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Preparing federal tax returns can be frustrating at times, even for those most knowledgeable. If you are self employed, things can get even trickier. But, fear not. The following are six basic but important tips about income from self-employment that can help sole proprietors or independent contractors stay afloat in the business world:

  • SE Income – In addition to income from your regular job, self-employment can also mean income received for part-time work.
  • Schedule C or C-EZ –  There are two required forms to report self-employment income: The Schedule C for profit or loss from business and the Schedule C-EZ, which reports net profit from business, along with the Form 1040. You may also use Schedule C-EZ if your expenses total less than $5,000 and meet other conditions. Click on the corresponding form link to see if you are eligible to use them.
  • SE Tax – Making a profit means you have to pay income tax as well as self-employment tax, which includes social security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to find out if  you owe this tax, which should be filed along with your federal tax return.
  • Estimated Tax –  Estimated tax payments, are typically done in four installments each year on income that is not subject to withholding. If you do not pay enough tax throughout the year, you may owe a penalty.
  • Allowable Deductions –  You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
  • When to Deduct –  In most cases, you can deduct expenses in the same year you paid for them, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.

Visit the Small Business and Self-Employed Tax Center on IRS.gov for all your federal tax needs. You can also get IRS tax forms on IRS.gov/forms anytime.

If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media.
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By: Kevin Hickman

For millions of people, their biggest hobbies also double as a source of income. For example, some may buy and sell collectible coins, while others take their handmade crafts to trade shows. If you make an income from your hobby, however, you still must report this on your tax return. Much like a business, there are special rules and limits for tax deductions that you can claim for your hobby.

This is why the IRS Small Business blog created an easy list of ‘Five Basic Tax Tips about Hobbies

1. Determine whether it is a business or a hobby

The rules for how you report income and expenses will depend on whether your income activity is actually a hobby or a business. There are nine factors to consider when determining the difference, including whether you make a profit, how often you engage in the hobby for sport or recreation, etc. These are the full 9 factors to consider.

2. Allow hobby deductions

While there are some limitations, you should be able to deduct some ordinary and necessary hobby expenses. An ordinary expense refers to expenses that are expected for that activity, while a necessary expense is one that is appropriate for the activity, but may not be as common.

e Hobby Show_Bruno Cordioli

e Hobby Show_Bruno Cordioli

3. Limits on hobby expenses

Generally, you can only deduct hobby expenses up to the amount of hobby income. If your expenses are more than your income, that is considered a loss from the activity. You cannot deduct the loss from your other income.

4. How to deduct hobby expenses

It is necessary to itemize any deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into one of three types of deductions, with special rules applying to each. See Publication 535, Section A for the rules about how you claim them for each.

5. Use IRS Free File

While hobby rules can be complex, IRS Free File can make filing your tax return easier and available free until October 15th. If your hobby makes %58,000 or less, you can use this brand-name tax software. If  you earn more, you can use Free Fire Fillable Forms, an electronic version of IRS paper forms.

Don’t panic! You have just received a notice from the IRS, but what does that really mean? Each year, the IRS sends millions of these notices, typically just to inform you about issues on your tax returns or tax account. For example, the notice may simply be asking you to correct an error or to provide additional information. To help you out, the IRS website has compiled an easy list on What to Do When you Receive an IRS Notice:

IRS Summertime Tax Tip

1. Don’t Ignore It

Most IRS notices can be dealt with quickly and easily. It is important for your to reply to these notices promtply.

2. Read it Carefully

Each notice will come with  a list of instructions to follow. These will help you figure out what you need to do.

3. Review the Information

If the notice says that the IRS corrected your tax return, review the information and compare it to what you submitted.

a. If you agree – You don’t need to reply unless a payment is due

b. If you do NOT agree – You must respond to the IRS with a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Also be sure to include the bottom tear-off portion of the notice with your letter and mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for the a response from the IRS.

Photo Credit: Ken Teegardin

Photo Credit: Ken Teegardin

4. Call with Questions

Most notices can be handled without calling or visiting the IRS. However, if you do have questions, call the phone number in the upper right corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call.

5. Keep Copies

Always keep copies of any notices you get from the IRS.

6. Avoid Scams

Don’t fall for phone and phishing email scams that say they are from the IRS. The IRS will always contact people about unpaid taxes first by mail, not by phone. The IRS never contact taxpayers by email, text or social media about their tax return or tax account.

For More Information

Visit IRS.gov and click on ‘Responding to a Notice,’ or see Publication 594, the IRS Collection Process. You can also contact the IRS at 800-TAX-FORM (800-829-3676) to request Publication 594 by mail.

Where is the line drawn?

Small Biz Trends recently wrote an article to clarify the differences between an independent contractor and an employee.  It boils down to three categories: Behavioral, Financial and Relationship.  Read on for details.

Still have some questions and want to make sure that you’re classifying your workers correctly?  Contact us!