all states that do not have individual state income taxes. New York City has its own city level income tax, so if you reside in New York City, you’ll need to pay New York City income tax, New York State income tax, Self Employment Tax, and Federal Income Tax. Webmasters shouldn’t worry too much about the state income tax, as these are typically nothing compared to the two elephants in the room – the Federal Income Tax and the Self Employment Tax.

Remember – You only need to pay taxes on your profits (Revenues after expenses). If you spent $5,000 on content, SEO, and marketing and made $7,000 in revenue, you’re only paying taxes on profit, which is $2,000. If you want to reduce your overall tax burden – the best thing you can do is reinvest your profits into your website. That way you increase the value of your website and reduce your tax liability. Learn how to reduce your taxes by reinvesting your profits. (Link coming soon)

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