As we all know, it’s that dreaded time of the year-Tax time! In honor of tax season, I have a new series called “Ask An Accountant”. Send in your tax questions each week to [email protected] and I will post the question and give an answer from an experienced accountant.
I keep hearing that as a person who enters giveaways you have to file taxes on the prizes that you win (no matter the value). Is this true? Do you claim the prizes as income and as a new blogger I haven’t earned any income yet, but I sometimes work out of my home just doing hair with no chemicals (more of a stylist because I work with dreads). How do I claim this as an income or can I and if so: Do I estimate my earnings and will this hurt me because I haven’t paid any taxes but earned income (plus I am a mom of 4).
While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:
- cash earned from side jobs,
- barter exchanges of goods or services,
- awards, prizes, contest winnings and
- gambling proceeds.
You would normally include these as miscellaneous income on your tax return, not subject to self-employment tax.
For the hair business, that income would be reported as a Schedule C (Profit From Business). I would also suggest you get yourself a separate business license and an EIN for each of these ventures ASAP. This will generate additional taxable income as well as “self-employment” tax which is an additional tax (estimated to be around 14%) on the profits from these activities. So for every $100 dollars in profit you should expect to pay $14 in self employment tax. Avoid “estimating” as the use of whole round numbers sends a red flag to the IRS that you may be estimating the figures and they may ask for substantiation of these figures.
As an accountant that has Hair Salon clients, I would say there must be some basic supplies you need to operate (combs, brushes, scissors, clippers, water bottles, clips, aprons, as well as Home Office expenses (for the portion of your home used exclusively for hair styling) such as a portion of the electricity, water, mortgage interest/rent, taxes, etc… All of these can be deductible items for you business.
*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.