Does it matter if they're tracking it separately in a dedicated account? I've heard that can sometimes make a difference with the IRS if the money is clearly segregated.

Keeping the money in a separate account is good practice and helps demonstrate your intent, but unfortunately it doesn't change the fundamental tax treatment. The IRS generally looks at the nature of the transaction when it occurs, not what you intend to do with the proceeds later. Having a separate account does provide a clear paper trail though, which is always helpful if questions ever arise. It shows you weren't trying to hide anything and had a specific purpose for the funds.

This is actually brilliant! My sister did something similar with her kids' "chore money" - she reported it properly as rental income but then put it in 529s for them. The growth being tax-free for education expenses made it really worthwhile.

Thanks for the warning! So if I have a desk in my bedroom that I only use for work, but it's in my bedroom where I also sleep, would that area around the desk qualify? Or does the entire room have to be exclusively for business?

The space needs to be exclusively for business, not the entire room necessarily. So if you have a clearly defined area in your bedroom that's used only for work (like a desk and the surrounding area), that specific space can qualify. Take measurements of that dedicated workspace to calculate what percentage of your home it represents. You'll need to be able to prove that area is used exclusively for business if audited. Take photos of your setup, keep records of business activities conducted there, and ensure nothing personal is stored in that specific area. I recommend consulting a tax professional if you're unsure, but many people successfully claim partial room deductions.

This is great advice. I started a SEP IRA when I was contracting and it made a huge difference in my tax bill. I think you can contribute something like 20% of your net earnings? Definitely worth looking into.

16 Doesn't that end up costing more overall though? I considered doing that but couldn't justify paying for two separate plans when most carriers have unlimited everything these days anyway.

5 It can be more expensive if you're looking at two completely separate plans. But many carriers offer multi-line discounts that make additional lines much cheaper than the primary line. In our case, the extra clarity for tax purposes and the ability to keep business calls separate (and turn off the business phone after hours) was worth the additional cost. Another option is a dual-SIM phone where you can have two different numbers on one device. That might give you the separation without needing two physical phones.

14 For an S-Corp, you have a few options: 1. The business can pay the entire bill, but you should only deduct the business portion (say 50%). The personal portion (other 50%) needs to be treated as part of your compensation - either added to your W-2 wages as a taxable fringe benefit or handled as a shareholder distribution. 2. You can pay the bill personally and have the business reimburse you for the business portion (50%). This is often cleaner from an accounting perspective since you're only running the actual business expense through the company books. The second approach is generally recommended for S-Corps to maintain a clear separation between business and personal expenses.

3 What's the threshold for needing to issue a 1099 to a contractor now? I thought it was $600 but someone told me it changed recently?

11 The threshold is still $600 for payments made in the course of your trade or business. So if you paid a contractor $600 or more during the tax year, you need to issue them a 1099-NEC. This hasn't changed despite some rumors floating around.

8 Not a stupid question at all! You would use the amount paid to the contractor ($590 in your example), not including the fees. Since $590 is below the $600 threshold, you wouldn't need to issue a 1099-NEC in this case.

11 Wait, so if my candle making business hasn't been profitable yet, I can't deduct ANY of my expenses?? I've spent like $2000 on supplies and only made like $800 in sales so far this year.

22 That's not exactly right. You CAN deduct expenses even if you're not profitable yet. The hobby loss rule doesn't kick in immediately - it's more of a guideline the IRS uses after several years of losses. The key is demonstrating that you have a profit motive and operate in a businesslike manner, even while you're in the startup phase. Keep good records, have a separate business bank account, develop a business plan, market your products, and maintain professional practices. These all help show it's a legitimate business attempt, not just a hobby.

16 That's not actually how tax deductions work for sole proprietors. You can't "deduct" the value of your own labor - you can only deduct actual expenses paid. Though I agree it's important for pricing products correctly!