Do I Have to Claim Online Income?

The majority of online income is from self-employment. However, any online income that has taxes removed by an employer is considered a employee position and a W2 should be received. This type of income is filed along with regular income on a 1040 yearly Income Tax Return for the Internal Revenue Service (IRS). Any non employee income that is over $400 US Dollars (USD) must be claimed on the 1040 Schedule C. Anyone who earns more than $600 USD as an independent contractor from a particular source of online income should receive a 1099 form in the mail which can be used to document the income.

Many online auction store owners wonder if they have to file the profits from their store as income. If there is a profit involved, it must be claimed. If the auctions are like a garage sale, where the money gained was less than the money originally paid, it does not have to be claimed, since the sale is actually a net loss.

Form 1040 Schedule C requires those who are self-employed to provide a list of income and sources. This is also the form where write-offs, which are is deductions of business expenses against income, can be listed. Many home workers think that they can deduct some home expenses like internet and phone bills, but this is often not the case.


Rent or mortgage payments can only be deducted in portions if there is an office or distribution area in the home that is only used for the business. Rooms that serve multi-purposes can not be deducted. Internet and phone expenses can only be deducted if they are dedicated lines, while computers that are used for both business and personal purposes are also ineligible.

There are cases when portions of home bills can be deducted. If there is a dedicated area, the deduction will be proportionate to the size of the area compared to the size of the home. For example, if one room of a six room house is dedicated to the business, somewhere near 1/6th of the payments made on the home including utilities can be deducted. Travel expenses like gas, hotel and food for travel related only to the business can be deducted as well.

There are many other expenses that can be deducted from online income. If selling on an auction website or other business website, workers should deduct the cost of the item before sale and any shipping expenses so that only the profit is counted as income. Expenses for printing of materials, paper goods, packaging materials and other such necessary office items should also be deducted as well as the cost of any websites and fees paid to payment companies.

If the online income after all deductions exceeds $400 USD, the worker is required to pay the Self-Employment Tax. This tax covers the Social Security and Medicare taxes that are taken out of regular employees' pay. With a regular employee, the employer and employee split the cost of these taxes. Those who are self-employed must pay both halves of this tax on their own. In 2008, that rate was 15.3% with 12.4% going to Social Security and 2.9% going to Medicare. Anyone with questions about whether they should file a Schedule C or Self-Employment Tax for their given situation should consult with a professional accountant to be certain.



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