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Tax Law (Questions About Taxes)/Estimated Taxes and Self-Employment

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QUESTION: We are preparing to file our 2013 tax return and have a question relating to self-employment income reporting. First off, we had no tax liability last year and meet the other requirements, so we have not paid estimated taxes. We do file a tax return every year, but it was explained to us that we were exempt from paying estimated taxes because we were not required to file.

This is a small side business of my spouse, making and selling homemade purses at flea markets, and her total gross is under $5843 annually minus $1426 in expenses. My wife also has a primary job; she receives a W2.

This will be our first year having to deal with self-employment tax law and we were told that our EIC could be reduced or eliminated if we filed income without a W2 or a 1099 from an actual employer. Is this true? If so, could we file our personal taxes and then file the purse money as a business? Or is there another solution such as Married filing separately and then she file her taxes. Forgive my ignorance if none of that makes sense and thank you in advance for your response.

p.s. I'm not sure if this will add to the confusion, but I am disabled and on Social Security, so I have no taxable income.

ANSWER: David,

Thanks for your question,  there are several issues in your question.

First, the inclusion of self employment earnings on your return will affect your EIC, but no differently than a W-2 or other earned income,.

Next, you will report the purse activity as a business on Schedule C , showing income and expenses.  The net profit shown will be subject to self-employment tax and in determining your EIC ( and taxable income, if any). To file it separately as a business you would have to form a corporation and pay corporate tax.

Third, if you file separately, 85% of your social security will be subject to taxation and you cannot receive the EIC.

Hope this helps.

John Stancil, CPA

---------- FOLLOW-UP ----------

QUESTION: Okay, that actually eases my mind a great deal. Thanks for the explanation. If her purse money will affect our EIC as a W-2 would, it should increase our EIC. She works on commission and her gross wages,tips, etc. was only $8210 for last year. With her income so low and my Social Security payments being unearned income, the $4417 added to our total earned income will actually increase our EIC! Am I understanding that correctly?

The only drawback is that we were planning on e-filing on our own this year using HR Block's software.(we've been with them for 15 years and they can insert our personal information and our previous tax returns into the software). As a rule in general, do you know if individuals (married filing jointly)are allowed to e-file if they have to file a Schedule C?

If all this turns out to be the case, we will be receiving some desperately needed funds for medical expenses. Regardless, thank you so very much in advance!

Answer
David,

It may or may not increase your EIC.  That is a number that is difficult to predict without more detailed information about your tax situation. There is a point where it maxes out and additional income reduce the EIC.  It depends on the number (if any) of qualifying children.

One more thing. You stated you are on SS disability.  I don't know your age, but if you have no qualifying children, you cannot get the EIC if you are age 654 or older.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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