In the wild world of business taxes, expenses get the most attention. Business people want to focus on them because they lower income, thus lower tax due. Well, something many business people do not know is that income is scrutinized just as carefully as expenses by the ever vigilant hawk-like eyes of the IRS agent.
“Why would the IRS care where my money comes from? Don’t they just want to see more of it so that they can tax the tar outta me?” The answer my friends is that they want to know that you are not padding your income for bigger credits, not taking deductions against illegal income and applying your deductions to the appropriate income.
Take heed of these tax tips to keep more money in your pocket and yourself out of jail.
1. Separate your income from different sources
Expenses have to match the income source. Therefore you must separate income that is not related. For example, a webcam actor needs to separate that income from their content writing income and the expenses need to match the income for which it was used.
2. Illegal income must be reported.
The poster boy for this is, of course, Al Capone who was nabbed, not for the vicious crimes he committed, but instead for tax evasion. Until prostitution is made legal, income from it is also illegal. Obviously, unlike Al Capone, prostitutes are not vicious, unless that is what the client desires. The fact that this income is illegal doesn’t mean you don’t report it or neglect to take deductions against all of your hard-earned income. Au contraire, mes soeurs! As many know, often there is much more time spent courting your client than there is satisfying their sexual needs. Therefore, to be legal on your tax return and fair to yourself, you should separate your legal escorting income from the income from sexual services, if you provide them. In this way you can then take your well-deserved deductions against the legal income and not from the illegal income, thus making everybody happy.
3. Detail your income spreadsheet as carefully as you do for your expenses.
This means providing dates and detailed information about how and from whom your income came. In the case of an audit, you will be able to defend it.
4. You must report income even if you do not receive a 1099.
You are supposed to receive a 1099 as an Independent Contractor if you receive income of $600 or more. However, do not let a lack of a form deter you from reporting this income. The IRS states that all taxpayers must have received all expected tax documents before filing their tax returns, but you can still file anyway to make certain that you file on time if you know how much you made. This is why it is important to keep track of your income throughout the year and not leave it up to a company. You will want an accurate record of what you brought in and companies sometimes report wrong amounts.
5. Claim all self employment income of $400+.
The Social Security Administration is not part of the IRS, but they collect Social Security Tax and Medicare through the IRS tax returns. As a self employed person you pay this tax yourself and therefore must claim all of your earnings to report this tax, even if you will end up with a tax refund.