I think once the new year starts I am going to do this like a business...pros/cons/yays/nays/pitfalls/misc...insight from people who've done it...Discuss!

IMHO it is the only way to handle it. When you treat it as a hobby you get no advantage of deductions against your income. When you treat it as a self-employment business you can deduct the same kinds of expenses that other small businesses enjoy: mileage, equipment, supplies.

Not sure if I asked this before...lets say I start this as a business and I buy a car for doing some shops...is that an expense I can write off against the business' profits? Am I making sense?

Someone asked it recently, perhaps you. There are two methods of deducting your vehicle. The first is to keep track of the actual miles traveled for shops and multiplying that by the IRS per mile allowance. For 2016 that allowance is 54 cents per mile and IRS has not yet released what it will be for 2017. The allowance is to cover the costs of the vehicle, repair, maintenance, insurance, licensing, and gas. You need to keep a written record of the mileage. If you have another job in addition to mystery shopping you cannot deduct 'commuting' miles to that job, even if you stop along the way to do a shop.

The second method is the actual costs method where you will be calculating the depreciation of the vehicle, keeping actual costs of repair, maintenance, insurance, licensing and gas (gas, oil changes and maintenance that not already reimbursed by shops). Then using the mileage for the year, determine the percentage of miles driven as commuting, shops and personal miles. If you drive 10,000 miles in the year and 2000 of those are for shops while 8000 are commuting and personal miles, you would be allowed claim 20% of the expense as a business expense.

The kicker is that whatever method you choose, you must stay with that method for as long as you own that vehicle and use it in your business. Actual costs might serve you well in the early years of the vehicle but in the long run the per mile is not only easier to document but likely to yield you a larger deduction. My truck has been fully depreciated for years yet I still get that 54 cents per mile for 2016.

Thats something to consider. Sounds like the latter would be the way to go. Miles might be easier to keep track of these days with apps. Thanks for the advice!

So in theory lets say i make $100 in shop fees...and at 54 cents a mile my "expenses" amount to $150, does that mean im operating at a loss and wont be taxed on the $100 ?

In theory, yes. In practice, maybe.. In tax planning, not so much. Here is the problem. Although we may loose money (have a tax loss) on some MS trips, and even for a whole year when in "start-up" mode. It is up to the tax payer to provide evidence that a losing year is part of a business development, not using a hobby to claim a tax loss. So, there are some rules of thumb that the IRS uses about how many years out of, say, five years you can show a net loss without triggering questions about the nature of the endeavor. And, if they decide that you really were using a hobby to generate tax losses, you will owe taxes on all of the income for the years in which you claimed losses, since they will declare that none of the expenses of your "hobby" were deductible. Penalties and interest on back taxes may result, as well.

Some posters have taken a "the sky is falling" approach to this information in the past. However, there is no evidence that anyone at the IRS is going to be concerned with a few shop routes that throw off loses, such as your example, as long as there is a profit for the tax year. But, several years of tax losses would be a very different matter for a small business. (Huge business enterprises do, routinely, have legitimate huge tax loss years, sometimes back-to-back. And, they expect to be audited when this happens. See recent business/political news stories.)

For a small business, this is not rocket science, and the Premier version of TurboTax will walk you through sorting it out very nicely. In addition, I hope that Flash will return to comment with a more exact description of the rule of thumb concerning frequency of tax loss years. She has much more experience (and I do NOT mean experience of tax loss years!) than I have.

Thats some great insight. I figured a discussion woukd bring out such insight! Reason i mentioned the loss part is we lived in one state and moved to another state. Wanted to see how those deductions would affect doing shops in both states. Im sure the travel to home state wont coubt as business if the whole family goes on a trip back home and i pick up a shop there before i leave.

Not if you pick up one shop or two.

What I do when I go from MD to CT for Thanksgiving (with an overnight stop at a friend's place in northern NJ) may be something like what I did last month:

Drive to Manhattan, do 2 shops and an overnight hotel shop;
do 3 more NYC shops, plus another overnight hotel shop;
drive out to Long Island to do a New home shop, return to the City for yet another overnight hotel shop;
drive to my friend's house on New Jersey, via a shop in Jersey City.
Note the odometer reading there, and spend the night.
Drive to CT and back for a strictly personal visit.
Return to friend's NJ home overnight, note odometer reading ther so that I can subtract the personal mileage from the total trip miles.
Drive home.

Now, if, in addition, you own a rental property where you used to live, you could make the trip your annual inspection trip and get a whole different set of deductions for your Schedule E for the trip. (But, no double dipping!)

That trip will show a very nice net taxable income, even after taking all expenses.
Note that the claimed business miles will be just the same as if I only did the shopping route with an overnight near the last shop. Meals and tolls (tons of tolls) will be deducted solely for the Home-NJ friend's home-Home segments of the trip.

Alternatively, I could have driven to CT with no shops enroute, and then done a whole bunch of shops, over several days in CT, while with family. In addition, it would be iffy if my stay in CT were in a hotel where I had to take 2 rooms, instead of 1 to accommodate my family. And, meals for the family along the route would not be deductible except for MY portion.

Another tip: if you buy a gently used car of good reliability and great gas mileage, skip the depreciation option! You have already avoided the (real, not tax based) losses from the first couple of years, so the generous IRS mileage allowance is a great option, and usually the best. (The first owner took a real hit, of course!) My 2008 Honda Fit was bought at 2 years old for less than 2/3 s of what I know the previous buyer paid (And, he got a good deal.) It costs me about 22 cents per mile to run. Year after year, it makes Consumers' Report list of the most reliable small cars to operate. I have, so far, replaced the battery and done routine maintenance. Later this year it will be due for its FIRST tune-up. I also expect to replace all four tire later this year and may have a brake job.

Whatever size of car you expect to need for your family and business, buying the best rated used car is definitely the way to go.



Edited 1 time(s). Last edit at 12/04/2016 04:55PM by walesmaven.

Isn't there a way we can pay in taxes each month anyway, though as an independent contractor? My regular job holds $150 extra out each pay check per my request but I thought those who did this as their sole income had a way to pay in directly to ole Uncle Sam?

Unless it has changed, IRS expects to see profitability 3 out of 5 years at least for your business. I try very hard to show at least SOME profitability every year, though in 2008 and 2009 that was difficult to do because the mileage reimbursement rates were high and with the recession many of the franchise locations shopped went out of business or stopped being shopped. That meant that shops were fewer and far between as well as there being many desperate unemployed folks taking every shop they could find, regardless of fee.

There are also other identifiers as to whether you are operating a business or a hobby. One of those is record keeping. IRS has every reason to expect a business as keeping good records. They generally want a 'record of original entry', which is readily handled with a spreadsheet that shows dates, client, location shopped, fees agreed to, reimbursements agreed to. They will then want the basic accounting of receivables and payables. And whether you use the IRS mileage or actual cost, you need contemporaneously kept mileage records. I find it easiest to keep all records on a spreadsheet that is my 'record of original entry' and gets updated with the mileage attributable to each route and updated again when payment is received. It is an annual record from Jan 1 - Dec 31 and once I have prepared my taxes, a copy is printed and put with my file copy of my return. IRS also wants supporting documentation, and this is primarily receipts to prove that money received as reimbursements is just that. I run all money received through one account, transferring PayPal payments to that account, having direct deposits go to that account and depositing checks received to that account. The statements of that bank account thus link in an easily visible way to my spreadsheet to verify money received. A business is to keep their records 'forever' and I do keep (and adequately backup) spreadsheets for 'permanent' accessibility, though paper receipts and shop collateral I dispose of 4 years after I filed the return.

clinen,
There is a system of quarterly tax payments set up by the IRS, for your convenience. TurboTax or your tax preparer should walk you through the set=up so that you are not over-contributing to your estimated taxes. There are several options for paying Quarterly Estimate Tax that protect you from any penalties if it turns out that you actually under paid! So, not sense in giving the IRS extra money when you can use those to eliminate that risk.

You can use the Estimated Tax Payment system regardless of whether or not this is your sole earned income. If you learn to actually make real quarterly estimates of where you will stand at the end of the tax year, you my find that you can save a LOT. Those of us who do that are now looking at what business related expenses we want to incur in 2016, or in 2017, for instance, as a way to minimize 2016 taxes. Actually, the same goes for non-business expense. If you have the option of paying your property taxes, or estimated state income taxes for 2016 in December or January, you need to know by December of each tax year which month will best save on federal taxes taxes. The same goes for charity contributions. For some folks, doubling their 2016 contributions and making none in 2017, or visa versa, will make good sense but only if they know pretty well where they will have other income/expenses in the current tax year and an educated guess about next year.

It really pays to become an educated tax payer!

@clinen11 wrote:

Isn't there a way we can pay in taxes each month anyway, though as an independent contractor? My regular job holds $150 extra out each pay check per my request but I thought those who did this as their sole income had a way to pay in directly to ole Uncle Sam?

Several quick notes. If you pay into the system during the year an amount equal to your total tax liability for the previous year, you will not be subject to penalties. So if in 2015 you had $1,234 withheld and paid another $200 with your return to cover your remaining liability, $1,434 was your 'total liability' for 2015. If you pay at least that amount into the system for 2016 you will not be subject to penalties even if your total tax liability jumps to $3,000.

A second scenario to having no penalty is to owe IRS less than $1000 beyond money already sent in or withheld. Lets use the numbers from above. In 2015 you had a total tax liability of $1,434 and in 2016 you paid into the system only $434 but your tax liability jumped to $3000. You would be subject to penalties. If, however you had paid in $2,001, you would not be subject to the penalty.

Third scenario is the 90% rule. If you have paid into the system at least 90% of the total tax liability you are not subject to penalties. In this case if your total tax due was $3000 and you had paid in at least $2700 you would not be subject to penalties.

For those who only have mystery shopping income it may make sense to file quarterly payments with IRS of at least what their tax liability was for the previous year (assuming it was also solely from mystery shopping). For those with other employment as well, extra withholding from paychecks may make sense, though if you are taking advantage of the business expenses you are entitled to, I suspect $150 per check is likely to be excessive.

@walesmaven wrote:

clinen,
There is a system of quarterly tax payments set up by the IRS, for your convenience. TurboTax or your tax preparer should walk you through the set=up so that you are not over-contributing to your estimated taxes. There are several options for paying Quarterly Estimate Tax that protect you from any penalties if it turns out that you actually under paid! So, not sense in giving the IRS extra money when you can use those to eliminate that risk.

You can use the Estimated Tax Payment system regardless of whether or not this is your sole earned income. If you learn to actually make real quarterly estimates of where you will stand at the end of the tax year, you my find that you can save a LOT. Those of us who do that are now looking at what business related expenses we want to incur in 2016, or in 2017, for instance, as a way to minimize 2016 taxes. Actually, the same goes for non-business expense. If you have the option of paying your property taxes, or estimated state income taxes for 2016 in December or January, you need to know by December of each tax year which month will best save on federal taxes taxes. The same goes for charity contributions. For some folks, doubling their 2016 contributions and making none in 2017, or visa versa, will make good sense but only if they know pretty well where they will have other income/expenses in the current tax year and an educated guess about next year.

It really pays to become an educated tax payer!

I may have to suck it up and get a tax person next year. I file my taxes myself each year because I've usually had such a simple situation with being single, head of household, sole income, student loan interest and just a walk through on the software and edit any updates from new tax laws.

We were required to file our own taxes as business students with the help of tax professors and tax associates along with the software--mine were simple and still usually are, but I've continued to use my tax program and self-file since graduating. I was not an accounting major, but I did have to take a course each year in the basics and usually my tax situation is simple so I haven't read into anything outside of my own situation.

The last two years, I just claimed the extra income as other earned income because it was hobby money and until the middle of this year I was only working with one company that had work in my area. I may do the same this year and file the extra mone since my records are weak other than receipts and shop pays-- from January through July I may have "made" $100 each month, maybe.

I can catch up/start fresh January 1st, 2017 with the nitty gritty and start a little more seriously. I do this in addition to my regular job but with my head of house hold, single status I usually get money back. Toss in student loan interest, payments on property, major medical and dental, donations, and such and it put me into the poverty income bracket the last few years. Ah well, good info though And tons of it! I'll have to study up this month and my Alma Mater helps prepare taxes FREE (and it's accountants who do it and provide a guarantee ) for anyone earning under $40k a year (I made $18k last year when I was finishing my second degree).

hopping income it may make sense to file quarterly payments with IRS of at least what their tax liability was for the previous year (assuming it was also solely from mystery shopping). For those with other employment as well, extra withholding from paychecks may make sense, though if you are taking advantage of the business expenses you are entitled to, I suspect $150 per check is likely to be excessive.[/quote]

I tend to have them hold out extra too so I can get back a larger refund. The last 12 years of taxes I have been entitled to a refund and over the past 4-6 years I have had extra taken out and I don't miss it. It's great to get it back at tax time and stamp down some debt. This year I opted to have a larger amount of $300 a month taken out because I knew I would have some mystery shop income but also in hopes of an even larger refund

You would do better, I think, to use that extra withholding to pay any consumer (i.e. credit card) dept, since it is costing you interest each month, and IRS is not paying you any interest to keep that money! If you have debts, you are actually losing money by "banking" those funds with the IRS. Instead of automatic withholding, use those same funds to set up an automatic payment to a creditor, or two! And, if it was me, a small part of it would go to an automatic deposit to a savings account, in hope that that account could help me avoid using credit when an emergency arose.

Before tax time, spend some time getting to know IRS schedule C. It has all the information about what you can deduct for the business. [turbotax.intuit.com] or [www.thebalance.com]

Zero credit cards here and minimal debt (have a car payment but I'm purposely dragging it out to help build credit). I've saved enough to pay off the car but I just can't bring myself to do it while I'm reaping the benefits of making payments It's worse not having established credit than it is having bad credit, I think in some instances -_- I've thought about getting a $500 credit card just to pay the bills with that I will pay off immediately and any other number of options. Being a young'n out of college where I was a dorm rat with no bills... no phone... nada... getting credit established is frustrating.

Also, I did a 17 hour work day with driving so I'm a little frazzled. The English words are all jumbled

If you now have a history of paying a utility bill, that can be used in many instances to establish credit. You may want to start with a credit union, since they are more understanding of folks in your situation. There are many shops that will be out of your reach without a credit card. BUT, you would be wise to start with a low credit limit and use it ONLY for shopping activities.

That's also a Catch 22. I bought a single wide home cash on hand to get out of a crap relationship so no payments there (it was from a neighbor) and I rent the land which covers water, sewer, trash, etc. in a monthly payment. I've only really recently realized I need to start working on credit. I looked at my report and my payment history is 100% but I have two bills that I believe get reported. I have 2 lines of credit open and only one inquiry on the entire report from the last 5 years... heh