(This is the tenth in a series of postings about citizen media business issues. See the introduction here. All of these entries are considered to be in “beta” and will be revised and refined as they find a home on a more permanent area of the Center for Citizen Media web site. To that end, your comments, additional examples, and criticisms are welcome and will be invaluable contributions to this process.)
Regardless of whether you sold ad space, referred people to buy things at Amazon, or hawked a couple t-shirts, as soon as you make money through your website, the government considers you to be in business. Except in rare circumstances, that makes you responsible for reporting income, and paying taxes.
If you are the business’s only owner, you are operating as a sole proprietor (assuming you haven’t formed a legal business entity like a limited liability company or corporation). If you own the business with someone else, you are considered to be in a partnership.
Net income from sole proprietorships and partnerships is taxed as part of the owners’ personal gross income (the income is “passed through”). For IRS purposes, you are responsible for paying self-employment tax (social security and Medicare taxes that add up to a little over 15%) and for filing section SE and section C of your 1040 income tax return if your business revenue less expenses amounts to at least $400. This minimum is good news for small projects, which are exempt from paying and filing if their net income totals less than $400. Partnerships must also file a yearly informational return (form 1065) that says how finances were divided. As with any other income tax, there are likely to be state requirements as well.
“The guide is intended for use by citizen media creators with or without formal legal training, as well as others with an interest in these issues, and addresses the legal issues that you may encounter as you gather information and publish your work online…[it] covers the 15 most populous U.S. states and the District of Columbia and will focus on the wide range of legal issues online publishers are likely to face, including risks associated with publication, such as defamation and privacy torts; intellectual property; access to government information; newsgathering; and general legal issues involved in setting up a business.”
The currently available sections are titled “Dealing with Online Legal Risks” and “Forming a Business and Getting Online“. The latter contains a wealth of national and state-specific information about issues such as taxes, business creation, legal documents, and nonprofit status-an idea that appeals to many citizen media types.
While the term “nonprofit” is sometimes used informally to refer to any organization that does not seek to make money or simply does not turn a profit, the legal definition is a little more complicated. Legal nonprofits are typically corporations that have applied for and are granted tax-exempt status with the IRS for federal income tax purposes. Depending on where it was incorporated, an organization may also be granted exemption from state income taxes.
The fact that corporations, not individuals, are granted tax exemption will probably be a deal breaker for most. Forming and maintaining a corporation requires a burdensome amount of time and paperwork, a host of legally required formalities, and in some states, prohibitively high fees. The Citizen Media Law Project section on How to Start a Business can give you a good idea of what goes into this process.
One way to get many of the benefits of being a nonprofit without all the work is to find a fiscal sponsor. Some organizations will extend their nonprofit status to groups or even individuals whose activities are within the scope of the sponsor’s purpose. This typically involves donations or other transactions going through the sponsor, who keeps a percentage (or charges a periodic fee), before untaxed money is passed along to you. One example of this is Fractured Atlas, which offers sponsorship to artists, acting similarly to PayPal in the way it accepts donations and charges administrative fees to withdraw.
Keep in mind that nonprofits are still responsible for paying taxes on “unrelated business taxable income.” The IRS considers this to be revenue received from any business trade or activity that is ongoing (one-time events, even if they last a week, are ok) and not substantially related to the organization’s charitable purpose. Generally speaking, a good way to gauge whether something is unrelated is if the only reason you have to call it “related” is that the revenue it generates will be used to further the organization’s cause.
Selling ad space is usually taxable, but underwriting or sponsorship-when a company donates money and is simply recognized as such by way of a logo or neutral text acknowledgement-is usually not. Most merchandise income will be taxable unless the sales come from a one-time special event or if the products being sold are directly related to the organization’s purpose (CD copies of your podcast are ok, but not a branded keychain). Affiliate income would almost never be considered related, but donations from the public would (both for you and for your donors, who can write it off of their own personal income tax). Please note that due to the room for interpretation the IRS leaves, there are exceptions to all of these rules. For more detailed information on unrelated business income, including dozens of examples, refer to IRS Publication 598.
If you still have questions about taxes, want to learn more about forming a business, want some examples of fiscal sponsors, or want to research these topics in more depth, much more information can be found at the Citizen Media Law Project. Moreover, you may well need the advice of a tax professional such as a certified public accountant.
(Ryan McGrady is a new media graduate student at Emerson College where he is studying knowledge, identity, and ideas in the information age.)