If you accept money for readings or sell reports or recordings, you have become a small business owner, whether you think of yourself as one or not. As such, you have entered a web of legal rules that apply to you, whether you know about them or not.
One area of rules that has major consequences for the unsuspecting is tax law. This brief primer will introduce some tax requirements and considerations that deserve your attention.
Tax Forms. If, like most astrologers, you see clients on your own, the name for your type of small business is a sole proprietorship. (This does not apply to you if you have set up a corporation, limited liability company or partnership. If you have, skip down to Barter Income.) As a sole proprietor, you must report your business income and expenses on Schedule C of IRS Form 1040. This schedule is called Self-Employment Income. If you have to file Schedule C, you can not file the short tax return form, Form 1040-EZ, but must file the long form 1040.
You must pay self-employment tax (equivalent to social security) on your self-employment income, in addition to income tax. The two taxes combined mean that your effective tax rate will be higher than if you were an employee making the same income. The form is Schedule SE to Form 1040.
You will probably be required to make estimated tax payments, in advance. The IRS form is 1040-ES. Payments are due in the middle of April, June, September and January. The IRS assesses penalties (and interest) if you fail to pay or if you underpay. Use the figure of $500 in taxes as a guide. The rule is that you must make estimated tax payments if you expect to owe at least $500 in tax (over any withholding payments and credits) and you expect that your withholding and credits will be either less than 90% of the tax on your current year’s return or 100% of the tax on the previous year’s return.
Don’t forget the locals. You must declare and pay state tax on your self-employment income if your state has an income tax. If your income is high enough, you will be subject to estimated payments on the state level, too. If you live in New York City, you must also declare and pay a city business income tax on your self-employment income.
For information about federal taxes, including small business guides and downloadable tax forms, visit the IRS site at www.irs.gov. A directory of state tax websites is online at http://www.taxadmin.org/; look for the US map and click on your state.
Barter Income. It’s common to trade goods and services in a lot of fields, and for some reason metaphysics is among them. (Massage is, too — go figure.) A trade or barter happens when one person provides goods or services to another, and that person pays by providing goods or services in return, rather than writing a check.
What’s the risk in trading? The only problem (from a legal point of view) is how you treat it in your bookkeeping. Barters and trades are taxable as income. Each end of the trade should be reporting the value of what was received as income. Many people are lax about this, but be forewarned: If you are audited and barter income is uncovered, you will be treated as having underreported your income and subject to penalty. If you choose to join the legions of the lax, do not barter for items that are deductible as business expenses. Pay for them with a check.
By the way, bartering has another risk that has nothing to do with taxes or legality. It’s important to agree on and document the value of each side of the barter. Problems arise when one side thinks what it’s getting is worth less than what it’s giving — or one when side treats the arrangement as doing a favor for the other.
Deductible Expenses. You are allowed to offset your income with expenses you pay out to run your business. These expenses may include the cost of business cards, flyers, ads, stationery, professional organizations dues and journal subscriptions, seminars and conferences, your phone line, etc. For certain large ticket items, such as software, office equipment and furnishings, you do not deduct the cost all at once. Instead, you amortize the cost over a period of years. (An accountant can help you calculate this.)
One expense in particular sounds enticing but may not be worth it, and that’s taking a deduction for maintaining a home office. With this you would calculate the percentage of the total square footage in your home that your home office occupies and deduct the same percentage of your home expenses (generally mortgage or rent payment and utilities).
Do not take this deduction without a tax advisor. The IRS has very stringent restrictions on business deductions for home use. Taking a home office deduction is commonly considered to be a red flag for the IRS; this is one of those items likely to trigger an audit. Your odds are better if the home office is a separate room, rather than a nook in a bigger space, and if the office never doubles a sleeping space. (Even better, if it is too small, or filled with furniture, for anyone to sleep in it.) If you want to pursue this, consult with a tax accountant. Keep records; document everything, with photos, even. If you’re claiming a portion of your utilities, you’d better hold on to the bills.
Hobby Loss Rule. Whether you’re operating on your own or in a partnership, corporation or LLC, your business must show a profit two out of five years. It doesn’t matter how much – one single dollar is enough. If you do not show a profit two out of five years, the IRS may take the position that your business is a hobby and disallow all business deductions. (The income is still, of course, taxable.)
Other taxes. Depending on the laws of your jurisdiction, your business assets may be subject to taxation at minimal rates by various county entities, such as school districts. The tax is levied and collected by the county. Technically you are generally required to take it upon yourself to report your property to the county. As a practical matter the county will, sooner or later, send you a property declaration, and it will probably not impose a penalty for earlier years in which you failed to file.
You must have a sales tax permit, and you must collect and remit sales tax, if you sell goods in the regular course of business – for example, if you sell tapes of your lectures or recorded guided meditations or books. (If you buy goods for resale, you may be entitled to an exemption from paying sales tax.) In certain jurisdictions, some services are also subject to sales tax. Direct questions about sales tax to the tax office of your state.
This information is presented for educational purposes and is not intended to constitute legal advice or take the place of consulting your own attorney.