Just because you work out of your house or write a blog does not mean that you are exempt from the tax regulation inserted into the recently passed Health Care Reform Law. The rule requires that any business customer must issue a 1099 to the seller when goods or services valued at $600/year in total are purchased. Accordingly, for every business customer to whom you sell at least $600 in goods or services, you must provide your tax ID so they can generate that 1099 form.
Congress wants to crack down on income that may not be reported by freelancers, home based businesses and bloggers. So how will this situation about the tax ID affect you?
Incorporation status
It’s a pretty safe assumption that most bloggers, freelancers and small business owners who work out of their home are not incorporated. Most of the time, this is due to the sales being too small to justify the cost of incorporating. It doesn’t make sense to spend $5,000 in legal costs when you only made $2,000.
Now here’s the rub, if you are a sole proprietorship, your tax ID number is your social security number. That is what you report to the IRS on the Schedule C (Business Income) for your tax returns (1040).
Under the new Health Care Reform Law, you would have to provide your personal Social Security number to comply with the new rule. How comfortable are you at giving total strangers your social security number. There are some serious risks in doing this. I consider this to be worse than giving out the business tax ID number.
What are your options?
1) Give your social security number.
2) Spend the money and incorporate. This will involve extra costs every year for fees and tax preparation. In California, an S corporation has to pay $800 state tax minimum every year whether they make money or not.
3) Go through the paperwork to get an Employer’s Identification Number (pretend like you are going to pay salary to someone). I’m not sure how the IRS will treat this situation when your EIN number on the 1099 is different than your social security number.
If you are a home based business or stay at home mom trying to make a little income, $800 in extra cost is a big chunk if you’re trying to write off your computer and web design costs.
How will you deal with this issue?
Don’t forget the effect on your income, especially for bloggers.
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