Cruise Ship Entertainer Gets No Tax Breaks

Many months ago I received the email below from Charles, a cruise ship entertainer. Charles and I have exchanged email over these months. I had questions for him prompted by my many conversations and correspondence with the IRS. At times I waited weeks for a response from the advanced tax law section of the IRS.

Here's the situation:

Hi June,

I really appreciate your site and what it has to offer... Excellent, clear, understandable advice and information.

Here's my question in two parts: I work as a guest entertainer on cruise ships. I spend most of the year away with a few weeks at home.

I also hire dancers and technicians on the ship for my show and pay them in cash onboard. They are not US citizens and do not get a 1099 from me. I simply have a record of paying them. Do I need to send out 1099's? Is there another way I should do this? It adds up over the year to a considerable amount.

The second part is that if I'm spending 330 days outside the US on the ship, do I qualify for the foreign earned income exclusion? Or, if not, since I pay for meals, etc. is there a per diem amount I can use for those days out at sea or in port in other countries.

There's not a lot of info for us cruise ship workers, but I hope to learn more.

Best,
Charles

I also learned from Charles that the ship is registered in the Bahamas and he is paid by the cruise line. He visits up to 20 or more countries each year and is in US ports sometimes for a few hours. He's in international waters about 95% of the time.

When not on a ship he lives in Las Vegas, Nevada. He has a house there and a Nevada driver's license. Charles says that he does not consider Las Vegas his place of residence since he is never there. "I live on a boat but visit my house once in a while to dust," is what he tells people.

The ship provides accommodations, but Charles pays extra for meals and incidentals.

My findings ...
The good news is that Charles is doing it right regarding the independent performers he hires. His payments to them are business deductions and all he must do is keep a record of payment. No 1099 is required. This is because the work is being performed outside the US.

The bad news is that someone in Charles' working situation does not get a business travel deduction for meals and incidentals. The IRS gives a deduction for expenses incurred while away from home, such as the per diem for meals and incidentals, to alleviate the burden on someone whose business needs require him to maintain two homes. "Home" in this circumstance refers to the principal place of work, not the personal residence. The exception for this circumstance is when the work is "temporary."

And then there's even more bad news. A US citizen may exclude up to $82,400 income earned in a foreign country or countries if he is a bona fide resident of another country or countries. [Read more about foreign earned income here.]The cruise ship travels to many countries and through international waters. Charles resides on the ship. The Bahamanian ship is not considered a residence in the Bahamas. Charles is an itinerant and so gets no foreign earned income exclusion.

Indie Health Insurance -- somebody is trying to help

Take a look at the Small Business Times based in Milwaukee. Our representatives in congress are trying to help us self-employeds with health insurance.

Self-employed need level playing field in health care
The "Equity for Our Nation's Self-Employed Act" (H.R. 3660) was recently introduced in the U.S. House of Representatives by U.S. Reps. Ron Kind (D-Wis.) and Wally Herger (R-Calif.) to help put self-employed businesses on equal footing with large corporations by permitting health-insurance premiums to be deducted from both their income and payroll taxes .......

Ron Kind's Web Site: www.house.gov/kind.
And, Wally Herger's Web Site: www.house.gov/herger .

Let them know that we support their efforts.

Jazzercise Franchise

Hi June,

I stumbled on your site while looking for self employment tax info and found the article pertaining to whether a person is an employee or self employed. I read that it is about the relationships.

Well, I am a franchisee without owner status. The students pay the owners and the owners pay me a set amount per class. The owners decide which times and days I can teach, I am given music and choreograph notes and DVD's from Jazzercise Inc. to follow with approved routines. I cannot make up my own. Corporate determines how long my class is, the structure of my class, and even how long I can stretch in between routines. I am monitored for compliance once a year by Corporate and failing would mean termination. They require that I have CPR certification and pay liability insurance or again termination would ensue. The owners pay the rent, decide the class fee, maintain the membership, and promotions and all advertising. I own my microphone, because I choose not to use theirs, they own the mixer, speakers, weights, and mats that both I and the students use. I do not have my own business cards and had to sign a no compete document so that I cannot teach another aerobic format anywhere else.

Should I be filing self-employment tax? My owners do not give me any tax forms to file, even when asked. I did get the grand total of earnings for the year in writing after much prodding, (the total being $5730) and they do not report income paid to me to the IRS. What do you think? I believe I have the option of getting paid a percentage of the center instead of a base rate. Would that make a difference? So again, employee or self employed?

Thank you in advance for all your help!

Carol from Oregon


Hello Carol,

Franchise laws have different elements than those for indies. There are many questions in your email and your situation is too specific for a general response.

Here's a site that might point you in the right direction. It is from Jazzercise explaining its two franchise types:
http://www.jazzercise.com/become_franchise.htm

I assume you would have entered into a franchise with the advice of an accountant or attorney. You should contact that pro and get your situation cleared up. And maybe there are some Jazzercise folks who will read this and pass on some info to you.

Best,
June

Want a correct answer? Know Your Source

June --

Do I need to obtain a business license in order to practice privately in the state of Louisiana or is my occupational license issued by the state board sufficient?

Barbara


Hello Barbara,

You are assuming a wealth of knowledge on my part of the intricacies of state by state regulations that would be impossible for even the Great Oz.

And if I did give an answer, how would you know it were correct? What are my credentials regarding Louisiana state regulations?

As an indie, flying solo, you must be sure that your sources are authoritative. Therefore, whenever you seek information, make sure you are asking the the right person -- or agency -- a well thought out question.

You might start your quest for info on licensing at Louisiana.gov.

Best,
June

More about Medical or Business Expense

Hello June,

I have a wonderful therapist who is very expensive! I understand that it's fine to deduct psychotherapy. Now this therapist also happens to be a great bodyworker, and occasionally he does bodywork and other kinds of body-oriented psychotherapy on me. Even though I know "massage" isn't deductible, I still deduct this. Is that kosher? How about herbs that I buy from him?

I also get lots of massages and body treatments for myself--no way of making that deductible, though, right?

Finally, even though I teach "raw culinary arts," a lot of my students have health related questions, so I'm up on a lot of things regarding herbs, supplements, yoga, and exercise. Can I deduct expenses related to these things as "business research" related expenses such as yoga, DVDs and classes?

Thanks.
Jenny


Hello Jenny,

If the body-oriented psychotherapy is part of your medical therapy treatment, the same way that, for instance, art therapists may work with children, then I would consider it a medical deduction. However, you need to ask your psychotherapist whether he classifies it as a medical treatment, that is whether he has a code # for health insurance reimbursement.

You are correct. Massages and body treatments are not medical deductions. Wish they were! See Medical or Business Expense on whether you may deduct the cost of yoga.

Yes, the costs of DVDs and classes that better prepare you to answer your students' questions are deductible business expenses.

Best, June

Self-employed Tax Solutions -- 6th Printing!

A little horn tooting this morning. Self-employed Tax Solutions' publisher, The Globe Pequot Press just contacted me to say that the 6th printing of my book is happening as I write this!

I'm not sure if it's because there are so many indies out there, or because there are so few accurate, easy-to-understand, books to help on indie taxes, but for all of you who bought the book, and to everyone who writes with questions, comments, and kudos, my thanks go out to you!

Homeland Security or Jobs 'n' Things

A while back I received the following email:

Hi June,

I'm almost done with your book, it has been and will continue to be extremely helpful. Very well put together, great job!!!

Now for my question: My husband and I were recently replaced by illegal immigrants on our w-2 job (janitors). My question is, how can an employer get away with hiring illegals that have no ss#'s, no drivers licences, or licences from another state.

Thank you June.
Yvonne, from Urbana, Illinois

Even though this is a question about W-2 people and not indies it certainly could apply in self-employment situations. And I thought the answer to Yvonne's question was going to be quick -- something like: They get away with it because nobody notifies the authorities. Then I was going to tell her to call her local Department of Labor (DOL).

I expected a quick confirmation of my planned response by a call to my local DOL. And that's where the marathon started.

If you have been replaced by an undocumented worker – or, the term I prefer, an illegal alien – there isn't much you can do about it. Neither the federal government nor most of the state governments are doing anything to protect American workers from getting pushed out of jobs by cheaper illegal alien workers.

Once upon a time government was a friend of the working people – adopted laws that helped them to organize, protected them against unfair employment practices. That feels like a long time ago. In fact “the Department of Labor” born in the New Deal, would be better given the 21st century name of "jobs 'n' things." In Illinois, state of my blog visitor -- the name has been changed to the Department of Labor and Human Rights. In New Mexico the DOL has been renamed the Department of Workforce Solutions.

And if you look up state websites for the department with oversight over labor matters, there’s nothing about undocumented workers to be found on them. In most states there appears to be no agency that has any jurisdiction over them.

You’ll find, for instance, a notice posted on the website of the North Carolina Department of Labor – that it “does not have anything to do with immigration or the working of documented or undocumented alien workers. For general questions or information on immigration, you need to contact the North Carolina Employment Security Commission's (ESC) Immigration Section in Raleigh.”

But when my office called the North Carolina Commission, we were told that it has nothing to do with undocumented workers either.

But, if you are the sort who refuses to give up, and you’ve lost a janitorial gig in Illinois, try the Illinois Department of Labor (IDOL). According to Anjali Julka, who handles departmental press relations, you can file a complaint.

“If they feel that they’ve lost their jobs for reasons that might fall under our authority, they can file a complaint and see what action we can take.” A formal complaint, she said, “would certainly prompt the department to review their case at least and see if it’s not us that can help them, who can.”

Minimum wage violations or failure to pay overtime may be valid issues, Ms. Julka noted.

A complaint form can be printed from the IDOL website and mailed into the Department, or the forms can be picked up at any IDOL location, or can be requested by telephone.

“An investigation by our department would determine if they have been wrongfully terminated,” Ms. Julka said. “There’s no need to provide any information other than what’s printed on the form.”

And if you don’t mind whether your grievance at being replaced by illegal aliens might take a decade or so to clear up, you have one more long shot – you can report the case to Immigration and Customs Enforcement [ICE], a bureau of the federal Department of Homeland Security.

Don’t hold your breath, though. A Senior Special Agent in an ICE regional office lamented that he has two Special Agents to cover an 18-county area in one of the fastest-growing areas for undocumented workers in America.

The agent (speaking on the condition of anonymity) said that “the government is overwhelmed” because of a shortage of people in Homeland Security. He suggested that the aggrieved parties try anyway.

How long would it take to get action? That, he responded, depends on the priorities of the local office. “The report is taken and it’s taken to the field and prioritized. Maybe never, maybe immediately,” he said. “National security-related issues, probably immediately. Politically-motivated issues, maybe quicker. If you could only spend a day in your local ICE office and see what happens, the volume of work and what kind of resources they have, you’d have a good understanding. But this isn't like the private sector where when you get a demand for your product you increase your manpower.. . . If were up to me we’d have an agent for every illegal alien. Well, maybe one for every thousand.”

So, it was asked, an average time wouldn't mean much because much depends on the urgency of the matter? “Yes, an Osama bin Laden sighting would take precedence. . . . and unfortunately we don’t have the physical manpower to address every single issue. And it might be a supervisor’s decision to not assign it to somebody.. . . I wish I had a good answer.”

New Mexico Workforce Solutions (formerly Labor Department) -- its vision statement saying, "The New Mexico Department of Workforce Solutions is a World-Class, market-driven workforce delivery system that prepares New Mexico job seekers to meet current and emerging needs of New Mexico businesses" -- appears eager to welcome willing hands from south of the border. A Workforce Solutions official pointed out that Santa Fe has designated “a safe haven for illegal immigrants – they can hang around there, they take them burritos in the morning, and employers come by and pick them to take them to day-labor jobs.”

Many illegal aliens work at construction sites. U.S. Commerce Secretary Carlos Guttierrez comes on a news show every once in a while to tell us “that we have to face the fact that there are jobs that Americans are unwilling to do.” But I don’t think Americans decided that they don’t want construction work or janitorial work anymore. I think they’re being displaced by undocumented workers willing to take these jobs for much, much less money. That’s really what the undocumented workers issue is about, and in the long run it isn't good for American indies or for Americans generally.

Making a payment to someone? Plan ahead

Hi June,

I have a quick question. I own a rental property here in San Francisco and I had a tenant who I paid off to leave the building. I paid her $20,000. I would like to write it off but the tenant refused to fill out the W-9 form. I have her new address but not her social security number. What are my options?

Rusilla


Hello Rusilla,

An overview before I answer: Whatever an indie pays someone in the course of business is a deductible business expense. And, that someone must claim the income regardless of amount received. If any individual is paid $600 or more the indie must file a Form 1099 stating the amount paid to the individual . The Form 1099 is sent to the government and to the individual.

What you are supposed to do before you pay anyone is have him or her complete a Form W-9. This provides you with the person's legal name, address and social security number. All this info is needed when you file a Form 1099.

Rusilla, you didn't do this.

Step #1: The IRS says that if someone refuses to give you the necessary info you should withhold 28% from the payment and send the withheld money it to the feds. In other words you are responsible for withholding and paying the tax of the individual you paid. Of course, since you already paid the vacating tenant that can't be done.

Here's steps 2, 3, 4, and 5.

#2: Send a letter to the tenant with a request for info. Let her know that failure to provide you with the info will cost her a $50 penalty. [Big incentive. Right?] Include a W-9 with your letter.
Keep a copy for your records. IRS suggests that you get some kind of postal receipt acknowledging delivery.

#3: If you get no response, repeat Step #2.

#4: File the Form 1099 with no social security # for the tenant.

#5: You'll get a notice from the IRS about why there's no SS#. You explain and include copies of your letters to the tenant.

You may still use the $20,000 payment as a cost of business. There is no need to forfeit such a cost but you must follow the above procedure.

For all my readers: Learn from Rusilla's error. Get the info upfront.

Best,
June

Using your own car for work

Hello June,

Thanks for the great and informative sites.

My question--I work as an investigator for a company that investigates accidents involving City government "department" vehicles.

The job requires the use of my own vehicle to travel to accident scenes, and I am required to drive to work so that my vehicle is available for me to respond to the scenes of accidents. I also respond to emergencies after hours as required. I am required to type up notes and report, which I can do from home.

I read that the IRS does not allow the deduction of expenses/mileage for traveling to an office, unless I am traveling from home office to office office. So the crux of the question is: Can I deduct traveling to the office, since I am required to bring my vehicle? Is my home considered an office because I am often times required to respond from home to accident sites, or if I can write a few sentences before work everyday will that suffice?

Thanks for the help.
Michael from Los Angeles, CA


Hello Michael,

So glad my sites are providing useful information. Thanks for letting me know.

On deducting transportation: The IRS says you may deduct the transportation costs of going from one work location to another, not from one office to another. So you may deduct the costs of getting from one accident scene to another, or from the office at work to accident sites.

You may not deduct your commute from home to the office and back home even though your are required to use you car once at work. The reasoning. You would need to drive to work anyway.

You talk of your "job" so I assume you are an employee rather than an indie. In which case I would use the following example from the IRS Publication 463 to allow for the costs of going from your home to an accident site after hours.

You regularly work in an office in the city where you live. Your employer sends you to a one-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.

There are several posts on this blog and my website explaining what and when working at home means legitimate home office. Take a look at them here. Writing "a few sentences before work everyday will" not suffice.

Best,
June

Hello Indies, the IRS calls each of you an independent contractor.

Hi:

I have really enjoyed your site and put the information to good use.

You have probably already been asked this question, but I am wondering what the tax difference might be between being a 1099 or being a consultant.

Kristie from Kansas City, KS


Hello Kristie,

No difference. Please read on.

On the home page of my site I say: If you call yourself a 1099 Worker, Sole Proprietor, Freelancer, Subcontractor, Free Agent, or Self-employed then this site is for you. You're an independent professional -- I call you an indie.

And on the very first page of my book, Self-employed Tax Solutions, I say:
Artists,
astrologers,
psychologists,
personal trainers,
pet sitters,
writers,
real estate appraisers,
coaches,
creators of intellectual property,
graphic designers,
investment counselors,
carpenters,
information technology consultants,
Web site designers,
solo performers on the stage and in the business world …
each of you is unique. Yet despite your uniqueness you all have one thing in common -- you are all self-employed.

You may call yourself by another name -- sole proprietor, freelancer, indie, subcontractor, free agent, independent professional -- but to the taxing authorities all these descriptions mean the same thing. And the taxing authorities require all of you, no matter what you call yourselves, to follow the same rules.

I am pleased my site is useful to you. Thanks for letting me know.
June

Dental Insurance from Frelancers Union

Freelancers Union has worked for a long time to bring its dental insurance nationwide, and now it's here! Freelancers in all 50 states will be able to get dental coverage (Freelancers Union usual eligibility requirements apply).

Indie Health Insurance Deduction: An unfair regulation!

Hi June,

I have some questions about deducting health insurance premiums:

Would COBRA payments qualify as health insurance premiums I can deduct as a an indie? (I am not talking about the personal deduction which must be 7.5% of income.)

If COBRA does not qualify, would another plan qualify given the fact that I do have COBRA available to me and there is a rule that you can only deduct if another plan such as an employer or spouse's employer is not available to you?

Thank you so much, Alexis from Santa Monica, CA


Hello Alexis,

Often getting the same tax advantage for indies that goes to employees is just a matter of research and interpretation. Not so with this situation. It is unfair! Even the IRS researcher that I spoke with this morning agreed with the assessment of the indie getting the short end of the stick.

A little background for my readers: If a self-employed's business has a profit [not a loss] then health insurance premiums may be deducted on the tax return as an adjustment to income -- also said as "deducted on the front of the return." This placement for the deduction saves much more tax than taking the cost of health insurance premiums as a personal deduction inside the tax return.

You cannot deduct the premiums on the front of the return if you were eligible to participate in a health plan subsidized by your employer or your spouse's employer.
*** Here's the scenario:
You have a job as well as an indie business. Your employer offers you a health plan inferior to one you could get on your own. You purchase your own health coverage. You cannot deduct the premiums that you pay on the front of the return. The deduction gets stuck -- and often lost -- inside your return.

The same applies to COBRA. COBRA came about in 1985 and requires most employers to provide group coverage to terminated employees for up to 18 months. [That's an oversimplification, but is accurate.]

*** So here's another scenario:
Your employer fires you. You start your own indie business. You buy your own health insurance, superior to the COBRA offer. For 18 months you cannot deduct the premiums on the more advantageous part of your return. There's a good chance you get no deduction at all.

Thanks for the question Alexis. I think it's time for all of us to take a careful look at the various healthcare plans offered by the current candidates.

Best,
June

Auto: Lease vs Buy

Hi,

I am a freelance motion graphics artist. I have been thinking about getting myself into a new or slightly used new car. A colleague of mine mentioned the other day that I may be able to lease a new car and write off most, if not all of the cost. Is this at least partially true? Was she pulling my leg? Are there any benefits to leasing a new vehicle rather than buying being self-employed?

Joe from Los Angeles, CA


Hello Joe,

If your business requires you to wow clients with glitter, a new car every two years is imperative, and leasing is probably the better way for you. If you plan to keep the car until people start laughing at your antique then buying is better. Leasing versus owning, however, is generally based on how good a deal you can get, with tax considerations secondary. Any savings in tax deductions must of course be balanced against purchase price, operating expenses and other considerations.

Whether you buy or lease you may deduct only the potion of the car that is used for business. So if you put 10,000 miles on your car and 4,000 of those are for business then you have a 40% auto deduction. If you use the actual method of deducting auto expense you'd get to deduct 40% of the cost (over time) or 40% of your monthly lease expenses. You might want to read Deductibility of a New Truck or Car .

There are advantages to buying rather than leasing if the car is expensive, you use it more than 50% for business and you plan to keep it at least 5 years.


The factors in a lease vs buy decision are:
** How long you plan to keep the car.
** How good a deal you can get.
** What portion of your driving is for business.

Cheers!
June

LLCs, Partnerships and Self-employment Tax

Rhonda from NY asked a multi-part question a while ago. One part of her question was answered here I am an LLC. How do I pay taxes? And now that I've successfully met the October 15 deadline for a lot of slow-to-get-to-it clients I can answer the other part of her question.

Rhonda's situation and questions are:

I am starting an LLC in NY with 2 other members. I am the managing member and the other 2 will not participate in management issues.

I understand I am subject to self employment [SE] taxes and they are not, but is this done only after profits/losses are distributed?

If the business has no net income, does that mean I pay no self-employment taxes?

I hope I did this the right way in leaving this question here and not posting a comment on line to you answer. This is my first time doing something like this and I do not know the "proper" procedures.

Again, thank you for you help.
Rhonda ... Bronx, NY


In a typical partnership, several people with different complementary skills get together to form a business. Rhonda doesn't say what kind of business they have formed so let's make one up to facilitate my examples. Since there are so many IT folks out there, I'll give Rhonda an IT business.

If all three participate in this business then they are all general partners. If they are equal partners each will share in 1/3 of the loss or 1/3 of the profit of the partnership. If the partnership has gross income of $50,000 and expenses of $20,000 then each would have income of $10,000 subject to income tax and SE tax. If the partnership had no profit, then there is no income or SE tax liability.

Profit is another way of saying net income -- that's gross income minus expenses -- and each partner will receive a partnership K-1 at year-end stating income and whether it is subject to SE tax or not.

An alternate scenario has Rhonda as the only one with technical skills and the only one to work for the partnership. Only her income is subject to SE tax. Partner #2 did nothing for the business other than contribute money and partner #3 did nothing for the business other than contribute equipment. Their partnership income was taxable but not subject to SE tax.

To recap: Simply not being part of management does not make the other partners exempt from SE tax. Their relationship to the partnership must be limited. That means they do not work in the partnership. For their portion of the partnership profit they may do things such as:
** Put in money
** Contribute equipment
** Loan a name or reputation
** Perform a specific service -- not related to the nature of the business, for instance -- legal or accounting, or logo design for which they'd receive a Form 1099-MISC from the partnership.

One last note: Of course, Rhonda should not set up an LLC and form a partnership without guidance from her tax pro.

June Walker

Work in Another State

June --

Just came across you site. My husband is going to Arizona to subcontract for a Wisconsin company. We live in Texas. Presumably, we have to pay all we earn on this 1099 as AZ state Taxes. New to this travelling thing!

Diane from Spicewood, TX



Hello Diane,

State income tax is paid to the state where the work is done. That's the nonresident state. A nonresident state tax return must be prepared. [Of course, this is not the case for states that do not have an income tax, such as Texas and Florida.]

If the state where you live -- the resident state -- has an income tax, then you must file a resident state tax return. On your resident return you will receive a credit for taxes paid to the nonresident state.

In your case, you'll need to pay and file for Arizona, not Texas.

Best,
June

Trucker Expenses

June --

What are the usual and customary expenses of a long haul truck driver?

Frank


Hello Frank,

A trucker, much the same as any other indie, may deduct expenses related to his business.

For starters, I emailed to you the list of expenses typical to all self-employeds. I also suggest that you read Is it a deductible business expense? on my website .

In my book, Self-employed Tax Solutions, all travel and also travel-meal expense is explained in depth. To sum up: Generally, you may deduct all travel expenses and the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. In most cases, you can deduct only 50% of your meal expenses. Here's a Travis Truck Driver example directly from my book:

Travis Truck Driver leaves the terminal at five in the morning. Three hundred miles later he’s at the turnaround. While his truck is being unloaded he has a big lunch and then dozes off outside the diner while waiting for the guys to finish the reloading. He then heads back to the terminal where the truck is again unloaded. He’s home by midnight. Travis’ lunch break nap was just that, “a nap.” It was not enough time to get adequate sleep. His trip is not considered TRAVEL. Therefore he cannot deduct TRAVEL expenses.

As a long haul trucker, however, I assume Travis' situation does not apply to you. There is a special per-day meal allowance for transportation workers. You're a transportation worker if your work involves moving people or goods by airplane, barge, bus, ship, train, or truck, and if you are regularly required to travel away from home through various parts of the country.

If this applies to you, you can claim a standard meal allowance of $52 a day. Were you not considered a transportation worker you would need to determine the standard meal allowance for every area where you stop for sleep or rest.

As I said, generally, you may deduct only 50% of your meal expenses. However, if you are subject to the Department of Transportation (DOT) hours of service limits, that percentage is increased to 75% for business meals consumed during, or incident to, any period of duty for which those limits are in effect.

Hope that puts you on the right road.

Best,
June

Medical or Business Expense

June,

I have been a personal trainer for 2 years. I am a veteran working in the health/fitness industry and have needed alternative and out-of-pocket medical treatments (acupuncture, physical therapy, massage) for a service-connected orthopedic problem (for which I do have a disability rating).

Working with these other health care professionals has also been a help in furthering my skills in working with my clients. How/which of these should be taken as medical expenses and/or training/education for my work?

Thanks a bunch, "Ron"


Hi Ron,

Wish I could give a different answer but ... it all is medical expense. Especially since you have a disability rating. Were you "healthy" and had decided to do 10 sessions with another pro as training or some other learning experience then I'd OK the business expense.

Best,
June

Southwest Takes a Shine to Self-employed Tax Solutions

I love getting feedback from readers of my blog, but it's nice, every once in a while, to get kudos from big organizations.

Self-employed Tax Solutions is a finalist for the 2007 New Mexico Book Award . The Award, which includes authors throughout the Southwest, is sponsored by several organizations including Borders Books.

Self-employed Tax Solutions is one of four finalists in the business category. Competition includes: Mastery at Work: 18 Keys for Achieving Success; The Japanese Money Tree; and Web Marketing for Dummies.

For Solutions complete Table of Contents, please visit here.

Thanks for your interest in my blog and my website. Please wish me luck and I'll keep you posted ... June

Equipment or Supplies Expense

June,

Thanks so much for the info. Lots of great stuff in there.My only question for now is: Does equipment have to cost over $200 to deduct it as a business expense?

Thanks again,
Chuck


Hi Chuck,

You are welcome.

If you purchase something for business that lasts longer than a year it's considered an EQUIPMENT expense. But realistically, what about a $10 stapler? That lasts longer than a year but does it make sense to depreciate it over 7 years? Nope. So we set up an arbitrary limit of $200. Anything less than $200 is a SUPPLIES expense.

Best,
June

Web developer with lots of questions

My answers to Peter are embedded below. Think that makes it easier with so much going on in his correspondence.
-- June


Hi June,

Great site. Thank you. I must say, a lot of info - possibly too much to find all the questions I have. Try the "search" box in the upper left of the screen. It may help.

I am a web developer. I started an LLC (sole proprietorship) in Ohio last month. I have couple of clients I make websites for (some for over 2 years now) and as expected I have some questions about what my new "status" brings:

1) When I receive checks, they all go to my business account. I read on your site that as a sole proprietor I am not an employee but rather I AM the company itself. Therefore: How do I pay myself? You don't pay yourself. You may take money whenever you like. You "income" is the profit your business has at year end. Can I just take the money from the same bank account, do I write myself a check, or what? Write a check to yourself or to cash.

2) How do I pay taxes? Read this post Estimated Taxes I have an EIN, I have no employees, and I have some freelance developers doing some work for me at times - I consider them as vendors, not employees.

3) What are the benefits of having an accountant, Jack Smith has a web making program. Why does he need a web developer? I do not do much business really, one or two checks a month come in... I read somewhere that in order to comply with the Limited Liability part, I need to separate my business and personal expenses. If you are an LLC you must have a separate checking account and a separate credit card to maintain limited liability.This comes together with Q#1: If I pay myself, transfer money to my personal account, or buy personal things directly with my business credit card, does that in any way change the LL part of the LLC? Yes.

4) How do I know if I should charge my customers a Sales Tax?? Every state is different. Call your state tax office.

5) What can you do for me, besides making my life easier by answering the above questions, or at least pointing me in the right direction? Contrary to most laymen's thinking, tax preparation for indies -- and many other situations -- is not simply putting #s on specific lines. There are often many choices for the same kid of deduction, there is different tax treatment for similar situations, there are different kinds of pensions for indies depending on income, age, family situation.

Just like Jack Smith doing his own website. For some Jacks it might be OK for other Jacks it might mean a big loss of money.

Thank you so much in advance! You are very welcome.

I can tell by your questions that you would benefit from the info in my book, Self-employed Tax Solutions. You might want to check it out.


All best, Peter, OH

Shared Rent: You may still deduct for home office

Hello June,
Thanks for your thorough and detailed site. It's great to know there are experts like you who are on the side of us freelancers. We are in sore need of information. It's a hard job to have, plenty of rewards and plenty of challenges.

My question ... I'm a self-employed actress, playwright and theater-based educator. I've taken a home office deduction for the past 3 years, but this year, I'm not sure what is appropriate for me to deduct. In fact I'm wondering if it was alright for me to make those past years home office deductions in the first place.

I share a house with 5 other urban, single professionals. I have my own large bedroom in which a section is devoted to my home office where I have a desk, computer, printer and files. Can I deduct a home office expense? That small section of the room is exclusively used for business purposes. However it's not a separate room or even partitioned off. And I share the rest of the house with other people. So if I could claim a deduction -- then how much could I claim? The rent I pay is for the room and shared use of kitchen, living room, etc. Apart from your response, the option I have for next year is to just move my office section to the basement. A student I live with would use one section for her office, and I could use another section. No one else uses that half of the basement. On the other side of the basement is the washer and dryer and a rehearsal space for a music band of former housemates. Would this be a more appropriate deduction?

Thank you for your time, Anu from DC


Hello Anu,

You are welcome. As you can tell from the lag time between your question and my answer, the freelancers seeking questions are many.

Yes, you have a legitimate home office expense. Here's a hypothetical of how you would calculate your deduction. Follow the arithmetic carefully.

Four of you share an apartment.
Rent is $2000, you each pay $500. [2000/4]
Apartment is 1,600 square feet.
You each have your own room and share the rest of the apartment.
You each pay $500 per month for 400 square feet. [1600/4]
You use a 20 square foot area [5 ft X 4 ft] of your room exclusively for business.
20 divided by 400 = 5%. You use 5% of your share of the apartment for business.
So you may deduct 5% of your share of the rent, or $25 per month.

Hope that's clear. Please let me know.

Best,
June

Save Taxes: Pay your spouse for his help

Dear June,

Thank you, thank you for speaking in a voice that I can understand. I'm beginning to feel a little less like Alice going down the rabbit hole :-)

About me - I teach classes to homeschoolers. (I realize that sounds like an oxymoron, but in today's world "home education" is more like "parent directed education" and doesn't have to take place in the home exclusively.

So far, from reading your site, it doesn't sound like I need to incorporate. I'm not worried about legal liability and I don't have business debt that I need to protect personal assets from. Your book is on its way and I look forward to learning about taking advantage of more deductions. I plan on paying my children and my husband.

So far so good! Here's my question: Is there any other reason to incorporate given the fact that as a sole proprietor my income is being taxed at my husband's rate? I guess I'm confused because if I pay him then he still has to declare the income, correct? So aren't we back where we started? Am I missing a piece of the puzzle here?

Thank you again!

Renee from Houston, TX



Hello Renee,

You are very welcome. I am so pleased my writing is useful to you.

The hiring of a spouse is a big puzzle to explain in a short post that's why you are missing a few pieces here and there. But let me give you a few more pieces to the puzzle.

If you hire your spouse, yes the income is simply moved from your side of the return to his. No tax break there. The advantages come with your spouse as an employee in this way:
** You may now deduct travel costs for him when he is on a business trip with you. If he were not your employee, even though he conducted business for you while traveling, you could not deduct his travel costs.
** You could provide him and his family [that includes you and your son] with medical coverage and thereby deduct as your business expense all health insurance and other medical costs.
** Were you to set up and contribute to his pension that would also be a business deduction for you.

How's that for starters?

Best,
June

Going Legit

June --

I am a website owner and operator. I make money from ads.

I haven't really made that much in the past 5 years or so (or paid taxes) but this year, it has really taken off. I don't have a DBA or anything like that, but I really need to get everything legit. I can't even get a loan or a credit card because as far as everyone knows I haven't had a job for years. But I made about $10,000 last month alone. Reading various articles on your website has me a little scared to go to a local cpa. I'm not sure what I need to do.

Brian from Juliet, TN


Hello Brian,

Yours is not a unique situation.

For starters you do not need a DBA. For more info, read this DBA: Doing Business As -- It's just a name .

You may be able to get a "no income verification" loan. That means the bank doesn't look at what you earn but what you own.

Some credit card companies will give you a card with a very low credit line. After several months of proving yourself a good risk, upon request, they will increase the line of credit.

You do not need a CPA, you need a tax preparer with knowledge about taxes for the self-employed and experience working with indies. There are several posts here about picking a tax pro. Whether or not you get the right pro depends on on how you go about looking for one. As these posts point out, you need to ask the right questions when you interview him or her.

Keep in mind that as an indie you are responsible for your financial well-being. That means you need information about taxes and recordkeeping and a lot more. If you like what you read on my blog and website, 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.

Best of luck!
June