5 Myths about Work-at-Home Business Taxes
If you are working in your home or your business address is your home, you may not be sure if you should pay business taxes, or whether you are a REAL business in the first place. Here are some common misconceptions about home-based businesses and their tax situations:
1. If I’m not registered as a business, the IRS doesn’t consider me a real business. Yes, they do. If you haven’t designated any other specific business form, the IRS considers you a sole proprietorship. Let’s consider some examples:
- You work from your home doing freelance writing or freelance computer work.
- You sell products like Avon, Mary Kaye, or Pampered Chef from your home.
- You run errands for people in your community, you clean houses or businesses, or you do occasional catering for parties.
The IRS expects you to report all income from all work, and for you to pay taxes on that work. No exceptions.
2. If I don’t get paid much, I don’t have to report business taxes. Not true. You must report all income to the IRS. If you worked for someone as an employee, of course, you will receive a W-2 before the end of January that shows how much income you received from that company. If you work for someone but not as an employee, and you earned $600 or more this year, you will receive a 1099-MISC, showing the income you received. If you work for several individuals or companies as in some of the examples above, even if you don’t receive a 1099-MISC from any of those people, you must report all your income from these people on your personal tax return. Schedule C is for reporting sole proprietorship income, and the net profit gets added to your other income for tax purposes.
3. If I don’t report income, the IRS won’t find out. Yes, they will. They are like Santa Claus - they’re gonna find out if you’re naughty or nice. If you received more than $600 from any person or business this year (not as an employee), you should receive a 1099-MISC, a copy of which must be sent to the IRS. And if you are audited, the IRS may look at your bank statements and ask about the source of your income. If they find the additional income, that means fines and penalties.
4. If I am not a “registered” business, I don’t have to pay Social Security and Medicare taxes. Again, not true. If you received income from business activities this year (including the examples above), you must pay self-employment taxes on the profits from that business. The information from your Schedule C will be used to calculate your self-employment income (on Schedule SE) and the self-employment tax will be added to the amount of your federal income tax. Remember, this tax is based on your profits, so if your business lost money, you don’t have to pay it.
5. If I trade services with someone, neither of us has to pay taxes because there is no income to report. Remember what I said above - the IRS wants to know everything. You are supposed to report barter income on your tax returns. Not everyone does, of course, and barter income is kind of a “no income” proposition, since neither of you is reporting income. But you also can’t deduct any expenses for doing the work for the other person.
In general, report all income to the IRS on the appropriate forms. It’s one of those “Pay me now or pay me MORE later” propositions.
I’m not a CPA, tax attorney, or tax accountant. My purpose is to give you some general information about home business, so you can ask your tax advisor for more details.
Tags: 1099-MISC, business taxes, reporting busienss income, work-at-home businessesShare This
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POSTED IN: Finances & Money, Home Biz Myths, Laws & Regulations, Laws & Regulations, Taxes
3 opinions for 5 Myths about Work-at-Home Business Taxes
Sheryl Schuff, CPA
Dec 16, 2008 at 4:59 pm
I hear these myths all the time. You’ve done a great job of explaining the truth to your readers. Congrats on a job well done!
Miranda
Dec 17, 2008 at 9:11 am
Thanks for these great reminders! It is important to realize that — even if you are a sole proprietorship — there are taxes to be paid. The government always wants a cut!
Mary Emma Allen
Dec 17, 2008 at 5:33 pm
Good information, Jean. I’m suggesting my Quilting and Patchwork readers check this post because many of them may receive payment for what they do.
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