Do eBay Sellers Need to Pay Self Employment Taxes?

After informing my eBay Partner that he needed to pay taxes on eBay his sales he called me up yesterday and asked if he owes self employment taxes in addition to income taxes on his eBay profits.

My response was, if you are selling on eBay and have a net earnings of more than $400 in a year, you may be subject to the self employment tax of 15.3%. Needless to say he wasn’t exactly happy to hear that his profits in his new business could take another hit, this time over 15%!  He wanted to know what that 15% was for and why he had to pay it.

Self Employment Tax Explained
I explained that the self employment tax rate is made up of two parts: 12.4% for Social Security and 2.9% for Medicare, for a total of 15.3%. To answer why he might be subject to self employment tax, I answered that generally if you have income earned in any of the following ways Uncle Sam expects self employment tax:

* as an independent contractor
* as a sole proprietor of a business
* as a member of a partnership
* from any business you run yourself

Part Time Employment
“But I only sell in my spare time, it’s not my full time job or anything”, my friend protested. I was sorry to tell him that a business does not have to be full time to be subject to self employment tax, income earned from a part-time business in addition to a full time job may also be subject to self employment taxes.

He does work in a full-time job as a software developer and is paid a salary by his employer but the profit from his eBay sales is considered self employment income and is subject to the self employment tax if he has net
earnings of at least $400.

Paying Self Employment Tax
Obviously none of this was making my friend very happy but he knows you can’t fight taxes.  “So how do I pay what I owe”, he asked. I explained that Schedule C of Form 1040 is used to report his business income and expenses and to calculate his net profit or loss. Schedule SE is then used to calculate his self employment tax and to report the amount owed. The numbers from both Schedule C and Schedule SE are then transferred to his Form 1040.

Reducing Your Taxes
As he moaned and groaned about paying another 15.3% of taxes I suggested that next year he record & document all his business expenses carefully to help offset his self employment income. The lower his self employment income the smaller the amount that’s subject to the self employment tax. Keeping good records of what he spends can really pay off!

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Personal Finance Review – The Psychology of Spending & Saving Edition

We experienced usually warm weather this weekend so we spent a lot of time outside, taking advantage of the balmy temperatures before the cold returns.  It was the first time in a while I had a chance to workout; a busy work schedule and the cold weather have kept me out of the fitness routine.

I noticed something this weekend that made me stop and think about the psychology of spending and saving.  When I exercise I tend to eat better and when I’m slacking in the workout department I’m more likely to eat unhealthy.  I’ve found that when I’m in the fitness mindset I think more about what goes into my body since I just had to work hard to burn off some calories.

I think the same applies to personal finance as well.  When I’m focused on working hard to increase my salary, saving more money, and getting a better investment return I tend to spend less money.  I’ve had to work hard to build our net worth, the last I want to do is turn around and spend it away. On the other hand, if I’m not thinking about how many hours I had to work to earn money or what our portfolio returns are, I’m more likely to spend a little more money.

The good news is that when I’m “in the zone”, I’m not only increasing the acceleration of net worth accumulation, I’m also decreasing the depletion of our net worth.  The bad news is that when I’m in money denial, I’m earning less and spending more at the same time, having a double negative effect on our net worth. I guess the first step is being aware of this weird behavior so that I can avoid being loose with money in my financial mental downturns.  Anyhow, enough philosophizing about finances.  Checkout some of the good articles of the week:

Lazy Man & Money kicks off the Carnival of Peer-To-Peer Lending and is nominated for an award. Free Money Finance does a little money math on taxes and spending away your retirement fund.

The Digerati Life tells us why most investors don’t make money in the stock market and Generation X Finance says to take advantage of record oil and gas prices.

Suns Financial Diary talks about changes to FICO Credit Scores and Blueprint for Financial Prosperity reminds us that checking your credit score won’t hurt your credit score.

No Credit Needed writes about dividend reinvestment, Five Cent Nickel helps a reader with Roth IRA Income Limits, and the Mighty Bargain Hunter talks some more about valuing your time.

A guest post on Get Rich Slowly considers frugality and quality and The Simple Dollar asks how much frugality is too Much?

Finally, My Money Blog gives us a 2008 Financial Jump-Start Checklist, 5 Actions That Can Take 5 Minutes Or Less.

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How to Save Your Energy Dollars

Unless you live in someplace like Hawaii, your energy dollars will likely take a major hit during the winter season due to heating costs, and another slap in the summer, in order to keep your grass green. How can you save on you energy dollars, giving less to the utility company and keeping more money in your pocket?

Make sure your home is well insulated against the heat and the cold. If air leaks in or out, your energy dollars will leak out of your pocket as well. For example, my home is only 300 square feet larger than my mom’s. Yet, her utility bills are far less. Why? For one, I have a wall air conditioner. Unless I cover the conditioner in winter, the cold air will seep in through the vents. Two, my dog scratches the insulation around the door frames. Major Leak. Three, I keep my house warmer all day; she turns her heat down at night.

Turn the heat down a couple of degrees. Personally, I like to keep my home a little warmer in the winter. With arthritis, it simply feels better. However, I have turned down the heat a little this season. With the rising cost of heating fuel, I didn’t want my utilities to be more than my house payment!

Instead, a nice warm blanket is free. Since I work at home, it is no big deal to wrap a throw over my lap during the day, when I am sitting still. When the kids come home, slippers and sweaters are great. Plus, they too love to snuggle under a blanket if they are sitting around watching television or reading a book.

Check out this list of energy saving tips from the Department of Energy.  In addition to the heating and insulation tips I just offered they cover how to reduce energy usage in your car or truck, with appliances & electronics, in your landscaping, lighting your home, water heating, and seasonal tips for summer and winter energy savings.

How do you save your energy dollars?

Tina

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Paying Taxes on eBay Income – Do eBay Sellers Need to Report their Earnings?

Should I be paying taxes on my eBay income?  This was a question I was faced with yesterday from my friend / business partner as we celebrated our earnings for December. Our eBay partnership has been a success so far, bringing in over $700 for me last month!

When he asked me whether he needed to be reporting the income that he earned on eBay I turned to a resource by a friend of mine that’s all about managing your taxes on eBay sales, eBay Tax Tips Book. I ran him through the list of nine factors that the IRS looks at to determine if you are trying to make a profit, or if you’re just enjoying a hobby:

1. Whether you run the activity in a business like manner
2. How much time and effort you put into making a profit
3. Whether you depend on the activity for your livelihood
4. Whether your losses were due to conditions beyond your control
5. Whether you changed your operating methods to improve profitability
6. Whether you or your advisors have the knowledge needed to carry on a successful business
7. Whether you successfully made a profit in similar activities in the past
8. Whether the activity makes a profit in some years, and how much
9. Whether you can expect to make a profit in the future from the activity

He answered yes to enough of the questions that we determined he needed to establish a business entity to manage his eBay income and expenses. So yes, he should be reporting his income, in addition to tracking his expenses so he can offset some of the earnings and bring down the total tax bill. 

Of course, in order to deduct those expenses he’ll need to be able to prove he’s running a business.  We went over some things he can do to show that he’s indeed operating a business and not just a hobby:

· Get an employer identification number (EIN)
· Apply for a business name
· Have a separate checking account to be used for business transactions
· Hire an accountant to keep his books
· Create a business plan
· Keep track of the time he spends each week doing business activities
· Consult other business owners or advisors to help make his business profitable

I know he wasn’t happy with my answers since it meant some of the profit our partnership generated for him would have to be paid to Uncle Sam but it’s better that he starts tracking it now rather than wait until tax season and have to play catch up.

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Do NOT Tempt the Tax Man

Being self-employed as a work-at-home mom definitely has its perks. I can work early in the morning, or sleep in and work late at night. Also, since I am the boss, I can choose when to take time off or if I want to work overtime to get things done, so I can have a 3-4 day weekend. However, it can also have a downside, especially at tax time. I worry that I might tempt the tax man to come after me.

Although I took math classes in college, they are definitely not my favorite subject. After all, I have a BA in English. My expertise is in reading and writing, not numbers. Nevertheless, I am now responsible for my taxes, social security and all. What am I going to do!

Fortunately, I do not have many unusual deductions to worry about. My work consists of a laptop and high speed Internet. I do not employ anyone else, and my office space is a corner of my bedroom. But, I also remember my parents suffering during tax season. The table was spread with tons of paperwork, and my mom spent hours poring over the information. Of course, they wanted to be sure to take all the legal deductions. Thus, the crux of the problem!

What is legal? What is not? Can I take this deduction? Do I claim as single or head of household, because the children’s dad claims them as dependents, so I cannot? How do I know how to pay the least possible amount, without tempting the tax man?

Last year I discovered the true joys of filing electronically. I signed up with a free program. In about 1 hour, the questionnaire asked me a myriad of questions. I answered truthfully and to the very best of my ability. Plus, I did not claim anything for which I did not have a receipt. At the end of the hour, I had filled out the proper forms for my day job, and my part-time self-employment.

I am satisfied that my tax forms are correct, and I did not tempt the tax man to audit my math skills. No one wants to have Uncle Sam question the validity of a remittance or a refund. The penalties can be astronomical.

My best advice: Do NOT tempt the tax man. If in doubt, seek help, especially if you are new at self-employment. It is better to pay a fee for someone to check your paperwork than have interest and penalties assessed by the IRS. Then, after you are familiar with your tax concerns, you can do your own taxes next year.

How do you make sure not to tempt the tax man?

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Time Tracking with Fresh Books – New Year Review Edition

What have you accomplished in 2008?  I know, the New Year is only a dozen hours old but the clock is ticking on your 2008 goals!  Wouldn’t it be nice if you could finish the day already having made some progress towards one of your new year’s resolutions?

One of my major resolutions that I MUST achieve in order to reach my self employment goal is to do better managing my time.  I setup a Fresh Books account early in 2007 for time tracking but sadly neglected it after the first few weeks.  I already have my existing projects setup in the account and I’ll add all my new ones this afternoon.  It really is a cool tool for time tracking and invoicing, it gives me everything I need now and has many more features I can take advantage of as my small business grows over time. 

Fresh Books makes it easy to track your time which is great, the easier it is, the more likely I am to do it! Every time I sit down to the computer I will start the timer in my account and assign the time to a specific project that I’ve defined.  I’ll review the time reports every two weeks to see exactly where my time is being spent and adjust accordingly. I’m not going to focus on any other goals for the year until I have time management/project prioritization under control. 

Of course, I’m not the only one looking back on last year and looking forward to 2008.  Check out the articles below that cover the best of 2007 and things to look for in 2008.

–Twelve Posts of Review – May 2007 April 2007 @ Lazy Man & Money

–The Exciting Financial Year That Was At The Digerati Life @ The Digerati Life

–2007 Year End Reviews (I): Financial Moves @ Suns Financial Diary

–The Best of Generation X Finance From 2007 @ Generation X Finance

–Setting Financial Goals for 2008 @ Five Cent Nickel

–Thanks for 2007 and goals for 2008 @ Mighty Bargain Hunter

–15 Resolutions And Goals For 2008 @ No Credit Needed

–Don’t Make Resolutions — Set Goals for 2008 @ Get Rich Slowly

–The Simple Dollar: Best of 2007 @ The Simple Dollar

Not everyone was pontificating about the past and future. Money, Matter, & More bought a new Honda Civic, Blueprint for Financial Prosperity gives us the The Fundamentals of Frugality, and Free Money Finance offers Three Simple Steps to Financial Security

Hope you all had a wonderful New Year’s celebration and I wish you great things in 2008!

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What to do When the Gas Bill Equals the Car Payment

A couple of days ago, I heard that the price of gas is expected to rise substantially in the near future. If you live in California, you may expect $4 a gallon or more. If you live in Hawaii, where the fuel has to be shipped in, you are probably paying that already, and wondering how it can possibly go any higher.

Unless you live within a mile of your job and shopping, you probably need to drive on a regular basis. If you live in a big city, the commute can really blow your gas budget.

While I cannot promise to save you enough to put your firstborn through college, I may be able to remind you of a few ideas that will keep a few bucks from being poured into your tank.

1. Carpool. Whenever possible, share a ride. Take turns driving kids to school, soccer practice or even going to work. Not only will it save your budget, it will also reduce pollution a smidgen.

2. Walk. If at all possible, take a walk. Americans in general are spoiled by transportation. For some, it is unheard of to even walk a couple of blocks to visit a friend. Take the time. Not only will you save gas, you may find yourself healthier in the process.

3. Ride a Bike. Recently, I have seen more people riding bikes to work and school. It may mean you have to start out a little earlier, but you will get used to it. In some countries, like Japan, where over population is a problem, you cannot simply go out and purchase a vehicle. You must prove you have a place to park your car before you can own one. Thus, many people ride bikes everywhere they go.

4. Plan the Route. A lot of people waste gas by not planning ahead. They often find themselves going from one end of town to the other, and back again. Instead, plan your route, so you can run all your errands in the most expedient manner and save gas as well.

How will you reduce your gas bill?

Tina

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The Blessing of Income Tax

Am I insane!  No one thinks giving a significant portion of their hard earned income is a blessing!  However, before you send someone out to put me in the loony bin, consider the following circumstances:

The more money you make, the more income tax you are required to pay.  A blessing?  Yes, in a round-about way. If you had to pay more income tax last year, it means you also earned more in spendable income.

Consider the alternative.  For years, I did not even have to file income tax, because I did not even make enough to qualify. However, that did not mean I was doing great in the financial department.  I was going to school, newly divorced, and trying to raise two small children alone.  Financial speaking, we lived well below the poverty line.

Now, I have to file income tax.  Do I feel blessed?  Most definitely!

No, I do not always agree on how the government spends the income tax of its citizens.  Yes, I wish the politicians had to be as careful with their finances as the average household.  However, I still feel blessed.

I drive on the US highways; my freedom is protected by servicemen and women whose wages I help to pay.  Most importantly, if I have to pay taxes, it means that my personal financial situation has vastly improved.

So, before you begrudgingly file your income tax this year, consider the alternate.  Just maybe, you will consider the blessings of income tax. 

Just my thoughts,

Tina

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Are You Taxed by Your Taxes?

No one looks forward to paying taxes, unless they are 100% sure of getting a refund.  If so, the forms are filed the minute all the necessary paperwork has been received.

On the other hand, the people who anticipate owing taxes generally wait until the last possible moment to file.  Thus, they are essentially taxed twice. Why?

Although we naturally budget for bills and other household expenses, many individuals fail to budget properly for their portion of income tax.  Thus, when tax time comes around, they are taxed emotionally and financially to meet they obligation to the IRS.  After all, we have all heard the old saying that the only sure things in life are death and taxes. 

If the IRS is owed, it expects to be paid on time.  If a citizen is late in remitting taxes, the interest and penalties can be astronomical.

So, if you are one who feels taxed in more ways than one, here is a little bit of advice:

1.  Think of your taxes as an expense, much like utilities or a car payment.

2.  If you owed taxes after filing out your forms last year, change your deductions. 

3.  If you are already claiming zero deductions, have an additional amount deducted throughout the year.  (What you don’t see in your paycheck, you won’t miss.)

4.  If you have children, start a tax free educational account.  The money will not be taxed if used for your child’s post-secondary schooling in the future.

5.  You can also contribute to charities. As long as the charity is registered as a non-profit organization with the federal government, it can also help reduce your tax bill, as well as helping the less fortunate. 

How do you keep from being taxed by your taxes?

Tina

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Personal Finance Review – Holiday Roundup Edition

What makes the holiday season special?  In my opinion it’s who you spend it with, not how much you spend on it.  Contrary to what retailers would have you think, you can have a perfectly fulfilling holiday season without setting foot in a store or hitting any door buster sales.

Thanks to the shopping on the Internet you can find some of the best deals available and have them delivered to your door; saving you time, money, and stress.  Instead of spending your time trudging through the crowds, you can spend it with the ones you care about most.  Of course, you’ll also have time to check out some of the good money posts this week.

Five Cent Nickel talks about the alternative minimum tax and the Digerati Life offers up answers to tax questions.

To help cover the growth in social lending options, Lazy Man & Money is launching a new peer-to-peer lending carnival.

Generation X Finance discusses shady Fed mortgages and Suns Financial Diary lets us know about a $100 bonus  for opening an account with OptionXpress.

Free Money Finance suggests the best way to spend your year end bonus and the Mighty Bargain Hunter covers end-of-year bargains.

No Credit Needed is sick of credit card applications and Blueprint for Financial Prosperity takes a look at different types of bank accounts.

Get Rich Slowly talks about the value of social capital and The Simple Dollar gives tips on finding a mentor.

Happy Holidays!

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