So I have a lot of experience and education on this topic -- and I will not presume to give you tax advice here. Nobody else on this forum should either. Even the CPA's on this forum will not presume to give you tax advice. There is too much potential liability if they tell you something that is incorrect for your tax situation and there are too many factors regarding your tax return for anyone to know the "best" answer without actually sitting down and doing your return.
What I will tell you here are some things you need to discuss with your own tax professional or look up on the irs.gov website, and how to prepare for doing your taxes.
Business or pleasure?
As a mystery shopper, you might be in business and need to file a Schedule C, or you might be mystery shopping as a hobby. In either case you must report your income on your tax return. You must report it even if you don't get a 1099. The difference between these two situations is how you deduct your expenses and whether you can deduct a loss and whether you will pay Self Employment taxes. The Self Employment tax is over 15% and applies to your Net income on the Schedule C (receipts minus expenses minus automobile deduction), but it is not charged on hobby income. So when you talk to your tax professional -- ask about these things and let him guide you.
Also ask about taking a home office deduction. Look on the irs.gov website to learn how to set up a home office that will allow you to deduct some of your housing expenses against your mystery shopping income.
And before you get excited when you see this on Turbo Tax (if you use that) -- your health insurance premium is asked about on the Schedule C, but it is *not* deducted there. It does *not* reduce your self employed income or the Self Employment taxes. Have your tax person explain this, because there are a couple of different ways this can be deducted, depending on your income level and whether you are itemizing deductions or not -- and whether you got a subsidy on the government exchanges. But it is never deducted on the Schedule C. Only insurance paid for employees, never the business owner, can be deducted on a Schedule C.
As a mystery shopper, you need to keep records to support what you put on the tax return. You need to independently (don't rely on the mystery shopping company to tell you) keep track of every dime you receive from every company, and why you received it. Shop fees and bonuses are all the same, reimbursements are in a different category. So keep track of the total and keep track of the reimbursements because you will deduct the money you paid out and got reimbursed for.
You need to also track your mileage driven for shops, where you went, the date, and why you went there. The last part seems easy, you went to do a mystery shop, right? .... or maybe you went to a conference to learn to be a better shopper. So you need to distinguish why you made the trip and have this recorded in case of an audit. Your tax professional will help you decide if you should take the standard mileage deduction or actual expenses -- so while you're tracking your mileage, also keep track of what you spend for gas, oil changes, repairs, car washes, tires, registration, loan interest -- anything to do with your car. If you use more than one car, keep track of the mileage and all expenses separately by car.
If you travel to mystery shop (or mystery shop while traveling), keep track of what you spend on hotels and meals, whether it was reimbursed or not, and then ask your tax professional to calculate if it is better to take actual expenses or "per diem" for those days you were away from home. (And have them explain the difference between "traveling while shopping" and "shopping while traveling."
You also need to keep track of anything else you spent to be a mystery shopper, such as buying a recording device or computer used for shopping, and paper and toner. You will prorate these items between personal and business, so keep a general estimate of how much time you spend on personal stuff and how much on mystery shopping. If in doubt, write it down, keep the receipts, and discuss it with your tax person.
Clothing is almost never deductible unless it is a uniform, but certain "costume" items *might* be -- such as a wig. Ask about that. The IRS is very specific about this. Don't just lump it in with "other expenses" and cross your fingers.
Do not rely on the people in this forum to tell you about these things. They are not going to be paying any penalties if they advise you incorrectly. Likely if your tax professional advises you incorrectly, they will pay the penalties for you.
Local fees and taxes
As a mystery shopper in business, you need to know your local laws for having a business in your home. Don't ask about that here; only someone in your same town would know how to answer ... and only if they actually bothered to find out. Call your local town hall and ask. If you live in an unincorporated area, call the county or parish. But find out. You might need a business license.
To EIN or not to EIN?
Having an EIN is required for some companies, and can't be used at all for other companies. Some people prefer to use an EIN to minimize exposure to identity theft. Some refuse to use it because they think getting one will allow their locality to assess fees they wouldn't assess if they used their SSN. By getting information from your town before the subject comes up, you'll know what decision to make. As a self-employed contractor, you are free not to work for companies who require an EIN, and you are also free not to work for companies who won't let you use one at all. Entirely your choice. Don't ask us to decide for you.
Most, but not all, mystery shopping companies will not pay you as a corporation. So if you get an EIN, it will be tied to your SSN and you can combine the income reported on your EIN with income reported on your SSN into the same total on your personal tax return. If you have a corporation and they pay your corporation under its EIN, then that income goes on your corporate return, and income paid under your SSN goes on your personal return. So keep those figures separately if you get involved with mystery shopping as a corporation. (If you're shaking your head going "huh?" you probably don't have a corporation anyway and this paragraph does not apply to you.)
The Bottom Line
The bottom line is, keep excellent records of all mystery shopping and merchandising (you can lump it all together as long as you are not being paid as an employee) income and expenses and mileage and have a conversation with your own tax professional or do your own research. Unless someone knows your entire tax situation -- filing status, dependents, amount and nature of any other income -- they will not be in the position to advise you what is the best way to report your mystery shopping income.
This post is just meant to give you enough information to have a conversation with a tax professional or to do some searching on the IRS website. The more you know about taxes, the better job you will do keeping your records. And finally ... be honest. You'll sleep much better knowing if you get an audit, you have all your records and have nothing to worry about.
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