Most mystery shoppers are not required to pay quarterly estimated taxes, because mystery shopping represents a small portion of their overall family income. However, if mystery shopping and other independent contractor or small business income makes up a significant part of your income, you should determine if you need to pay quarterly.

Not sure if you have to pay? You can figure it out by consulting the IRS web site at http://www.irs.gov/publications/p505/ch02.html

Need to know more?

Here are some general rules about who has to pay estimated taxes:

If most of your income is from being an employee, and you have tax withheld from your paychecks at your primary job, you may not need to pay estimated taxes. (This could also apply if your spouse is the primary wage earner and s/he has taxes withheld from his or her check.)

You must pay estimated tax for 2009 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2009, after subtracting your withholding and credits.

2. You expect your withholding and credits to be less than the smaller of:
1. 90% of the tax to be shown on your 2009 tax return, or
2. 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

Keep in mind that because of a change in the withholding schedules during 2009, the amount of income tax withheld from paychecks decreased. That means that many people who expect refunds will be surprised with a tax bill when they file.

You can download the 1040-ES form for paying your estimated income taxes, along with the instructions and more information about estimated taxes at http://www.irs.gov/pub/irs-pdf/f1040es.pdf

You should never purchase something just because the expense can be deducted. Deductions reduce your taxable income, and therefore you pay less in tax, but it is not a one-for-one deduction. That means if you spend $100, you do not pay $100 less in taxes. Your “savings” may be about $25 – $50, depending on your overall income level. It is a nice savings for those necessary expenses, but buying something you do not need just to get a tax deduction doesn’t make sense.

It does make sense, however, to time your purchases to make the best use of tax deductions. If you want to reduce your taxable income for this year, you still have some time to buy things you need. For example, if you had more independent contractor income than expected this year, and want to reduce your tax bill, now is the time to stock up on some supplies, or make a purchase you have been considering, such as a laptop computer or mystery shopper certification.

Keep in mind that if the expense is incurred (e.g., put on your credit card) in 2009, it may be deducted this year, even if you pay the bill in 2010. Many stores are offering zero-interest financing on major purchases (such as computers) so you could charge the purchase now and deduct it this year, but take the maximum time allowed by the promotional rate to pay off your purchase.

Making planned purchases during this tax year can be a good strategy if your mystery shopper income along with other employee or contractor income could cause you to pay a penalty because you didn’t make quarterly estimated tax payments. (Estimated tax payments are usually required if you expect to owe at least $1000 more than was withheld from your family members’ paychecks.) Or if you expect to owe taxes or penalties due to underpayment of your 2009 taxes.

On the other hand, if you expect that your tax rate will be higher next year, you may wish to defer some purchases until after the first of the year. Your tax rate may be higher if your family income increases next year (e.g., someone was unemployed for much of this year, but expects to be working next year) or if Congress increases tax rates.

Timing your deductible expenses can save you money and smooth out your cash flow. Before making a major purchase for your business (such as a computer) consider how the timing of your purchase will affect your tax liability.

Unfortunately, many of the people who got more money in their paychecks this year may find Uncle Sam waiting with his hand out when they file their taxes next year. Some may even find that they will have to pay a penalty for the underwithholding, in addition to the tax they owe.

It is estimated that 15.4 million taxpayers had too little tax withheld and will owe money to the government. So who are these taxpayers?

Those most likely to be affected are those with more than one income, such as single people with more than one job and married couples who both work. This could include independent contractors, such as mystery shoppers. Many people secret shop for “extra income,” to supplement the wages they or a spouse earn at a job where their employers withhold taxes. Because no taxes are withheld from independent contractor income, it is possible to underpay taxes, especially this year.

Although it is expected that the IRS may waive penalties for underpayment due to the withholding change, taxpayers will still be required to pay any tax they owe. If you think you may owe money to the IRS, start planning now so you can pay any taxes due by April 15, 2010, and avoid penalties and interest for late payment. If possible, you might even want to make an estimated payment on January 15, 2010 to avoid any possibility of an underpayment penalty.

This may not affect you, but you should be prepared. Calculate your taxes as soon as possible so that you can plan to pay any tax you owe. Although you can not file your taxes until you have received your W2 form(s), you can estimate your taxes based on your pay stubs. The forms and instructions for 2009 tax returns are available now at the IRS website. Http://irs.gov/

You may also wish to adjust the amount of tax withheld by your (or your spouse’s) employer. The same withholding schedules will be used in 2010, so if you owe money for 2009, you will probably owe again in 2010.

Not sure if you have to pay? You can figure it out by consulting the IRS web site at http://www.irs.gov/publications/p505/ch02.html

Need to know more?

Here are some general rules about who has to pay estimated taxes:

If most of your income is from being an employee, and you have tax withheld from your paychecks at your primary job, you may not need to pay estimated taxes. (This could also apply if your spouse is the primary wage earner and s/he has taxes withheld from his or her check.)

You must pay estimated tax for 2009 if both of the following apply:

• You expect to owe at least $1,000 in tax for 2008, after subtracting your withholding and credits.
• You expect your withholding and credits to be less than the smaller of:
  1. 90% of the tax to be shown on your 2009 tax return, or
  2. 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

Seem complicated? Well, the tax code certainly can be complicated. Here is one easy way to determine how much you should pay: If you expect your income to about what you earned last year or more, you can simply make sure that the taxes withheld from your paycheck, plus any amounts you pay in estimated taxes, equal your tax liability for 2008. If you earn more money this year you may end up owing more in taxes, but you will not owe any penalties if you pay the taxes by April 15, 2010.

You can download the 1040-ES form for paying your estimated income taxes, along with the instructions and more information about estimated taxes at http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Will I get a 1099 from every mystery shopping company I did work for in 2008?
You will not necessarily receive a 1099 from every company for which you mystery shopped. Companies are required to provide a 1099 if they paid you at least $600 over the course of the year. Some companies include all payments they made to you when calculating the $600 threshold, and others exclude amounts paid for reimbursements and other expenses.

There were several mystery shopping companies that paid me less than $600 each during the year. Do I have to pay taxes on that money? How do I account for it without a 1099 form?
You are required to report all of your income. You will take deductions for reasonable and necessary business expenses, and pay income and self-employment taxes on your profits.

You must report income, even if you do not receive 1099 forms from some companies. You should have records of your income and expenses for the year, so you can rely on those records when calculating the amount of tax you owe.

When are companies required to send out 1099 forms?
The due date for providing 1099 forms is January 31st. That does not mean that you will receive all 1099 forms by that date. It does mean that the forms must be properly addressed and mailed no later than that date, except that when the due date is on a weekend or holiday, the due date is the next business day.

In 2009, January 31st falls on a Saturday. That means that 1099 forms must be properly addressed and mailed by Monday, February 2, 2009.

What if a secret shopping company paid me more than $600, but I do not receive a 1099 form?
Be sure to allow time for the form to reach you by mail. If you have not received an expected 1099 by mid-February, you should contact the mystery shopping company and ask if a 1099 form was mailed to you.

Whether or not the company provides a 1099 form, you are required to declare the income and pay any tax owed. You can file your tax return without the 1099, as you are not required to include the 1099 with your tax return. Refer to your accounting records to determine the amount of income you must declare.

The 1099 form I received included amounts for reimbursements of required purchases and even some travel expenses the mystery shopping company paid me for. How do I account for that?
You may want to address this with your tax professional, but it is important that you show all of the moneys reported on 1099 forms on your tax return. Amounts you received as expense reimbursements should be deductible as business expenses. That means that you include them in your gross income, then deduct the expenses and pay taxes on the net income.

Not sure if you have to pay? You can figure it out by consulting the IRS web site at http://www.irs.gov/publications/p505/ch02.html

Need to know more?

Here are some general rules about who has to pay estimated taxes:

If most of your income is from being an employee, and you have tax withheld from your paychecks at your primary job, you may not need to pay estimated taxes. (This could also apply if your spouse is the primary wage earner and s/he has taxes withheld from his or her check.)

You must pay estimated tax for 2008 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2008, after subtracting your withholding and credits.

2. You expect your withholding and credits to be less than the smaller of:
1. 90% of the tax to be shown on your 2008 tax return, or
2. 100% of the tax shown on your 2007 tax return. Your 2007 tax return must cover all 12 months.

You can download the 1040-ES form for paying your estimated income taxes, along with the instructions and more information about estimated taxes at http://www.irs.gov/pub/irs-pdf/f1040es.pdf

You recently wrote about doing mystery shopper jobs while traveling on vacation. I think that might be a good way to make my trips more affordable, and I also had this thought:

If I mystery shop on my vacation, may I deduct the cost of my trip from my taxes?

I am not a CPA or tax professional, so this should not be considered legal or professional advice. In fact, the best thing to do is to consult with your tax professional to get his or her opinion. However, here are some portions of the tax code that seem to apply to this question.

According to IRS Publication 463:

Travel in the United States

The following discussion applies to travel in the United States. For this purpose, the United States includes the 50 states and the District of Columbia. The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States.

Trip Primarily for Business

You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.

Example.

You work in Atlanta and take a business trip to New Orleans. On your way home, you stop in Mobile to visit your parents. You spend $1,070 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $920. You can deduct $920 for your trip, including the cost of round-trip transportation to and from New Orleans. The deduction for your meals is subject to the 50% limit on meals mentioned earlier.
Trip Primarily for Personal Reasons

If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.

A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.

—–

My reading of this is that squeezing in a few mystery shops on your vacation does not make your vacation tax deductible. (You expected another answer? Sorry.) However, you could be reimbursed for some of your expenses as part of the mystery shopper jobs, and some or all of those reimbursements would likely be deductible as reasonable and necessary business expenses.

You can read more about this in IRS Publication 463.

As secret shoppers, we typically work as Independent Contractors (ICs), not employees.

There is not a single factor or test that determines whether a worker is an employee or an IC. Saying that someone is an Independent Contractor does not necessarily make it so. There are several things that regulatory agencies, such as the Internal Revenue Service and state tax departments, consider when determining is someone is an employee or an IC. The rules are often vague, and interpretation is up to the agency making the determination.

The IC relationship is spelled out in the Independent Contractor Agreements (ICA) between mystery shoppers and mystery shopping companies. These agreements define the rights and responsibilities of both parties. ICAs often include language relating to the factors regulatory agencies consider when determining if someone is an employee or an IC.

So what does it mean to be an Independent Contractor?

Some of the characteristics of Independent Contractor relationships are that ICs typically:

• Market their services to the public, or to a number of clients
• Are free to take on the clients and projects they choose
• Get paid by the project, not by the hour
• Provide their own tools and materials
• Are responsible for their own expenses

Additionally, ICs retain control of their work. They choose the clients and assignments they will accept. Although the client can require specific results and impose deadlines on the IC, the IC decides when and how to complete the work.

Companies do not provide Workers Compensation or Unemployment Insurance for ICs. Nor do they withhold income taxes or pay the employer portion of Social Security and Medicare taxes for ICs.

Because they are not considered employees, ICs have all the tax advantages of any other small business. That means that they can deduct reasonable and necessary costs of doing business, such as car expenses, equipment and supply purchases, Internet access, and other expenses, including a home office. This can be a tremendous advantage to Independent Contractors, often outweighing the loss of benefits such as Unemployment Insurance.

Being an Independent Contractor–with the flexibility to work when and where you wish, and with whomever you wish–has many advantages over traditional employment relationships for those people who like having complete control over their work.

How? Well, as a CPA friend of mine says, “It’s not how much you make, it’s how much you keep.” Here are some suggestions to help you keep more of what you make as a secret shopper.

Maximize tax deductions. You can deduct reasonable and necessary expenses incurred in the process of running your business. These may include:

• Computer and Internet expenses;
• Office supplies (including paper, ink, toner, etc.);
• Cell phone service;
• Mileage or automobile expenses;
• Training and education;
• Voice recorders, digital cameras and other technology;
• Batteries and supplies for technology;
• A home office; and
• Other costs.

You may not be able to deduct 100% of these expenses. In general, you may deduct the percentage used in your business. For example, if you use your Internet connection for business 35% of the time, you may deduct 35% of the cost. Document usage to substantiate the deduction.

Keep good records of expenses so you do not miss any deductions. Put a notebook and envelope in your car (the map pocket is a good place). Record mileage and expenses as they are incurred, and drop receipts in the envelope. And do not forget to deduct the cost of the notebook and envelope.

Look for ways to reduce expenses. It is not a smart or profitable move to incur an expense just because it is deductible. For every dollar of expense you incur, you get a tax benefit of about 15 to 50 cents (depending on your tax bracket). If you believe it is a good deal to spend $1 to get 15¢, please see me. I will give you a full 25¢ for every dollar you give me. What a deal!

Reduce expenses by:

• Eliminating unnecessary expenditures. Do you really need a new digital camera or will your current one do?
• Looking for ways to reduce costs and fees. Can you get a better deal on Internet or phone service?
• Grouping trips to save car expenses.
• Seeking cost-effective solutions. Consider the costs of maintenance and supplies when buying equipment. An ink jet printer may cost a little less up front, but the cost of ink may make using it much more costly than a laser printer. For example, when I had to replace my fax machine, I chose a laser instead of an ink jet or thermal fax. It cost a little more to buy the laser fax, but I have saved hundreds of dollars on ink cartridges over the last few years.

The general rule about who has to pay estimated taxes is:

You must pay estimated tax for 2008 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2008, after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:
   
   1. 90% of the tax to be shown on your 2008 tax return, or
   2. 100% of the tax shown on your 2007 tax return. Your 2007 tax return must cover all 12 months.

If most of your income is from being an employee, and you have tax withheld from your paychecks at your primary job, you may not need to pay estimated taxes. (This could also apply if your spouse is the primary wage earner and s/he has taxes withheld from his or her check.)

You may have to pay a penalty if you are required to pay estimated taxes and do not do so. Although the penalty is usually not a large amount of money, it is easily avoided. Determine if you must file, then send in your quarterly payment.