Home Studio Exclusivity

Dear June,

I heard you speak at the NM Committee of Women in the Arts last spring and I bought your book, Self Employed Tax Solutions. Your book has been very helpful to me.

I have a question that I hope has a simple answer. I have never taken a home studio/office deduction on past advice from accountants. I would like to take that deduction this year, but am unclear if I really meet the requirements. I have a room in my apartment that is used exclusively for my painting. It's the only place I paint other than when I go outdoors to locations for plein air painting. So it's exclusive and it's regular use. However, I don't do my bookkeeping there (I do that in my office area that is not used exclusively as a business office) and I don't meet clients there since I normally sell out of shows or galleries. Can I still take the studio as a deduction?

Also, while I am doing my best to sell my work and earn a profit, I have yet to do so. I believe I would be able to prove my painting is not a hobby. Does that have any bearing on a home studio deduction?

Thank you for your reply.
Sincerely,

Lee


Hello Lee,

Yes, you have a legitimate deduction for home studio. You may be confusing the meaning of "exclusive use." in this situation." Exclusive simply means you cannot do anything else in the area you use for your business -- in you case, painting. It does not mean that you must do all your business -- all your painting and paperwork -- in that area. You may have more than one business work area. All are deductible as long as they are exclusive.

Because you don't yet have any profit only some of your home studio expenses will be deductible now. Others will be calculated and put on hold to be used against future income.

By the way, the accountants you've been dealing with are not unusual. So many out-of-touch tax professionals tell indies not to take a deduction for home office or studio expense. Those same accountants would never tell the local car fix-it shop not to deduct the repair shop. I find it infuriating. When that happens, I hear the tax pro saying: "You're not a real business. " Get away from that kind of accountant as quickly as you can.

Here's some columns to give you more info on home office:
It's tax time so ... beware of bad advice from the real-life Sammy Segar, CPA
Home Studio

Best,
June

More Self-employed vs Employee

Hello!

I have a job offer to work for a Houston based company that is opening an office in LA. They have made a generous offer after I countered the first and the main thing we were waiting for is that they have offered me full benefits and status as a full-time employee but they will 1099 - me instead of my going in to get them. Does that make sense to you? I am not an indie contractor but the 1099 has me a little nervous/skeptical.

Thank you
Guy, Sherman Oaks, Ca


Hello Guy,

A company that gives you "full benefits and status as a full-time employee" cannot legitimately pay you as an independent contractor "1099." No way, no how. Full benefits and employee status means you are an employee. Something's wrong.

I suggest you read It's all about relationships: Are you an employee or are you self-employed? on my website.

Best,
June

Designer: New to self-employment and the 1099 world

June,

I am a designer -- interior / furniture / industrial . This is my first time handling my taxes as a 1099, and after reading about my deduction opportunities in your "Designers Dozen: Tax Saving Tips for the Graphic Artist " article, I'm wondering: Do I need physical receipts for every write-off I claim or will my credit card / bank statements suffice?

Rachel -- Brooklyn, NY


Dear Rachel,

You will need paper backup for just about all expenses. Some expenses may be estimated, for instance, if you know that once a month you subway to the Bowery to get something fabricated, then you may estimate that monthly transportation expense. Or if on one or two occasions you lose the receipt for a supply house you regularly purchase from, you may estimate. Certain expenses may not be estimated, like business gifts and meals & entertainment.

Regarding credit card statement versus the actual receipt, there are two areas where statement rather than receipt is a problem. First, you would need to show, for instance, that a Macy's receipt is for a business attache and not for a blouse. The other is how would you total all specific category receipts from your credit card statement? You're going to need to sort receipts into business categories -- supplies, postage, dues, etc. My book Self-employed Tax Solutions has an entire section on easy, audit-proof recordkeeping, that shows how to deal with business expenses on credit card.

You are new to self-employment, you need a lot of information. I recommend you start by reading a short column on my website, like: Is it a deductible business expense?

If you like what you read there, I encourage you to buy a copy of my book, Self-employed Tax Solutions. The book answers many of the most common self-employed questions in the same easy-to-understand style you'll find in my columns.

And more than just answering your taxing questions, the information in Solutions will give you a firm foundation on which to build your solo venture!

I wish you much luck!
June

Recordkeeping: "I got it."

Dear June,

I had to write and tell you that I just finished reading your book, Self-employed Tax Solutions, cover to cover. I am an intelligent person, having graduated with degrees in microbiology and nursing and done quite a bit of graduate level work as well. However, business accounting has always been very intimidating to me, stressful, and overwhelming. this year I decided to give up on Quick Books, which I paid someone dearly to set up for me, and go back to paper, but to really learn about what I was doing. (Because my son is off to college soon and I need to double my income...at least!) Yours is the first book I read (except those warm fuzzy business books you refer to.) I got it! I set up my bookkeeping a bit more complicated than the simple system you outline (b/c I'm obsessive compulsive!) and I'm thrilled that someone has given me permission, in writing, to set it up my way.

Thank you!
Dawn Jardine, Dressmaker and Sewing Instructor in NY
Member, Professional Association of Custom Clothiers


Hello Dawn,

What a wonderful story. I fly out tomorrow morning heading to Massachusetts and then upstate New York. Despite the time crunch I had to take a moment to read your email to my daughter-in-law, an artist-writer. Yours is a such moving -- but not unusual tale. Others have told me that my book has, for the first time, given them confidence to deal with the business side of their indie venture.

When I was first writing my book and in the middle of explaining it to someone, he said, oh yeah, I get it, it's a Taxes for Dummies. I went bananas! Absolutely not, said I. It is taxes for very bright and talented people who never had the right teacher.

You are the perfect student. Thank you so much for letting me know the book's impact.

Best regards,
June Walker

Husband & Wife Business

June,

I am a 1099 web developer. My wife makes jewelry which she sells in her spare time. Can we roll both of these businesses into one entity (a DBA maybe?) to be able to deduct her expenses for tools and supplies.

Thanks!
Jason


Hi Jason,

This is how to do it: One of you has a sole proprietorship business that legitimately combines all services and products that you both offer. One spouse becomes the employee of the spouse with the business.

There are many benefits to this type arrangement, including medical and pension. There'll be a posting soon explaining all the benefits.

Studio Workspace

Hi June,

Great site, you offer a rare combination of hard-nosed nitty gritty strategies and clarity.

My question is similar to one asked all the time but with a twist. I work as an artist and freelance technology consultant. I have a separate studio/work space that I would like to deduct. I know about the exclusivity rules and my work space is not wholly mine - I sublet out part of it so I can afford the rent. The entire rent is paid first by me, and it is only in my name, and then the other people pay me. I pay less than my subletters because I did the renovations and do all the work and take all the risk. So - can I deduct the percentage of the space relative to the square footage I use, similar to how home office deductions work? Or do I have to deduct the percentage of the space I *pay for*, which is far less? Or, the last and saddest option, can I deduct nothing because the space is not exclusively mine?

Thanks! Eric


Hi Eric,

Thanks for the quotable. I may use it in my next press release!

The exclusivity and loss rules on home office do not apply to any other workspace. Therefore, you may deduct your portion of the rent. For instance if the rent is $1000 and the others pay $700, your cost is $300. Likewise, the artists who rent from you can deduct the amount that they pay to you.

So now, no need to be sad!

Cheers,
June

New York City Tax Professional Needed

June --

I am an Actress/Exercise Instructor. I have not yet read your book, Self-employed Tax Solutions, but am planning to do so. Your website/blog are both great. Any classes you will be teaching in NYC? If not, could you recommend -- classes or a colleague? I have worked with an accountant for several years but would like someone knowledgeable in Quicken and financial planning. Thanks in advance!

Katie


HI Katie,

So glad you like my site & blog. Thanks for letting me know.

I am currently in upstate New York but have no planned speaking gigs in NYC. Finding a tax pro knowledgeable about indie taxes is always difficult. I don't know one on NYC although I had an office there for many years before heading west. You might call SAG [Screen Actors Guild] for a recommendation. Finding someone will take some work on your part. These posts on my blog may help in making your choice. -- if you've not already seen them:How to pick a Tax Professional
It's tax time so ... beware of bad advice from the real-life Sammy Segar, CPA
Clueless Professional Accountant (CPA) Says You Can’t Deduct a Gift to Your Mother Pick a Tax Professional: Experience or Price

Perhaps someone who reads this can point you to an appropriate tax pro.

Best regards,
June

Recordkeeping and a Refusing Spouse

June:

I am starting a small business and I have a question regarding recordkeeping. I have a personal checking account, which I rarely use. I also have a joint account with my husband. We use this for all of our bills. My husband will not use the method you describe in your book, SELF-EMPLOYED TAX SOLUTIONS ,of creating an audit trail. He refuses to deposit his entire paycheck and write a check to himself for cash. And most of "our" joint money will be helping me get on my feet. How do I handle this?

Thanks, Amy


Hmmmmm, Amy. I think this is more a marital relations question rather than a tax question, but I'll try. You said your husband "refuses, " so here are some questions to ask your husband:

• 
  
  If his boss told him to punch a time-card at work because it made for easier business recordkeeping, would he refuse?
• 
  
  In case of an audit, will he spend his days or weeks dealing with the IRS folks explaining the inflow and outflow of your household money? Or would he expect you to take on this task?
• 
  
  If the audit result were bad, does he not mind putting extra dollars in the government coffers rather than having done it the correct, easy, audit-trail way in the first place?
• 
  
  Is he not open about other family financial transactions?
• 
  
  Is he supportive of you and your business?
• 
  
  Does he take your new indie venture seriously? Or does he look at it as something to occupy your time?

Well, whatever he answers, you need to be creative in working with a stubborn husband.

What about this:[I'll make up some #s because I have none from you to work with.] Let's say he gets a $1,000 paycheck and keeps $200 out for spending money. Is there anyway that you could be a week ahead of him [maybe borrow the $200 from someone, if you don't have it]?

You be the banker. When he gets paid, have him deposit the entire check and you hand him the $200 cash. You then write out a check to cash for $200 to have ready for the next week.

I wish you much success in you new venture!

Best regards,
June Walker

PS to others: If you haven't read my book and so don't know why you should deposit the entire paycheck amount. please let me know.

Full-time Job and Freelancer: W-2 and 1099

Hi June,

My question is this. I have a full time job as a graphic designer and also do freelance on the side. I take a standard deduction on my W-2 form. As far as my freelance, I get 1099 forms for each company I work for each year. Can I take a standard deduction on my W-2 and still claim expenses against my 1099 forms?


Hello Joseph,

Your situation is typical of many graphic designers -- you have a job and you also freelance. And, your question is a designer's typical question in that it is more complicated than you realize.

Let's look at a few definitions. You receive a W-2 at year-end stating income earned when you have a salaried or wage payng job. When you freelance you get a 1099-MISC staying income earned.

Your tax return is filed on a Form 1040. You take a standard deduction on the 1040 instead of itemizing expenses like: medical costs; mortgage interest; real estate taxes; charitable contributions; and business expenses that you against your W-2 job.

A standard deduction has nothing to do with business expenses that you have against freelance income. Those kind of expenses go on a different part of your tax return. You can take the standard deduction and deduct all freelance business expenses.

Here's some more info from my website on this topic:
What'll it cost me to leave my W-2 job for the indie life?
You say you’re self-employed —Will the IRS? Let's first look at W-2 vs. 1099

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

Bloggers, designers, inventors: 3 Ways to Expand Business Deductions

Because of my most recent posts I've had a bunch of questions on business expenses in general. I think this will answer a lot of questions. And I hope it encourages you to ask some questions of your tax pro.

Common sense – you know, that’s the commodity your mother wished you had – would tell you that business expenses are the costs you incur to run your business – the money you must spend in order to make money.

The IRS explains it this way:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is appropriate and helpful for your business. An expense does not have to be indispensable to be considered necessary.”

Okay, but what's an ordinary expense to a blogger? What's a necessary expense to a computer games inventor?

The answer: Anything you do that relates to your work, that stimulates or enhances your business, nurtures your professional creativity, improves your skills, wins you recognition, or increases your chances of making a sale is a potential business expense and deductible.

When Victor Visual attends a friend's talk on web marketing, that isn’t a personal experience for graphic designer, Victor. Even though he may attend as support for his friend, it's business and any related costs are business expenses, and deductible. It’s just as legitimate a deduction as that paid by a salaried middle management executive attending a seminar given by his colleague on “Employee Motivation."

Ivan Inventor – of computer games, that is – shouldn’t assume that buying someone else’s computer game can’t be a business expense. Even if Ivan stayed up half the night fighting invaders from another galaxy, he was researching the competition. The purchase of the game is a business deduction.

Whether you blog or design or invent, if you're doing it to make money: You are self-employed – so from this moment on, whenever you reach into your pocket for money, write a check, or slip out your credit card, be aware that you may be engaging in a business transaction.

Here's 3 Ways to expand your business deductions:
1. Define your business as broadly as you honestly can. The more multi-faceted and inclusive your field of endeavor the more wide-ranging your expenses and thereby the less taxes you’ll end up paying!

• A photojournalist can deduct a more extensive variety of expenses than can a wedding photographer.
• A technological consultant’s expenses will be more diverse than those of a computer repair person

2. Look with a different perspective at your activities. Don’t be so sure that there is a well-marked difference between work and family and play and chores. The business life of an indie like yourself is intertwined with your personal life. And the two two can get pretty tangled. If you’re dropping off your children while delivering products to clients, or struggling to find time for your new independent venture while holding down a full-time job, the interplay of your business and other interests can be intricate.

• A visual artist attends a Broadway performance and scrutinizes the sets and costumes. She deducts the cost of the ticket as a business study expense.
• The designer of hand-made all-cotton clothes for children deducts, as a publication expense, every magazine she purchases that has any clothing, kids, or fabric industry trends in it.

3. Review your relationship to the people you spend your time with. Anyone who has a connection with your business may be primarily a business associate even though in some cases he or she may also happen to be a college classmate, friend, parent, child, or spouse. Friendship with a business associate is not necessarily fatal to a deduction. You’ll just have to show that the predominant motive for the activity that warranted the expense was business-related.

• Faye Fabrique deducts not only the fabric paints that she buys, but also the expense of dining out with her husband. Why? Because during the meal she gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.

Think like a business. Take every deduction possible. And, click here to get your complimentary list of self-employed business deductions?
As always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .

Business Expenses on Credit Card

June:

If I bought a computer on credit, and have payed off some off it, how do I claim a portion of my computer?

Michael from Atlanta


Michael,

Any charge made on or before December 31st to a bank credit card is an expense for that year, regardless of when the credit card balance is paid. For a store credit card it is an expense in the year it is paid. So if you bought your computer at BestBuy 2010 on a BestBuy credit card and paid for only half of it by the end of the year, you may deduct only half the cost on your 2010 tax return.

A similar treatment applies to expenses paid by check. For cash basis taxpayers (you’d know if you weren’t) a check written on or before December 31st, regardless of when it clears your account, is considered paid in the year it was written.

A hint for recordkeeping: Most bank and credit card monthly statements do not start on the first day of the month and end on the last. They straddle months and therefore they straddle years – for instance, December 14, 2010 through January 13, 2011. When you have a monthly statement that straddles a year, make a copy of it. Put the original and any paperwork (receipts, deposit slips, canceled checks, etc.) dated December 31 or before with the earlier year’s records (2010); put the copy and all paper transaction records taking place January 1 or later with the later year’s records (2011).

Visit here for June's 2011 manual recordkeeping how-to guide: The Confident Indie: Five Easy Steps

-- June

Recordkeeping for small cash purchases

June --

I have a small home business selling used books on Amazon. Most of the book sales I buy from do not give receipts and accept cash only. Also, I pick up books at yard sales, etc where I also pay cash and have no receipt. If the amount is over $50 I usually pay by check and use my cancelled check as proof. I always keep a dated log showing what I purchased, where and the cost and mileage. Is that enough proof for the IRS for small cash purchases (under $50)?

Thanks.
Maureen from Pennsylvania


Maureen, you are doing exactly what you need to do. A log of purchases will work. And if the people selling won't give a receipt or accept a check, and the expense is a large one, just write down the book titles and / or authors. You're showing a "businesslike" method and that's what the IRS likes.

-- June

For recordkeeping how-to check out: The Confident Indie: Five Easy Steps

Pick a Tax Professional: Experience or Price

June --

Is it more advantageous to employ the services of a CPA who specializes in preparing returns for self-employed/artistic types or should I be less picky and find someone who is cheap and close to work? Thanks for all the great advice.

Liz, graphic artist in Orlando


Well, Liz, as you may have learned, if you've been to my website, my method is one of education -- teaching indies how to use what they know in their own field and apply it their tax or financial situation. So, let me ask you a question: I need someone to design my business logo and general image. Should I hire a talented graphic artist with experience or one who is cheap and available tomorrow? When you answer me, you'll have answered your own question.

BTW -- you don't need a CPA. The bad guy in my book is the clueless accountant, Sammy Segar, CPA. An experienced tax preparer will do.

And, you are welcome. Glad my advice helps. Please tell your colleagues.

Best,
June

Designers Dozen: Tax Saving Tips for the Graphic Artist

Take notice all you unique visual designers – whether you use Dreamweaver or Six Apart or Oil on Canvas; whether your income is $2,000 a year or $200,000 a year; whether you receive a 1099 or not: The IRS applies the same rules and regs to all of you.

That’s right, unique carries no weight with the IRS. You all must follow the same rules.

Here are some time and money-saving tips -- a Designers Dozen -- on how to simplify those complex rules to fit your unique situation. All stem from questions you have asked me or areas I know you need help in.

1. Use two offices. Forget the old husband’s tale that home office or studio is an audit red flag. The IRS has lightened up on this. Even if you work out of two or three places, if used exclusively for your work they are all legitimate deductions. Yes, both your home studio and the spare room at the beach rental where you do your three-hour morning blogging routine are deductible business expenses.

2. Work at home to increase your business transportation deduction. If you freelance at someone else’s studio you can still deduct costs for the area of your home used exclusively and regularly for your business – no matter how small the area. And by having two work places you’ll increase your deduction for auto use or public transportation costs.

Here’s why: The IRS does not allow a deduction for commuting from home to work and back. But it does allow a deduction for getting from one workplace to another. If you work in your home studio and then drive to your other studio you are now driving “from one workplace to another.” You’ve increased your business miles and the amount of your auto deduction, or made your subway trip a business expense.

This also applies to something like attending the Boston Flash Forward Conference. Creative Bostonians without a home office would not get to deduct the “T “ cost from their home to the conference.

3. Careful, no office sharing allowed. Keep in mind the all-important IRS exclusive use rule: that your office must be yours and yours only. If you’re the designer for Clyde Client and your wife handles the tech side of Clyde’s site and both you and your wife use the same office – sorry, no deduction. The way around that: make one spouse the employee of the other. BTW – there are a whole lot more benefits to hiring your spouse.

4. Hire your spouse. Even if your honey only helps you out with printer jams or errand running, pay him for it. Putting him on your payroll opens up a vast array of deductions. You can provide generous employee benefits and deduct the costs of those benefits from your design income. What kind of benefits? Well, for one thing, you can give him a medical plan that covers his family – that’s you and the kids. That would make your trip to the doctor a deductible business expense.

5. The more broadly defined your business the more deductions you can take. If you sell Web page templates for MySpace, Blogger and Moveable Type via your blog, and also generate AdSense income from the blog, and also consult on how to promote through blogging, you need to think of all that as one business. Give your work an expansive general description, like consultant to the virtual universe. Claim all the income --- every dime. Consider as a possible business expense everything you do that makes you better at making money.

6. Keep it simple. By taking the broadest possible view of all your income generating ventures you can group them as a single enterprise and thereby can really simplify your recordkeeping. But don’t stretch it beyond reasonable limits. A single business that combines dog walking and web design is just too far fetched. But that combination might very well stand up if you design only for pet stores and pet services.

7. Why do you watch TV, rent DVDs, see a movie? If it’s just for fun, no tax deduction. However, if seeing the visual art of others is vital to your own creativity, keeps you abreast of current design trends, or clues you in to the latest fashion, then consider the costs a tax deduction.

8. TV for research. Has the artistic void on network TV forced you to get cable? Well then, part of your monthly cable cost is a business deduction. And remember, the business use portion of the cost of your TV and DVD player is also a business expense.

9. Are you allowed to deduct a gift basket of fruit to Grandma? Of course you are -- if Gram has some connection to your business. Did she show you how to hook up your scanner? Make curtains for your office?

You’re an indie business and even though you may have a personal relationship with someone, that does not rule out also having a business relationship. This is particularly pertinent in gift-giving. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business gift deduction. But what about the friends with whom you have a business connection? If dinner at a friend’s house was planned so that she could help you with your Webby’s submission, then the chocolate you arrived with is a business gift.

Of course, all the costs related to your Webby’s submission are business expenses. And when you’re the winner and head to the awards event this spring, well, your travel expenses are also deductible.

10. Deduct your laundry and dry-cleaning. Spill ink or red wine on your white silk blouse while attending an awards event? Dry cleaning and laundry while on a business trip are deductible expenses. You may also deduct the costs of the first dry cleaning bill after you return home.

But don’t get too creative and save all your winter’s dirty clothes for cleaning the day after you return from a 3-day workshop.

11. Just starting out? Final Cut Pro and Adobe After Effects not bringing in the bucks yet? No problem. Even if you haven’t yet made your first dollar as a graphic designer you may still deduct your expenses. As long as your goal is to make money, you’re in business – whether you actually make any money or not.

12. Invite the public! If your Grand Opening or gallery show is open to the public you may deduct the entire cost of food and liquor served. If it is for invited guests only, you may deduct only 50% of your costs. Note, it doesn’t matter how many people actually attend the function.

13. Discuss these ideas with your tax pro before incorporating them into your business. That’s the most important tip of all. If your tax pro isn’t aware of them … time to get a new pro!

Be sure to take a look at my 2009 money saving offer for visual artists. It 's right here.
-- June

Clueless Professional Accountant (CPA) Says You Can’t Deduct a Gift to Your Mother

In an earlier post, It's tax time so ... beware of bad advice from the real-life Sammy Segar CPA, I warned about bad advice from tax professionals, using a comparison to Segar, the fictional CPA in my book. Another real-life Segar type turned up as if on cue when BusinessWeek published an interview with me.

A New York CPA sent an email to the magazine, which, cut to its high concept, protested that I didn’t know what I was talking about. The magazine, to check whether it had disseminated wrong information to millions of readers, forwarded the email to me.

But Mr. NY CPA was wrong on all counts.

Too many to go over all of them here, but let’s look at one – a point I made because my interviewer was not a magazine staffer but a freelancer.

Suppose she had to hire a babysitter to be free to do the interview with me, I said, and suppose the babysitter called at the last minute to say that she couldn’t make it. My interviewer could ask her mother to watch the baby, and if she presented her mother with a little gift in gratitude, the cost of that gift (up to $25) is a legitimate business expense deduction.

Oh, no, wrote Mr. NY CPA. That’s not allowed. You can’t deduct a gift to your mother.

But, the IRS says: if you give a gift in the course of your trade or business, you can deduct all or part of the cost of the gift. The IRS doesn’t say, unless the gift is to your mother.

In the same interview I advised that incorporation is expensive, complicates the life of a self-employed, and is usually unnecessary.

Mr. NY CPA disagreed with that. Of course you should incorporate, he wrote, so that you can deduct the premiums you pay on your $50,000 life insurance policy. And so that you can deduct the $5,000 you are paying to your babysitter.

Well, few indies have a $50,000 life insurance policy. And for those who do, the tax savings from deducting life insurance premiums do not outweigh the costs and hassles of incorporating.

And, to benefit from the babysitting deduction, the indie must have a kid, and pay a babysitter $5,000 -- on the books!

The tax code is not written for indies. It’s written for the corporate world and the employees who inhabit that world. To correctly interpret those laws so that they fit the situations of independent professionals is a lot of work. Sammy Segar doesn’t want to work that hard. He’d rather stay in the dark ages and not move into the 21st Century where the US holds 33 million self-employed and growing.

Once again, I remind you: Until the Sammy Segars get it together, stay on your toes. Check out the advice you get.

If you’re unsure read SELF-EMPLOYED TAX SOLUTIONS or email your question to me.

When your subcontractors are in India

June,


This is Dan again, from Quicken or Quickbooks .


Now for a different question: I mentioned that I am working with overseas developers in India. Taxwise, how do I handle this? Is there something that I am supposed to file? These developers are in no way my employees. They work under their own companies and I am contracting a certain amount of work to them.


Thank you very much for answering my questions.




Dan, you must withhold 30% federal tax on the income of the people who live and work for you in India. Each of them should complete a W-8BEN: Certificate of Foreign Status .... etc. You will need to file a Form 1042 [they each get a 1042-S at year-end] . You can get more information on this from the IRS at 866.455-7438 and you can get info on filling out Form 1042 also from the IRS at 215.516-2000.


Not all foreign workers have to be withheld at 30%. With some countries the US has reciprocal tax agreements and so that changes the mandatory 30%. At my latest understanding, we did not have such as agreement with India. But, check it out. Things are happening at web-speed.

Travel Or Start-up Costs

Hello June,

I have been a self-employed chiropractor for 28 years. I am taking a brief trip with my wife and daughters to Las Vegas. I have considered moving there to practice chiropractic. Would my expenses and my families' expenses be deductible if I could document investigation of health care environment, locations, visit other chiropractors, etc?

Craig from Minnesota


Hello Dr. Craig,

The expenses for your family members are not deductible. [If your wife were your employee, her expenses would be deductible in the same way as might yours.]

If you go to Las Vegas for business purposes, your expenses would fall into one of two categories: Travel or Start-up Costs.
The two posts below Expenses While Changing Work Locations and Travel Expenses should help you determine whether or not the expenses fall into the "travel" category.

If they don't fit the travel category, then consider start-up costs. Let's think of a practice in Las Vegas as a new business. Expenses prior to opening a new business are considered start-up costs. If the new business actually gets started, then you may deduct the expenses.

However, if the new business does not get started, the expenses you had in trying to establish yourself in business fall into two categories:

1. Exploratory or General: The costs you had before making a decision to begin or acquire a specific business. They include any costs incurred during a general search for or preliminary exploration of a new venture. These costs are personal and nondeductible. These include going to Las Vegas to check things out, as you described.

2. Investigative or Specific: The costs incurred in your attempt to acquire or begin a specific trade or business. These costs are capital expenses and you can deduct them as a capital loss. For instance if you paid an attorney or accountant to review a Las Vegas chiropractor's practice that you were thinking of purchasing.

Looking at the IRS guidelines on start-up costs for a business that never gets off the ground, it's quite clear that the agency wants to rein in people who have a notion to explore the possibility of going into business for themselves, but only as long as they can write off the "search" at the expense of their fellow taxpayers.

If a business never gets started then exploratory expenses never can be deducted; but specific expenses always can be deducted -- one way or another. Be aware that when the IRS says "specific business" it means just that -- that the costs are incurred trying to start a new business or buy an existing one. It does not mean exploring a specific type of business.

Therefore, someone aspiring to a new indie business can be assured of getting a tax deduction if he settles on a business and makes concrete moves toward starting it up, whether the business actually gets started or not.

Quicken or Quickbooks

June –

I noticed your book entitled Four Steps. I am wondering if the Quicken tweaks you write about in this book will suffice for my business? I am a consultant that builds eLearning and Web Applications. Well...to be accurate, I don't really build them...I work with the client, conceptualize them and then outsource all of the programming and sometimes graphics work to others (usually in India).

I work in a very project based manner. I setup a budget for each project that is based upon an estimate. I would like to be able to keep track of money going out and coming in based upon each project. I have recently installed the 300 buck version of Quickbooks and now, after seeing your book, I am wondering if Quicken will be able to do everything that Quickbooks can? I guess, to sum up my question, I am asking when you would recommend Quickbooks over Quicken and vice versa? Thank you for you insights and wisdom, I look forward to reading you book (SELF-EMPLOYED TAX SOLUTIONS)


Hi Dan,

I recommend Quicken [Q] over Quickbooks [QB] . It's easier.QB is a double-entry bookkeeping system. Accountants love it. Just plain folks find it overkill. The time you save with Q over QB will be well worth the money lost on your QB purchase.

Q has categories and subcategories and classes. The classes will allow you to separate expenses by project. Because you're computer-savvy I'll do a couple of shortcuts here. If you don't understand let me know.
For instance, take a look at this:

Supplies:Software/Project A
Supplies:Ink&Toner/General
Supplies:Software/Project B
Publications/Project B

Get the idea?

Q has a lot of bells and whistles. It allows you to set up budgets so you could compare budget to actual. I don't go into that in Four Steps. Four Steps is a basic how-to – how to make Q work for a self-employed business rather than for a family with wage earners or a small business that makes widgets.

Hope that helps.
June Walker

yeah, June, that makes sense. Now...there are a variety of Q versions. Do you recommend one over the other. Because I make widgets would you recommend the premium version or does it really not matter? With regard to project based budgeting...Q used to have a very useful Budget heads up display sort of thing that you could pull up and allow to sit on top of all Q windows. The display would show you by color (green, yellow and red) and progress bar how much you had left in your budget for a wide variety of categories. I made use of this a lot in Q ’98, I believe. Does the latest version of Q have this?

Do you know what I'm referring to?

-- Dan

1099 Forms and the Unpaid Taxes

Hey 1099ers and Indies!

The government is owed $300 billion in taxes. And they want to collect it – now! Are you one of the culprits? You might be because the IRS says 80% of the tax is owed by individuals, not corporations. And guess which individuals they say owe most of that money. An article in Friday’s New York Times, Democrats Seek Unpaid Taxes, reports that according to the IRS almost all of the tax owed on unreported business income is due “from sole proprietors, like painters, plumbers, dry cleaners, florists, limousine drivers and restaurant owners.”

The IRS thinks you are cheating. You’re hiding income. You get paid in the parking lot or under the table and so you don’t report the income.

That may be so. Some indies do hide income. But I think the bigger problem is that indies don’t know what to do with 1099s that they receive. They stick them in a drawer … for later. Or often an indie doesn’t receive a 1099, and she thinks that since she were paid, let’s say $6,000, and her expenses were more than that, why bother to file a tax return.

Here’s a figure that’ll get you shaking your laptop: When someone you worked for sends a Form 1099-MISC for $6,000 to you and to the government, that form notifies the federal and state government that you earned the money. The Feds then expect about $2,000 from you in taxes.

That’s right! If you deduct no expenses from your freelance income, you should plan on paying about about 30% to 40% of your income as taxes. Here’s an explanation about how that works: Taxes: Which ones and how much do I pay?

Even with no 1099 the government can learn about your income – and their methods of detection keep getting easier. One way, for example: If you design a website for me I’m going to deduct the expense, even if I didn’t send you a 1099 or even if I paid you in cash. And if I’m audited, the IRS now knows about you.

If you get a 1099 the government gets one too. And the government knows only about your income, it knows nothing of your business expenses. That means, they are expecting that 30% to 40% tax payment. So, to pay less tax: File a tax return, claim all your income, and deduct every business expense possible.

Click here for a complimentary copy of the Self-employed Business Expenses List.

Employee vs. Self-employed

Dear June,

My husband is a subcontractor delivering office supplies. He has hired a helper on a full time basis. My husband is listed as a sole proprietor. Should his helper be classified as an employee or contractor, and what are the advantages and disadvantages of either?

Hope from Georgia


Dear Hope,

If the helper is full-time and not offering his services to anyone else and he works at the direction of your husband, it's likely he is an employee. If he meets certain criteria he must be one or the other, you really don't have a choice. And, if he is an employee you will have to withhold taxes and prepare payroll forms.

Because of the many tax advantages to self-employment many folks try to twist the regulations to fit their situation. To cover both the contrived and the honest situations, the IRS has put together a guide to help determine whether someone is an independent contractor or an employee. The IRS focuses the criteria upon a single issue – control versus independence. The IRS looks at things like: Does the worker perform independently? To what degree is his work controlled?
It is a question of relationship, it is a matter of degree, and it is measured in three categories. The categories are:

• Behavioral control· Who directs and controls what will be done and how it will be done?
• Financial control · Who directs or controls the business aspects of the work?
• Type of relationship· What facts show the type of relationship?
  
  There are a couple of columns on my site about self-employed vs. employee and the advantages and disadvantages of each. You might want to read It's all about relationships: Are you an employee or are you self-employed? and Employee or Self-Employed:Which is Better?

Also look in the Archives on my site for more information about employees and self-employment.

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


Best,June

Home Office and the Fiancee'

Dear June,

I don't know whether or not to take the home office deduction. I'm stuck on the "exclusivity" part of the definition. I have a little room in my basement where I have a PC. I use it to administer my business (which includes using the Internet). I certainly pass the "regular use" part of the definition. However, I do go down there to surf the web and check email also.

I talked briefly with a CPA, and he said to go for it, because he didn't think the government would come around, looking into my window to see what I was doing. TECHNICALLY speaking, I do other "little" things in there besides administer my business. Does the IRS come into your office to see what's in it?

What do you think? Should I just forget it, or perhaps do my surfing elsewhere in the house and deduct the home office next year?

Thanks.
Mark from Virginia


Hi Mark,

A lot of tax law isn't as murky as some folks think. There are certain areas -- not many, but some -- where you can apply logic or common sense. So let's see how these same questions would apply to some other part of your life.

I'm stuck on the "exclusivity" part of the definition.
Every once in a while my fiancee dates her old boyfriend. Is this an exclusive relationship?

I certainly pass the "regular use" part of the definition.She sees me most of the time.

TECHNICALLY speaking, I do other "little" things in there besides administer my business.
Technically speaking she's engaged to me so the other guy isn't really important.

Does the IRS come into your office to see what's in it?I wouldn't have even know she dated the other guy, but a friend of mine saw her and told me.

We're talking a few thousand dollars in deductions here.I'm in my 40s and really think it's time to get married.

I talked briefly with a CPA, and he said to go for it, because he didn't think the government would come around, looking into my window to see what I was doing.
My mom is concerned that I'll never get married and she really wants grandkids. And who's to know about the other guy anyway?

Now to answer your question: The office must be exclusively used. The IRS could and does visit home offices, although not unannounced -- unless you fall into the Al Capone category of taxpayer. So, as Al would say: For this year, forget about it.

By the way, inventory storage does not require exclusive use. Also, every indie struggles with answering business and personal email on the same computer. There is no practical way to separate them. I know of no court case dealing with that situation. Were I your tax pro, I would look at the legitimacy of your entire solo business before making a decision on home office.

For more on working from home be sure to read the Home Studio post.

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

Cheers,
June