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Here's a tip if you're doing your own bookkeeping: create a separate "Sales Tax Collected" account in your accounting software as a current liability (not income). When Ebay collects the tax, you'd record it going into this account, and when they remit it to the state, it leaves this account. This keeps it completely separate from your income accounts and gives you a clean trail if you ever get audited. The balance should always zero out if Ebay is handling all the remittance for you.
What about if some of my sales are direct through my website where I have to collect and remit the tax myself? Do I treat those differently than the Ebay collected ones?
For sales through your own website, you'll use the same principles but with a few extra steps. You'll still record the collected sales tax in a liability account (not income), but since you're responsible for remitting it yourself, the balance won't automatically zero out like with Ebay. You'll need to regularly (monthly, quarterly, or annually depending on your state requirements) transfer that money to the appropriate tax authorities. When you make those payments, you'd record them as drawing down from your sales tax liability account. This keeps your income clean and gives you a clear record of your tax collection and remittance activities.
Important note: if you're selling on multiple platforms, double-check the marketplace facilitator laws for each state you sell into. Some states have different thresholds for when marketplaces must collect taxes vs when sellers need to handle it themselves. It gets complicated fast!
I've been using TaxJar for this and it's been pretty helpful for tracking all the different state thresholds. The economic nexus rules are such a pain to keep up with manually.
Has anyone else dealt with county property tax reassessment after inheriting rental property? In my case, continuing the federal tax depreciation was straightforward, but I got hit with a massive property tax increase because the county reassessed the property value when it transferred to me. Might want to check if that's an issue in your area.
One more tip - don't forget to depreciate the building separately from the improvements. The building itself (not including land) depreciates over 27.5 years from your date of inheritance based on the stepped-up basis. But as others said, the specific improvements like the roof continue on the original schedule. I messed this up my first year and had to file an amended return.
Does anyone know if the distribution code "1" on the 1099-R matters for how this gets reported? When I had a similar situation my form had code "7" and I think that made a difference.
Code "1" on a 1099-R generally indicates an early distribution with no known exception, which means the custodian (Vanguard in this case) is basically telling the IRS "this person took money out early and we don't know of any exception that would exempt them from the penalty." Code "7" indicates a normal distribution, which wouldn't trigger the 10% penalty automatically. The different code does make a significant difference in how the IRS initially processes the form. If you complete a proper rollover, you'll need to report it correctly on your tax return to override what the 1099-R is indicating. Most tax software has specific sections for handling rollovers that will guide you through this.
Don't forget to look into your state tax implications too! The federal 10% penalty is one thing, but some states also have their own early withdrawal penalties. I learned this the hard way in California where they hit me with an additional 2.5% state penalty on top of the federal one for an early 401k withdrawal.
A little different perspective here - i work for an accounting firm and see lots of audits. About 80% of the time, the IRS is just looking for documentation on specific deductions, not trying to "get you." Audits targeting self-employed people with home offices and travel expenses are super common right now. the absolute worst thing u can do is ignore the letter or miss deadlines. that will turn a potentially simple documentation check into a nightmare. second worst is to provide MORE info than they ask for. just give them exactly what the letter requests, nothing more.
Just went through an audit this past year and want to add that organization makes a HUGE difference. Create a simple coversheet for each category they're questioning with a summary of the expenses and why they qualify. Makes the auditor's job easier which absolutely works in your favor. Also, be super professional in all communications. The auditor has enormous discretion, and being respectful and organized gave me much better results than my friend who went in confrontational and ended up with a much more thorough (painful) audit process.
That's really good advice about the cover sheets - I wouldn't have thought of that. Did you end up owing additional tax after your audit was completed? I'm worried they're going to disallow all my legitimate business expenses.
I did end up owing a little more, but nowhere near what I feared. They disallowed about $2,100 of my $19,500 in business deductions because I couldn't find adequate documentation for some meals and entertainment expenses. My well-documented home office and equipment deductions were accepted without issue. The cover sheets definitely helped - the auditor actually commented on how easy I made their job. Each sheet listed the category (like "Home Office"), total amount claimed, how I calculated it, and an itemized list with all supporting documents attached. I even included IRS publication references showing why each deduction qualified. It turned what could have been multiple sessions into just one 2-hour meeting.
Morgan Washington
Don't forget to save around 30% of your freelance income for taxes! I learned this the hard way my first year. The 1040-ES helps you pay quarterly, but many newbies (including myself) underestimate how much they'll actually owe. Self-employment tax (15.3%) + regular income tax can add up fast. Also, track EVERYTHING for deductions - home office, software, equipment, professional development, portion of internet/phone bills. I use a separate credit card just for business expenses to make it easier at tax time. This can significantly reduce your taxable income.
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Mohammed Khan
β’Thanks for this tip! Does it matter what method I use to track expenses? Like can I just keep a spreadsheet or do I need special software? Also, for the home office deduction, is it better to do the simplified method or the regular one?
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Morgan Washington
β’A simple spreadsheet works perfectly fine for tracking expenses - just make sure to keep all receipts too (digital copies are okay). I personally use a Google Sheet where I log the date, amount, vendor, and category of each expense. Some people prefer apps like QuickBooks Self-Employed or FreshBooks, but they're not necessary when you're just starting out. For the home office deduction, it really depends on your situation. The simplified method is just $5 per square foot up to 300 square feet (max $1,500 deduction), which is super easy. The regular method can potentially get you a larger deduction if you have a big office or high home expenses, but requires much more detailed record-keeping and calculations. I'd start with the simplified method your first year, then see if it's worth doing the math for the regular method next year.
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Kaylee Cook
Anyone know if it's too late to start making quarterly payments for 2025 if I started doing gig work in January but didn't know about these forms until now in August? Will I get penalized?
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Oliver Alexander
β’You can still catch up! Make a payment now that covers what you should have paid for Q1 (April) and Q2 (June). Then stay on track with Q3 (Sept) and Q4 (Jan). You might face a small penalty for the late payments, but it's WAY better than waiting until tax time to pay it all! The penalty is basically an interest charge.
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