Jan 07 2009
Self Employment: Online Earnings and Filing Taxes
The IRS requires that you claim any self employment income that meets or exceeds $400 in one year. That includes the money you earn online through PTC, article and review publishing, Adsense and other advertising earnings, paid Blogs (like Today.com) and digital sales. This is reportable on a Schedule C: Income or Loss From Your Business or Profession.
You should receive a 1099 MISC (Independent Contractor) if you made $400 with any one company, if you do not receive one that does not necessarily mean you do not have to report your earnings. As an independent contractor, which is what the IRS considers someone who is not paid as a W-2 employee, you are solely responsible for keeping records of income and expenses. It is in your best interest to keep diligent and accurate accounts of your business activity, the IRS can require that you provide these in the future to prove your income and expenses.
The most confusing part of self employment can be deductions, what is and is not considered a legitimate deduction. The simplest determination is this: Is the expense ordinary and necessary in your business? Ordinary is defined as one that is common and accepted in your business, and necessary is defined as one that is helpful and appropriate to your business. A farmer would not reasonably deduct the new copy of Photoshop he purchased but a Graphic Artist would.
Basically, just because you purchased it does not mean you can deduct it; and just because it is listed on the Schedule C does not mean you can claim it. Most online earnings do not incur mileage expenses, this is one example of a deduction that although it is listed on the Schedule C, I as a Digital Scrapbook Designer can not legally claim. I also can not claim printing expenses; such as photo paper, toner or ink because it is not necessary to my business.
I will leave the floor open for any questions you may have at this point and return with more information on this subject tomorrow. If anyone has a specific question they would like answered please leave a comment and I will answer it in the next post. For those who are visiting for the first time, I am an Office Manager for a Tax Service with 6 years of tax preparation training and experience. If I feel that I can not answer your question I will seek the appropriate response from my colleagues who have experience in that area.
