If You're In Business And You Know It, Clap Your Hands...
Cliff Ennico
www.creators.com
#147;Earlier this year I started selling stuff on eBay, mainly to clean out my attic. I ran out of attic stuff a while back, so I#146;ve started selling stuff for some of my friends and relatives. So far I#146;ve made about $50,000 after expenses and splitting the proceeds with the people who give me stuff to sell. I don#146;t really look at this as a business, but I#146;m being told that I have to pay taxes on what I#146;m making. Is that right?#148;
Let me get this straight . . . you#146;ve made $50,000 in 8 months and you#146;re not sure if you have a business? ARE YOU KIDDING????
A lot of people are surprised to find out that their cherished hobbies have somehow #147;morphed#148; into real businesses overnight without their knowledge. Your good-faith belief that what you are doing is #147;only a hobby#148; doesn#146;t count for much when it comes to the Internal Revenue Service and your state and local tax authorities. Under current law, if you are making even as much as One Dollar doing ANYTHING, the tax authorities will view you as being self-employed, you will have to report your earnings as income, and you will have to pay taxes on that income (if you are losing money, that#146;s a different story).
You need to talk to an accountant right away to determine your total tax liability, but based on your e-mail, I#146;m pretty sure that:
you will have to pay federal, state and local income taxes on the full $50,000 in earnings from your business on eBay;
you will have to pay #147;self-employment tax#148; (roughly 15.3%) on everything you#146;ve earned from eBay sales over $400;
you will have to pay these income and self-employment taxes in quarterly #147;estimated#148; installments on April 15, June 15, September 15 and January 15 of each year; and
if you have received more than $600 in fees from any one of your friends and relatives this year, he or she may have to send you a Form 1099 next January.
But that#146;s not all. It sounds from your e-mail that you are taking consignments of stuff to sell on eBay. A growing number of states (mostly in the Midwest) are requiring eBay consignment sellers to obtain #147;auctioneer licenses#148;. If you live in one of these states, you will have to pay a fee ranging from $200 to $500, and will also have to take an evening course in #147;auction practices#148; at your local community college, before you can get the license.
Since it sounds like you have started a business, whether you knew it or not, and will have to pay taxes on your income, whether you like it or not, why not go the extra mile and set it up as a legal retail business? That way you can deduct your business expenses (most of them anyway), as well as certain of your household expenses if you claim the #147;home office deduction#148;. The steps involved are quite simple for a business like yours:
you will have to obtain a federal Tax Identification Number (or EIN) from the IRS (go to
www.irs.gov
and download Form SS-4, the application for a tax ID number);
you will have to register for your state#146;s sales, use and other business taxes #150; your accountant can help you with the necessary paperwork;
if you have a cute name for your business, you probably will have to file a #147;trade name certificate#148; with your county clerk#146;s or town clerk#146;s office; and
you will have to file Schedule C (#147;income or loss from a trade or business#148;) with your Form 1040 each year.
Welcome to the wonderful world of self-employment! You have already passed the most difficult hurdle any new business faces #150; you are actually making money! The only businesses that are tax-free (other than charities) are businesses that don#146;t make money. So set yourself up right, keep up the good work, and may you always regard your business as a #147;hobby#148; that#146;s both fun and profitable.
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2005 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com
