With April 15th upon us once again, here's hoping you've successfully filed your tax return for the previous year. But, when preparing your forms, did you remember to account for your online income? Some folks feel they can safely avoid such declarations, skirting tax liabilities for their e-commerce earnings. But be aware that Uncle Sam is watching closely.
If you're busy growing and maintaining an online income (and we hope you are), now is the time to look ahead to next year to be sure you can accurately and honestly report such income and—better yet—take advantage of business-related expenses that can reduce your year-end tax liability.
Seek out a pro
Chances are, if you hadn't included online income in your tax return, you likely weren't best prepared to accurately report the extent of your earnings and expenses
First, the disclaimer (and you knew this was coming): The information provided here is intended to guide you toward a better understanding of legally reporting your online income. Always consult a licensed tax preparation expert to be sure you fully understand the tax liabilities, allowances and limitations, as they might pertain to your particular situation. 'Nuff said?
Why didn't you tell me sooner?!
If you've already filed your taxes but didn't consider legal deductions from your online exploits, don't deem this information "too little, too late." Chances are, if you hadn't included online income in your tax return, you likely weren't best prepared to accurately report the extent of your earnings and expenses. Looking ahead, though, now is the perfect time to establish a reliable record-keeping method to track your online profits, losses, and costs of doing business. Read on to learn how to position yourself for an irreproachable income statement next year.
For fun or profit?
The majority of online business owners regularly identify and declare their sales to the tax man, yet others believe they are exempt since their online efforts constitute a mere hobby—selling trinkets they've picked up during their travels and outings. The fact is that all income is taxable, even hobby income, according to the IRS.
So what's the difference between hobby income and business income? Well, it all boils down to your intent and whether you gain a profit for three out of every five consecutive tax years. For example, if you enjoy scouting garage sales and flea markets in search of goods, some that you regularly sell online for a profit year after year, you're essentially operating a business. And if the thought of tax liability seems depressing, recognize the benefits that await you when you elect to declare this income on a Schedule C form, enabling you to fairly deduct expenses from these profits; more on that in a moment.
Of gains and losses
The rule is simple: Whenever you make a profit, you are obliged to pay taxes. Even if you decide to infrequently sell off prior investment pieces such as fine art, vintage automobiles, antiques or what have you, if any such infrequent sale earns you a profit over and above your original purchase price, the IRS deems the profit as taxable income. On the other hand, if such a sale fails to recoup the original investment, you would be presented with a net loss, that which could be deemed a "declarable loss" (again, consult a tax professional in these matters). Naturally, if you're pursuing a profitable online business, you'd prefer to see your gains exceed your losses—and so would your government.
A business, no matter how small
If you enjoy scouting garage sales and flea markets in search of goods, some that you regularly sell online for a profit year after year, you're essentially operating a business
Even in light of the facts of declaring their taxable income, some folks insist they're not a business, per se—it's just "li'l ol' me." Your government thinks that's just dandy and cheerfully considers you to be a sole proprietorship.
Sole proprietorships are bona fide business entities. Even though you may have never aspired to being recognized as a limited liability corporation or as a C or S corporation, a one-person enterprise—the sole proprietorship—is nonetheless recognized as a real business.
Estimated payments
Those who have embraced the fact that they are legitimately self-employed businesspersons and are beholden to a tax liability also recognize that they're responsible to make quarterly estimated tax payments based on the income realized for the previous three months. Required payment dates are April 15, June 15, Sept. 15 and Jan. 15 of the following year. These payments are filed using Form 1040-ES (OCR). But, there's a catch when paying these taxes on your business: Besides paying a regular tax on any profit, you're also responsible to pay an additional 15.3 percent to cover Social Security and Medicare contributions.
So, when it comes time to file your annual tax return in April, you should consider reporting your business' activity using Schedule C, Profit (or Loss) from a Business or Profession, with your Form 1040.
The expense defense
Now, here's the good news: Whenever your business incurs expenses while striving to make a profit, those are probably deductible expenses. Document all your expenses and keep a mileage log throughout the year (start today!), otherwise you might cheat yourself out of a legal deduction. Although some folks try to claim questionable expenses (e.g., vehicles, vacations and so on), here are some of the expenditures that are generally acceptable deductions:
- Online auction listing fees and commissions
- Business-related postage costs
- Phone and Internet connection fees
- Supplies
- Office furniture and equipment
- Business-related training and educational expenses
- Tax preparation fees
- Legal fees
These are just some of the common deductions you can legally claim as you operate your business. Be sure to consider other expenses you incur as part of keeping your business alive and thriving, and consult your tax adviser (of course) to see what additional deductions you may be letting slip through your fingers (and into Uncle Sam's hands).
And even if you might have missed the opportunity to fully exploit the allowances due to you in your self-employment endeavor, get started today in your rigorous record keeping so you'll be well prepared each quarter and by the end of this new tax year.