If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
We recently had a discussion on my Yahoo group and I received a couple of questions in my personal email about taxes for a home business (or hobby) depending on what the poster’s definition is there. I thought I’d mention my thoughts through research and experience her e and recommend a very helpful resource. Many people wonder if they are required to report the profits they earn online. The short answer is “yes”.
If you do business online, whether it’s selling on eBay, affiliate marketing, selling a service, or direct selling, it’s taxable income. This is true even if you think you just have a hobby.
Generally, any income you receive from all sources is subject to U.S. income tax unless it is specifically exempt by law (hint: online profits are not exempt by law). That means that a lot of activities that you might not think of as taxable, such as garage sale income, gambling winnings, and online businesses are taxable.
You must file a tax return if your net earnings from self employment are $400 or more. You are self employed if you carry on a trade or business for profit. If you are selling on eBay with the intent of making a profit, then you are self employed.
To report your earnings, you should file Form 1040, and attach Schedule C or C-EZ. Schedule C is used to calculate your net profit or loss from your business, which is then reported on your Form 1040.
At this point, you may be thinking “I don’t run a business; I just have a hobby”. Unfortunately, income from hobbies is taxable as well. Even worse, you can only deduct expenses up to your hobby income, which means losses are not deductible.
There are several tax advantages to doing business online. Personal expenses, such as the use of your car, home or computer may become partially deductible, retirement savings plans can shelter part of your eBay income from taxes, and you may be able to hire your family to help shift income to members in a lower tax bracket. So even if you only earn a little money online, not only are you required to report your earnings, it may even help you reduce your income taxes by taking advantage of tax opportunities available only to small business owners.
Finally, there is a common misconception that if you did not receive a 1099 or W-2, you are not required to report your income. This is not true. All income is reportable, regardless of whether you receive a form or not.
Following are the top five deductions that small business owners fail to take on their tax returns:
1. Automobile expenses – if you use your car for business, you can deduct a portion of your car expenses. You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (50.5 cents per mile through June and 58.5 cents per mile through December in 2008).
2. Start-up expenses – business expenses incurred before you actually start the business used to have to be depreciated over 5 years. Starting after October 22, 2004, you can now deduct up to $5,000 of start-up expenses in the first year of business. Startup expenses over $5,000 still have to be depreciated (over 15 years). Start-up expenses include advertising, hiring employees, purchasing equipment, supplies and more.
3. Education expenses – you can deduct the cost of classes, seminars and other education costs if they are related to your current business.
4. Travel – when you travel for business, you can deduct the cost of the airfare, taxis, hotel, meals, and other travel related expenses. If part of your trip is for personal reasons, you may need to prorate part of the expenses. Also, if you bring your family along, only your own expenses are deductible.
5. Home office expense – many people choose not to take this deduction because it is considered a red flag. If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn’t not go into business because someone says you’re more likely to get audited as a small business owner, would you?). Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm. You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.
A recommended resource: Your Top Tax Questions Answered Teleseminar
The class comes in both PDF report and audio. I love that I can pop it into my MP3 player and listen while walking or driving. Kristine has so many eye opening and thoughtful suggestions, I am sure you will be glad you listened to her advice. Be sure to look at page 6 with a great tip if you plan to expand and do any hiring. This tip alone saves us hundreds in taxes! Also, I loved page 17 telling us the six common mistakes business owners make in filing their taxes.
Stay tuned for my next post on how to add the children into your home business and benefit in more than one way. If you’re in a hurry and need the if on now check out another resource from Kristine here: How to Hire Your Kids; a Step by Step Guide If you want to save income with the kid’s working for you and be able to take that deduction 100% next year, I’d get the ebook today. The first quarter is nearly over.
Photo credit: Shaun_the_Sheep
{ 2 comments… read them below or add one }
I have always heard you must file a tax return if you earn $600 or more not $400 has this changed?
~Linda
Thanks for the comment Linda. I looked it up to double check and indeed under self employment taxes the IRS insists we pay at the magical number of $400. You can read the boring and fine print here if you wish: (I can think of a gazillion funner things to do, however) http://www.irs.gov/