How do I report the income for self employment or a home business?

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Host: How do I report the income for self-employment or a home business?

Aurthur Auerbach: Well normally, if you did work for somebody and they paid you more $600 then most individuals will get a 1099-MISC, miscellaneous and you add up all of those 1099-MISC plus income that you collected for which you didn't get a 1099-MISC and that's goes on line 1 of Schedule C. That's considered your gross income from your business.

So it's whatever it is that you have collected the expenses will come later. If you had a cost of materials or you paid electricity, those are the expenses that will come later but right now, we were focusing on getting the correct amount of income reported. Now this is extremely important, this is a focus program of the Internal Revenue Service. It is believed that a goodly portion of what's known as the Tax Gap is created by sole proprietorships who are either not reporting all of their income or are inflating their expenses, deducting things that they shouldn't.

So get in the correct amount of income and the way I would recommend doing this as a professional is if you have a home based business to have a separate bank account. Look at all of the credits and deposits that went into that account. That generally is going to be your income unless you borrowed money obviously, your borrowed money is not income, but you will be able to get a grip or a handle on what your total gross receipt should be.

Be very careful in self-employed businesses where you barter your services. For example, you might be a plumber and somebody else is an electrician so you go to the electrician's house and do the plumbing work, he will come to your house and do the electrical work. But in effect, you have collected money for what you have bartered away in services. So make sure you correctly report your gross income. Just because you didn't get a 1099-MISC doesn't mean you leave the income off the return. You still have to report it and getting an accurate reporting here is very, very important.

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