Social Security
As a self-employed businessperson who files quarterly returns, no one withholds tax from your paycheck. This, however, does not mean you are exempt from making contributions to Social Security like everyone else. Typically, this contribution is called self-employment tax. Applied as fixed percentage, it must be computed at the end of the year and added to your year-end taxable income on your Form 1040.

State Sales Tax
Sales tax, as it relates to online auction transactions, is one of the most confusing and misunderstood subjects for sellers. (Vendio spoke with the director of e-commerce at the IRS to clarify this issue.) Currently, online auction sellers are not required to apply sales tax to transactions made with buyers outside their state. In other words, sellers are not required to remit sales tax to the buyer's state.

In 1998, congress passed The Internet Freedom Act, which waived sales tax on out-of-state online sales. (It also placed a moratorium on new Internet tax legislation for three years.) With more than 7,500 U.S. municipalities and differing tax codes in each, Congress determined that the application of sales tax on out-of-state Internet transactions would be too burdensome for online merchants.

However, auction sellers in the "trade of business" are required to add sales tax to in-state transactions. Also, buyers are technically required to assess a "use" tax to their out-of-state purchases, remited to their state. This is rarely, if ever, done. Change might be on the way, though. Currently, Governor Gilmore of Virginia, is leading a commission to evaluate the current laws. Also, sales tax software is in development, which would provide the sales tax for any item in any municipality and make it technically feasible for sellers to remit state sales tax on any sale. Yikes!

Deductions
Beyond the standard business expenses, such as final value fees, postage, and packing materials, you also can justify deducting the cost of mileage to the post office and magazine subscriptions that relate to your specialty. You should also think about trying to deduct the monthly expense of your Internet Service Provider if you use a dedicated line for your auction activity. If you buy supplies and merchandise from a discount warehouse store, you could even try to deduct the cost of your membership.

If your home is your principal place of business you also might be eligible for the new home office deduction, rolled out in the 1997 tax code. In addition, the update tax code's new Section 179 expense deduction allows self-employed business owners to deduct as much as $19,000 a year on business equipment. Previously, self-employed individuals had to deduct expenses on large items over several years as a depreciation deduction. That's no longer the case--now you can deduct the cost of whole items, such as a high-end computer, all at once. Finally, because of adjustments to the tax code, the self-employed health insurance deduction will increase from 60 percent in 1999 to 100 percent in 2003 and after. That's right--you'll be able to write off 100 percent of your health care premiums.

Tax Breaks and Shelters
Another way to offset taxes if you are self-employed is to open up a retirement plan, such as a Roth IRA or Keogh retirement plan. Income is either tax deductible going into a plan or tax deductible after being taken out at retirement. Remember, there are penalties if you deduct money from an IRA before retirement.

If you are self-employed and your auction business is unincorporated, you also can shelter income from taxes by employing your under-18 child or children. Income paid to self-employed individuals under-18 dependents is not subject to taxes. In essence, the parent is allowed a tax deduction of as much as $4,000 for the wages paid to the child. That's a good chuck of change! Before applying this technique, consult with a certified tax accountant.

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