Monday, July 30, 2007
Help! I am an independent consultant whose boss treats me like an employee. I have had to stand my ground constantly to retain any of my independence. The situation is very blurry. I am also under contract for two years. What do I do at tax-time? A few examples of the confusion: -I have hired and trained his other independent consultants, as well as done their initial paperwork. -I am their manager, and on the job I am his "director of operations." -Out in the field working a booth, I use all of his equipment, and am paid hourly + bonus(no taxes taken, of course). -He claims that my contact lists are now his -I have to send him a nightly progress report -I receive constant requests to help him find sponsors for his company's events. It just goes on and on. The big whopper was when I picked up a new graphic design client for myself, and he said the client was his!! And the client was in another field! As I will have to deal with this for two years, I'm thinking I should report it to the IRS. I do not make enough in deductions for it to cost me too much. Also, do you know what happens to the independent consultant contract I signed if it turns out I am an employee?
Thank you so much for your help!!!
Kendra from Colorado
I think Kendra's email is an excellent example of oh-my-goodness-it's-such-a-mess kind of thinking. Where would one start to help or advise her? Where should she start?
Let's break up her email so that we can see just what areas specifically need addressing.
Is she self-employed or an employee?
It appears she is an employee. Her "boss" [Of course, you don't have a boss when you are an indie.] is getting all the advantages of having an employee but paying none of the costs. He can't have it both ways.
Kendra needs to call the Department of Labor in her county or state and report the situation and ask for advice.
Is she willing to deal with the consequences of such a move? She'd likely not work for the boss after that.
What are the terms of the contract she signed?
There's a very wrong idea out there that just because two parties enter into a work contract that they are NOT in an employer/employee relationship. Not so. It's just a way of attempting to skirt the law.
"He claims that my contact lists are now his". Is this in the contract?
"I have to send him a nightly progress report." Is this in the contract?
"I receive constant requests to help him find sponsors for his company's events." Is this in the contract?
"I picked up a new graphic design client for myself, and he said the client was his!!" Does the contract state that any new client she gets belongs to her boss?
Why does Kendra think she must adhere to a contract but her boss does not? Perhaps she will need to have the contract reviewed by an attorney.
So many indies, at the prospect of making money, walk into a situation and sign on to it without looking at all the components. When work is offered to you, say, "Thank you very much. Let me go back to my office [or studio] and check it out with my business advisor." Remember you are a professional in business. Then call a friend or a sister, or anyone who thinks a bit differently than you do and go over the terms of the work offer. No matter how difficult to get things ironed out at the beginning it is northing compared to the difficulties once you've signed on.
Kendra, and all other indies: Develop your business mindset. People don't do things to you. You let them do it.
A most frequent comment from readers of my book, Self-employed Tax Solutions, is that it gave them confidence -- and it seems to me that in the situation we're looking at here, a major factor was lack of confidence.
I just found your site and am enjoying it, and learning a lot.
Question: My husband and I are partners in our home-based business.
When we bought our home 2 years ago, my husband set up his office in the attached garage. We finally saved enough to officially convert the garage to office space. We're spending a lot on county permits, fees, plans, materials, etc. To make it even more complicated, the county is requiring us to build additional covered parking on our property in order to turn the garage space into residential (office).
What portions of the costs associated with remodeling this office and meeting the county's requirements are legitimate deductions?
Will they be direct expenses, or a percentage of the home maintenance?
I've looked everywhere and can't seem to find an answer to this. I have a tax person--but they are not a self-employed expert! I appreciate any advice you can offer.
Thank you. Jolene
All expenses -- materials and permits, etc. -- related to building or remodeling a business structure are part of the cost basis of the building. They are all business costs. However, they are not "direct" expenses as you call them. For instance, repairing a window in your office for $100 is a $100 expense that you can deduct immediately.
Building or remodeling is considered a capital improvement cost. For a business building the cost must be written off over 40 years. It's called depreciation. So, if you spent $40,000 on your new building you would get to deduct $1,000 per year for 40 years.
You say that you and your husband are partners. Be sure to talk with your tax pro. A husband and wife partnership is the least tax advantageous setup for you guys. You might want to take a look at these:
Husband-Wife Business and Insurance
Husband & Wife Business
Designers Dozen: Tax Saving Tips for the Graphic Artist tip #4.
Sunday, July 29, 2007
My position was eliminated from my company but I am approved to be an outside consultant (speaker). Should I get a business license or DBA? They will pay me via 1099. Right now I have 2 engagements lined up but hopefully there will be more in the future.
You do not need a DBA. Read DBA: Doing Business As -- It's just a name to understand what DBA means. Also, you need no license unless your profession requires it. Here's a column on my website you might want to check out I am a Business.
Wish you success!
My wife was offered a part-time position as secretary under a 1099 contract for a loan officer (mortgage broker). Wanting to maximize our tax opportunities, we purchased your book, (Self-Employed Tax Solutions). I read your section on "What determines Employee or Self-employed Status?..." Under the 'control versus independence" guidelines of the IRS, this is most like to be considered an 'employee' position and not 'self-employed'.
My question is, how do temporary staffing agencies conduct business under these guidelines? What makes the temporary staffing agency different then a self-employed person performing the same task?
Thanks, Chris from Pflugerville, TX
P.S. This book is the best. A must for anyone even thinking of starting their own business.
Thanks, Chris, for your generous comment about my book. Please tell all your indie friends!
The temporary staffing agency is not playing by the rules. They get away with it because no one reports them. Legitimate, well-known temp agencies pay the workers as employees of the temp agency. Note that the worker is not paid as an employee of the company where he or she is temporarily working.
If you want to set everybody straight, you can call your county or state department of labor.
PS on Monday 7/30.
I contacted Kelly Services , one of the oldest and largest temp agencies I know of. They confirmed by email that "The worker would be an employee of Kelly. They get paid by Kelly."
PS on Wednesday, 8/1.
AQUENT gave a similar response and said that if you have more questions on this kind of arrangement to contact an Aquent agent at 877-2-AQUENT.
Saturday, July 28, 2007
I've been SE for 4 years as Architect/Environmental Design.
Notified a client of rate increase to $75/hour (undercharged at $50/hr for 4 years--my own fault for not knowing the minimum market rate in So Cal).
Employer came back with $120k/year direct hire employee offer.
Have not yet done '06 taxes (filed extension), still paying '05, none paid so far on '07.
Expenses too high in So Cal. Family of 5, keep house $28k mortgage interest deductions, or take cheap rental home (no mortgage deductions). Mid life and NO retirement.
Should I stay SE to start taking advantage of the SEP IRA opportunities, or go with $120k/year employment offer?
Thanks so much---REMARKABLE WEBSITE YOU HAVE HERE! Leslie from Mission Viejo, CA
My goodness, you have a lot happening and it sounds like you have very little guidance. My first advice: Make no decisions until you get a lot more information. I will do my best to run down the line and deal with each element of your email but do keep in mind that this is an email answer to what appear to be life decisions!!
Many indies don't charge enough money. Every independent professional should call around -- or have a friend make the calls -- and ask the going rate for the kind of services you perform. Whether house painting or business card design or dog walking -- get a price. If you need to raise your fees do it incrementally and don't spring it on a client. For instance, in July send a carefully written notice to clients thanking them for their business and tell them that on September 1st your fees will go up XX% or to $XX.
You say your "employer" came back with an offer. If you're an indie the person to whom you provide services or sell products is not your employer. Only employees have employers.
$120,000 per year divided by 52 weeks divided by 40 hours per week = $57.69 per hour. What benefits are being offered? Keep in mind that business expenses are not as tax advantageous to an employee as they are to a self-employed so that makes that offer less than you are earning at $50 per hour.
Owing money to the government is not terrible. It doesn't mean jail it just means a lot of penalty and interest but at a cost of a lot less than credit card interest.
Rent vs own in your situation is not a snap decision. Your entire financial picture must be looked at and analyzed.
"No retirement" -- well, you don't say how old you are nor at what age you want to retire so that may or may not be a problem. There are many pension plans for indies in addition to the SEP-IRA that you mention. However, you have a lot of other areas to straighten out before you decide on a pension.
I am so glad that my website has helped you. Thanks for letting me know. Be sure to look to the left here on my blog at the various categories. There are 23 posts on "Being Self-employed." I think they will help you in your current situation.
Friday, July 27, 2007
I am glad I discovered your blog. Already I learned a great deal! Anyway, I am starting an LLC in NY with 2 other members and am a bit concerned about messing up with estimated & self employment taxes. I am the managing member and the other 2 will not participate in management issues. It is a brand new business so how will estimated taxes be calculated?
Also, I understand I am subject to self employment taxes and they should 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?
Thank you for any help you can give, I just want to get this right. Rhonda in the Bronx :)
I, too, am glad that you discovered my blog!
You say you are an LLC with other people. I assume from that you have formed a partnership. I cannot say it frequently enough so i will take another opportunity here: An LLC [Limited Liability Company] is a legal entity and can be a sole proprietorship, partnership or corporation. More info here LLC? Incorporate?
As a self-employed you -- and your partners -- [I am not sure what you mean by "they should not"] must pay federal and state income tax and self-employment [SE] tax. Depending on your income amount you may also be subject to New York City Unincorporated Business Tax. SE tax is based upon your business net profit. No profit means no SE tax. Income tax is based upon your net profit and all your other income as well. Taxes are explained on my website here Taxes: Which ones and how much do I pay?
You may have to pay estimated taxes. It depends on business and all other income and also how much may be withheld from your spouse's income, or via a pension, etc. How much and when to pay estimated tax is explained in this blog post Estimated Taxes .
Wish you much success!
You say you are starting your own business but then you call yourself an employee. This doesn't jibe. Want to tell me more? You might want to read these columns from my website first --I am a Business and Taxes:Which ones and how much do I pay?
I own the business, but I also work the business. It is a tree removal company and I do all my own advertisement, use my own personal vehicle, and normally do the work all myself. Occasionally I have to bring someone out to help me and I normally pay them by the hour.
Merlin, you didn't say what business entity you are so I assume you are a sole proprietor. I can't tell from your response whether or not you read the columns I suggested. Read them! You are a self-employed. You are not an employee. You are your business. You ask how much tax you should be withholding. Read Estimated Taxes and you will see that as a self-employed you don't withhold taxes the way an employee does.
Whether or not the people your hire by the hour are your employees or independent contractors depends on who controls what they do. Here's a post Employee vs. Self-employed that will help you decide which they are.
After you've read the columns and posts I've mentioned, do let me know if there is something in them you do not understand and we can go forward from there.
Can a DBA have its own invoices, purchase orders and so on? Where can I find out about my responsibilities and my rights.
Thanks John from Forrest Cypress, TX
DBA means Doing Business As and is just another way of saying that you John Jones are naming your business something other than your name. Perhaps you've named your business, "John's Business."
Take a look at this column DBA:Doing Business on my website.
DBA is not a business structure or business entity. You could be called John's Business were you a sole proprietor, corporation, partnership -- doesn't matter. There's more info on this at my blog post Which business entity is best?
Yes, you may write purchase orders using your business name. You need to check with your bank about depositing checks made out to your business if you don't have a business account.
John, I can tell from your question that you need a lot of basic information, too much for me to provide in one email. I recommend you start by reading a short column on my website, like: Is it a deductible business expense? and Estimated Taxes, a post on my blog.
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.
Saturday, July 21, 2007
I've recently started a new lawn care business, but I still retain a full time job. When I do my taxes how would I go about that? Would I have to do them separately, or could I combine both in one form.
One last question when I do this either way, I'm I able to write of the equipment that I bought for my business.
Jack from Pennsylvania
Congratulations on your new business.
As a sole proprietorship -- that is the structure of your business -- you do not file two separate tax returns. There will be additional pages in your return that relate to your business.
You may deduct from your business income each and every business expense that you have including the daily paper if you buy it to check the weather forecast.
I can tell from your questions that you need a lot of information. I suggest that you start by reading Is it a deductible business expense? on my website and Estimated Taxes on this blog.
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.
I wish you much success in your new venture!
Friday, July 20, 2007
Welcome back! I have been checking your blog and hoped you were on vacation and not ill.
I started my own business June 1st. I sell noni juice, run a canister route for charity and do some janitorial work. Problem was my husband had no job. (We worked together for a company and quit together.) I got a tax consultant/accountant and he recommended I hire my husband as an employee.
I know you mentioned doing just that in your book, Self-employed Tax Solutions.
Now here's the problem....For the janitorial work I have to have liability insurance (not that big a deal) but since I hired John the insurance company says I must have a workmens comp policy to cover him. This is a big deal as I am not making very much money and it costs $1,014.00 per year. I can pay quarterly, but still gee wiz!
Now finally for the question, can we save money by becoming partners? Is co-ownership just another word for a partnership? As things are set up right now John is only my employee for the janitorial work which is not bringing in much money. We would like to split profits from all 3 ventures 50/50. What would you recommend?
Thank you for your time June, sincerely, Yvonne(in Illinois)
First, try to combine all you business efforts into one business if at all possible. Perhaps you provide a variety of general business services to other small businesses. That will make recordkeeping much easier because you won't have to allocate expenses between two or more places -- for instance a run to the post office or a supply store, or the purchase of a computer.
Liability insurance generally covers injury to another person. For instance, if a client walks into my office and trips, my liability insurance would cover that. Do you understand why you have liability insurance for yourself? Whether to have liability insurance is generally a choice you have.
Property insurance [often combined with liability insurance] covers damage to someone's property. For instance, you break a window while cleaning it.
Workers compensation covers injury to an employee. It's the state [Illinois, in your case] regulation/law that determines whether you must have workers compensation. It is not determined by insurance companies. In some states you are not required to have workers comp if your spouse is your only employee or if you have fewer than three employees. In New Mexico it is not required for a spouse. In New York it is. If it is required, some states will sell you the coverage directly and/or you may choose to purchase it from an insurance company. The cost depends on the wages paid and the kind of work. More hazardous work means a higher insurance premium. You need to get more information from someone/someplace other than your insurance company. When I researched this for a New York client it took umpteen phone calls to find the right department and get a correct answer. I hope Illinois is more organized.
Co-ownership is just another word for partnership. And you don't want that type business structure. Sole proprietor with spouse as employee is the most tax advantageous structure for a husband and wife business. As I've said to a number of folks who have emailed me: I am working on a publication with a complete explanation. There's just not enough time finish it!!! Anyway, with your honey as your employee you may give him a medical and dental plan for him and his family -- that you! and kids if there are any -- and a pension. All those costs would be deducted from your business income. Not so in a partnership.
This should point you in the right direction.
And, thank you so much for your generous comment about my book on Amazon.
I just received one and so have my clients.
THE FOLLOWING IS NOT FROM THE IRS. IT IS A SCAM.
After the last annual calculation of your fiscal activity we have determined that you are eligible to receive a tax refund of $97.00.Please submit the tax refund request and allow us 2-4 days in order to process it.A refund can be delayed for a variety of reason. For exemple (invalid records or applying after the deadline). The good news is that IRS will make this refund directly to your visa and/or mastercard linked to your checking/savings account instead a check or a direct deposit.To access the form for your tax refund, please continue to our secure form at "Tax Refund V-M" .
The link, of course, does not take you to the IRS site but to their site.
.Important: Do not use credit and/or american express or discover cards.Only cards that are linked to your checking/savings account are accepted.
Internal Revenue Service - Tax Refund Specialist
Thursday, July 19, 2007
I've been self-employed for about 1 year. I've been making my quarterly SE tax payments. If I choose to return to an employee (w-2) job, am I required to continue making quarterly SE payments?
Dave, I assume by SE tax payments you mean estimated tax payments. Take a look at these posts below. If they don't answer your question, then please get back to me.
Estimated Tax: How much to plan for
Estimated Taxes Paid Late
Full-time Job and Freelancer: W-2 and 1099
Tuesday, July 17, 2007
When I sent the expense list to Caroline I included a note: "Yikes! Yours is not a unique situation."
I thought the correspondence that followed would be of interest to many of you. Here it is.
It was a step up for me to hire an accountant several years ago. She has a good heart but severe anxiety issues.
She keeps leaving messages on my cell phone marked “urgent" saying that for 2007 I’m going to owe 15K etc. I haven't filed this year yet but last year I paid about $900.
If I’m making almost the same amount of money, why would it jump to such crazy numbers? Is it just that I’m naive?
I have two questions:
How much do you charge? I made 23k last year on a 1099, have a home studio -- my entire living room plus closets etc.
Can I use the $41.00 a week expressbus/subway pass as a deduction? I use it to take me to absolutely everything. Cabs are just too expensive anymore.
Thanks for all the info.
"... she has a good heart but severe anxiety issues." Were she your friend you'd help her. As your tax advisor, get rid of her. .
Saying that you owe 15K means nothing because it's a stand alone piece of info. Sort of like my asking you if the blue watercolor that I have is a good painting.
Also, there is no way that you could owe $15,000 if your only income were $23,000 gross self-employed income.
Subway expense is deductible if you are going from one business location to another. Here's lots of info on that if you check out the auto expenses category on my blog.
Based on your questions and accountant situation, before you make any decisions about a new tax pro, you need information -- more than I can give in an email. The least expensive, easiest way to get a basic understanding of indie taxes is to read my book, Self-employed Tax Solutions. Here's a link to the table of contents . See what you think. And here's a link to purchasing -- about $13 on Amazon.
I can send you more information on my services and how I work with new clients, however, I think your first step should be in the direction of educating yourself.
Thank you, June. You are very kind and generous with your time. I will buy the book and take it from there. You have really helped me just with this e-mail. because when it comes to money, I just assume I’m making the wrong and bad choices.
All the best,
You are most welcome, Caroline.
When in doubt about your own skills with money, think about putting a paintbrush or sculpting clay in the hands of a typical accountant. What would you end up with?!
Always ask questions when interviewing a tax pro . Then make your decisions not just on the answer but how your question was received and how the answer was presented.
I might use our email on my blog. If I do I won't use any identifying info.
June -- That is soo great, transforming anxiety and angst into something that could help others with number dysfunction. I look forward to seeing it on your site. Also I have forwarded the blog/site address to lots of friends with similar fear.
I eagerly await the arrival of your book.
Friday, July 13, 2007
Wow--could the same apply in real estate transactions? I bought 3 properties a few years ago with extra money I had saved, held them relatively short-term and sold them at a profit. Had no clients---just myself making money for myself. This was my only income I had that year.
Accountant classified me as Self Employed, I paid IRS. IRS audited me last year and I assessed substantial additional taxes and penalties as Self Employed on those properties' sales. Was I really not SE, is the IRS wrong, and/or did my accountant unintentionally help me believe I was, therefore possibly misclassifying me in the first place?
Mr. Anonymous maintained his privacy but lost the opportunity to get a good answer from me because I can't get in touch with him to get clarification on his situation. So instead of directly answering his question I'll give you all some info on being self-employed and owning real estate. And, I also hope this will give you some guidance on how to ask a question.
Mr. A said there were "real estate transactions" on "3 properties" held for a "relatively short-term."
Real estate transactions: Hmmm ... could be buy, sell, trade, or exchange.
Three properties: Barren islands off the coast? Residential rentals? Golf courses?
Relatively short-term: Never relative. It's specific. One year or less is short term. More than a year is long term.
With real estate you have three, well sort of three, possible tax treatments:
1. Income from the sale of real estate held as investment property is taxed using capital gain and loss rules.
2. Rent received from rental property results in rental income, which is ordinary income.
If you are a real estate professional then any loss from renting property may have a more advantageous tax treatment.
If you are a real estate dealer, depending on your intent for holding the property -- rental income or investment profit -- it may also be subject to self-employment tax.
3. Rental property with services you provide is self-employed income.
You buy land in Santa Fe. Do nothing with it. Sell it two years later. That was an investment. Just like buying and selling stocks. It is not self-employed income.
Rent that you receive from tenants less rental expenses leaves you with rental income that is taxed as ordinary income. It is not self-employed income unless you provide services such as cleaning, linens, meals, etc. for your tenants. Here's an example:
- Mike Mobile had a sizable piece of land near the lake. He let visitors park their campers there for a fee. He provided no services. The fees he received were rental income not self-employed income subject to S-E tax. Within a few years the spot had become so popular that he added some amenities and raised the rent. He provided things like a laundry facility, fax and phone line hook-ups in the main office, fresh water, etc. Now he’s receiving income as a self-employed.
Thursday, July 12, 2007
I am an Independent Literacy Consultant. I am a sole proprietor who set up a SEP [simplified employee pension] last year for myself.
Now I am taking advantage this summer of hiring my 17 year old to work in my business (I only have to pay withholding taxes on him, not Social Security, Medicare or unemployment, via a special regulation with the IRS (outlined in Publication 15).
However, I want to do what is more advantageous for our family in terms of contributing to an IRA for my son, either directly as a employer-paid contribution or by asking him to contribute from his salary to a traditional IRA. Is that the only or best way to do it? Do I have other options?
Cathy in Huntsville, AL
The following factors come into play when choosing a pension type:
** Your tax bracket
** Son's tax bracket
** Amount your son will earn this year
** Your business net income
** Whether now or in the future you plan to have other employees
** Your age
There may be a plan for you and your son that is more advantageous than a SEP but without a lot more info there's no way to tell.
Whether your employee is your son or a non-relative you must treat him fairly. That means all employees must receive the same benefits and that you cannot give yourself a better benefit than you give your employees.
With your current plan you need to complete a Form 5305-SEP and keep it with your records.
All SEPs are also IRAs. So the best way to use your current SEP depends on your son's income. An IRA allows for a $4,000 contribution. A SEP allows you to contribute 25% of his wages. Your contribution to his pension is a business deduction for you. Choose the method that gives you the biggest deduction.
Wednesday, July 11, 2007
I recall that your new business can only lose money for a certain period of time before it's a hobby. Is that still true and if so, how long is that?
There is no time limit on losing money. That's hogwash! Never was a rule, an old husbands' tale, maybe. For a better understanding, think of it in reverse: If your business makes a profit in three out of five years you're home free. Notice that says that IF you make a profit not that you MUST make a profit.
As long as your goal is to make money, you're OK. The IRS says that in order for you to be engaged in a business rather than a hobby, the goal must be to make a profit. The IRS doesn't insist that you actually make a profit, but there must be a reasonable expectation of one.
How do you prove you're in it to make money if you're not making any money? That's too long to go into here but the full explanation is in my book, Self-employed Tax Solutions -- starts on page 11 with Cheech and Chong as the solo entrepreneur example.
Tuesday, July 10, 2007
Here's a question that could only be asked in this new coffee culture.
I am self-employed and about 50% of the work I do requires me to have internet access, which I don't have at home. I am always at the same local coffee shop using their internet for a couple hours a day. I always buy a cup of coffee because I'm using their internet, electricity, and space for a minimum of 2hrs/day. I never do work at home. Can my coffee be considered a business expense as it may be necessary in order for me to have internet access? There is no sign posted at this independently owned coffee shop stating that you must buy something to use the internet. But, you can't get access to the wifi unless you have the special code, which you receive at the register.
Angela from Seattle, WA
Wish I could tell you the coffee were an expense, but as it's currently set up at your local coffee place it is not. That's because you may not take as a deduction the cost of meals or snacks for yourself. Why not ask for the cost of access to the code without buying coffee and see if they give it to you. If you must buy something in order to get access then you have a legitimate reason to deduct the cost of the least expensive item.
Other ways to look at it:
If coffee were $3.00 a cup but to get the code a cup cost $4.00 then you'd have a $1.00 deduction.
Or if coffee shops all over town charged $2.00 a cup and your place, the only one with Internet service, charged $3.00, well, then we could argue for a dollar deduction.
Of course, if you were there with a business associate and you paid for her coffee and yours, then both coffees are a deductible meals&entertainment expense for you.