Wednesday, February 9, 2011

I’ve earned money writing - What do I do now?

There are ways in which hobby (or sporadic) income and expenses/deductions are treated differently than those of a business and there are ways in which they are treated the same. It's important to know the difference because Congress and the IRS do.

First, all income from a hobby (or sporadic activity) or a business is subject to taxation. BUT, just how much and how it is taxed will vary between the two tax structures.

Second, all expenses/deductions used in a hobby or business MUST be reasonable and necessary, but how they are treated in the calculation for taxable income -- and even some of the forms used -- is different.

Ima Hobbyist not only earned money writing for her friend's business but she also received a Form 1099-MISC. In a panic, she called her friend because she had never seen one of these before and wanted to know what it meant. Also, she hadn't realized that she had made as much money as the document indicated.

Her friend calmed her down and advised her to talk with a tax professional. Ima Hobbyist said that she didn't know how to even begin to choose one of those since her return had always been so easy to do in the past. Her friend gave her the name of her own accoutant and advised Ima Hobbyist to contact her.

The accountant explained that a 1099-MISC form was issued for a variety of reasons to include reporting to the IRS money tendered to independent contractors such as herself, and that these documents were required when the total amount of money tendered/recieved at one time, or over a given tax year, was $600 or more.

Perplexed, Ima Hobbyist queried as to what an independent contractor was and the accountant explained that this is someone who provides a service to someone else or to a business, and who is not an employee of that person or business. (More discussion forthcoming on this topic in a future Blog.)

It was clear that Ima Hobbyist had much to learn even though she felt she had earned very little money over the year. Armed with the advice of the accountant, Ima Hobbyist set out to have a better understanding of just what she had gotten herself into. So, she went to the IRS website (www.IRS.gov) and downloaded the following publications, forms and instructions for tax year 2010 per the accountant's advice:

Publication 17 - Your Federal Income Tax
Form 1040
Form 1040 Instructions
Schedule A
Schedule A Instructions
Form 1099-MISC
Form 1099-MISC Instructions

She also downloaded Form 1099-MISC and the instructions for tax year 2011 since they were also available.

Dear Writer - you too should download these publications, forms and schedules (you may even want to print out the forms and schedules - the instructions can be 100's of pages so watch out) - AND grab a calculator because we're going to run some numbers just so you can see where the money flows on Ima Hobbyist's federal tax return and how her income is taxed. We'll also see just how much of her hobby income is taxed and how it affects the rest of her federal tax return calculations.

Get ready to run some numbers and have some fun!

1 comment:

  1. Save time and avoid penalties filing your tax forms.For fillable 1099 forms or any tax form you need you can find it at PDFfiller
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