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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3345
Experience:  15+ years tax preparation and tax advice.
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I am a self employed freelance artist with little or no inventory

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I am a self employed freelance artist with little or no inventory since I sell it off at the end of the year. My question is I would like to add/create new store online for clothing at retail price.
To be simple, my question is: when I buy wholesale 100 pair of socks, my cost $1.00 each, total of $100.00. then at the end of the year I sold 75 pair of socks.
Now, I have 25 socks leftover for new year inventory.
So, in the Schedule C deduction for business expense, should I deducted $100.00 for 100 pair of socks even though I sold only $75.00 worth?
In the beginning of the year inventory at the top of schedule C, I should put down $25.00 for 25 pair of socks at my cost? But I read, it said to add 50% inflated for retail inventory, so it should be $50.00?
For statutory employee or sub contractor.
Since I will be providing all the office supply as stamp, card board boxes, etcs. It will be on a small scale like 5 to 10 orders a week and the person's job is to wrap it and ship it on her own time within a week time frame, no rushing and choose her own post office or may deliver to customer if it is local, it is her choice, route.
If I hire this person as statutory employee, how do I pay the person on the tax form in commission instead of hourly wage? Since this will be pay based on per order.
Should I use 1099 MISC form instead of statutory employee?

Thanks, Christopher
Submitted: 3 years ago.
Category: Tax
Expert:  Wendy Reed replied 3 years ago.

Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.

 

#1. Your cost of goods sold is $75 (line 42). Your inventory at the beginning of the year is $0.00. Line 36 is $100. Line 40 is $100 and end of year inventory is $25.

 

#2. Very few workers are eligible for statutory employee classification --what you are describing here seems to be an independent contractor, since she has behavioral control over when and how the work is done. You can ask the IRS to determine worker status, using form SS-8 if you are not sure yourself. You will need to file a 1099MISC if you pay the person $600 or more as an independent contractor, but you can still file that form no matter how much you pay them.

 

Here is additional information for you:

 

http://www.irs.gov/newsroom/article/0,,id=173423,00.html

 

http://www.irs.gov/businesses/small/article/0,,id=179118,00.html

 

 



Edited by Wendy Rieger on 1/2/2011 at 3:28 PM EST
Customer: replied 3 years ago.

Thank you very much for clearing it up for me.

 

There is more I want to clear up.

 

I recently applied for Federal EIN for bank account purpose in April 2010. Should I use EIN on my two Schedule C, one for the self-employed as freelance Artist and the other my retail store with or without hiring of sub-contractor or just use my ss number?

Does Pennsylvania tax office have their own EIN or I just use the Federal if they ask just in case?

I have PA sales license for 10 years now for my freelance Artist work and I am planing on opening a clothing retail online (not related to my freelance Artist work), should I get another PA sales license for this or just combine both under my original sales tax license?

The report of 1099misc should be on line 11 of Schedule C, right?

Expert:  Wendy Reed replied 3 years ago.

If you have an EIN for a business, then you can use it on the corresponding Schedule C. If you are not required to get an EIN, you may use SS# XXXXX Schedule C. So, it is possible and permissible that you could have two separate businesses, and use EIN on one Sched. C and SS# XXXXX other Sched. C.

 

Your federal EIN can be used on PA forms. States do not issue EINs.

 

I am almost positive that you should get a separate PA sales tax license for a separate business (please note that most clothing is NOT subject to PA sales tax)--however, I would call the information number to make sure (I can't find this info in the publications).. The Department phone # XXXXX XXXXX Rev. Pub. 717 on this site: http://www.revenue.state.pa.us/portal/server.pt/community/sales%2C_use___hotel_occupancy_tax/14487

 

Yes, funds paid to contract laborers is reported on line 11 of Sched C. You must also furnish the 1099MISC to the IRS and the contractor by specific deadlines.

Customer: replied 3 years ago.

Yes, I do know most clothing do not require sales tax but there are some that do. I have a booklet on tax items and non-tax items for PA tax.

 

Few more things, Material and supplies such as boxes, bubble wrap, tapes for shipping should be in line 22, correct ? and not on line 38?

 

On line C, should I use the same business name on both form or develop a new one to keep it apart?

 

The reason I ask about labor, do I leave cost of labor blank on line 37 or is this for 1099 as well?

Expert:  Wendy Reed replied 3 years ago.

Shipping supplies could go on line 22 or as other. Not on line 38.

 

I would use a different business name to avoid confusion.

 

Do not include cost of labor on line 37.

 

Lines 37 and 38 would only be used if you were manufacturing a product, not merely selling or reselling it. For example, if you were paying someone to sew clothing that would eventually be sold, then the labor would go on line 37.

 

 

Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3345
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and 5 other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Going back to inventory/cost of goods sold, is line 36 as Purchases less cost of items withdrawn for personal use is 100.00 for new business inventory?, I want to double check what you send me below.

 

#1. Your cost of goods sold is $75 (line 42). Your inventory at the beginning of the year is $0.00. Line 36 is $100. Line 40 is $100 and end of year inventory is $25.

What is for line 36 next year? Leave it blank? what is the purpose thereafter this year?

Expert:  Wendy Reed replied 3 years ago.

Yes, Line 36 is your purchases (new inventory) during the current tax year.

 

 

 

What I sent you was an example, for the start of a business year. Theoretically every year, you will probably buy new supplies to add to inventory. For this example, Maybe the next year 2011, your line 35 is $25 (inventory at the beginning of the 2011, matches inventory value at end of 2010)--- Line 36 is $150 (because you spend $150 on new inventory) Your inventory at the end of year (Line 41) is $50, so your cost of goods sold is $125.

 

I hope this makes sense. If you don't buy new items for sale, then your line 36 for that particular year would be $0.

Customer: replied 3 years ago.
So, what I buy all this year will go back into line 36.
Expert:  Wendy Reed replied 3 years ago.
Yes, on your 2011 return.
Customer: replied 3 years ago.

Another thing, what happen if 3 pair of socks out of a 100 was damaged, not able to sell and not returnable since some wholesale company do not accept return. What should I do with it on Schedule C in the cost of goods sold or is there other area to deduct it? How do I claim it as a lost or damaged?

I see they say you can deduct sales tax for 2010, is this for business or personal use?

When I buy something for the business for material or inventory, should I round the whole invoice with sales tax for deduction, or without the sales tax?

For federal, I use 1040, Schedule C and Self Employment form. Is there any other form that I am require to use?

if I decided to close the business one day and there are some inventory leftover. What happen to it, just leave it or pay tax on it?

Expert:  Wendy Reed replied 3 years ago.

The damaged goods will be thrown away, so they will not be in your inventory at the end of the year, so their cost will be included in your deductible cost of goods sold.

 

When they say that the "sales tax deduction" is extended for 2010---they are talking about the personal option (Schedule A) to deduct either sales tax or state income tax.

 

Generally, when business purchases are inclusive of sales tax, use the entire cost on the return.. For example---if you purchase a desk for 100 dollars, and the sales tax is 7 dollars, use 107 as the cost on your tax return.

 

For Federal, you need schedule C and Schedule SE (if you have a profit in excess of approx $400.) You would need an additional form if you are depreciating assets.

 

If you close the business, how you record the inventory depends on what you do with it. If you keep it, that is personal use-so no deduction. If you sell it, even at a loss, that will be recorded on your schedule C. You could also donate it, and take a tax deduction for it.

Customer: replied 3 years ago.

Ok, I e-mailed the PA state tax office, you are right, there is no sales tax when it is for business purchase. It is very gray and not specific and that is why I wanted to double check with you. I have been buying things for my self employed business for years and knew that sales tax does not apply to inventory and material bought for business. The problem arise when they added use tax and it got really confused.

 

All done and wonderful communicating with you, it is such a pleasure, Christopher

Expert:  Wendy Reed replied 3 years ago.
Great, lots of luck! Smile
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3345
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and 5 other Tax Specialists are ready to help you

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