Today TaxMama hears from Sirian in the TaxQuips Forum with a concern. He says, “I am an Internet marketer & web developer. I have always collected state sales tax for my clients in my state (Texas). When filing my Federal taxes I usually include the full income (including all state sales tax collected) in the reported gross income & then deduct the state sales tax as an expense. I was recently told that the state sales tax money is being collected on the behalf of my clients and that it’s the state’s money, not mine. Don’t get me wrong; this definitely makes sense to me. My question is, since I have always just included the sales tax in the gross income of my 1040 & then deducted it on my schedule C, can I continue to do that? Is there any issue with doing so?
I do the same thing. And it’s only logical.
After all, if IRS or a state were to audit your business (Texas doesn’t have an income tax), they would look at your bank statements. They would expect at least the same amount as your total deposits to appear as your total income. Your deposits include the sales taxes you collected. So naturally, you would then deduct the sales taxes from your income, on the line for taxes.
If you didn’t pick up the sales taxes as part of your total income, when IRS adds up your deposits, you would appear to have unreported income. No one needs that fight.
You’re doing it correctly.
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