Do You Have To Pay Tax On Your Online Income? By Kristine McKinley At Isnare.com Ezine Articles

Q: I just started my home based business this year and expect to just break even this year. Do I still need to report my income, even if I don't actually make a profit? Also, what expenses can I deduct?

A: You must report all income earned. It's a common misconception that if you don't earn over a certain amount or if you're just doing it as a hobby that it's not reportable or taxable. That's not true. All income is reportable from the first dollar earned.

It doesn't matter if you receive a 1099 or not. It also doesn't matter if you earn less than a certain amount. Another myth is that if you earn less than $600 you don't have to report the income. Again, it's just not true.

All income is reportable from the first dollar earned, unless it is specifically exempt from taxes in the tax code (hint... online income is not exempt from tax!).

However, you are allowed to deduct business expenses from your income, if they are reasonable and necessary to run your business.

So in this case, just because you have to report the income doesn't mean you'll have to pay any taxes. If you have expenses that are as much as or greater than your income, you won't owe any taxes, and may even be able to use the resulting loss to reduce other taxable income.

The most common expenses that online business owners may have include:

* Inventory (your accounting method determines when you deduct your inventory costs)
* eBay fees
* PayPal fees or shopping cart fees
* Shipping fees and supplies
* Postage
* Office supplies
* Advertising
* Mileage (business mileage only)
* Phone (cell phone or second line)
* Bank charges
* Accounting and legal fees
* Computer and software (computers must be depreciated over the life of the computer unless you qualify for Section 179, which allows you to deduct the entire cost in the year purchased)
* Internet, website and faxing services (you can only deduct the business portion of your internet fees, so if you have 3 kids and they all use the internet, deducting 100% of the internet fee would not be a reasonable deduction)
* Contract labor
* Furniture and office equipment (furniture and equipment must be depreciated over the life of the item unless you qualify for Section 179, which allows you to deduct the entire cost in the year purchased)
* Membership fees
* Continuing education
* Home office expenses (you may deduct a percentage of certain expenses, such as real estate tax, mortgage interest, rent, utilities and repairs made directly to the home office space - this is beneficial because it reduces your net profit, and can therefore reduce your self employment taxes)

This list is not all inclusive, but these are the most common expenses that online business owners will have.

You report your income and expenses on Schedule C - Profit or Loss from Business, and attach this schedule to your individual income tax return (Form 1040). If you have a net profit of $400 or more, you will also need to complete Schedule SE - Self Employment Tax.

So in summary, yes, you have to report your online income, but you only need to pay taxes on your net profit, so it's important to keep good records and understand what expenses you can deduct so you don't give Uncle Sam more than his fair share.

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