First, you will be filing a "Schedule C" for your shopping business with your personal return. On that form you will be claiming your income and expenses from shopping to come up to a net profit or loss that will be transferred onto your 1040 (usually on line 12 of the front page of your 1040 unless they change the form this year).
You will be asked what your "Business code" is, which is simply the type of business you are in. I indicate code 541910, though I know other shoppers sometimes use different codes.
You will need to decide whether your business is done on a "Cash" or "Accrual" basis. Whatever you elect to do in the first year, you will need to do the same EVERY YEAR thereafter for the life of your shopping business.
"Cash" is probably the most frequently used method by shoppers because you claim what income you actually RECEIVE during the calendar year and what expenses you ACTUALLY PAY during the year.
"Accrual" is different in that it is what you EARNED and what expenses you had during the calendar year that you claim, whether you have received payment by Dec. 31 or not. This is definitely my method of choice because I can go through my records a week or two before the end of the year to decide if I have earned under $400 net income or not. This allows me in the last days of the year to make business purchases (camera, laptop, memory cards, thumb drives, DVR, etc.) to reduce my net income to under $400 so I am not subject to "Self Employment Tax". If I were working on a cash basis, electronic payments or a mailbox full of checks on December 31 could totally mess up my planning. And remember, if you do a job in 2010 that does not get paid until 2011, under the cash method it is considered income for 2011. Under the accrual method, if you EARNED the money in 2010, you claim it for taxes in 2010. If you never get paid for it (company went out of business, company shorted you on the payment and will not make good on the rest of it) you can claim a bad debt deduction on it on your 2010 tax return if, by the time you do your taxes, you know you will never be paid, or you can deduct it in 2011. I find this can be useful in adjusting my income as well because it can allow me a deduction for the following year if I don't need it in the current year. The deduction to income is taken in the year you write off the bad debt.
There are two things you need to be aware of in your tax planning. First is that any income over $400 is subject to Self Employment Tax. When you work with a normal employer, the employer pays half of the money that goes to Social Security and Medicare on your behalf. The total of these taxes for every dollar you earn over $400 is 15.3%. As an Independent Contractor, you must pay both the employer and employee portion of the taxes. Thus it is to your advantage to take what legitimate business expenses you can to keep your Schedule C net income under $400.
Second is that IRS expects your business to make a net profit three of the last five years. While it is indeed our goal to always make a profit, there were years like 2008 and 2009 where that was very difficult because of the high mileage reimbursements you were entitled to take and the distance we needed to travel to find work in a sagged out economy. Failure to make a profit three out of the past five years will cause IRS to make a determination that your "business" is really a "hobby" and not entitled to business deductions such as mileage, equipment, etc. You do not want that to happen! If this is your first year shopping, don't be too concerned if you have a small loss. If you have shopped a couple of years and are going to have trouble meeting the 3 of the last 5 rule, don't claim some of your expenses or postpone the expenses into 2011 to show a profit for 2010. My business worked at a paper loss in 2008 and 2009, so in 2010 I need to make a profit or I will be in violation of the 3 out of 5 year rule. IRS is not likely to challenge you for UNDERCLAIMING expenses in order to show a small profit.
Reimbursements are not taxable but all fees and bonuses are, whether you receive a 1099 from the company or not. I generally receive only one or two 1099s per year and I just file them away. Based on my records, I enter my total income as a lump sum and should there be a question, I have the itemized information to back it up from my shop sheets. Different shoppers handle what they are reporting in different ways. Some claim only their fees and bonuses on their Schedule C as income and then deduct their mileage and expenses from that. My personal preference is to claim every cent I get from the companies and then create a line item called "Reimbursed business expenses included in income" in the expenses section of the Schedule C where I subtract out all reimbursements. I do this for two reasons: First it makes the income line of the return more feasible as being a job rather than a hobby. Second, my statement of "Reimbursed business expenses . . ." pulls out all those reimbursements and makes a following line item I create called "Unreimbursed business expenses" more feasible and logical, I believe. Whenever you do a flat fee job and are required to make a purchase, that purchase becomes an unreimbursed business expense. Similarly, if you are being reimbursed 'up to $1' and walk in the store to find that the cheapest item you can reasonably locate is $5, you must spend $4 more than you are being reimbursed to be able to get the job done. I claim the $4 as an Unreimbursed business expense. You do a job where you are required to purchase a regular burger, small fries and small soda and are reimbursed 'up to' $4 and the price for those items comes out to $4.93, you have an unreimbursed business expense of 93 cents. There are shops to be done at Costco that require a Costco membership. When my membership is up for renewal, I renew when I next go for a shop and list it as an unreimbursed business expense of that job because I have no way of knowing if that shop will ever be available to me again. Of course future shops there will not have that expense until it is time to renew my membership again. Finally, you do a job, enter your report and, for whatever reason, the report is rejected. While you can't claim the fee as a "bad debt", because according to the company you never earned it, you can leave the mileage in your records to deduct and you can move the required purchase amount spent to unreimbursed business expense because it was a good faith expense that is not going to be reimbursed. (Keep track of these things! Over the year they can mount up. I always have several hundred dollars of them, though mostly from fee only shops.)
Be careful about "double dipping." I occasionally am reimbursed mileage at 26 cents per mile. While the company will list this as a reimbursement, I feel I have a choice. I can move the reimbursement over to the fees and bonuses category as taxable income and take the IRS mileage deduction of 50 cents per mile (in 2010) for those miles or I can be sure that I don't deduct those miles at all when I do my IRS mileage calculations. But I had better not decide the reimbursement is a tax free reimbursement AND take the IRS deduction for the mileage. Similarly, I need paper for my printer. I do an office supply shop with a $2 reimbursement and buy the paper for a total of $3.32. I claim the paper as a $2 reimbursement and a $1.32 office supply expense with a note on my expense sheet that it was $3.32 with a $2 reimbursement. IRS would be unhappy to see me have the $2 reimbursement and still claim the entire $3.32 as an "office supply" expense.
So what CAN you deduct? The categories that apply most to shoppers are Car and truck expenses, Repair and maintenance, and Supplies. Generally any equipment you purchase for your business needs to be "depreciated". This includes thing s such as computers, printers and other items that cost more than a couple of hundred dollars and should last for a few years. However, there is something called a Section 179 expense deduction that allows you to take the full price of equipment as a deduction in the year of purchase rather than go through the whole depreciation record keeping. The limitations on that are pretty high and you are unlikely to exceed them, no matter how fancy your equipment is. There is an area in the expense section of Schedule C that allows you to deduct for repairs and maintenance. If you take your ailing computer to the local geek, this is where that expense fits in. Very little of a shopper's equipment (except vehicles--which are covered in vehicle expense, not in repairs and maintenance) requires outside maintenance. Supplies tends to be a catch all. Paper, pens, pencils, envelopes and stamps to mail in materials, clipboard, stapler, printer cartridges, batteries, thumb drives, minor software, memory cards, etc. fit very nicely here.
The Schedule C allows you areas to claim expenses such as advertising, commissions & fees, contract labor, depletion, interest, legal & professional services, pension & profit-sharing plans, rent or lease, taxes and licenses, and travel meals & entertainment. These really do not apply to shoppers because why and how would a mystery shopper advertise? (Bribing your scheduler does not qualify as advertising :-) ) The commissions & fees line item pertains to people you employ and is an expense item--do not put the commissions and fees that the companies pay YOU here. Mostly we are not allowed to subcontract our work so would not have any commissions & fees we paid out. Interest applies to loans. The only loan even vaguely related to your business would be a car loan (and that is covered in your vehicle deductions) or interest on a credit card for shop purchases you have not yet been reimbursed for. I see nothing in the regulations that allows credit card interest deduction, sorry. You might have legal & professional services if you needed to take a company to court to get payment or for getting your tax return prepared for you. The cost of setting up company based pension & profit-sharing plans is prohibitive to a business as small as mystery shopping. By properly claiming your legitimate business expenses you are unlikely to have more than a $400 profit anyway. You do not need to deal with travel, meals and entertainment unless you are attempting to claim going to professional meetings. When you do something such as a restaurant shop or a golf shop the expenses you incur are a reimbursed or unreimbursed business expense as they are a specific requirement of the job. They are not reflected in the travel, meals and entertainment expenses at all. That line item is designed more for salesmen taking a client to dinner or a round of golf--not in the normal purview of the mystery shopper.
While you could, in theory, claim a home office deduction, it is a risky business and probably not advisable. Part of the rules include that the space must be separated by doors from other living areas of the house and used for NOTHING except your business. If you own your own home, you would need to claim depreciation on the space, furniture etc. and if/when you subsequently sell your home you will need to "recapture" the depreciation claimed as a lowering of your cost basis in your home. This is a situation where IRS can reasonably expect you to prove you did use the space exclusively for your business, and that is not easy if there are toys on the floor, a hideaway bed, personal files in the file cabinet etc. IRS specifically prohibits claiming your first landline telephone service to your home. They figure that everyone has and needs that anyway. I would even be cautious about claiming long distance calls from my home phone without careful documentation of to whom the call was made, when and for what purpose. Generally this is not an issue as most companies have a toll free phone and fax numbers. I do claim my cell phone, as it was obtained as part of a shop and is used almost exclusively for shops. I keep my cell phone records to show that I am not working up additional charges for personal use and that personal use constitutes only a very small fraction of its overall use. Thus I use it for every phone shop I perform and every company contact. Internet expense incurred is something which I have never been willing to claim with respect to my shopping. Certainly we cannot perform our jobs without an internet connection, but IRS is too specific that the deductible kinds of expenses are purchase of domain names and setting up web based sites. If someone locates information related to deduction of a portion of monthly fees I would love to have an IRS link to the information as it applies to Schedule C businesses. I do deduct my annual membership at Books-a-Million that I purchase solely to use as a nearby location Wi-Fi backup location for when my own internet service goes down (free Wi-Fi locations are significantly more distant and/or close early).
Car and truck expenses can be calculated one of two ways. Whichever method you choose, you MUST STICK WITH THAT METHOD every year as long as you are using the same vehicle. By far the easiest method is the standard mileage deduction. You note your mileage on January 1 (or on the date you started your business if you started it in the current year) and your mileage on December 31 because you will need to account for the mileage that was used 1) for your business, 2) for commuting (if you have a regular job) and 3) for "other" (which is basically personal miles). If you have no job away from your home, you will have no commuting mileage and every mile you drive is either business or personal. You need to have a record of the business miles you travel. This can be accomplished with a good mileage log in your vehicle or in some other written form. I just note the mileage with my records of the jobs I performed. For 2011 IRS will allow you to deduct 51 cents per mile for every business mile travelled prior to July 1 and 55.5 cents per mile for every business mile between 7/1 and 12/31/2011. Usually the deduction amount changes on January 1 and July 1 each year, so it is important to note your miles accordingly.
If shopping is a second job for you, your trip to and from your employer's location is considered commuting miles and is not deductible. You need to read the IRS rules carefully at www.IRS.gov to see what scenario fits you. But in general, if you stop and do a shop on your way to or from work on a reasonable commute path you probably will not be able to deduct the mileage.
The other method for vehicle deduction also requires January 1 and December 31 mileage and the number of miles you travelled for business because you are figuring a percentage of the vehicle's expenses that are applicable to the business. For the expense method you depreciate the vehicle over time, you can claim repairs and maintenance, gas, tags, insurance, etc. Word of caution, however, if you get your gas from gas shops and your oil changes or maintenance reimbursed as shops, you want to make sure you exclude those reimbursed items so you are not double dipping. Since much of my routine maintenance and a fair amount of gas is reimbursed by shops and my vehicle is worth very little except as a trade in, I do a whole lot better claiming mileage. Even if I purchased a new vehicle I would stay with the per mile deduction because I generally keep a car until it is worthless. If you trade in cars in just a few years or lease, you probably should explore the expense method.
Of course the reason that I shop, if you pay your own health insurance, it can be deducted against your business to the extent that your business is profitable. Thus, if my health insurance costs me $3100 per year, the first $3100 of profit gets wiped out to cover my health insurance. My business, then, can earn up to $3501 profit before I end up with a net profit of over $400 that would start Self Employment Tax liability. But my insurance is only deductible to the extent that my business shows a profit. Any uncovered balances get moved on over as a personal expense on my itemized deductions, where they offer me significantly less tax benefit.
Whether you do your tax return yourself or have it done professionally, keep good records. You need them, your tax preparer needs them and IRS has every right to ask for them. Are you likely to get audited? No, but if by some chance you are, history says if they find something wrong with your return you will be closely scrutinized in the future. TurboTax usually releases its annual tax software around Thanksgiving weekend to the office supply stores. Although you generally have no special offers on it until after the beginning of the year, making a quick pass at your tax return in November or December allows you to make adjustments to your Schedule C bottom line before the end of the year and can save you some real money by adjusting your end of year expenditures. I usually purchase the cheapest version that includes Schedule C information and deduct it in my supplies section of my return. For me, it is worth every dime. But you do NOT need to purchase software. If your Adjusted Gross Income is under $56,000 per year you are eligible to prepare and electronically file your own return on line (see [www.irs.gov]) and some of the providers they list may include Schedule C information. And a word of caution: About the beginning of the year you will see some tax shops that pay usually about $75 that require that you take out the Refund Anticipation Loan (RAL). These jobs will require that you are expecting at least a certain amount of refund, they require that the preparer electronically files your return, and the expenses of tax preparation and the fees and interest associated with signing up for the RAL are generally reimbursed expenses. The loans from these shops WILL be reflected on your credit report. Make sure you know exactly what you are getting into when you sign up for these shops. Since these tax preparers know they are shopped, you may not be terribly happy with having it revealed that your Schedule C is for mystery shopping, and in general it is advisable to keep any shops from having possible adverse effects on your credit score, whether they are insurance inquiry, tax, auto dealership negotiations, cell phone or other shops that access your credit report. Your credit score is worth more to you than the shops because it affects your interest rates on credit cards, any type of loan and mortgages.
For the 2010 tax returns, the early tax shops that appeared required that you have reasonable expectation of at least a $300 refund and be eligible for an RT, which is a Refund Transfer. This generally requires no credit check and the shops were paying only $70. Realize that with any tax shop, if you do not qualify for the refund product (RAL or RT) you will not be reimbursed for having your tax return prepared, nor will you receive the fee.
Finally, I cannot emphasize enough the importance of keeping good, clear records as you go along. I remember receiving a frantic PM from a shopper who had been shopping since May or June (they weren’t sure). They tossed receipts after they were paid. They thought they had worked with 5 companies—1 direct deposit, 2 Paypal and 2 by check—but it might have been more. They didn’t know if they were paid for everything they did and they never recorded mileage. Don’t do this to yourself! The only thing I could suggest is that from the websites that listed their old jobs they could reconstruct work dates, from Paypal and their bank account they could tie these payments back to jobs as long as they knew how much was payment and how much was reimbursement. Based on Google maps they could reconstruct mileage at least to some extent, but they needed to date organize their work to figure out what shops were done on the same trip. This could not possibly have been a fun process for them.
Start the New Year right! Record each job on some form of permanent record. Revisit that record and record the date you actually did the job, what the fee and reimbursement and any unreimbursed expenses may be, plus the mileage. Revisit the record again when the payment comes in so that you will know when and for how much you were paid. If your records are electronic, make certain they are backed up frequently. If they are hard copy, make sure they are filed safely away so they don’t get pitched in a cleaning frenzy. Realize that if you want the tax preferential treatment as a business you need to function as a business, and that includes good record keeping and retention.
1099s will be issued by any US based company for whom you do $600 in fees per year. Unless you have an unusual amount of work in your area or very high fees (excuse me while I laugh), you are unlikely to see any 1099s. And if and when you do see them, they are unlikely to match your records whether you are a cash OR an accrual shopper because the company claims the expense when they pay it and if you are cash you claim it when you receive it and if you are accrual basis, you claim it when you earn it. 1099s are not really an issue but rather claiming what you earn whether you receive a 1099 or not
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