Mystery Shopper Income Tax Planning

The end of the year is a good time to get things in order and start pulling together the records that you will need to file your tax returns. And even at this late date, there are things you can do to save money on your taxes this year, or plan for next year’s tax return.

Start by doing a quick tax calculation. You may not have every bit of information you will need to file your tax return, but you should have enough data that you can do a rough estimate of how much tax you owe for the year. Compare that to how much you paid, via withholding if you or your spouse are employed, and estimated tax payments.

If it appears that you have underpaid your taxes by $1000 or more, you may be charged a penalty by the IRS. The penalty is waived if (1) you paid at least 100% of the amount owed on your previous year’s tax return or (2) you paid (via withholding and /or estimated tax payments) at least 90% of the present year’s liability. Remember that there is still one more estimated tax payment due on January 18, 2011, if you make estimated tax payments.

Look for deductions. To minimize your income tax liability, look for every legitimate deduction. You should NEVER spend money to get a tax deduction. That is a bad deal. However, if you spent money on your business, be sure to deduct the expense. Legitimate business expenses for mystery shoppers may include computers, printers and supplies, Internet access, cell phones and service, office supplies, a home office, automobile expenses or mileage, etc. Some of these expenses may be for things you do not use exclusively for business, but in general you may deduct the business usage. That means if your computer is used for business 60% of the time and personal things 40% of the time, you can deduct 60% of the cost. (Note: Some purchases, such as computers, are typically amortized over multiple years. That means that you may not be able to deduct the entire cost in one year, but would take a portion each year for a number of years. Ask your tax preparer for more information.)

Time your income and expenses, when you can. We can not always control when we get paid, but if you expect to be in a lower tax bracket next year, you might want to defer income until January where it is possible, so that the income will be taxed at a lower rate. This probably will not apply to your mystery shopping income, but might to a bonus payable at a job or to other contractor income, such as money you earn as a consultant.

We definitely have control over many of the expenses we incur. If you expect to be in a higher tax bracket next year, you may want to arrange to defer expenses until next year. That makes the deduction more valuable to you. If you expect to be in a lower tax bracket next year, you may want to accelerate some expenses into this year. Prepay bills due in January, or buy that equipment you are planning to buy soon. (Once again, NEVER buy something just to get a tax deduction. We are talking about the timing of a necessary purchase.)

If you are expecting a tax refund, get your tax return ready ASAP after the first of the new year. You do not have to have all of your 1099s in hand to file your return, as it is not necessary to send copies of 1099s with your return. You will, however, need good records of your income so that you report everything you earned.

Keeping good records of your mystery shopper income and expenses during the year will make your life easier when tax time rolls around. And, you may save money because you will avoid mistakes that result in penalties and you will not forget any of your allowable deductions.

Comments

  1. Cathy, do you think anything more than an excel spreadsheet is needed to track expenses and income? I have been mystery shopping for about a month, and I use a spreadsheet to track Date, target time-frame, Company and location, Commission/Fee, Reimbursement, daily mileage, company worked for, and my shopper/auditor number and job number, if applicable. I can add a few columns or a second page, or if you think it is extremely important I could consider some business tracking software.

    • Cathy Stucker says:

      I would add at least one more column for “other expenses.” Those might include parking, tolls, required purchases above the reimbursement amount, etc. For example, a shop may pay a flat rate of $15. The shopper is required to make a small purchase of anything (e.g., a pack of gum) and the reimbursement is included in the $15 fee. In that case, you do not have a separate reimbursement but you do have a small expense.

      If you are using your spreadsheet for purposes beyond taxes, you might also want to include a few more columns. One for the date payment was received and one for the amount of the payment. You might also want to have a column for the date payment is expected, so you can easily see if any expected payments are overdue. Most companies state on their websites or in the shop guidelines when payments are issued. Allow at least a few days beyond that for transit, and that will be the date you expect to be paid.

      You certainly can use other software, such as Quicken, to track your income and expenses, but a spreadsheet can work just fine.

  2. Hi Cathy,

    I would like establish myself as a business. I have an EIN but I’m not sure if this is the right thing to do. I want to be able to separate my personal life from business since it feels like it is all mixed in. Any tips?

    • An EIN isn’t a requirement, but it is a good step. You can use that instead of your Social Security Number when applying to companies.

      More importantly, keep your money separate. Have a credit card you use only for business. Use it to for required purchases when you are mystery shopping and use it to buy supplies for your business. Have a separate bank account for your mystery shopper business. Deposit your income from mystery shopping into that account and pay the credit card bill and any other expenses from that account. It will make keeping track of your mystery shopping income and expenses much easier.

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