Many people do work for others and don't realize they are actually a small business. But the IRS considers you a small business and you must file a business tax return and pay taxes on your business income. Who am I talking about? Well....You are a "small business" if:
- You did work for someone (not as an employee) in 2008 and you will be receiving a 1099-MISC form showing the amount you were paid for this work.
- You did some freelance writing or computer work this year and you were paid for it
- You had a side job in addition to your full-time work, like Avon, Tupperware, jewelry sales, Pampered Chef, or other similar work.
In the cases above, you are considered a sole proprietor, unless you specifically have registered with your state as another type of business entity (like a limited liability company). As a sole proprietorship, you will need to fill out a Schedule C showing all of the income you received from your work this year. The Schedule C profit is reported on your personal tax return (Form 1040), along with other income you or your spouse received. AND you must pay Self-employment Tax (FICA/Medicare) on the profits from your self-employed income.
The good news is that you may also deduct any expenses you incurred in order to do this work, including advertising expenses, auto expenses, and legal and professional fees. (For a complete list of business deductions, see my article on Business Tax Deductions A-Z).
You will need records to prove your expenditures, but they can be used to offset the income you received. For example, if you received $3,000 in income from your side job as a home sales person for Avon, you can deduct your expenses for traveling to home parties and for delivering merchandise. This can reduce your profit and your tax obligation. The more legitimate expenses you can find, the lower your taxes and self-employment taxes, so it's time to get busy and find those receipts.