As independent contractors, mystery shoppers get to deduct reasonable and necessary business expenses. That can mean anything from pens and notepads to ink and toner, cell phones, computers and other supplies and equipment. Tax deductions can also include educational expenses, such as books and courses.
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 http://www.mspa-na.org/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.