Saturday, March 31, 2007
My husband is a custom painter. He works as a subcontractor and pays self employed taxes, what would make more sense taxwise, sole proprietor or continue as self employed?
Marcia, Morrisville, NC
A sole proprietor is a self-employed.
Self-employed is a description for anyone who works for himself. A sole proprietorship is how the business is set up. A sole proprietorship is the type of business structure.
For instance, if your husband went into business with a friend and they worked together they would both be self employed and their business structure would be a partnership.
If you work for yourself and do nothing about your business structure, you are automatically a sole proprietor. You might want to read this column on my website for more info I am a Business .
If you're a sole proprietor, you do not need to file a separate tax return for the business. It's part of your personal 1040. However, were your husband in business with his friend, the partnership would need to file its own tax return.
Thursday, March 29, 2007
When is a 1099 necessary? How much money would I have to pay before I have to claim (tax) my subcontracted work?
Ryan, Graphic artist in Salt Lake City, UT
So many people are confused about 1099s. Here's a quick summary.
At year-end employees must be sent a W-2 from their employer. A W-2 states wages earned.
At year-end, if a self-employed were paid $600 or more by an individual or a company, that individual or company should send a Form 1099-MISC to the self-employed. A 1099-MISC states self-employed income earned.
However, many times no 1099s are sent. Even if there's no 1099 the self-employed must report the income on his tax return -- no matter the amount.
Whether or not a self-employed will have a tax liability on his self-employed income depends on how much he has in expenses. And it also depends on all the other income and deductions on his tax return. Here's a couple columns from my website that give more explanation on which taxes you may have.
Taxes: Which ones and how much do I pay?
Estimated Tax:How much should I pay?
Keep in mind. there is a full explanation of income, expenses and taxes in my book, Self-employed Tax Solutions.
Tuesday, March 27, 2007
I have a weekly live television segment that I have to buy clothing for as well as stay groomed ( waxing, hair, etc..) and buy special makeup for. Are these items tax deductible? I would not be buying all the clothing I've had to purchase this last year if it wasn't for the show.
Thanks...Great blog! Ellen
Wish I had a more preferable answer. Street clothes -- pretty much meaning you could wear them through town and not attract weird looks -- are not deductible. On make-up and hair I look at what is typically spent for non-professionals and then take a deduction for the additional costs. For instance, typically women get their hair cut and colored every six weeks, so more often that that would be a business expense. The same with makeup. If you're doing full camera make-up each day or you're buying theatre/professional make-up you're going to spend a lot more than someone who makes up everyday for the office.
Other tax pros may treat this deduction in a different way. In cases where there is no yes/no answer, I choose a position that I would be able to argue comfortably.
Another way to look at why your clothes are not deductible: Think of the mother of a couple kids; She wears jeans and T-shirts all the time; Kids now are in school and she gets a job; she needs a whole new wardrobe. Not deductible.
Sunday, March 25, 2007
I am a cartoonist who has also become a self-publisher. With the help of your book, Self-employed Tax Solutions, I've been able to make sense of most of my business taxes, but some things remain tricky.
My question: Buying a proof of my books is a necessary expense. The proofs are not always perfect, so I consider any proof not saleable. Yet, they are something that I can keep in my studio to show people, rather than toss them. Where can I deduct the price of the proofs? Do they go under COGS, supplies, or other?
Thanks in advance, John
You have a choice.
You can consider the cost of proofs as production costs when figuring your per book cost. For example:
All production costs for 100 books = $1000. That means cost = $10 per book.
If the proofs cost you another $100, then your total production costs for the saleable books = $1100. So your per book cost = $11.
Or you can include the proof books as part of your inventory. And when you use them for show, treat them the same as you would books that you give away for promotion. For example:
Let's say your cost was as in the above example, $1100. But you got 100 saleable books and and 10 proofs. Then, your cost per book = $10. And every time you use a proof or send out a book with your promo packet your inventory cost = $10 per book .
Inventory is difficult to explain in a short piece. I assumed that, because you used COGS, "cost of goods sold," that you understand a bit about inventory. Hope I was right!
Saturday, March 24, 2007
What do I do if I have everything except one 1099 form from a client who is dragging their feet?
Graphic Artist, Morongo Valley, CA
You don't need the 1099 as long as you include the income on your tax return.
Thursday, March 22, 2007
What blessings to find your site! I have a question regarding deducting education costs. I returned to grad school recently (financed by student loans) while continuing to make my living as an indie yoga instructor and writer of web content on yoga and health. I've been getting Tuition Statements from my school and wonder how I'm suppose to use these to reduce my taxes? My studies are in Asian Philosophies and so absolutely related to my work.
You can get a tax benefit from education expenses, however, there are several different ways to get the benefit -- from credits to actual deductions. Which is the most beneficial depends on your entire tax return -- all the income, expenses, exemptions, etc. And you need to be careful so that you don't accidentally take both benefits. Only one is allowed.
To explain how that works would be instruction in tax return preparation -- much too complicated for an email or post.
Education expenses are explained in depth in my book, Self-employed Tax Solutions, however, keep in mind that I think indies should not do their own returns. Your job is to have all the info and then take it to a competent tax pro who knows tax law and can get get you the lowest tax possible.
Tuesday, March 20, 2007
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 is ordinary to an astrologer? What is necessary 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 business expense and therefore deductible.
When Anouk Astrologer goes to another astrologer for a reading, that isn’t a personal expense; that’s a business expense, and deductible. It’s just as legitimate a deduction as the cost of a “Learn to Motivate Employees by Role Playing” seminar attended by a salaried middle management executive.
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 he stayed up half the night fighting invaders from another galaxy, he was researching the competition. The purchase of the game is a business deduction.
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. Change your brain circuits to accommodate your new mind-set.
New mind-set in place? Good. Now turn on your brain – the fertile brain of an indie – and take a fresh look at these three aspects of your career.
First: 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.
• A generalist writer – someone who might write about anything – has more assorted expenses than a sports writer.
Second: Look at your activities.
Don’t be so sure that there is a well-marked difference between work and family and play and chores, or that you know what the difference is. The business life of an employee is rather sharply defined, but the business life of a self-employed like yourself is intertwined with your personal life. If your business is broadly defined and your life is richly complicated, it can make for an intertwining that gets pretty tangled. If you’re caring for your parents while running a day care business, or are dropping off several of your children at different locations 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. On the other hand, if you’re a loner, without commitments or obligations, the boundary between business life and personal life might be remarkably simple.
• A musician who is single and without children may do very little that is not considered ordinary and necessary to his business – travel, purchase entertainment system equipment and CDs, attend concerts.
• An alarm-system installer with 4 children who spends all his free time going fishing, by himself, is going to have limited business expenses.
• 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.
• A structural engineer drives through Millionaire's Mile looking at the period architecture of the houses. Since this is research for him the drive is a business event and the mileage there and back is a business expense.
• The proprietor of a hand-made clothes for children shop deducts as a publication expense every magazine she purchases that has any clothing, kids, or fabric industry trends in it.
Third: Review your relationship to the people you spend your time with.
Your new mind-set expands the way you think about the link between what you do and the people you do it 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.
• A dance instructor calls his friend to invite her to a movie and, also, to ask her to bring her workbook from the marketing workshop she attended so that he may borrow it for ideas for promoting his business. He deducts the business phone call.
• A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband she talks about her new business, 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.
To sum up, in looking for the best possible advantage regarding business expenses:
•Define your business as broadly as possible.
• Remember your business expenses may be expanded or limited by the scope of your business, the money available to spend on your business and the time available due to other commitments.
• Whatever you do, and whomever you do it with, consider the possibility of a business connection.
To receive a complimentary list of self-employed business expenses, visit my website here.
Sunday, March 18, 2007
In November I began training to be a sign language interpreter and speech therapist. The company has numerous franchises across the country and hires all of its trainees as independent contractors. They train us. They find us clients. We train on their facilities using their materials, following their schedules. They monitor and correct our performance.They instruct us on how the procedures are to progress, and specify certain milestones but they do not tell us exactly what order to teach the procedures.
I have been through the Indie checklist over and over and I can't come up with a written justification of how this job meets the IRS requirements. My contract with them stipulates I am an independent contractor, and they tell the new hires how much money we can save with all of the deductions.
I wrote the company requesting justification for its classification of workers as independent contractors. I received no response. I've put in over 100 hours of training preparing for this job. I don't want to step into a problem. Can my local IRS office help me with clarifying this status, and if I ask them, am I opening up an audit nightmare for this company and their trainers?
You are the fourth person that I know that's in this situation.. The other three came to me for in-person consultations. They were doing similar work -- therapy and testing of children.
In their cases the agency was contracted by the state and then the indie was contracted by the agency. The agency got a lot more money from the state than it paid the indie. These three people did not want to open any can of worms and saw it as their first "job" before going out on their own. So they put up with it and worked as indies.
I would think if your company has franchises all over the country they must have some kind of information to give you on how they justify the work relationship.
By the way, the company, too, saves a lot of money by hiring you as an indie rather than an employee.
Based on the other three situations, that I checked thoroughly, and your description about your company, my guess is that you should work as employee status. Of course, I don't have all your info.
You have three choices:
1. Do nothing and work as an indie.
2. Pursue a statement from the company. You might even let them know that if you get no response from them that you'll request a ruling from the IRS. That might move them along. Or it might get you fired, or not hired.
3. Request a ruling from the IRS. I'd have to get you info on that because I can't remember off the top of my head what form it's done on.
Let me know what you decide.
Saturday, March 17, 2007
I am technically a full-time student, but I also work as an independent contractor babysitting in different hotels in downtown Chicago. Generally, I have to drive down there and park, and I am confused about whether I can deduct my parking fees, or what not.
I do have them email me every job, which I have to check on my home computer before leaving, but I don't know if this could technically be considered "work."
Andi, being a full-time student has no bearing on whether you can be an indie or not. If you do something to make money, you are self-employed.
Only mileage from one job location to another is deductible. So from one hotel to the next: Yes.
From home to hotel: No.
Yes, parking is a business expense.
Friday, March 16, 2007
I am happy to have found your website. I am going to work for a family as a nanny. I have not done this type of work before, and they will be paying me by a 1099. How do I find out more about what expenses I may be able to deduct in a position like this?
Thanks for your help!
Congratulations on your new job, Michelle.
I do have not good news for you, though. If you are working for one family as a nanny then you are the family's domestic employee. You are not self-employed.
This kind of situation was a big news in the 1990s with a case about Zoe Baird. Since then people have been a bit more careful about paying nannies as legitimate employees.
SmartMoney has a short piece on nanny taxes here http://www.smartmoney.com/tax/homefamily/index.cfm?story=nanny .
Whether you're an employee or an indie, the same expenses are deductible. However, employee business expenses do not give the same tax advantage as do self-employed business expenses. You may get a complimentary list of self-employed business expenses from my website, here .
Wednesday, March 14, 2007
I am in a bind and don't know where to turn. We have purchased your book, Self-employed Tax Solutions , but don't have the time to fully read and figure everything out before we have to turn in our taxes.
I've tried to put all of our expenses into QuickBooks so we can turn over our information to an accountant to do our taxes, but have only ended up with a royal mess and a lot of frustration and tears.
Like your book says, we have a big bucket of receipts...and I don't know what to do now. I don't know where to turn and I don't know who to trust to help us maximize our deductions and make sure we don't get audited. Are you taking clients? How much would you charge to help us sort out our information and help us file our taxes? Or conversely, is there someone you would recommend that we could use locally in the Raleigh, NC area?
Any help would be greatly appreciated.
Thank you, Emily
First: Slow down. You do not have to file your return by the April deadline. You might want to read Extensions: Relax ... there's no need to file by April 15th on my website at http://www.junewalkeronline.com/index.asp?sPG=43 .
In the Most Simple System section of my book there is a complete explanation of keeping records manually. It tells you what to do -- simply and easily -- with your "bucket of receipts."
So, if possible get rid of Quickbooks. I don't like the program. It is too difficult. If you want to do your recordkeeping on computer, rather than manually, then use Quicken.
FOUR STEPS, available from my site as a PDF, will walk you through the setup of Quicken for an indie business. But don't go to FOUR STEPS or any recordkeeping method until you've had time to read my book. [Note added April 15, 2011: Four Steps is currently out of print.]
Next, you can never be sure that you won't be audited. What you can be sure of is that you'll be prepared for an audit if it were to happen. Self-employed Tax Solutions tells you how to do that.
Yes, I am taking a few new clients. And I have several in NC. I'll send you a separate email on how I work with new clients, but first, take your time and think about what I've written here. There is no need to panic or worry. It'll just take some time and patience and some reading on your part, to get to the next step.
How's that sound?
Tuesday, March 13, 2007
Here's the question from Gwyneth in North Carolina:
Oh man. I lived in 2 states last year, and I think I have about 4 or 5 W-2s. Additionally, I did independent contractor photography work for another photographer. I was paid in both check and once in equipment. She has not given me a 1099 form. I have definitely spent far more on equipment and start-up costs than I made.
*** Do I file two different forms to the IRS?
*** My camera was purchased before I ever used it to earn money with...can I still deduct that?
*** Can I spread out my start-up costs? (website, cameras, computer equipment, etc, etc.) Or would they all be deducted for the year the money was actually spent?
*** What about cell phones? My cell phone is my only phone, so of course I use it for business AND personal calls. (this goes for my computer, clothing I bought expressly to wear while working, but that I also wear other times, etc.)
In the end, I definitely didn't make any money w/ my freelance work. I know I still need to file, and I want to do it right, but I certainly cannot pay a well-qualified tax preparer...I don't even have any of the money I made anymore. I poured it all back into equipment...and then some.
I apologize for asking so many questions. I'm sure you've answered a lot of them in various articles. I've read tons of your posts, and I find them so helpful.
Good Golly! You cannot file your own return. Because of the complexity of your situation I can tell by your questions that you don't know enough to do it on your own and do it correctly.
This is what I think you need to do. There are two major parts to the whole tax preparation event. The first part is the task of putting everything together properly, aka, recordkeeping. The other part is the tax preparation itself. Your part will be to get it the information together in an orderly fashion. That will take a bunch of your time and effort and patience.
Then take your records to a tax preparation franchise. Someone there will do a much better job than you can, and although they are not cheap the fee won't be in the thousands of dollars.
Here's two reasons to relax and just look at this as a chore that must be done:
Since you have more expenses than income you'll likely owe no tax.
And, you have a lot of time to do this. You need to file an extension. Read Extensions: Relax ... there's no need to file by April 15th on my website at http://www.junewalkeronline.com/index.asp?sPG=43 . An extension will give you until October 15, 2007 to file your return
To answer your specific questions:
1. You file one IRS 1040 tax return but there are many forms that are part of it.
2. You must separate both income and expenses into two areas: W-2 and self-employed.
[The equipment you were paid with is both income and expense.]
3. Your camera can be business expense. Its cost is its value on your first day of business.
4, Depending on the cost and kind of start-up costs they may be deducted all at once or over a period of time.
[The tax preparer will know how to handle that.]
5. You may deduct a business portion of cell phone and computer.
6. Street clothes are not deductible.
7. All the above will need to be divided by the number of days you lived in each state.
I cannot explain a recordkeeping system in an email or post. In the Most Simple System section of my book, Self-employed Tax Solutions, you can learn how to put your records together, simply and easily. The book costs about $13 on Amazon. If you choose, you could certainly read it and put your records together in time for the October deadline. You'd learn a lot and save yourself a lot of stress and time and money!
All this should put you on the right track.
I was poking around on the web for information and I found your book and your site. I just ordered your book, but I have an immediate question. I'm a self-employed sole proprietor. My business is video production and editing. I am about to invest in a computer and editing software so that I can edit at home. My husband is eligible for a discount on the computer and the software - I am not. If he buys the computer and the software, and then I in turn write him a check and buy it from him - will I be able to claim the computer and the software as my business expense?
Thanks in advance for your advice.
Stefani, Elizabeth City, North Carolina
P.S. You happen to live in my favorite place - Santa Fe. I lived in NM for a few years as a child and have never gotten it out of my system. I still have fond memories of my last trip there a few years ago and my visit to Ten Thousand Waves.
Your husband can buy the computer, or spend money on any other business expenses for you and they will be deductible as your business expenses. You do not need to reimburse him. You don't even need separate checking accounts. You will see why when you read my book.
It's all a lot more simple than most folks think. And a lot more simple than most accountants will lead you to believe.
And, on your P.S. I feel the same way about Santa Fe. We came. We saw, We loved it. We're here forever. And here's a little weird thing, well, sort of. I married my first husband in front of a justice of the peace in Elizabeth City, North Carolina. He was an actor. Civil rights was a hot topic. Ah, yes, I remember it well.
Monday, March 12, 2007
I am getting lots of questions on estimated taxes, so I thought an overview necessary. Here 'tis.
Federal income tax, Social Security tax and Medicare tax are pay-as-you-go taxes; that is, the tax must be paid as income is earned. Dennis Dubya-two, shipping clerk for Toys 'n' Things, receives a paycheck every week. Each week Toys 'n' Things withholds all applicable taxes from Dennis’ pay and forwards them to various government agencies. At the end of the year Dennis receives a W-2 which shows income earned and taxes paid.
Self-employeds must follow the same pay-as-you-go method as do wage earners like Dennis. As an entrepreneur brings in income he withholds taxes from himself -- that is, he puts money aside -- and then sends his taxes to the government via estimated tax payments.
Not every self-employed has to make estimated tax payments.
It’s the overall tax liability of a self-employed that determines whether estimated tax payments are required. An indie’s total tax liability is made up of self-employment (SE) tax on his net self-employed earnings and income tax on all his and his spouse’s income.
SE tax and income tax on self-employed income are not the only factors in calculating estimated tax payments. If, for instance, you had a self-employed business income of $10,000 and also had investment dividends of $30,000, both these sources of income (totaling $40,000) would be elements in your estimated tax calculation. And if your wife earned $90,000 at her W-2 job, the taxes withheld from her income would also be a factor in those calculations.
Because someone is self-employed doesn’t necessarily mean that he must make estimated tax payments. Consider the following situations:
** When all income and deductions are combined, there is no tax liability. For instance, enough tax may be withheld via a W-2 job or pension withdrawals to cover the entire tax liability.
** The previous year’s tax refund may be carried forward in a sufficient amount to eliminate the need for estimated payments.
Who must make estimated tax payments?
Although there are exceptions, here's the safe and simple rule:
You must make estimated tax payments to the Federal government if you had a tax liability for the previous year and you expect to owe tax of $1,000 or more when you file your tax return for this year.
For more information on how to calculate estimated tax payments go to my site for Estimated Tax:How much should I pay?
When to make estimated payments:
Under most circumstances you will make four estimated tax payments to the IRS and also possibly to your resident state and, if you earn self-employed income elsewhere, to a non-resident state as well. The methods used to calculate the IRS estimated payment amount usually apply in the same way to the states – but to be sure you ought to confirm this with your tax preparer or state tax office.
The following shows the dates for making estimated payments.
For the period.............................Due date:
January 1 through March 31......April 15
April 1 through May 31...............June 15
June 1 through August 31..........September 15
Sept. 1 through Dec. 31.............January 15, the following year
It is not a crisis if you’re late on a payment due date. Depending on the amount of tax payment, an interest and/or penalty amount will be calculated at the time your tax return is prepared. The IRS rate is lower than most credit card finance charge rates.
How to pay estimated taxes:
There are several ways to pay estimated taxes.
Carry forward a previous year overpayment.
When you file your tax return, if you have an overpayment of tax you can choose to have the refund returned to you or you can apply part or all of it to your estimated tax for the following year.
The amount you have carried forward as payment toward the following year should be taken into account when figuring your estimated payments. You can use all the carry-forward amount toward your first payment, or you can spread it out in any way you choose among any or all of your payments. If you find the January 15 payment difficult because of holiday spending then use your carry-forward to ease your cash flow and have it applied to the fourth payment.
Pay by check.
Use Form 1040-ES, Payment Voucher, to pay Federal estimated tax. There are four numbered vouchers. Include one with each payment by check.
Be sure the voucher is filled in accurately. If you are married then put the names and Social Security numbers in the same order as they appear on your tax return.
Make the check or money order payable to the “United States Treasury.” On the check or money order write your Social Security number and “2007 Form 1040-ES.” Don’t staple or clip the check to the voucher.
If you made estimated tax payments in the previous year, you’ll receive IRS payment vouchers in the mail for the current year. You can get the vouchers and mailing address (it is not the same as that to which you mail your tax return) at www.irs.gov.
Careful! Never send a payment to the IRS (or any government agency) without the correct document – for example, a voucher-- properly filled out, accompanying it.
Pay by credit card, electronic payment or withdrawal.
Be careful if you pay your estimateds, or any other tax, by credit card. Most service providers charge a fee. This is in addition to any finance charges that will accrue, usually daily, on the amount you owe the credit card company. The options for credit card and electronic tax payments or funds withdrawal are changing rapidly. You can get the most current information at http://www.irs.gov/pub/irs-pdf/f1040es.pdf.
Estimated taxes are explained in greater detail in my book, Self-employed TAX Solutions.
Saturday, March 10, 2007
My accountant told me that, on an income of $72,000, that I should pay $6,215 every quarter as an estimated tax payment. Does that seem accurate? I have colleagues with larger client bases making more than that and paying less, so I'm confused.
Also, I'm a little intimidated since I wasn't planning for such a high tax liability. Guidance?
Jon-David, New York
Jon-David, let's look at income in relation to taxes.
Which income are you talking about? Gross income, which is all the money you bring in; or net income, which is what you have left after deducting all business expenses.
Perhaps your colleagues have a higher gross income, but because they have more expenses, or are better at keeping records of their expenses, or have a sharper tax pro, their net income is less.
As a general rule, I tell indies to plan on 30% to 40% of their net income going to taxes. It can be higher or lower than that depending on income level and state taxes. Your four payments of $6,215 equal about 34% of your $72,000 income, so that may be correct.
You can learn more about taxes in the column on my website Taxes: Which ones and how much do I pay?
Also, check out the post below, Estimated Taxes Paid Late .
Thursday, March 8, 2007
I have a question regarding Estimated Tax. My income did not change a lot from last year, but now after I completed the filing and printed the forms I noticed that I have four vouchers for estimated tax and one for my owed tax. So I have to pay $1415 -- the amount I owe for 2006 and the estimated taxes?
I have four payments of $351. It is correct or I did something wrong on my filling?
What’s happens if I don’t make these payments? I think this year I had to pay underpayment penalty of $50.
Thank you for your advice.
Four payments of $351 = $1404. If the tax program you're using did it correctly it'll have you pay for 2007 what your tax was in 2006. Was your 2006 tax about $1400?
Nothing terrible happens if you pay your estimated taxes late, or even if don't pay them at all. You'll simply owe some penalty and interest.
I suggest you read the following two columns from my site: Estimated Tax Payments and Estimated Tax: How much should I pay?
June, thank you, thank you so much for your response. I wasn't sure and I was afraid to send them away. Also thank you for the stuff you put out there on your website, it helps a lot a novice like me.
I am actually sending this for my wife. How much should an accountant charge for doing your taxes? I know I overpaid and it will be a deduction next year. I am learning more and I think I can handle the taxes next year. I went to the pro to see what expenses I missed and I really didn't do that bad the first year so I think I can handle it especially if I have your list of business expenses.
Yvonne's husband in NYC
Hello Caring Husband,
I wish I got a little more info from you so that I could give you a better example of how your question would be posed to someone in your profession.
Let me try. You said your business is Technical Design Consultant/ Fashion Industry, so, here goes: How much should I spend on my 2007 wardrobe? Or, how much should I spend on the design illustration of our main chemical process for my annual report?
You see what I mean? I have no idea of the complexity of your return. Is it a $10,000 or a $500,000 business? Is there an inventory? Are your records professionally kept or do you arrive in the office with estimated amounts? Do you have children? Investments?
And then there's the question of the skill and experience of your tax professional, better skills and experience mean higher fees. And of course, location, for instance, fees are higher in New York City than in Espanola, New Mexico.
A popular tax prep franchise did a return for my friend with only one W-2 and nothing else, and the fee was close to $200. My friend was their retuning client so she was already on their computer and so I estimated that the return took about 20 minutes to prepare. That's a fee of $600 per hour.
So, to answer your question, depending on location, tax professional's competence and complexity of the return, fees vary. Accountants typically charge from $40 to $260 per hour. A very simple self-employed tax return for a returning client with one resident state might take three or four hours.
It's admirable that you are learning more about taxes. The more you know the better prepared you will be to take advantage of all business deductions. Also the better prepared you are the less time your tax pro will need and so her fees will be less. Keep up the good work and your wife can put you on her payroll and give you employee benefits and then you'll pay less tax.
Check out the post below, Pick a Tax Professional: Experience or Price .
I suggest you read my book, SELF-EMPLOYED TAX SOLUTIONS. It answers many indie tax questions in the same easy to understand style you'll find in the columns on my website. And more than just answering those taxing questions, the information in SOLUTIONS will give you a firm foundation on which to make indie business decisions.
Keep in mind, I do not recommend any self-employed do his own return unless it is impossible to find a competent pro!
Monday, March 5, 2007
As a self-employed attorney, ordinarily I would charge my travel time to a client, usually at my full billable rate, but sometimes at a reduced rate. I spent several months last year working at a temporary work location as an independent contractor responsible for reviewing my clients' contracts, and negotiating and drafting agreements. The temporary work location in central North Carolina was situated 61 miles from my tax home in southern Virginia, so I spent about 2.5 hours per day traveling to the worksite for which I was not separately compensated, and for which I could not bill to the client (per our consulting agreement, I was responsible for my own travel costs).
Can I claim the 2.5 hours per day of non-productive, otherwise billable, but unreimbursed (by the client) travel time as an ordinary and necessary business expense to offset my gross profits on Schedule C?
The common practice of law firms billing travel time, and the stock-in-trade of an attorney being his/her "time" as measured by billable hours, seems to suggest I can list my expended travel time (necessary in order to reach my distant worksite, and unproductive because i could not work for this or for other clients while driving) as an ordinary and necessary business expense for purposes of trimming my taxable net profit.
Good argument, but no. you cannot claim your time, no matter how valuable, as a business deduction.
The same reasoning applies to contributions of your time and or services to a charitable organization. For instance, were you to donate your services to a non-profit you would get no tax deduction. But, were you to bill me for services and then give to the charity as a donation whatever I paid you, then you'd be able to deduct it. Take a look at No deduction for donated work or services on my website for a little more info.
Friday, March 2, 2007
There’s an old husband’s tale that contends deducting office-in-the-home expense on your tax return is a red, waving flag, so don’t do it. That’s hogwash. If you use your home for your self-employed business, then, by golly, don’t be afraid to take the deduction. By deducting expenses for your home workspace you’ll pay less tax. The only caveat: play by the rules.
The IRS has relaxed the rules in recent years, and they are simpler than you may have been led to believe. There are now only three home office rules.
RULE #1: Exclusive Use
The part of your home used for business must be used exclusively for business. It does not need to be an entire room, but may be a designated area of a room.
• If Lily Legal writes her briefs at the dining room table but also has dinner parties there, well, she has to forgo any deduction for the dining room.
• If Victor Visual and his wife Faye Fabrique, a textile designer, share the same studio-in-the-home, then neither gets the deduction because neither has exclusive use. (It seems unfair, but it's true.)
RULE #2. Used On A Regular Basis
The part of your home used for business must be used on a regular basis for business.
• Almost Sargent has a rented studio in town. He also has great light in a back room of his house. The room is always locked and seldom used. Once in a while he brings a potential buyer to his home to look at a painting and he uses the back room for the viewing. This is not regular use and so he cannot deduct the use of that room as a business expense.
RULE #3. Principal Place Of Business
Your home office or studio or workshop must be your principal place of business. The IRS term principal place of business is confusing. Even if you have more than one place of business, as long as the room or area in your home is used exclusively and regularly for business then your home office qualifies as a principal place of business if it fits any of the following three criteria.
** It is where you perform administrative tasks such as bookkeeping or scheduling.
** It’s a place where you meet clients, or patients, or customers.
** It’s a separate structure.
• Sally Ceramist rents a neighbor’s garage as her work studio. It’s always a mess. She has set up the small sunroom in her home as her showcase studio. Potential buyers come there by appointment to view her work. Although her works also show at a number of galleries throughout the United States Sally can deduct the sunroom as a home office.
• Kyla Chiropractor shares an office with an acupuncturist. They alternate days. Kyla does not keep patient records at the office. Each morning she brings from home that day’s patient folders. She keeps all her patient records, and her professional library, in a small barn on her farmland home. Kyla can deduct the barn.
There are exceptions to RULE #1, which requires exclusive use. The exceptions apply to home daycare businesses and storage of inventory.
What Can You Deduct?
Your home may be any kind of residence: house; apartment; condominium; cooperative; houseboat; mobile home.
And, all expenses for the portion of your residence used for business are deductible; that includes rent, repairs, utilities, security system, and upkeep expenses. If you own the home, deductions include mortgage interest and real estate taxes. If for instance 20% of your home is used for business then you can deduct 20% of all these expenses.
You cannot deduct lawn care unless there is an area that is for the exclusive use of your business.
The housekeeper that you have agreed to pay “off the books” – the one who takes cash only -- cannot be deducted as an expense. You can deduct the costs for a legitimate cleaning service or a housekeeper for whom you pay all payroll taxes.
Thursday, March 1, 2007
Although only 27 years old he managed to save up enough money to get started in his own business. (I told you he was unusual for a photographer.) When Phil announced he was going to sell the business to his brother Phineas, Billy really got busy, because he knew he did not want to work for Phineas. In a few months Billy spent $7,200 on locating and doing some repair work on a studio (with the help of his cousin, a carpenter) and printing high quality promotional literature which stresses the merits of his exclusive use of black and white photographs for all his assignments, including weddings, bar mitzvahs, retirement parties, and so on.
His decision to concentrate exclusively on black and white photography sets him apart from and avoids competition with Phineas; he can send customers who want the color photograph treatment to Phineas, who can reciprocate by sending to Billy those interested in black-and-white photos. They shake hands, part company, and Billy heads out on his own.
The expenses that Billy incurred in the organizing and planning stage of his new venture can be classified as START-UP COSTS.
The list of possible start-up expenses is as long and varied as a list of expenses for an existing business. Here's a sampling of business start-up expenses:
· Advertising for the grand opening
· Analysis of available facilities, labor, and supplies
· Fees for the professional services of accountants and lawyers
· Office supplies
· Salaries and fees for consultants
· Survey of potential markets
· Training employees
· Travel to find customers, suppliers, or financing
· Travel to look over business sites
Since Billy is now in business, all his start-up expenses are deductible.
However, deducting the costs of checking out a new indie venture are not always deductible. That's because start-up expenses fall into two types, general and specific.
Exploratory or General
These are costs you have before making a decision to begin or acquire a specific business. They include any costs incurred during a general search for, or a preliminary exploration of, a new venture. If you do not go into business then these costs are personal and nondeductible.
Investigative or Specific
These are costs incurred in your attempt to acquire or begin a specific trade or business. Even if you do not go into business, the costs are capital expenses and you can deduct them as a capital loss – similar to a loss on a stock sale.
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 deduct ski trips and South American adventures under the pretext of business exploration.
If a business never gets started then exploratory expenses never can be deducted; but specific expenses always can be deducted. 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.
There's more on Billy's business and a more complete explanation of start-up costs in Chapter Three of SELF-EMPLOYED TAX SOLUTIONS.