self employment tax?

[cdcellular]

What is the name of your state (only U.S. law)? MO

Starting in January of this year (2009), I have been making $800-$1000 per month from creating and selling virtual goods on Secondlife.com. I know that other content creators pay income tax on the money they make from secondlife. My question is... how to I pay this tax? How do i claim it as income? I dont want to get in trouble for tax evasion lol. One person told me to claim it all at the end of the year as "other income", someone else said that by law 90% of the tax has to be paid by the end of the year, so im stumped as to what i should do. Any advice would be appreciated. Thanks

 

[irsos]

Self-Employed

You are self-employed and are considered a business as far as the IRS is concerned. Unless you incorporate or form a partnership, you are a "Sole Proprietorship". You report your income and expenses for your business on a Schedule C, which is attached to your Form 1040. If your expenses for your business are less than $5,000, you may be able to use Schedule C-EZ. Since you are responsible for paying your own FICA/Medicare tax, you will need to use Schedule SE to calculate it. This form is also attached to your Form 1040. Depending on the nature of your business, you may need additional forms or schedules. The instructions for the Schedule C will guide you to those forms and schedules.

As an employee, the employer withholds taxes from your check and pays it to the IRS throughout the year. However, as a self-employed individual, that is now your responsibility. You pay what you expect to owe to the IRS in four quarterly installments. These payments are due April 15, June 15, September 15 and January 15. You make these payment using Form 1040-ES. You basically estimate how much you will owe and divide by four. If you fail to make these payments, or do not pay in enough, you will be charged a penalty on the amount of the underpayment.

One benefit of being a business is that you can deduct any expenses incurred in earning your income. I recommend that you open a separate checking account for your business. Furthermore, is suggested that you get a credit card that is used exclusively for business expenses. This will pay big dividends in the event you are audited.

It is also highly recommended that you spend at least an hour with a tax professional who can explain how to keep your records and advise you of the particular deductions available to the type business you have. They can also advise you if another form of ownership other than a Sole Proprietorship may be beneficial to you.