(Editor's Note: This article originally appeared in the February 2002 issue of my free monthly e-zine "Perfect Work-At-Home Job Update". To subscribe, CLICK HERE)
Cathy--thank you for kindly allowing me to share this great information with my readers!
Well, it is almost tax time. Are you ready? If you kept your expenses and payments recorded and have your receipts you will be ready to file your taxes. If not, you are in for a good learning experienceOne that will be not soon forgotten.
**Disclaimer (You knew this was coming!)
All advice given is from my own experience and that which I have gleaned from various sources. I am in no way a tax professional or consultant. As with any free advice, mine or otherwise, take it for what it is worth---FREE! Please consult your tax preparer or professional with any questions as to how you should file your particular income tax return.**
The $600 Myth
There is a misconception that as long as your yearly IC (independent contractor) income stays under $600 per company you do not have to claim that income. Yes, it is true that companies are required to provide you with a 1099 if you make $600 or over per year for their company. But you are still required to file a Schedule C for your total IC income from all companies that you worked for, even if you make less than $600 and don't receive the 1099. In fact, you are to file a Schedule C no matter how little your yearly total IC income is. I think Milton Tabor sums it up quite well when he says "I do report all of my earnings. The "we do not report under $600" is fine for the MS companies but I do not take the risk. If they are audited then the IRS will contact you about any shopping. There is no minimum with the feds except minimum security prison."
The only way out of filing is if you made so little income from all your sources of income (including wages and self-employment) this year that you are not required to file taxes at all. (Refer to the IRS guidelines for those who must file.) Even if you do not have to file a return it may be to your advantage if you are due a refund or are eligible for a earned income credit.
So, where to start? The IRS lists Forms and Instructions that are available online. The IRS also offers Fill-in Forms that allow you to enter information while the form is displayed by an Adobe Acrobat 3.0 (or later) product and then print the completed form out.
Tip: Be sure to click on the hand icon in the Toolbar when viewing the fill-in forms. It is called a "Hand Tool" and allows you to type on the form. Adobe Acrobat Reader ® is free software that lets you view and print Adobe Portable Document Format (PDF) files. With Acrobat Reader, you can also fill in and submit Adobe PDF forms online. Review the IRS Fill in Form Instructions.
Filing your Return
You must file a return using the 1040 form if you had net earnings from self-employment (i.e Independent Contractor). Because of self employment earnings you cannot use 1040EZ or 1040A. You can use the handy Fill-in 2001 Form 1040. For more details see the 1040 Instructions .
Profit or Loss from a Business
Use Schedule C to report income or loss from a business you operated or a profession you practiced as a sole proprietor. You need to include ALL income earned as an IC, even if you did not receive a 1099. ALL income you receive from any company you work for will be reported to the IRS, even if it is a nominal amount. You are an expense that they will claim and not overlook!
Schedule C is also where you deduct your business expenses. These are the current operating costs of running your business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business, trade, or profession. An expense does not have to be indispensable to be considered necessary. You deduct your business expenses on Schedule C or the simpler Schedule C-EZ if your business expenses are under $2,500, you do not have inventory or employees, you use the cash method of accounting, and certain other requirements are met. For more details review the Schedule C 2001 Instructions. For more details about Business Expenses, see Publication 535.
Deductible Expenses
Advertising--I will be deducting my biz cards here.
Car and Truck Expenses
Working as an IC If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits). If you use your vehicle for both business and personal purposes, you may deduct only the cost of its business use. Your expenses, divided between business and personal use, can be based on the miles driven for each purpose. You can generally figure the amount of your car's business expense one of two ways: the standard mileage rate method or the actual expense method. If you qualify to use either method, figure the deduction both ways to see which gives you a larger deduction.
For 2001, the standard mileage rate is 34.5 cents a mile for all business miles driven. If you use the standard mileage rate, add any parking fees and tolls incurred for business purposes. If you use the standard mileage rate, do not compute or deduct depreciation for the car or truck. Depreciation is an expense that is used with the actual cost method.
To use the actual expense method, you must determine what it actually cost to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, and depreciation (or lease payments) attributable to business miles driven. Also include parking fees and tolls attributable to business use. The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. The documentation you should keep for each of these expenses can be found in Publication 583, Starting a Business and Keeping Records, and Publication 463 Travel, Entertainment Gift and Car Expenses.
Working as an employee If your employer uses a non-accountable plan to reimburse you for the expenses, the reimbursements should be included in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non-accountable plan with your wages, salary, or other compensation and report the total on your Form W-2. Your employee business expenses may be deductible as an itemized deduction.
NOTE: If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, the reimbursement should not be included in your wages on your Form W-2, and you should not deduct the expenses.
For a definition of Accountable and Non-Accountable plans see Publication 463 Travel, Entertainment Gift and Car Expenses or, Publication 17 Your Federal Income Tax, Chapter 28.
Repairs and maintenance Include labor, supplies, and other items that do not add to the value or increase the life of the property. Do not deduct the value of your own labor. Do not deduct amounts spent to restore or replace property; they must be capitalized. This is where I would deduct if I had to have my computer fixed at the shop or replacement parts that keep it running.
Supplies and materials. Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. You can also deduct the cost of books, professional instruments, equipment, etc., if you normally use them up within a year. This is where I will deduct my office supplies such as copy paper, erasable pens, white-out, computer supplies such as printer paper, ink cartridges, postage and envelopes.
Depreciation If property you acquire to use in your business has a useful life longer than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. This includes the business use of your computer and software, laptop, cell phone, pocket recorder, stopwatch, Digital Camera, etc. Depreciation spreads the cost over more than one tax year.
As an example, a computer that you purchased for your business would be reported on Form 4562, Depreciation and Amortization, Part V. A computer is depreciated over a 5-year period. You also have an option to expense it in one year (a section 179 deduction) on the business portion, Form 4562 Part I if the computer is used more than 50% for business and if the business had taxable income at least as great as the section 179 deduction claimed. For details see How to Depreciate Property Publication 946 .
Office Expenses This is where I will be deducting the business portion of my Internet fees since most all my work requires access to the Internet. I will also deduct any unreimbursed printing, copying, and fax charges.
Phone Service You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.
Business Use of Your Home Whether you are an employee or self-employed, you may be able to deduct certain expenses of using a part of your home for business purposes, subject to limitations. The amount you can deduct depends on the percentage of your home used for business. Your home office may qualify as your principal place of business for deducting expenses for its use if you meet the following requirements: You use it exclusively and regularly for the administrative or management activities of your trade or business, and you have no other fixed location where you conduct substantial administrative or management activities of your trade or business. In general, because of the exclusive use rule, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes.
Some of the deductible business uses of the home expenses may include the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, painting and repairs. You may not deduct expenses for lawn care or for painting a room not used for business.
If you are an employee, use the worksheet in Publication 587 to figure your deductions. As an employee, you must itemize deductions on Schedule A, Form 1040, to claim expenses for the business use of your home.
If you are self-employed, use Form 8829 to figure your business use of the home deductions and report those deductions on Schedule C, Form 1040. For details, see Publication 587 Business Use of Your Home.
Self Employment Tax
You must file Schedule SE and pay the SE tax if your total net earnings from self-employment (from other than church employee income) were $400 or more. From the bottom line of my Schedule C I get the combined total net earnings from all the companies I work for as an IC. The SE tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using 2001 Schedule SE. Social security and Medicare taxes of most earners are figured by their employers. Also, you can deduct half of your SE tax in figuring your adjusted gross income. Employees cannot deduct social security tax. For more details see the Self-Employment Tax Publication 533 and the 2001 SE Instructions.
Again, I am in no way a tax professional or consultant. Please consult your tax preparer or professional with any questions as to how you should file your particular income tax return. (Fees paid for tax advice related to your business and for preparation of the tax forms related to your business are also deductible on Schedule C!)
Copyright 2001 Cathy Plumb
Cathy is the host of Cathy's Corner2, a forum for Mystery Shoppers and Merchandisers.
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Bonus: Tax Q&A From The February 2002 "Ask The Coach" Column in "Perfect Work-At-Home Job Update" E-zine
(to get your free subscription to my e-zine CLICK HERE)
Question: I get confused on reimbursements--what gets declared, and what doesn't?
Answer From Melanie: Depending upon the nature of the reimbursement, it may or may not be considered income. For example, if you are reimbursed for priority mail, that's not considered income, but you also cannot then claim the priority mail postage as a deduction.
Regarding reimbursements such as restaurant mystery shops, according to Ruth Perryman, a tax expert on mystery shopping matters (e-mail: perryman@web2riches.com), reimbursements that
are "necessary and ordinary" are not taxable. Since it's both necessary and ordinary to purchase a meal in order to evaluate a restaurant (how can you write your report otherwise), any reimbursement is therefore non-taxable.
The only time a reimbursement is taxable is in the rare cases when the reimbursement is more than you spent (there is a MS company that pays $5 reimbursement for a fast food meal that
always costs less). In this case, you'd have to pay taxes on the reimbursement amount that exceeds your purchase amount. One caveat, if you receive Form 1099 that includes the
reimbursement amounts, you can do one of two things. Preferably, you should contact the company, tell them they sent you an incorrect 1099 and ask them to send a revised one
(I say preferably because educating MS companies help all mystery shoppers). If you choose not to go this route, then you should claim the full income shown on the 1099 and expense the
reimbursement amount on the 1099. In other words, even though you claim it so your business income matches your 1099, it still has no impact on your taxes.
(Copyright 2002, Ruth Perryman)
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Guest features are provided for your information and may not represent the views of the publisher.
These articles offer information on the subject matter of mystery shopping. It is not intended to substitute for legal or other professional advice. Readers should consult with a professional whenever expert advice is needed. As laws and regulations may change from time to time, it is recommended that readers contact the appropriate authority to assure compliance with applicable statutes.
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