What Kind of Income is Adsense Income from Hubpages for Tax Purposes?

Up until recently, I hadn't received anything for my writing on Hubpages, and the whole idea of generating income from writing hubs seemed like more of a joke than a plan for the future. However, this year I received my first Google payout, and the next payout looks to be not too far in the future. Next year, I will report this income to the IRS. So the question occurred to me: what kind of income is this, for tax purposes?

For about two years now, I have seen people in the forums claim that Google Adsense income from Hubpages is passive income. Why do they say this? Well, because we don't get paid for working, and we don't get paid less when we don't work. Hubpages income, paid through affiliate programs, is completely unrelated to the number of hours we work, how hard we work or any direct effort that we put into our work.

For nearly two years, I worked tirelessly on my Hubs and got paid nothing. What I was paid this year was a return on the investment that I made many months ago. I don't get paid by the word or by the page, and quite frankly I don't get paid for writing well, or for any other technical, measurable criterion. I get paid when the words I put together miraculously generate income as ad copy, even though that's not originally why I wrote them.

Here's another reason many hubbers think of their adsense income as passive income. I could stop writing today, and I could keep my hubs up, and they would continue to generate income all on their own. I could go on a vacation, or get hit by a truck and fall into a coma, and I would still earn from the hubs I have already produced. In fact, I could die, and my heirs would continue to collect income from my hubs. If the economy doesn't completely collapse, if Google and Hubpages don't go brankrupt, my hubs could continue to generate income for my children, my grandchildren, and future generations of humans and chimpanzees as yet unborn.

Now that definitely sounds like "passive income". Only it's not. Not for tax purposes.

The Internal Revenue Code recognizes three basic kinds of income:

• passive -- which includes rents and income from a business in which the taxpayer does not materially participate
• earned -- which includes payment in return for work, employment income and income earned from running a business as an active participant
  
• unearned -- royalties, interest, dividends, pensions, annuities and other specifically named benefits.

Passive income is good to have, because you are allowed to carry forward losses. Unearned income is good to have, because it is not subject to social security taxes, which fall disproportionately on those who earn less. (You only pay social security or self-employment taxes on your first $106,800, and anything above that sum is free from that tax.) Earned income is good to have only if you hope to receive public benefits, such as the "earned income credit" or if you wish to eventually collect social security or disability benefits.

For those of us who want to live and let live, passive income and unearned income are preferable. But where do we stand with Google Adsense? What kind of income is that?

From the above description of the categories, it's reasonable to conclude that revenue from Adsense is not passive income for tax purposes. If you own rental property, the rents you receive, no matter how hard you had to work at your rental business, are considered passive income by definition. In every other case, you have to show complete uninvolvement with the business in order to claim that the income is passive.

Why this rule about rent? Ours not to reason why. It just is, so let's move on.

The next possibility is that Adsense revenue might fall into the category of "unearned income", just like royalties. After all, in their help page, Hubpages refers to our earnings as "royalties."

However, the word "royalties" is always in quotes, and it is used interchangeably with the word "commissions." Commissions, of course, fall into the category of earned income. In any event, none of this information from Hubpages is about tax liability.

So let's go and see how Google reports our income to the IRS.

Google requires us to file a W9 form in order to receive payment and they report our income to the IRS using a Form 1099.

Google considers us to be independent publishers and hence it grants us a Publisher ID. The revenue we are paid from Adsense is like ad revenue received by a publisher from an advertiser. But rather than being in an arms-length transaction with Adsense, the way an independent publisher is with its many advertisers, we are seen as independent contractors working for Google. In other words, they don't ask for the privilege of posting ads on our content. They see us as creating content to go with their ads!

We are not employees, because they do not pay us a wage, and they do not tell us precisely how or what to write. But we are also not receiving royalties in return for granting them the right to publish our content. We are writing ad copy for them, and they are paying us a commission on sales generated.

Well, anyway, it seems to be something like that. That's not my view of my relationship with Google -- it's theirs! It stands to reason that their view will prevail when it comes to assessing taxes.

If we are independent contractors with Google, then all our revenue from Adsense is earned income and subject to not only regular income taxes, but also self-employment taxes. If I even earn so much as $400.00 per year from Adsense, then I will have to pay, according to the social security report I recently received in the mail: "12.4 percent in social security taxes and 2.9 percent in Medicare taxes" on net earnings.

That's a really big bite out of a very small sum. Of course, I could avoid incurring these taxes by making sure never to reach the $400.00 threshhold. I could turn off my ads to all my hubs the moment Adsense shows that I am close to earning $399.99 for the year. But that seems like an awful lot of work for something that was touted as "passive" income!

(c) 2010 Aya Katz

DISCLAIMER: I am not a tax professional nor an employee of the Internal Revenue Service. The article you have just read represents my lay opinion and should not be relied upon in order to make any projections or decisions concerning your income or how to report it. Please refer to the Internal Revenue Service, the Tax Code or a tax professional in order to make informed decisions about your own income, how to report it, or what tax category it falls under. Please do not rely on any statements in this article to your own detriment. No representation has been made about the accuracy of the information presented.