Wednesday, December 20, 2006

Mid-year Self-employment

Dear June:

Generally speaking, I don't see much information on the web for those who become consultants mid-year. For example, IRS doesn't clarify if covered by a retirement plan at work for part of the year constitutes eligibility to make other contributions or not.

I quit my job late in the year effective Dec 10, and have $1,200 of consulting income since then. I am tempted to just ask the client to pay me next year so I don't have to get into making SS payments, set up a SEP-IRA etc. But if I could consider myself not covered by a retirement plan, it would be neat to fund a deductible IRA this year.


Dear Rajeev:

The rules and regulations that apply to self-employment are the same whether you are self-employed for part of the year or for the entire year or even if you are concurrently an employee. Some tax items may be affected by the business start date, for instance, the amount of deduction for equipment purchases or the maximum pension contribution allowed.

Also, the important date is not when you left your job, but when you actively started to pursue self-employment . That is, when did you start to look for clients, or set up shop?

Generally, it is to your advantage to collect and claim the small amount of earned income and then deduct all business expenses against it. You will likely end with a loss in your new consulting business and that loss can be deducted from the wages at your former job. You did not say what your indie business is and so I am limited in the advice I can give. A tax pro tuned in to the needs of an indie would suggest something to you like looking at a deduction for a computer already in your home that you purchased a while ago for, let's say, $3,000. If on the start date of your solo venture you could have sold that used computer for $1,000 and you use that computer in your new business you may have a $1,000 equipment expense this year.

Many pension rules have recently changed. For self-employeds they are much more liberal and flexible than ever before. Having a pension this year from a former employer does nor preclude your having another pension as a self-employed. Your contribution amount is limited by the maximum allowed and net self-employed income.

You mention making SS payments, I assume by SS you mean Social Security. A self-employed pays Self-Employment [S-E] Tax. S-E tax is a combination of Social Security Tax (also known as the employee’s FICA) and Medicare tax. You may or may not have an S-E tax liability. It depends on total wages from your job as well as your net self-employed income.

You may get more info on S-E Tax by reading Feature #9, Taxes: Which ones and how much do I pay? on my site.

And, as always, read the book that can simplify your tax and financial life, AND save you money! SELF-EMPLOYED TAX SOLUTIONS .

Good luck!

Wednesday, December 6, 2006

DBA:Doing Business As


I have become self-employed and would like to know if I need to file a DBA. I began sub-contracting wireless engineering services for a major contracting firm as a 1099 employee. Any information would be helpful as I am quite new to this game.

Best regards,

Dear Brian,

Congratulations on your new solo venture!

By the way, to clarify a term, as a self-employed you may call yourself a freelancer, or an indie, or a sub-contractor, or a free agent, but you can no longer call yourself an “employee.”

“Doing Business As” shortened to DBA, is needed only if you use a name other than your own as the name of your business. In that case you would register your “trade name” with the county clerk. The purpose of registration is to make sure that no two people in the same county use the same business name.

You can find a lot more info on being self-employed at .

And, as always, read the book that can simplify your tax and financial life, AND save you money!


Wednesday, November 15, 2006

No deduction for donated work or services

Dear June,

I'm doing some freelance consulting work for a nonprofit organization. The work has gone over budget and they cannot afford to pay me to finish the work. They offered to count the value of my work as a tax deductible donation. Is this Kosher and how do I handle it?

Ken, Graphic Designer in Massachusetts

Dear Ken:

You cannot claim a tax deduction for time or services donated to a charitable organization.·

If you drop ten dollars into the collection basket at church: A deduction. If you donate your worn shoes to the Helping Hands Youth Shelter: A deduction.· If you give 40 hours of your time "valued at $100 per hour" to the AIDS Walk, designing the advertising and promotional material: No deduction.

Only money or goods given to a recognized charity will result in a deductible charitable contribution. There's no way that the non-profit can credit you with a donation.You may think that's unfair. Whether you're justified to think that or not, here's how the IRS looks at it. If you give $10 to a charity, someone -- you or someone else -- earned the money before it was donated. If you purchased a $100 pair of shoes, somebody earned the money to buy the shoes. If you could have sold those old shoes at a thrift shop for $5 but instead donated them to a charity, you are entitled to a $5 charitable deduction on your tax return. But, you can't give away something you never had. And if you don't receive a fee, well then you never had the paid fee to give away.

Some non-profit organizations encourage people to donate services, assuring them that it is a tax-deductible donation. But services -- another word for your time — are not a deductible as a charitable contribution. Out-of-pocket expenses that you incur — such as supplies, telephone, transportation costs -- can be deducted.

I encourage you to give as much time and service to charity as you can. Doing so does create benefits but not in the form of a tax reduction.

By the way, self-employed people who file Federal Schedule C cannot take business-related charitable contributions as a business expense. For sole proprietors these are personal deductions and are deducted on Schedule A.

More info about donating products, services or your time in these posts -- expenses -- donated services or products.

And, as always, read the book that can simplify your tax and financial life, AND save you money!

Spread goodwill.

Wednesday, November 1, 2006

How does a self-employed pay himself?

Hi June,

Just started a new business – irrigation installation. When you own your own business is it more beneficial to pay yourself a salary or are you able to write yourself checks as needed for living expenses from the profits?

Shawn in Oklahoma

Dear Shawn,

You, like many self-employed, use the wrong term when referring to money you want to take out of your business. The only people who can earn a salary are employees. You’re a new business and you didn't say that you are incorporated so then you must be a sole proprietorship. And you can’t be an employee of your own sole proprietorship.

You are your business. Your business is you. You bring in money from clients. You pay out expenses. What’s left is profit. Profit is what you’ll pay tax on and profit is your “income.” How you take money out of your business, or when you take it, or how much you take has no effect on your profit. If the money is there you can take it out whenever you want.

Here’s an example: In one month a client pays you $5,000. You purchase $5,000 worth of supplies on a credit card. Your profit for the month is zero. That’s $5,000 income minus $5,000 expense. But you still have $5,000 in your pocket because you took none of it out of your pocket for supplies – you put it all on credit card and haven’t paid the credit card company yet. You can take that $5,000 and go on vacation to Tahiti. Not a good idea but you could do it!

And, as always, read the book that can simplify your tax and financial life, AND save you money! SELF-EMPLOYED TAX SOLUTIONS .