I think you need the advice of an accountant on this one, Lager.  Certainly expenses can be deductible, but I'm wondering why she didn't get a 1099 that shows the commission profit she made, however, technically they don't have to do that.

If she is considering this a business, then she will have to fill out a schedule 'C' form.  She can then deduct her expenses and then pay the 33% that is assessed to her profit.  For example, if she made $2000 in profit and had $1000 in expenses, then she would owe 33% of the $1000 profit.  Personally, I'd wait and see if she keeps working this as a business or considers it to be a hobby.

As I said earlier, it doesn't hurt to make a quick call to an accountant.  Let me know what happens.

Last edited by Just Fred (4/09/2015 1:30 pm)

Goose wrote:

I think that you need some professional advice.

This publication says that the IRS considers you a business if you do > $400 in sales in a year.
http://smallbusiness.chron.com/small-business-need-start-filing-taxes-4090.html

http://www.lbtaxservices.com/Forms/Direct%20Sellers%20Guidance%20%28Avon,%20Mary%20Kay,%20Pampered%20Chef,%20etc%29.pdf

I am surprised that she didn't get a 1099Misc.

Thank you Fred and Goose. 

 

With no 1099 there is no "paper trail" for the IRS to follow, so, essentially, you are on your own (and left solely to your own integrity) as to report the income or not.

At first glance it might be very tempting to just let it be part of the "underground economy".

But look again:  If she files as "Schedule C" sole propriator profit'/loss there are beaucoup business expenses which can be claimed.  Keep in mind that for "employees" business expenses are deductable on Schedule A only to the extent that they exceed 2% of adjusted gross income (AGI) which for a dual income couple fiiling jointly is likely to be quite high.

For the independent contractor expeneses are 100% deductable from gross income right off the bat.  No  ≥2% of AGI.  That should more than offset the need to pay both federal income tax AND Social Security Self Employment tax on the profits.

And one more reasons to plunge into the wateres of long form (1040) and Schedule C filing:  This year she turned a profit (great!)---but supposed next year she has a net loss.  That loss can be reported on form 1040 as a NEGATIVE number meaning that it can offset other income.   If you have had a profit for just one year, you can run a business as a loss for the next 20 years.   

If you start up an independent contractor business you must have a proift within 5 years or the IRS will consider it to be a hobby and there can be nasty consequences.   

Bottom line:  File the Schedule C.  Pay the Self Employment Tax.  And then enjoy the tax advantages that are denied to employees.

One more thing--just because your wife did not receive any 1099 does not mean the income wasn't reported to the IRS. The company could be lax in processing or didn't see a reason to send it to her and only they could explain that.

Make sure that you account for all of your costs of doing business.
Even miles put on the car, etc.
Income is not profit.