I know it's barely January, but I got an early copy of Turbo Tax and have been noodling with my expected taxes. I need to wait for my W2 for my day job which is at least a few weeks out, but I've got some questions about the MS part of my return in the meantime.

Before I go any further: I know no one on here is a tax professional whose advice I am paying for. I know everyone's situation is different and that what works for you might not apply to me. I'm just asking for advice and experience. All decisions about how to file my taxes will be mine. If I feel like there's something I can't figure out myself, after listening to other shoppers' experience and being pointed to resources on irs.gov, I'll bite the bullet and hire someone to prepare them. But I think I can do it, and I actually kinda like doing my taxes (especially since I think I'm going to get a bit a refund this year). OK, disclaimers adequate? Then here goes:

I've read Publication 334: Tax Guide for Small Business on irs.gov. I read the 2014 version and I understand there may be a revised one in the next couple of months, which I'll read. But in the meantime, I have a question about the Cash Method of accounting:
It seems pretty clear that you count income when you receive it. So, for the (hypothetical) shop I conducted on 12/15/15, I was paid by check that was issued to me on 1/10/16, I would count that income as 2016 income. What's less clear is whether I count any expenses incurred for that shop as 2015 expenses or as 2016 expenses. Do you guys count them based on when you performed them, or count the expenses as 2016 expenses? I would think you'd count them as 2015 expenses, but a couple of shops with high expenses that haven't been reimbursed yet could wipe out my (admittedly pretty small) profit for the year and inflate the next year's profits. It seems neater to keep the expenses and profits together, but I'm curious to hear what you do.

Thanks in advance everyone! I wasn't here on the board for last year's tax season, so I'll be interested to see the discussions that pop up. If they're as interesting as the non-tax discussions I've read and participated in, I'm looking forward to it. Also, I know I'm going to have more questions in the future (I could already have added at least 2 more, but I'll pace myself), so if anyone else wants to ask their own tax questions on this thread, feel free.

I count expenses when I have them and income when I get it.
So if I did a dinner shop on 12/31/15 and spent $100 that $100 in expense would go on my 2015 taxes. But the super duper lightening quick payment I got for the shop on 1/1/16 would count as income for 2016.

Awesome! Thanks, b.

I should clarify that I expect to claim less than $1,000 in net profit from Mystery Shopping in 2015 after expenses, mileage, etc. I have over $500 in required expenses for December that I expect I will be reimbursed for, but if I just take those off the top of my 2015 MS income, it really distorts my "income" for 2015.

For you, a few hundred dollars incurred in one year and reimbursed in another likely isn't a big deal. For me, it's hard to feel like I'm adequately reporting to the IRS my profit for last year. Especially since I'll be reimbursed those fees before I actually file my taxes. I understand if the answer is "yep, seems weird, but that's just how it is". Just wanted to make sure my conundrum was clear.

Yep, but also remember that it will even out next year. This is just your first year of MS and you don't have extra January income to even it out. This is not odd in the tax world for first year businesses.

Yes, indeed. December 2016 you'll be searching for shops with high expenses to offset your 2016 income!

And since you have a day job, you PROBABLY do not have to worry about quarterly taxes. But if your income from ms'ing is high enough, you MIGHT want to consider paying quarterly taxes. It does prevent you being
charged penalties in case you should have, but did not.

Deducting expenses when the occur (December 2015, for instance) and income when you receive it (February 2016, for instance) is one aspect of what is referred to as the "cash system," not the "accrual system." This is very common, and the easiest way to run your small business (and even large businesses).

Edited to fix an error I introduced.



Edited 1 time(s). Last edit at 01/08/2016 05:08AM by myst4au.

Thanks, @myst4au... I skimmed over the Accrual Method of accounting described in that worksheet because it said most sole proprietors use the Cash Method, but I'll take another look at the Accrual Method. As you've described it above, it actually sounds like what I thought I understood to be the Cash Method, so it looks like I may need to revisit.

Oops, you are right. I got the two names confused. I am going to edit my message.

@CaliGirl925 wrote:

Thanks, @myst4au... I skimmed over the Accrual Method of accounting described in that worksheet because it said most sole proprietors use the Cash Method, but I'll take another look at the Accrual Method. As you've described it above, it actually sounds like what I thought I understood to be the Cash Method, so it looks like I may need to revisit.

Thanks @ceasesmith, I don't think I need to worry about quarterly taxes for 2016 based on my performance in 2015. But, if 2016 is just spectacular, I'll take a look the need to set up quarterly payments for the future.

No, "accrual system" is claiming both income and expenses in the year earned/incurred. I am an accrual tax payer so I will claim a job performed on 12/31/15 as 2015 income and the expenses of that shop will also be claimed in 2015 when they were incurred. A "cash payer" claims the expenses when incurred and the income when actually paid. In your first year of your business you need to decide whether you are going to be "cash" or "accrual" and stay with that method in the future.

I chose "accrual" because that way I can plan expenses at the end of the year (equipment, supplies, etc.) so as to reduce my shopping income as may be desired. The best laid plans can fall apart if on 12/31 you suddenly receive a mailbox full of checks or Paypal account deposits and you are a "cash" taxpayer.

OK, sounds like the accrual method may be what I'm looking for. I like the idea of being able to plan my expenses and payments based on when I accept jobs (or not), not when the company decides to pay me. I'll read up on it! Thanks all!

The problem with the accrual method in my opinion is that if you never get paid for a shop, it gets messy to go back and straighten things out if it crosses tax years (I guess you write it off as a bad debt whenever in the next year you give up on them - and it does happen occasionally that MSCs go bankrupt - but I am not sure.) Plus, I see no reason to pay taxes on money which I haven't gotten yet. I much prefer the Cash Method, even though I forgot in my original response what it was called.

It's really a mater of personal preference. I chose the accrual method mainly because I needed more income in the first year to qualify for health insurance subsidies. I also like the fact I can fairly accurately estimate my annual income well before Dec. 31. Last year, for example, I bought a new computer knowing I made enough so that I could take full advantage of the tax deduction.

I just started entering mine into Turbo Tax last night. The only thing I had entered was my overall income from mystery shopping and my kiddo deductions. When I entered my mileage deduction, my refund actually went DOWN. Anyone else have this happen or know why it would happen?

If you are getting EIC, an change in income might increase/decrease the EIC amount. EIC increases, peaks and then decreases.

I have a PO Box I visit weekly that all check payments are sent to. Do those using the cash method count the payment from the day you pick it up out of your mailbox/PO Box/etc or the day the check is cut?

I've been shopping since 2004. Originally I had my taxes done because a close friend's husband did them. Then I moved to AZ and things got exceptionally messy until I was divorced. The past few years I have not filed because of the lack of work I performed. I'm getting married this year and need to start keeping up with taxes again.

@fyrekittyn wrote:

I have a PO Box I visit weekly that all check payments are sent to. Do those using the cash method count the payment from the day you pick it up out of your mailbox/PO Box/etc or the day the check is cut?

I believe with the Cash method you count the date the check was issued (so the date printed on the check that indicates when they cut it). Someone correct me if I'm wrong, please.

I use QuickBooks for my own record keeping and use the cash method. Also, keep in mind, I deposit checks right away, when I receive them. I use the date of the deposit to my bank account, NOT the date the check was cut. If you hang on to a check for a few weeks or months before you deposit them to your bank, this could lead to some questions or problems.

If I were doing Cash I would use the date I received the check because until it is received I have not been paid. I have received checks postmarked 2 or 3 days before that were dated 6 weeks or more before when a company was playing games.

With Accrual, if you claim as income a shop in one year and subsequently it is never paid, you deduct it in a future year as "bad debt" and move on.

I have always used TaxSlayer. This is the first time I need to report mystery shopping income, though I have kept a detailed spreadsheet running so I know the actual numbers that I will report.

Have never seen TaxSlayer mentioned on this forum. Anyone with experience with that software?

Here's the relevant example from the IRS form (publication 334) on Cash Method, which I think means that for checks issued and mailed on Dec 31st 2015, you're supposed to claim them as 2016 income if you received them in 2016:

Example. On December 30, 2013, Mrs. Sycamore
sent you a check for interior decorating services you provided
to her. You received the check on January 2, 2014.
You must include the amount of the check in income for
2014.

(note that because it's the 2014 version of the form, the dates are old)

I think this means that with a cash method, my PayPal payments on 12/30 or 12/31 this year would have to be considered 2015 income, but that the check written and mailed to me on 12/30 that I received on 1/5 would have to be considered 2016 income. If I use the accrual method, I would claim all income generated as a result of work done in Dec 2015 as 2015 income. I think.

Make sure you deduct enough though... you might be cheating yourself out of perfectly allowable deductions because you don't think of them as business expenses. With mystery shopping as a home-based business you can deduct a lot, pretty much part of any expenses you used for that purpose. For example, you can deduct part of your rent/mortgage payment, part of your internet expense, part of the office supplies you bought for the year, and of course mileage and directly related expenses, etc. Not a huge percentage of them, but every bit counts, because it chips away at that "profit" and diminishes your taxable income from that source. Just my two cents. Remember that the tax rate for 1099 employees is higher for a reason: Deductions. So take advantage of that and bring your tax rate way down.

How in the world do you calculate what percentage of your home is used for your business??

If you are going that route, you figure how many square feet are used as your 'office' and then how many square feet your entire house is. You then do the math to figure out what % is used as your office. So lets say that your house is a convenient rectangle that is 20 feet from front to back and 100 feet from end to end. Your house is 2000 square feet. Now you use a little space that is 5' by 10' or 50 square feet. You are using 2.5% of your house for your office (50/2000=.025=2.5%). Before you decide to take a home office expense go to the IRS.gov website and read for yourself what is allowable. Traditionally you could take a percentage of your rent or start depreciating your home (not a part of a mortgage payment but of your purchase price) if you owned it (which needed to be recaptured when you eventually sold). There is a different methodology that is a couple of years old.

More recently, the IRS has allowed you to count the rooms in your house (bathrooms and closets do not count). Suppose you have 8 rooms and use one of them to conduct business. Then 1/8 of mortgage/rent, utilities, etc. would be deductible business expenses on Schedule C. TurboTax does a good job of sorting this stuff out for you.

Wow! Thanks for all of the advice about claiming my home office. I actually have a pretty complicated home office situation, so I'd rather just skip that headache this year. Maybe next year when I earn vastly more in Mystery Shopping (hey, a girl can dream), it will be worth figuring it out. But for this year, I won't be taking a home office deduction.
Also, I've read up on the Accrual Method of accounting and think it's the one for me. I'm not sure why I didn't consider it much before, but it may have been the discussions of inventory that made me think it was overall more complicated than the Cash Method. Anyway, thanks everyone for the tips!

I see a lot of people mentioning deducting their expenses - I assume you are meaning non-reimbursed expenses, correct? IE if I go do a shop at Restaurant X and spend $5 on lunch, but am then reimbursed $5 by the MSC for that shop, then that is not something I could count as an expense because I'm not out that money.

I thought about deducting the area in my living room that I use as my "office", HOWEVER, I did some research and IRS has the "exclusive" rule. Thus, because I also use the "office" area for personal use, it technically means I cannot deduct my home office. I'm guessing other people might fall into this situation too. Whether or not they really monitor this or not, is another question.
See below:

Source: [www.irs.gov]

Exclusive Use

To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.

Example.

You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den.

Exceptions to Exclusive Use

You do not have to meet the exclusive use test if either of the following applies.

You use part of your home for the storage of inventory or product samples (discussed next).

You use part of your home as a daycare facility, discussed later under Daycare Facility .

Note.

With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test.

Edited 1 time(s). Last edit at 01/13/2016 07:23PM by SykoSwimmer.

@brittish wrote:

I see a lot of people mentioning deducting their expenses - I assume you are meaning non-reimbursed expenses, correct? IE if I go do a shop at Restaurant X and spend $5 on lunch, but am then reimbursed $5 by the MSC for that shop, then that is not something I could count as an expense because I'm not out that money.

That entirely depends on how you do your taxes. Lets say you do a shop that has a $10 fee and a $10 reimbursement. For me it is much easier to report $20 in income and $10 in expenses than it is to report just $10 in income. This mostly has to do with how I deal with payments. On my spreadsheet I would write down that I am expecting $20 payment for that shop. I can just carry those numbers right down and I'm done. Otherwise I would have to write down that I am expecting a $10 payment and a $10 reimbursement and then when I get that $20 payment I have to figure out how much to carry over to my income column. Twice as much work. Perhaps it doesn't sound like much but I've done about 180 shops so far this year. If you extrapolated that out to 20 extra seconds per shop 12 days into the year I've wasted an hour on it.

There are some people who do not understand that the net result is the same and freak out thinking they will pay more taxes doing it the way I do it.

I claim it all and then deduct out reimbursements because:
1) My sense is that a higher top line makes my business look more realistically like a business than a hobby.
2) The income coming into my account from checks, direct deposits and Paypal transfers matches to my top line

It is just as easy for me to keep track it all on my spreadsheet, it is just as easy (if not easier) to deduct out reimbursements from the top line as it would be to subtract them from each payment as we went along.

Finally, because I do some flat fee shops, deducting out 'reimbursed expenses' on my return then makes it reasonable to continue and deduct out 'unreimbursed expenses'.