Yes, mystery shoppers pay taxes like everyone else! When mystery shopping, you will most often work as an independent contractor. That means that the companies paying you don’t withhold income taxes, Social Security taxes or Medicare taxes. You are responsible for making sure your taxes are paid. In general, the fees you receive for mystery shopping are taxable as ordinary income, and are subject to federal income taxes, state and local income taxes, Social Security taxes, and Medicare taxes.
The good news is that when you are a contractor you are treated as a small business and you can deduct certain expenses. These may include postage, mileage and car expenses, travel, office equipment, computer and Internet fees, and perhaps even some purchases made while you are mystery shopping. You might qualify to deduct some of your housing expenses if you have a home office.
If any of the companies you work for pay you at least $600 during a year, they are required to provide you with a 1099 form. This is similar to the W-2 form you would receive from an employer, and you will receive it at the same time (i.e., January of the following year). The information on the 1099 is also reported to the Internal Revenue Service, so if you don’t account for the income you will hear from the IRS.
Companies that did not pay you at least $600 are not required to send a 1099 form, and they may not report to the IRS how much they paid you. Many mystery shoppers mistakenly believe this means they don’t have to pay taxes on that income, so they don’t report it. However, the income is taxable, and must be accounted for. You should have the integrity to do so, but you should also know that it can be discovered. For example, if the mystery shopping company is audited, tax auditors may verify that the money they say was paid to contractors was reported on the contractors’ tax returns.
To report your independent contractor income, you will file a Schedule C with your regular tax return. For instructions on record keeping, what expenses you may deduct, and how to complete Schedule C, contact the IRS and ask for their publications on small business taxes. You can often find these publications at your local library, or they can be downloaded at the IRS web site. The IRS also offers free workshops and an online course for sole proprietors. See the small business area of the IRS web site at http://www.irs.gov/ for more information.
Tax regulations are always changing, so be sure to refer to IRS publications, their web site and other guides for current tax information. You may want to consult your tax preparer for additional information about how your mystery shopping income and expenses should be reported. For more information on tax issues, go to the IRS web site at http://www.irs.gov/