tax tips — October 31, 2016

3 Urban Myths of Taxes for the Self-Employed

by Susannah McQuitty

Man fills in his credit card information for an online purchase.

Now that it’s so easy to make money doing things you love, the line can get blurred with how much you need to pay in taxes or whether you even need to. After all, that little hobby’s not a job—not your main one, anyway; you just paint mason jars after your 9-to-5 to relax. Do you really have to pay taxes on the buck or two you get from selling them?

To make matters even more confusing, urban myths about taxes seem to crop up everywhere. You’ve probably heard a few before, maybe even from people who seem to know what they’re talking about. Let's set the record straight on some of the most common myths about taxes and self-employment.

I don’t have to pay taxes on a hobby

Okay, you’re onto something. If it is only a hobby, you probably won't owe taxes. But how do you know? The IRS has a list of factors that draw the line between business and hobby, which you can find here. Two of the main determining factors are how much you make from the activity and how often you do it. If you make less than $400 a year from your hobby or business, you won’t owe self-employment tax. If the activity is considered a hobby, then even income of more than $400 may not be subject to self-employment tax. But if you make a profit in more than two out of five years, your hobby gets bumped up to a business as far as the IRS is concerned.

Also, sporadic activity does not qualify as a business. For example, let’s go back to the mason jars: If you paint jars for fun, put them on Instagram, and every so often sell them to enthusiasts, that’s a sporadic activity. On the other hand, if you use Instagram as a platform for selling your art and clearly communicate that to your followers, you’re likely to be defined as a business.

Man uses his laptop to run his own business from home.

Online transactions aren’t taxable

It’s easy to understand why this myth got so popular. After all, there was a time when you didn’t often encounter sales tax while shopping online – but income is income. While some online stores won’t charge sales tax, depending on their state, you can bet that they still pay income tax when you buy from them. Same goes for your painted jars: you still have to report income and pay necessary taxes when selling online.

I can write off all my home office expenses

Not quite, but you’re also not far from the truth. If you work from a home office as a self-employed person, you can write off your home office expenses only if you use your office space exclusively for business. For example, you can’t get a tax deduction for the new couch in your living room just because you do work there: you may also use the couch for your own personal enjoyment. A home office has to be a designated space used only for business purposes. Generally, any use of the space for personal interests disqualifies the home office deduction, but there may be an exception for child care providers or areas where inventory is stored.

There are a lot of “tax hacks” out there that sound pretty nifty, but be smart, do a little digging, and make sure any advice you take is from a trustworthy source. After all, there are plenty of sensible tax hacks for you to learn and use that will make tax season easier to navigate.

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