Independent work is popular. People who are independent workers are often referred to as “Direct Sellers” by the IRS because they often sell a product or service to people they know from personal connections or even networking events. Since Direct Sellers work for themselves, their tax filing rules are different from those who work a W-2 full-time corporate job. Follow these tips from ETax Service to learn about how to be prepared for potential tax auditing as a Direct Seller.
- File the Tax Return
Any income of $400 or more over one year must be reported. For example, people who only made $155 throughout a year will not owe any taxes. It is important to file because that is how people are issued tax refunds.
- File Business Income
Many independent workers make various kinds of income (product purchases, prices, commissions, gifts, and many more). Direct sellers often receive a Form 1099 if they made over $600 or invested more than $5,000 in inventory.
- Pay Self-Employment Taxes
The IRS requires the self-employed to pay their own taxes. This is because companies are not automatically deducting expenses such as Social Security, Medicare, and other income taxes. The tax rate for direct sellers is 15.3% of net earnings (12.4% for Social Security and 2.9% for Medicare).
- Understand Expenses You Can Deduct
A great way to lower your taxable income is by deducting business expenses. Self-employed workers can normally deduct various kinds of expenses. These expenses include home office, marketing, startup costs, inventory (value, not sales), and more.
- Separate Business and Hobby Incomes
Some people have a skill and do not intend to make an LLC or other business out of the skill. If you are providing a skill and are not concerned about money, you are considered a Hobbyist. Hobbyists still must report all income though no expenses may be deducted.
For more questions about tax rates for the self-employed, visit www.etaxservice.com to connect with our expert tax staff.