Page 32 - Small Business Taxes

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
whether eligibility for the payments depended on Public officials of state or local governments report their
length of service). fees from the public on Schedule C if they are paid solely
on a fee basis and if their services are eligible for, but not
Insurance agent, retired. Income paid by an insurance covered by, social security under a federal-state agree-
company to a retired self-employed insurance agent ment.
based on a percentage of commissions received before
retirement is reported on Schedule C. Also, renewal com- Real estate agent or direct seller. If you are a licensed
missions and deferred commissions for sales made be- real estate agent or a direct seller, your earnings are re-
fore retirement are generally reported on Schedule C. ported on Schedule C if both the following apply.
However, renewal commissions paid to the survivor of • Substantially all your pay for services as a real estate
an insurance agent are not reported on Schedule C. agent or direct seller directly relates to your sales or
Newspaper carrier or distributor. You are a direct other output rather than to the number of hours you
seller and your earnings are reported on Schedule C if all work.
the following conditions apply. • You perform the services under a written contract that
• You are in the business of delivering or distributing says you will not be treated as an employee for federal
newspapers or shopping news (including directly rela- tax purposes.
ted services such as soliciting customers and collect- Dealer in section 1256 contracts. If you are a dealer in
ing receipts). options or commodities, your gains and losses from deal-
• Substantially all your pay for these services directly re- ing or trading in section 1256 contracts (regulated futures
lates to your sales or other output rather than to the contracts, foreign currency contracts, nonequity options,
number of hours you work. dealer equity options, and dealer securities futures con-
• You perform the services under a written contract that tracts) or property related to those contracts (such as
says you will not be treated as an employee for federal stock used to hedge options) are reported on Schedule C.
tax purposes. For more information, see sections 1256 and 1402(i).
This rule applies whether or not you hire others to help Securities or commodities trader. You are a trader in
you make deliveries. It also applies whether you buy the securities or commodities if you are engaged in the busi-
papers from the publisher or are paid based on the num- ness of buying and selling securities or commodities for
ber of papers you deliver. your own account. As a trader in securities or commodi-
ties, your gain or loss from the disposition of securities or
Newspaper or magazine vendor. If you are age 18 or commodities is not reported on Schedule C. For more in-
older and you sell newspapers or magazines, your earn- formation about traders in securities or commodities, see
ings are reported on Schedule C if all the following condi- Pub. 550, Investment Income and Expenses.
tions apply.

• You sell newspapers or magazines to ultimate con-
sumers. Accounting for Your Income
• You sell them at a fixed price. Accounting for your income for income tax purposes dif-
• Your earnings are based on the difference between fers at times from accounting for financial purposes. This
the sales price and your cost of goods sold. section discusses some of the more common differences
This rule applies whether or not you are guaranteed a that may affect business transactions.
minimum amount of earnings. It also applies whether or Figure your business income on the basis of a tax year
not you receive credit for unsold newspapers or maga- and according to your regular method of accounting (see
zines you return to your supplier. chapter 2). If the sale of a product is an income-producing
factor in your business, you usually have to use invento-
Notary public. Fees you receive for services you per- ries to clearly show your income. Dealers in real estate
form as a notary public are reported on Schedule C. are not allowed to use inventories. For more information
These payments are not subject to SE tax (see the In- on inventories, see chapter 2.
structions for Schedule SE (Form 1040)).
Income paid to a third party. All income you earn is
Public official. Public officials generally do not report taxable to you. You cannot avoid tax by having the income
what they earn for serving in public office on Schedule C. paid to a third party.
This rule applies to payments received by an elected tax
collector from state funds on the basis of a fixed percent- Example. You rent out your property and the rental
age of the taxes collected. Public office includes any elec- agreement directs the lessee to pay the rent to your son.
tive or appointive office of the United States or its posses- The amount paid to your son is gross income to you.
sions, the District of Columbia, a state or its political
subdivisions, or a wholly owned instrumentality of any of Cash discounts. These are amounts the seller permits
these. you to deduct from the invoice price for prompt payment.

Page 26 Chapter 5 Business Income