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June 2010 Newsletter 

Summer Job News for Students; Are You A Hobbyist or Small Business Owner?; Treasury Goes Green to Save Green 

A Primer for Students Working Summer Jobs

If you know one, or are one, of those full-time students who works through the summer, here are some things you should know about summer employment and the IRS.

1. You need to fill out a W-4 form for withholding wherever you work. Students, who earn an income, even if only a seasonal one, are taxpayers.
2. If you’re parking cars or busing tables, hopefully, you receive tips as a result of your exemplary customer service. Tips are taxable income and must be reported to the IRS.
3. “Under-the-table” work is also taxable income, whether you’re painting houses, babysitting or moving mulch. If the amount is $400 or more, you are required to pay self-employment tax.
4. ROTC students participating in special training are paid a subsistence allowance, which is not subject to taxation. Active duty pay, received during advanced summer training camp, is taxable.
5. Newspaper carriers are generally considered independent contractors and subject to self-employment tax, if:
   1. All your pay for newspaper delivery relates to sales
   2. You perform your newspaper delivery services under contract and the contract states that you are considered self-employed for the sake of federal tax purposes.

Whether you have those “Working for the car wash blues” or simply “Work hard for the money” now you know how to keep what is really yours and not run afoul of the IRS during those long, hot summer months. Looking for some more information? Your local Liberty Tax Service office is open too, call ahead for hours.   

Stamp Collector by Hobby or By Trade

How do you relax? Grab your ‘ole fishin’ pole, or favorite gardening gloves and floppy hat and head out to the garden? Summer is a great time to relax and enjoy your hobbies – painting, stamp collecting and scrapbooking – are often done for pleasure, and can sometimes result in a profit.

If you’ve found a way to make money doing what you love, you may have also crossed over from small-time hobbyist to full-fledged small-business owner. And there may be tax implications. All income needs to be reported to the IRS from almost all sources, including hobbies. Here are eight questions to help determine if your activity is a hobby or a business.

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it has a reasonable expectation of earning a profit.
2. Is your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
3. Do you depend on income from the activity? If so, your activity is likely a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may be a business.
5. Do you have the knowledge needed to carry on the activity as a successful business? People, who carry out hobbies just for fun, often don’t have the business knowledge to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may indicate your activity is a business. An activity is thought to be carried on for profit if it makes a profit in at least three of the last five tax years, including the current year.
7. Does the activity make a profit some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

So, if your garden gnome collection is not turning a profit, allowable deductions cannot exceed the gross receipts for the activity. If your crocheted tissue box covers are doing well you may deduct your ordinary and necessary expenses.

Hobby? Business? For profit? Not-for-profit? Your local Liberty Tax Pro can help. Of course, you’ll have to catch them on a day when they’re not hitting the ‘ole fishing hole or trading stamps, too!

Treasury Goes Green to Save Green

Business owners accustomed to using Federal Tax Deposit coupons will have to start making electronic deposits in 2011 as part of an effort by the U.S. Treasury Department to save money and cut down on paper use. There will be some exemptions when it comes to businesses being required to use the deposit coupons. Companies with $2,500 or less in quarterly tax obligations when filing their returns will still are able to use tax deposit coupons.

Also, individuals receiving Social Security, Supplemental Security Income, Veterans, Railroad Retirement and Office of Personnel Management benefits will begin to receive payments electronically beginning on March 1, 2011 and existing check recipients begin on March 1, 2013. Currently, 85 percent of federal benefit recipients receive their payments electronically.

The benefits of electronic transaction to consumers and companies are many. Electronic transactions provide safety, convenience and control for payment recipients and tax payers. These simple steps and others, once implemented, will bring about a potential savings of $400 million, in addition to 12 million pounds of paper over the next five years alone.

First-time Homebuyers Credit Deadline Approaching

Liberty Tax Service is reminding taxpayers they still have until the end of June to take advantage of the popular First-time Homebuyers Credit. Under the credit, homebuyers must have a property under contract by May 1, 2010 and the home must be closed on before July 1, 2010.

"The First Time Homebuyer credit has helped nearly two million families achieve the American dream of owning their own home. The expanded tax credit has been one of the great successes of the Recovery Act. Potential homeowners across the country should know about it and should take advantage of it," said Deputy Treasury Secretary Neal S. Wolin.

The provision, which was approved under the federal stimulus act, provides an $8,000 credit for first-time home purchases, or $6,500 for those who are long-time residents of their home but choose to buy a new one.

Yep, It's A Deduction

Cat Food.

In a 2001 case, (Samuel T. Seawright, et ux., 117 T.C. No. 24) the IRS allowed the taxpayers a $300 business expense deduction for cat food purchased and set out in their scrap yard (they operated an automobile salvage business) for the purpose of attracting wild cats to deter snakes and rats. While the case may not directly apply to you, it's food for thought, or at least for a pet.