What do I need to track as a self employed software developer?

[User50234]

I have a full time W-2 job as a software developer.

I have an idea for a software product that I intend to develop in my spare time. This is not for any specific company/person but rather something that could be of use to a large group of potential customers.

I intend to make "basic" version of software free and potentially charge for the "advanced" version. Have not decided whether I will charge or not at this point. If so, I would probably use PayPal, Digital River or some similar service.

I don't intend to create a corporation because at this time I just don't think it is worth the money and complications. From what I understand it would cost at least $500/year even if there is no activity of any kind (I may be wrong on that).

On the occasion that I do charge something - what do I need to keep a track of in order to be able to claim it as an expense on my income tax return? Some things are obvious, like web hosting fees, cost of the software I need or new computer. But does it make sense to track the time I used to work on that software? This is not a situation where I would do this for someone who would pay me on an hourly basis.

Am I correct in understanding that if I do charge something for my product I would need to file my taxes as self-employed even though my main job is full-time W2?

[Bsch4477 · Accepted solution]

You can’t deduct the time you spend developing your product. Yes, if you begin to have income from your product you would complete Sch C as self employed and report income and expenses and pay self employment tax as well as income tax on any profit. 

[VolvoGirl]

FYI - 

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment. You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400. The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. So you get social security credit for it when you retire. You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040. The SE tax is already included in your tax due or reduced your refund. The SE tax is in addition to your regular income tax on the net profit.

Here is some IRS reading material……
IRS information on Self Employment
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Publication 334, Tax Guide for Small Business NOT WORKING YET
http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf