Clarification needed on taxes

As the end of the year approaches, I have been researching all of the threads on the forum (as well as the IRS website) regarding taxes. I understand tracking income and reasonable business deductions with the goal to show under a $400 profit to avoid paying self employment tax. My question is, if you are able to show enough deductions that are within reason to not have to pay a self employment tax, (let's say you were able to get it down to $350), you still have to pay state and federal taxes, correct? If so, is the state and federal taxes based on the $350 or the amount before deductions?

Many thanks!

Edited 1 time(s). Last edit at 12/22/2014 01:35AM by Mbrookes.

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Mbrooks, you will need to complete a Schedule C for your shopping business. The net profit or loss for your business will show at the bottom of the Schedule C and this number is carried to the 1040. The net profit or loss figures into your total income, which may or may not be taxable depending on the amount of income, deductions, dependents, etc. Your state and federal taxes will be based on the total of all your income, which will include the net profit or loss from your Schedule C. Income taxes do not apply individually to the net profit from your shopping business unless it is the only income you have.

Mary Davis Nowell. Based close to Fort Worth. Shopping Interstate 20 east and west, Interstate 35 north and south.
I get confused because I am adding it to my husband's income (filing jointly) and my mom mentioned that I could be sabotaging myself by placing us into a higher tax bracket, thus, making my secondary income a moot point. I am not well versed when it comes to taxes, so was trying to figure it out.
It's true that if you made a substantial amount of money it may push you into a higher tax bracket. If you take all the deductions to which you are legally entitled, that is not likely to happen. Your gross income will be fees and reimbursements received but you have a lot to subtract from that to reach the net profit. Do not forget to subtract your required purchases on shops as an expense and don't forget to take the deductions for mileage, home office, and all other reasonable expenses.

You can download the instructions for the Schedule C from IRS.gov. If you did make enough to push your family income into a higher bracket, good for you.

Mary Davis Nowell. Based close to Fort Worth. Shopping Interstate 20 east and west, Interstate 35 north and south.
That makes sense. And no, I don't make nearly enough to push us into a higher tax bracket, at least not that I am aware of. I work very part time, on a good month.
MDavisnowell Wrote:
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> Do not forget to subtract
> your required purchases on shops as an expense and
> don't forget to take the deductions for mileage,
> home office, and all other reasonable expenses.

I was told by my tax guy (for the past two years) that if the required purchase was reimbursed as part of payment then it is not deductible. And if you go over the required purchase amount, you can not write that off either.
Sybil, your tax guy may be right. I've always added the fees and reimbursements together for total income and then subtracted required purchases as an expense of doing the shops. I did that on returns every year since 2010 with no problems. I haven't been audited, but I know they've looked at my return closely at least one year because they sent me a small refund I hadn't calculated.

Based on your post and what your tax guy told you, I'm going to see what I can find on this at IRS.gov. When I first searched it out in 2010 I found nothing that really addressed it. Thank you for your post.

Mary Davis Nowell. Based close to Fort Worth. Shopping Interstate 20 east and west, Interstate 35 north and south.
Sybil2 Wrote:
-------------------------------------------------------
> I was told by my tax guy (for the past two years)
> that if the required purchase was reimbursed as
> part of payment then it is not deductible. And if
> you go over the required purchase amount, you can
> not write that off either.

We have a couple of tax peoples on here (and other long time shoppers) that can probably comment on this better than I can, but I don't think your tax guy is entirely correct. I'm fairly certain no matter what the structure of payment is that you can always deduct any required purchase. I also think that if the cheapest required purchase is more than the reimbursement, you can deduct that. IE if you are required to purchase a pair of shoes and the cheapest pair of shoes is $25 and you are reimbursed $20 then yes, you can deduct the whole $25. Now if their are shoes cheaper than $20 then no, you could not deduct the amount over $20 of the more expensive shoe.

There are reasons that a body stays in motion
At the moment only demons come to mind
You have two options for reporting your revenue. I prefer to report the entire amount I received as income and deduct the reimbursement as an expense. (I actually put it on the line for "returns and allowances" because technically you "returned" that portion when you paid the company you shopped. But there are other ways it could be deducted.)

It's also possible to subtract the reimbursements from the amount you got, report that as the income and disregard what you paid out. But then you're in the position where what went through the bank, and what may be on a 1099 if you got one, is bigger than what you're reporting. This is why I prefer to declare the whole payment and deduct the expense separately.

If the tax preparer who is being quoted here was not claiming the full payment as income, then it would not be right to deduct the reimbursed amount and what was quoted is correct under those circumstances. If they did claim the full payment as income, then they are incorrect to say you can't deduct the reimbursed amount that you paid out.


This is why it is very important to get advice from your own tax preparer because what one preparer told one shopper about their situation may not be correct for another shopper unless their return was being prepared in the same way.

If you think of it as you only have to pay tax on the amount you got to keep, maybe that will clarify it in your mind.

I am a bit bothered by this statement of OP: I understand tracking income and reasonable business deductions with the goal to show under a $400 profit to avoid paying self employment tax.

The goal of working should be to make money. Making money means paying taxes. You will be far better off financially to generate a profit of $4000 and pay taxes on it than to make only $399 and not pay taxes. Why? Because the tax rate is not 100%. Even if your tax bracket was 40% and you paid the 15.4% SE tax on top of that, you still get to keep the other 44.6%, which is over $1700.

Would you rather have $1700 in the bank after paying taxes or only $350?

Please discuss this with your own tax preparer as there are a lot of components to a tax return and they interact with each other. The tax you would end up with depends on the totality of your situation -- married or single? children or not? other dependents or not? other income? investment losses?

If you have kids you may qualify for earned income credit, which can actually create the situation where the more you earn, the bigger the refund, not the bigger the tax bill. If you don't yet have enough SS credits to qualify for benefits, you are better off to make over $1250(?) and pay the SE tax so you get a credit. (Not sure if it's $1250 or 1280 or some other figure, you can look it up)

So don't be so quick to assume that minimizing your income is always the best thing. For one thing, it works against your profit motive if you keep filing tax returns with less than $400 net when you have possibly a few thousand in gross income.

Talk to your tax preparer.

Time to build a bigger bridge.
Admittedly, I do not understand taxes well at all. It sounds like there is no 'one size fits all' formula that works as a standard breakdown on taxes. Dspeakes, you mentioned that you are 'bothered' by my statement of the goal to not pay SE tax. This is purely derived from the information I was reading about taxes on various websites of small business owners on how to maximize your deductions when operating as an Independent Contractor. There are other factors involved.

We DO have all of the variables you mentioned above, husband's income, four children, rental property, other income losses, etc. that play into this. And I agree with you regarding speaking to my tax preparer. One year, it didn't work out in my benefit and we paid a hefty fee at the end for another type of IC work. The difference was we didn't have business mileage deductions to use that helped reduce our over all expenditures.

When you mentioned (even if you pay 46% in taxes), this is exactly where I sit and think about each assignment before I apply for it. A great example is a $15 retail shop with no purchase. When I receive that email, I think to myself, by the time I read the shop instructions, drive there, perform the shop, drive back, input the report, plus deduct say 20% in taxes, was that shop worth doing?

Perhaps, I am looking too far into things and making this more difficult than it really is.

Regardless, I appreciate everyone's insightful input. Thank you for the information you provided. It was certainly helpful.

Happy holidays!

Edited 1 time(s). Last edit at 12/22/2014 02:58PM by Mbrookes.
It didn't bother me on a personal level; it bothers me as a tax preparer because I see all the pitfalls of that strategy. I have been through audits with my tax clients. They're not fun. The interpretation we like to put on the tax code that benefits us is not the interpretation the IRS agent is going to put on those same parts of the tax code.

My taxable income from shopping has been under the $400 threshold, but I didn't force it there; that's just where it landed after I deducted my actual expenses and mileage. I'd rather be making $5000 a year after deducting expenses and mileage -- and paying taxes on it. (my cash flow is much higher than $400; it doesn't cost me 56 cents a mile to operate my car.)

Time to build a bigger bridge.
Mbrookes,
Here's yet another take on one aspect of your high margnal tax rate, which I assume factors in federal and state income tax plus self-employment tax. That high rate makes reimbursement for items that you would purchase, regardless of whether or no it was a mystery shop, very appealing. Consider this: if an oil change would have cost $30 anyway, but you get it "free"with reimbusement of a shop, that reimbursement amount is not taxed. If you had paid the $30 with out it being a shop, your family income, before taxes, would have to be more than $40 gross to net that $30 of income to pay for the oil change. Multiply that by two family cars and then by 4 (every 3000 miles) and you have made a very nice little contribution to family net income just by writing a few very easy reports and taking the time to get the cars to the shop. The same is true of the value to your family for reimburements for groceries, hair car, pet supplies, vet visits, any reimbursements for meals and hotel stays and amusement park visits and movies that you would otherwise have had to pay for out of taxable income. And that is just a partiallist of reimbursed "swag" that many shoppers target as they plan their shop mix.

Edit to add: If you scroll down a few threads you will find one entirely devoted to shoppers' lists of the amazing variety of the things that they have scored "free with reimbursement" in the past year!

Based in MD, near DC
Shopping from the Carolinas to New York
Have video cam; will travel

Poor customer service? Don't get mad; get video.


Edited 1 time(s). Last edit at 12/23/2014 01:34PM by walesmaven.
I appreciate your viewpoint from that angle. Thanks for taking the time to illustrate that benefit from your perspective to help me figure this all out. Happy holidays!
I keep a shop fee column, a bonus column and a reimbursement amount column on my Excel spreadsheet among many other columns. I just plug in the appropriate numbers at the end of the day or every few days. Excel tallies all the totals and I give those numbers to my accountant. Then I get a tax refund. The End.
Sybil - Do you also keep a mileage form for each shop as well as receipts for any reimbursement shops? Do you find that you owe taxes at the end of the year other than for State?
Keep in mind, unless you are getting a refund in the form of earned income credit or child tax credits, your refund is only a reimbursement of what you paid in. If you don't pay anything in either through withholding from wages or Estimated Taxes, you won't have a refund. Think of that "refund" as a "partial reimbursement" from a company that waits nine months to pay you and doesn't pay interest on those tardy fees.


(I had a potential client call me recently, wanting to catch up several years of self-employed tax returns because he wanted to get his 40 credits for Social Security. Except he didn't want to have to pay anything in to get them. He wanted to file the returns, get credit for his SE taxes, and then negotiate out of paying the tax bill.

I have no idea if he would get the credits without actually paying into the system. But I was shaking my head after I hung up the phone after telling him to contact one of those IRS negotiation firms. If he would get the credits without paying anything in, then our tax system is more hosed up than I thought it was.)

Time to build a bigger bridge.
Mbrookes Wrote:
-------------------------------------------------------
> Sybil - Do you also keep a mileage form for each
> shop as well as receipts for any reimbursement
> shops? Do you find that you owe taxes at the end
> of the year other than for State?


Yes, keeping track of mileage is a must so that is included in my Excel spreadsheet. And yes, I keep all receipts. I staple them to my /notes/reports/invoices. And I have a separate checking account and credit card just for business purposes. And I have never had to pay taxes.
Sybil - Why do you separate the standard fee and the bonus? For tax purposes, only the total matters. It might be of importance to you, but it seems like it would be irrelevant to whoever prepares your taxes. I used TurboTax, and I assure you that there is nowhere on Schedule C to differentiate between a standard fee and a bonus.

I generally report the gross amount which I am received, and then deduct the cost of items purchased as a cost of doing business. This is also very easy on Schedule C. Some MSCs only report the shop fee to the IRS, but some report the gross (shop fee plus reimbursed amounts).

Shopping Southeast Pennsylvania, Delaware above the canal, and southwestern NJ since 2008
In the past I have not made enough money from any company to have to report it but this year I will. I hadn't thought about the tax consequences and all this tax chat has me thinking.

Any advice? I didn't track my mileage--is it worth it? What else would I want to try to figure out to offset my earnings?
Mileasge is worth $0.56 per mile. Depending upon the year, 1/3 to 1/2 of my gross receipts end up being mileage expenses. For instance, if I gross $1000, then $300 to $500 of that will be deductible as mileage expenses. You can always go back and figure out mileage for shops using Mapquest. Most of mine are parts of small local routes, so I just sting them together and calulate point to point mileage. Schedule C is only going to ask for your total business mileage, as well as odometer readings at the beginning and end of the year.

You probably also have expenses for ink, paper, and items which you were required to purchase as well as other things. You might be able to subtract expenses for cell phone, internet, and home office as well.

By the way, any income you made from mystery shopping is reportable to the IRS to you. The amount is irrelevant. In some years, you might even lose money. That is reportable, and will offset other income you have frm other sources.

Today I had a gross of $144 and I drove 105 miles (unusually far due to bonused shops which made it worthwhile) giving me a $58.80 deduction for mileage.

Shopping Southeast Pennsylvania, Delaware above the canal, and southwestern NJ since 2008


Edited 1 time(s). Last edit at 12/24/2014 01:52PM by myst4au.
I didn't start getting serious about mystery shopping as a line of income until about June. I have no idea what my odometer read on Jan 1. It's that going to be a problem for Schedule C? Obviously I am reporting every fee I've received, but can I claim mileage deduction without the odometer reading?
myst4au Wrote:
-------------------------------------------------------
> Sybil - Why do you separate the standard fee and
> the bonus? For tax purposes, only the total
> matters. It might be of importance to you, but it
> seems like it would be irrelevant to whoever
> prepares your taxes. I used TurboTax, and I assure
> you that there is nowhere on Schedule C to
> differentiate between a standard fee and a bonus.

I like to have everything broken down on my Excel spreadsheet. Keeping track of bonuses is great so you can quickly look at what they accepted last time and now I can try to bump it up another $5 or $10. I always want to be going forward, not backwards. When I give the totals to my accountant, I add the shop fee column and the bonus bonus.

I am not a tax expert; I just keep excellent records. Then pay someone to do the math. I don't have the time or desire to prepare my own taxes. Never have, never will.
The only time you don't have to report it is if your SE income is under $400 *and* your total income is under your standard deduction plus personal exemption amount. If you are filing a return at all, you need to record all of your income on it regardless of whether you got a 1099 or not.


I also track my bonuses separately from the "fees." I do this for my own information, so I can tell if I am generating enough bonus money to cover my driving expenses. It also makes it easier for me to look back and tell if fees have gone up or down for a given shop, or if bonuses are up or down at different times of the year or month. So even though the distinction is irrelevant to the tax return, that doesn't mean there isn't value in keeping track of it.

My columns on my spreadsheet are Fee, Bonus, Useful Reimbursement (for oil changes where I'm getting something I would have to buy anyway), Reimbursement, Total due from MSC, "Anyway" miles, "Extra" miles. The extra miles are miles I drove only because of the shop. "Anyway" miles are miles driven to get to the shop that I was going to drive anyway -- such as shopping the Jack in the Box in the parking lot where I work. It took me 14 miles round trip to get there but I was going there "anyway."

I use those figures to determine my true "to my pocket" proceeds from mystery shopping, which is not the same as what will hit my tax return.


siamese5555 Wrote:
-------------------------------------------------------
> In the past I have not made enough money from any
> company to have to report it but this year I will.
> I hadn't thought about the tax consequences and
> all this tax chat has me thinking.
>
> Any advice? I didn't track my mileage--is it
> worth it? What else would I want to try to figure
> out to offset my earnings?

Time to build a bigger bridge.
MPorter - You probably have service records for your car which would allow you to make a reasonable estimate of your odometer reading last January 1st. It is not perfect, but unless you get audited, it won't matter. Even then, it will probably meet the test of reasonableness especially if your mileage this year and next year (it will be several years before you could be audited) are relatively similar. You have to put the number of miles driven in 2014 (total and then business miles) on Schedule C.

Shopping Southeast Pennsylvania, Delaware above the canal, and southwestern NJ since 2008
Siamese,
Regardless of how little/much you earn from a company, ALL of it has to be reported. If your tax advisor told you differently, you may want to change tax advisors.

Based in MD, near DC
Shopping from the Carolinas to New York
Have video cam; will travel

Poor customer service? Don't get mad; get video.
Sybil2 Wrote:
-------------------------------------------------------
> MDavisnowell Wrote:
> --------------------------------------------------
> -----
> > Do not forget to subtract
> > your required purchases on shops as an expense
> and
> > don't forget to take the deductions for
> mileage,
> > home office, and all other reasonable expenses.
>
> I was told by my tax guy (for the past two years)
> that if the required purchase was reimbursed as
> part of payment then it is not deductible. And if
> you go over the required purchase amount, you can
> not write that off either.


IE.. Your 1099 shows $2000.00 they do not break down wheter it is money paid or reimbursement. You go though your records and $600 of it is reimbursements. So you actually earned $1400. that will be the amount that you apply the deductions to.
I always thought we had to pay taxes on any amount received, not just from companies that I've earned $600 or more. For example, I may earn $300.00 from Company A, $500.00 from Company B and $400.00 from Company C. I would have to pay taxes on $1,200.00. Is this correct or do I not have to even claim money earned from one company if the amount is under $600.00?
You are supposed to pay taxes on every penny you earn and then take the allowable deductions. $600 is the point where the companies have to send you a 1099. It is your responsibility as a business owner to keep track of and pay taxes on all of your income.
dspeakes Wrote:
-------------------------------------------------------
> The only time you don't have to report it is if
> your SE income is under $400 *and* your total
> income is under your standard deduction plus
> personal exemption amount. If you are filing a
> return at all, you need to record all of your
> income on it regardless of whether you got a 1099
> or not.
>


Just to clarify -- under the scenario above you would not be required to file a tax return at all *unless* there were 1099's filed for more than that $400. Under that situation, you need to file the tax return to show that while you got (for example) the $800 on the 1099, you had $450 in deductions and don't owe any taxes because it nets out less than $400. Otherwise the IRS will send you a bill based on the 1099.

Time to build a bigger bridge.
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