Small Side Business Requires Filing of Schedule C With State, Federal Tax Returns

Q. In addition to my full-time job for a large company, last year I started a small consulting business on the side, which generated several thousand dollars in income for me. How do I report this on my tax return? Do I have to register my business in some formal way? If it matters, I do not have any employees and this business is run strictly out of my home computer.

--T.N.T.

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A. You should complete and file Schedule C with both your state and federal income tax returns. On this form you will declare your income from your “sole proprietorship” and deduct against that income any business expenses you had during the year. Assuming that your enterprise in no way conflicts with local zoning and other codes, you do not need to register your business with the state or federal government. Your Social Security number is considered your “tax identification number” for the purposes of your tax filing.

And speaking of Social Security, you should know that you are liable for paying both the employer and employee shares of this tax. If your earnings on your regular job exceeded the ceiling on which the “old age pension” portion of tax is levied --it was $61,200 in 1995 and is 62,700 for 1996--you still must pay both the employer and employee portions of the Medicare tax on your consulting business revenue, a total of 2.9%. Remember, the Medicare portion of FICA is assessed on all earnings; your obligation is never satisfied.

The good news is that as a self-employed person you may open either a Keogh or SEP/IRA and set aside a portion of outside income in a tax-sheltered retirement account.

A Keogh account must be opened before the end of the calendar year, but you may open a SEP/IRA for the previous calendar year until April 15 (or later if you file for an extension) of the current year. Your pretax contribution to a SEP/IRA is roughly limited to 15% of your self-employment income, up to a maximum of $22,500 a year. If your consultant business continues this year, you might consider opening a Keogh account before Dec. 31. The maximum pretax contribution to a Keogh is generally 20% of your self-employment income up to a maximum of$30,000 a year.

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NOTE: In a column last month we discussed the matter of the car mechanic who wanted his customers to pay their bills in cash, rather than by check. This same mechanic, our reader said, also charged customers a 2.5% fee for paying their bills with a credit card, a fact that drew several responses from other readers claiming that this practice is illegal. And perhaps the mechanic is acting illegally; it all depends on how artfully he presents the differences in his billing system.

Let’s explain: Under the Song-Beverly Credit Card Act, merchants are prohibited from charging customers a surcharge for using a credit card in lieu of payment by cash or check. However, merchants are permitted to offer customers who pay by cash or check a discount. So, if the mechanic in question increases his prices by 2.5% across the board and then offers those paying by cash or check a 2.5% discount, he’s acting within the law.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com