Disclaimer: Julie is not a tax professional. As a matter of fact, she did so poorly in Accounting that it didn’t even count toward her college degree. Please check with your tax professional about your finance. This blog is for informational purposes only.
I’m doing my taxes using TurboTax and crying in my… well, green tea, but you get the point. Mystery shopping can be good money. But you’re an independent contractor. That means that you pay your own taxes. Generally, when you’re an employee, a company is matching what you’re putting into Social Security and Medicare taxes. That terrible deduction amount is only your share. There’s a whole ‘nother half. When you’re an independent contractor, you’re paying the whole thing.
Surprised? A lot of people are. Especially when they’ve kept no records, no mileage logs, and haven’t put away anything to pay them.
Companies will issue you a 1099 if you make over $600 for the year. “Oh good, I’ll just stop at $550 and I won’t owe anything.” WRONG. If you’ve made the money, it’s income, and it’s reportable. If you get paid, they get paid. Fret not, though. Being wise in your record keeping and shop choices can help a great deal.
Most importantly when mystery shopping is to keep a mileage log. Just make it a habit when you get in the car to jot down the starting and ending mileages. There’s disagreement as to when your mileage starts (you can call the IRS, but you’re likely to get a different answer every time). From what my accountant says, the mileage begins once you leave your home area. In other words, if you mystery shop the grocery store down the street, there’s no mileage involved, but if you drive out of town, there is. Mileage is a huge deal. It’s going to be your biggest write-off. For 2007, it’s 48.5 cents per mile. If you’re traveling 30 miles each way to do a couple of shops that pay $15 apiece, your mileage has eaten up $29.10 worth of that $30 profit. The 90 cents is what you’ll be taxed on. If you failed to keep a log, use an online mapping program to find the mileage, and log that.
Keep track of your other expenses as well. How many times did you have to change ink in your printer to print out those awful huge packs of instructions? How about your Internet connection and cell phone? You can deduct the percentage that you use for business. Just be certain the expenses are reasonable. If you’re paying $100 a month for Internet access that you claim is all mystery shopping related, yet you’re only making $150, it’s going to make someone take a second look.
As an independent contractor, you’ll be filing a Schedule C. Guess what kind of tax returns are most often audited? Your odds are more than twice as high for an audit, especially if you report a business loss. Report one three years out of five, and you’re almost assured an audit. I usually purposefully underestimate my expenses, so that if I do get audited, they’ll owe me instead of the other way around. For me, it’s not worth showing a loss to save a few dollars. The same applies to maintaining a home office. Home office deductions are a huge hassle and a big red flag, especially for a mystery shopper whose business is mostly conducted outside the home. If you save $15 by claiming a home office, yet spend 40 hours preparing for the audit it triggers, is it really worth it?
I’m still waiting for the tax form that reads, “Gross income goes here. Move the decimal point over one place to calculate your tax. Submit.” Until that happens, your best bet is to keep mileage logs, and claim reasonable expenses for ink, paper, phone, and Internet access. Unless, of course, you’ve found the company that mystery shops the IRS!