It is true that you have to pay taxes on your earnings from your home business. If you make more than $600 a year, you have to report it — even if you are a sole proprietorship not "officially" listed as a business. Indeed, it is vital that you report your home business earnings, since the government always wants its cut. And eventually the IRS will discover if you’ve been holding out.
Over at Home Biz Notes, Jean Murray has a list of common tax myths that often afflict the home business:
1. The IRS doesn’t think you’re a business unless you register as one. Not true. You are a sole proprietorship. That is a business. And you have to pay taxes.
2. If I’m not getting paid much, reporting isn’t necessary. See what I wrote above. If you make more than $600 a year, you have to report it. Even if your clients don’t send you a 1099 (some of mine don’t).
3. Non-registered home businesses don’t have to pay Social Security and Medicare taxes. I wish. That along would have been enough to keep me from switching to the LLC. However, even a sole proprietorship has to pay into these programs — on top of the self-employment tax. (I’ll tell you who needs a tax break/bailout to get through this recession — home business owners!)
4. Barter doesn’t have to be reported. If you are trading services with someone, you do need to report it. If you don’t you can’t deduct expenses incurred for the work you did as part of the arrangement.
A good tax preparer can help you figure out what you need to pay for your home business, and how to pay it.
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