The IRS is not out to make us all honest. They operate like any other business; they have a budget and want as much return as possible.
State and local ordinances are different.
I can only speak of Illinois law and that of Kankakee County and City of Kankakee.
If you are not selling merchandise (albums, prints, frames, etc.), no tangible product, then you are selling a service. For instance: I'm a semi-pro musician. I work a music director at a church. I do report the income and I do pay taxes on that. But I have no other tax liabilities for this.
I'm a bonafide photographer. It's my primary source of income. On sales where I complete a job without prints, framing, photo processing, etc., I need only pay tax on the income. The same Schedule C I file with the IRS goes to the state of Illinois.
As for Retailers Occupational Tax (Illinois sales tax), I pay very little as most of my work no longer includes merchandise.
This stuff isn't all that tough. It scares us because the state, even when they're wrong, has seemingly unlimited measures to hurt us. You really have to be a blatant scofflaw before anything too terrible occurs. First, they want anything owed to them. It's only when they feel they're owed and you don't pay that life gets pretty rough.
-Pete
