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Making Money Online: When Are You a Business?

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Making Money Online: When Are You a Business?

By BobK
Published: July 15, 2010 Updated: June 14, 2011

Several small business owners recently asked:

'I am starting a website that advertises products sold by online retailers. ;m just an affiliate and will not be selling anything. Do I need a business license?'

'I want to start an online store, do I need to register as a business?'

Moneymaking opportunities are plentiful on the Internet- from selling your old books on eBay to promoting products and services for online merchants, or becoming an online merchant yourself.

Below are a few common ways in which you can make money over the Internet and the tax and regulatory obligations tied to each:

Business or Hobby?

The nice thing about the Web is that you can dabble in e-commerce without spending a lot of time and money. Many online entrepreneurs have fallen into their businesses through an online hobby or selling things around the house on eBay. However you make money online, you have to pay taxes on your income. So before you begin, make sure you read over the IRS' guide Business or Hobby? Answer Has Tax Implications, which will help you determine your tax obligations.

Affiliate Marketing

One of the most common ways in which individuals can earn money on the Web is through affiliate marketing. This is an arrangement where individual Web site owners receive a sales commission by promoting products and services of other companies.

The vast majority of affiliate marketers are individuals looking to make some extra money or website owners who want to generate revenue from their site without selling products directly.

So, le-s say you have set up a Web site that includes nothing but links to affiliate sites. Affiliate marketing is comparable to being a commissioned sales person, as a result the money paid to you must be reported on your taxes as income. Affiliate companies are required to send you an IRS 1099-MISC form (instructions) showing your earnings for the previous tax year by February 1. You report your affiliate earnings on your federal taxes using 1040 Schedule C (instructions).

Opening an Online Store

The basic rules for starting a business also apply to those starting online businesses. Whether you are using a marketplace like eBay or Etsy or starting your own Web site, you will need to make register your business with the approriate government agenices, and comply with regulations around privacy, advertising, and intellectual property.

Her's a checklist of key regulatory requirements yo'll need to be aware of:

1. Determine whether or not you need an Employer Identification Number (or EIN). Generally, if you are in business for yourself, and do not employee anyone, you do not need an EIN. Your social security number is your EIN.

2. If you plan on operating a business under a different name than you own, you may need to register your trade name with your state or local government. This form of registration is known as'doing business a' (dba) or fictitious name filing.

3. Most small online merchants operate as a sole proprietor, which does not require any kind of special incorporation filing. Other online store owners choose to form a limited liability company (LLC). Forming an LLC helps protect your personal assets in case you are sued for products you sold. In addition, you do't pay taxes on your LLC. Rather you report income and losses from your business on your personal tax return.

4. Check your local government office, such as your city cler's office, to see if you need a permit or business license. Most online merchants work from the comfort of their home. However, many city and county zoning and planning agencies require all home-based businesses to get a Home Occupation Permit. New e-tailers often overlook this requirement since all the work is done online. However, because you operate your business exclusively at home and over the Internet does not necessarily mean you are expempt from complying with local zoning regulations.

5. Make sure you understand your federal, state and local tax obligations. If you are operating your online business in a state that charges a sales tax; or levies a gross receipts or excise tax on businesses you may have to apply for a tax permit or otherwise register with your state revenue agency.

Online businesses are responsible for collecting state and local sales taxes from their customers when applicable, and paying these taxes to state and local revenue agencies.

6. Comply with online business regulations concerning privacy, advertising, and copyright. Online business owners are required to take steps to protect the privacy of their custome's personal information. In addition, if you advertise your business online, you need to ensure you are making fair and truthful statements, and complying with all applicable SPAM regulations.

Remember, these are just the basics. In future posts, w'll explore some of these topics (e.g., sales taxes), and other issues (e.g. domain registration) in more depth.

However you plan to earn money online - whether by helping others sell products or selling products yourself - you will need to pay taxes on your income and have some obligations to the government that should not be overlooked

Message Edited by BobK on 03-16-2009 04:41 PM

About the Author:



As for business or hobby, I think the best business born from a hobby because it means that it is a business that is done with pleasure. I am trader (with Forex and binary options), and in my opinion to earn money you need always a good strategy. Any business idea demands that it must have clear strategies for him or her to emerge successful. Whereas some believe that there is no right or wrong strategy, it is important to remember that some are more rewarding than others. Every strategy is mainly built on the basis of information and knowledge, therefore for any businessman to successfully participate in this trade he or she ought to seek as much information as possible on the assets that they are trading in. A sobering article. Congratulations!
i believe point #4 is very important - Check your local government office a call to your local town hall might also be a good idea to see what is required with taxes etc
Thanks for an excellent article. Any business needs promotion to get clients. Today, youtube is one of the best online marketing channels that business owners must utilize. This FREE marketing channel provides excellent clients if one knows how to use its function. Youtube is the 3rd top site in the world with over 1 billion unique visitors every month. Over 6 billion hours of video are watched every month on youtube. It is localized in 56 countries across 61 languages. Nielsen says youtube reaches more U.S. adults ages 18-34 than any cable network. There are millions of new youtube subscribers every day. Youtube is available on hundreds of millions of devices. Over 700 videos are shared on Twitter each minute; 100 million people take social action like sharing, comments, etc. Need I say more? Imagine the number of customers you will get if you use youtube to promote your product or service. For details on how to use the functions of youtube you can go to http://youtubeforpromotion.com/
Thanks for detailing this out BobK, I do have a friend who is working at home and do affiliate marketing and keep on asking me, will he be sue of not paying taxes when he is earning? I will share this link and I’m sure he will give an idea on how much he pay for taxes.
Hello. Internet is an endless workplace so people can make money even more than real life, at least theoritacally :). But with a realistc approach we can say that we can earn reasonably from internet. A website or blog is necceassary for some methods but for most of them it is not. Some are very classic, some are proven and some are totally new. I spend some time to find out the answer but most of the resouces points out same methods. But you may try http://www.find-tr.com . This website contains several interesting online money making system. Anyway, I wish luck to you. Don't give up :)
Awesome post Bob. The main thing in making money online is determination. Everybody thinks that they could make million of dollar online very fast and low cost way.But infact,its really very hard. The main thing is hard determination and labour.I created my Ludus Love website nearly 9 month ago,after huge labour ,I am finally able to draw some traffic ,thus its the labour.. I guess affliate marketing is the best way to earn money.
Awesome post Bob... really like the strong alternative paths that you can take when making money online. This post is relevant to a blog post i created not too long ago that pertaining to finding out what to sell to make money on the internet
I'd also like to add to also "keep it simple". We all remember the popular acronym KISS, right? When signing up for a business license/registration, the simpler the better. A few years back I formed an LLC with a DBA. It made sense at the time but became a nightmare during tax season. I should have consulted with an accountant, but was too stubborn and convinced myself I could just figure it out in the end. For anyone selling online: Just sign up for an LLC at your state registrar. This can be done online and usually you can get approved in a few business days. An LLC *may* provide better legal protection than a sole-proprietor, depending on your state (or commonwealth, territory, etc) of residence.
As I am starting an online business and I am self employed, do I need to incorporate and what Federal guidelines do I need to follow.
Nice article and really interesting, from my point of view internet its going more competitve so its more difficult to obtain results...


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