Happy Days Are Here Again!

Bet you didn’t realize that this economic train wreck holds great promise for a wonderful 2009.

Here are just a few of the benefits we can expect:
** Make new friends …… hitchhiking and ride sharing are in.
** Get healthy ……walking or bicycling are the new mode of transportation.
** Make less trash and waste …… fix and keep the old appliances.
** Have fewer traffic jams …… trains, buses, even trolley cars are the way to go.
** Have fresher vegetables ……from our own backyard gardens.
** Become an antiques collector …… the old furniture has such charm.
** Have a new source of revenue …… by renting the spare bedroom.
** Do our own investing …… drop spare change into a big jar or piggy bank .
** Spend more time with our kids …… after-school programs will be cut.
** Have more time to watch the sunsets ….. no job eating up all our time.

Did you know?

In the First Great Depression of the 1930s
Loaf of bread cost ………………8 ¢
First-class letter …………………3 ¢
Movie theater ticket …………...10 ¢
Average annual wage …..$1,600.00

In the 21st Century
Loaf of bread cost…………...... $ 3.25
First-class letter …….....………. 42 ¢
Movie theater ticket ……......… $10.00
Average annual wage … $40,200.00

So – in 2009, let’s use our imaginations to create new industries and services, to rebuild our crumbling roads and bridges, to turn America green, to help those who need help, and to rethink our priorities.

As our President-elect put it: We are the people we have been waiting for.

Wishing you a wonderful holiday and joyous new year,
June Walker

Donations: Cookies and websites are very different

June--

I was viewing Q&A #7 on your website -- No deduction for donated work or services .

I have been developing a website for a non-profit free of charge. While I understand that I cannot claim the time as 'service donated'... The website itself, or the files, are tangible real world items, as a pair of shoes or a bicycle would be. So, as I created and donated the website in its entirety, would that qualify for a deduction of some type. Normally I would charge a client $1500.00 for the ownership of such files.

Thanks in advance!!
CWS


Dear CWS,

Tangible is something that can be touched. I can pick up my shoes. Hold up the bike for the child to ride. But, no matter how good you are at web development my bet is I could not walk into your office and lift up that website and put it into an attache' case. Right? So we got tangible out of the way.

The first sentence of the Q&A that you refer to is: "You cannot claim a tax deduction for time or services donated to a charitable organization." It's your time and skill that made that website. No bricks or screws or bolts or anything else that you paid for went into that site. If you had phone charges or extra electricity fees because of the volunteer services, you could claim those expenses as a charitable deduction.

If you were not a web developer but, let's say, a plumber with IT skills, and you bought Dreamweaver solely to make the site for the charitable organization, then you would be able to deduct the cost of Dreamweaver as a charitable contribution. That would not be a business expense.

In the same way, had you developed a great chocolate cookie recipe that you gave to the charitable organization so that volunteers could bake cookies to sell -- no deduction for you. On the other hand, were you to bake the cookies and donate them to the charitable organization your deduction would be the cost of the flour, sugar, chocolate, gas use for your oven, etc.

Here's more to read on the topic expenses -- donated services or products .

Best,
June

Unemployment Benefits for the Self-employed

Hi,

I am graphic designer/cartographer in San Francisco, CA and have been self employed on and off for over 12 years, including the last 3 years (prior to that, was employed by my dad's marketing llc). I am currently just a sole proprietor, paid by 1099s, haven't even done a DBA since I am just using my own name.

I did search the site and read many of your posts, which are extremely informative and helpful--thanks! I didn't see a specific answer to this question, although there was some info in the posts about LLCs.

I am getting increasingly nervous about unemployment, as people are dropping all around me (aunt, uncle, cousin, best friend). I currently do most of my work with one company and they are starting to cut back. I do know that I should be getting at least $20,000 next year, based on work I have started but not billed for yet. So my question--Can I structure my business so that I can pay into, and therefore be eligible for, unemployment insurance?

Would the simplest way be to set up an LLC, and pay myself through payroll? Is there any other way?

thanks
jennie


Dear Jennie,

I just spoke with the IRS to confirm what I am about to tell you. It was surprisingly easy to get through to them. I suppose there's not a lot of people thinking about taxes on the day before Christmas.

Unemployment benefits are a combination of federal and state regulation. Were you to be an employee of your own S-corporation or C-corporation you would pay into the federal unemployment system. You would need to check with California to see if there were any state restrictions on receiving unemployment benefits as the only employee of your own corporation.

You might want to consider the cost and hassle of incorporation as well as corporate recordkeeping, and that as employer you will pay into the system versus the small amount of unemployment benefit you would receive after only a year of income of about $20,000.

Happy Holidays!
June

More About Expense Reimbursements

June,

I am a historic preservation consultant in Chicago, just beginning my practice as an LLC.

I understand from past work in the IT field that some service providers separate client payment for work done from reimbursements for travel and expenses. The contract would specify that the client reimburses directly for T&E. I'm assuming the result of this is to clearly limit income to dollars paid for actual work done (I would not count the reimbursement of travel expenses as income). To avoid submitting detailed expense reports to my clients for reimbursement, I would prefer to roll T&E into my total estimate, rather than keep it separate. What are the benefits / drawbacks to taking either approach? I anticipate perhaps half of my work (say six projects a year) requiring up to four separate overnight stays in order to complete each project.

Thanks!
Nick



Dear Nick,

First let's take a look at reimbursements in general. Whether or not the payer includes reimbursed expenses on your 1099-MISC your income is the same.

Here's an example:
$5,000 fee + $1,000 supplies bought for a client for which you are reimbursed by the client = $6,000 you receive from the client.

A 1099 stating $5,000 income means you claim the $5,000 as income and do not deduct the $1,000 expenses on your return.

If the client gives you a 1099 stating $6,000 income you claim the full $6,000 in income and you deduct the $1,000 supplies on your tax return which brings your fee income to $5,000.

In your situation, whether to choose reimbursement or a higher fee will take some calculation on your part. If the payer reimburses you dollar for dollar there is no tax difference in either method. If you pay $1,000 in travel expenses and are reimbursed $1,000, the only difference is in the amount of paperwork.

On the other hand, if you are reimbursed at 60 cents per mile for auto use and your calculations of actual auto expense come out higher than that then it would be better to raise your fee to include your higher cost rather than receive reimbursement at a per mileage rate.

If you are reimbursed for less than your cost you would pay less tax than if you were reimbursed for more than your cost.

I have two caveats to what I just said.

The first is about meals & entertainment expenses. If you spend $100 on a meal for which the payer reimburses you and included the papyment on your 1099 you may deduct the entire $100 as a deduction on your tax return. Read this post to understand how and why: Reimbursed Expenses Included on a 1099 .

However, if you choose to instead up your fee by $100 and deduct the meal on your tax return, the deduction for that meal on your tax return is only $50.

The second caveat relates to state gross receipts tax. In some states you must pay a tax on your gross income. Payment for reimbursed expenses that are included on 1099s complicates the state tax reporting procedures and also may increase the amount of gross receipts tax you must pay.

Be sure to read all the posts on reimbursed expenses here expenses -- reimbursed .

Best, June

Reimbursed expenses: Income or not?

Hi June,

I found your site very relieving to a current new gas reimbursement situation.

I'm a musician from Altamonte, Springs, FL. 13 years as an indie with a clean tax record using an accountant every year .

I'm in a band. My drummer drives his own van for me to the gigs with equipment and me inside, but I own the band. He's a good guy. Since the cost of gas has gone up, he has begun charging me gas mileage at approx. $.59 per mile plus tolls. I pay him that with no problem... he's doing me a great service and has done so for 13 years. Recently, my new accountant advised me to put the whole amount (reimbursements and gigs) on my 1099 to him at the end of the year.

I never have done this even when he sporadically charged me for gas w/wear and tear as according to the govt. approved numbers.

However, my drummer (who is not happy about what my new accountant advised) would prefer that I put only the amount of the gig on this year's 1099 (not the reimbursement) since only the gig is real income.

Things are a bit tense.

Usually, before this, I've deducted mileage expenses anyway in my categories at the end of the year should the IRS question it. It's all above board and honest. I'm a chapter "S" corp. and my friend is viewed a subcontractor to me not an employee.

My drummer is afraid/concerned about being red flagged if his 1099 looks different from years past this time around.

Please give me insight and or opinionated options (or hybrids acceptable to the IRS) to maintain my friendship with him should I put or not put both the mileage and the gig total as one at the end of the year. He would rather divide the two amounts himself. I see his point. What are your thoughts? I need some piece of mind between my friend and myself. I appreciate your time and look forward to hearing from you.


Dan

Well, Dan, the big questions may be how good a friend and how good a drummer?

Whatever you pay the drummer, whether for his drumming or driving is income to him. You can give him a statement with his 1099 showing how much is for drumming and how much is for driving.

The drummer then claims the entire income and deducts the cost or running his van using either the mileage method or the actual method. See a little more about auto expenses here More about Business Auto Expense .

You deduct as an expense the total amount that you pay the drummer for both.

In order for you to deduct the amount you pay the drummer for his driving, the drummer must claim what you pay him as income.

There are other ways of treating expense reimbursements -- see here expenses -- reimbursed (6) -- but the upshot is: In order for somebody to deduct the cost of reimbursements for expenses somebody else must include the reimbursement as income. If the drummer did not claim the driving reimbursements as income then he could not deduct the cost of using his van to drive you around.

Best,
June

No profit motive means no business.

June,

I am currently living in Brazil and working as a volunteer social worker. I'm not in it to make a profit. I'm in it to make a difference. My income consists of donations given from individuals. Some donors send their gifts to a non-profit organization which then deposits that donation into my bank account. In return the donors receive tax exemption for their gifts. The non-profit organization has sent me a 1099-MISC for those donations. Am I obligated to pay the self-employment tax on those gifts or can I just put it in box 21 on my 1040 and go on with my life?

Thank You, Brian


Dear Brian,


You goal is to make a difference not a profit. If your goal is not to make a profit then you are not a business. The IRS says you must pay self-employment tax on profit from a business.

So you must pay income tax on the income, but no self-employment tax. Include the payment as "Other Income" on your tax return.

Remember you may deduct any out-of-pocket volunteer expenses as an itemized deduction.


-- June

What % of my income for taxes?

June --

I work and live in San Diego CA, I am a mortgage loan processor and just started as an independent processor. I get paid per loan closed. No hourly pay. I get $400 for each loan I close and was promised at least 10 loans per month. So if I make about $2000 every other week, how much should I take from that check to put aside to pay for my Federal State Tax, Social Security taxes and possibly self employment tax?

I will have several deductions at the end of the year for working such as my transportation, office supplies, cell phone, use a room from home as my office etc.

I thought I should put aside at least 25%, am I thinking right?

Look forward to your answer.

Thank you, Rose
San Diego, CA



Hello Rose,

You need to put aside between 30% and 40%. Take a look at this column on my website for an explanation Taxes: Which ones and how much do I pay?.

-- June

House Trailer or Motel

June --

Regarding travel related expenses: cost to operate and maintain a house trailer, would that also include the purchase price of a trailer to use instead of lodging while on a temporary work assignment, or would it have to be depreciated?

Laura
Fort Pierce, FL


Dear Laura,

Assuming you have established that the house trailer -- or part of the house trailer -- is a legitimate business expense then you must depreciate the cost. The procedure is similar to depreciating a home office.

-- June

Inaccurate Mortgage Applications

Hi June,

I'm on my 4th year of owning a marketing firm as a sole proprietor & work from home when I'm not traveling for business.

I just bought my first home and had to make certain my adjusted income on my 2007 tax return was high enough to qualify for the mortgage. So in order to achieve this I did not write off thousands of business expenses on my return and owe A LOT. Someone suggested I send an addendum to the IRS on my return to lessen what I owe now that I have the new house. Should I do this or would this trigger an audit?

Help! I want to do the right thing for my hard earned money!

Thanks in advance - Ali (Texas)


Dear Ali,

You have probably heard the adage: You can't have your cake and eat it, too. Well, in the same way, you can't have high income for one purpose and then lower income for tax purposes.

When you applied for a mortgage you probably signed a form that allowed the lender to request copies of your tax returns from the IRS. In a bank audit, the auditors can get a copy of a borrower's return from the IRS and compare it to the return presented by the borrowed during the application process. You cannot file a return with one set of numbers to the IRS and another set of numbers to the lender. Well, you can but it can get you in big trouble.

-- June

Indies are responsible for their business decisions. No excuse.

June --

I live in the State of Virginia and have been an indie for 7 years. I am in an audit right now. My original tax preparer said for mileage my gas receipts that I accumulated were fine . However, now that we are in the audit, she said I have to have a log. I was very upset she didn't tell me this 4 years ago.

Anyway, I researched the auto IRS publication regarding logs. It appears that to reproduce a mileage log, I have to use chronological receipts that are dated such as going to the post office, going to Office Depot, etc. I dug up my client files and researched dates of closing that I attended and when I had to meet clients for loan apps, credit pulls, etc. I also mapquested every place from the office to these locations.

It took 2 months to complete all this. I have a very tough auditor. Do you think this will suffice? Am I missing anything?

Mary


Dear Mary,

This is not a tough auditor. This is an auditor who is not lenient. The records that the auditor is requesting are pretty much standard. The problem lies in your having to reconstruct from activities of four years ago. Just think how easy it would have been had you kept records in a timely fashion. I explain In my Most Simple System of recordkeeping how it takes almost no time to keep a record of mileage. If you make a run to Office Depot simply write "errands Off-Dep" in your calendar and if you didn't note the mileage at the time then at year-end you could do your mapquest and enter the round trip total in your calendar.

Now let's look at responsibility and developing an indie business mindset. You, as an independent professional -- you don't say what profession -- have a responsibility to assess information and instruction given to you. If you went to a doctor and were told that you could eat four brownies a day and still lose weight, as welcome a message as that might be, you would know that it were incorrect. Right?

So look at what your tax pro told you: Gas receipts were enough to prove business mileage. You don't have to delve too deeply to wonder how a gas receipt proves that you drove to Office Depot or to a client's office. It was your responsibility to ask, "How do the receipts prove business miles to the IRS?" rather than just accept her too-easy-to-be-true instructions.

In your reconstruction or records, assess the time you are putting into this against how much work time you are losing in the process. If the additional tax is, let's say $500, are you losing more than $500 of work time. If yes. Then forgo the deduction and take the financial hit.

You might want to read these posts indie business mindset .

Best,
June

Graphic Artist in London

Dear June,

First, thank you for taking the time to help me with my questions and concerns.

I am a freelance artist and designer, I have been freelance for about 20 years.

This coming June 2009, I will be going to London, where my son will attend school for 1 year. Because I used to live there as I was married to an Englishman, and my other two sons are already there with dad, I have the ability to work in London legally.

So my question is about taxes. Will I have to pay taxes to the US on the money that I will be earning in the UK, as well as paying taxes to the UK on the same money? If I have to pay taxes to both countries, I will end up with very little, so I am not sure at all about these tax rules.

I would appreciate any help that you can provide about this situation.

Sincerely,
Adrienne
Winter Springs, FL


Dear Adrienne,

This is how it works from the US side.

You must pay Self-employment [SE] tax on your net self-employed earnings. (Take a look at these posts for more info on SE tax -- taxes -- self-employment tax (7) .)

Since you will be out of the country for a relatively short time you must pay income tax just as you would were you living in the States.

If you were out of the country for an extended period of time -- think of it as almost a year, and the time can straddle years -- close to $90,000 of your income would not be subject to US income tax. But, you must still pay SE tax.

If you must pay income tax to the country you are in then the US will give you credit for taxes paid to that country. That means you will not be doubly taxed. Each country has its own tax laws so you must ask the taxing authorities in the UK what are your tax obligations.

Also be aware that the US has reciprocal tax agreements with many countries.

You might want to take a look at these posts foreign situations (7) .

And, you are welcome!

Best,
June

Taxpayer Advocates Help with IRS Problems

I received an email from someone explaining a complex IRS audit in progress. Although the problem is not of general interest to my readers the question and my response are.

After explaining the situation, Mary, from Williamsburg, Washington, asked: Is there any statute stating that because of undue hardship, monetary, and time, the IRS must grant our request for a change of venue?

Whenever you deal with the IRS and the actions of the IRS cause you undue hardship, you should contact the Local Taxpayer Advocate (LTA) office. The service is offered by the IRS. It gives free, independent, and confidential tax assistance to taxpayers unable to resolve their tax problems through normal channels or individuals experiencing a hardship. The Taxpayer Advocate Service helps individual and business taxpayers resolve problems with the IRS.

In Washington the LTA contact info is:
915 2nd Ave.,
Stop W-405,
Seattle, WA 98174
206-220-6037
206-220-6047


The Taxpayer Advocate Service toll-free phone number is 877-777-4778.

Self-employed Tax Solutions 1st Edition

Some of you have asked about the second edition of my book, Self-employed Tax Solutions, it is now available on Amazon.

The economic morass that we are all in has indies looking to increase income, cut expenses and lower the tax bite. I’d like to help and here’s the scoop on how.

As those of you who have read Self-employed Tax Solutions already know, my book provides a basic education in being self-employed. It explains things like the difference between hobby and business; when travel is deductible as a business expense; how to determine if you can deduct the costs of a home office; and how to calculate estimated tax payments. It arms you with clear, useful, easy-to-understand tax and recordkeeping basics. And it shows you how to pay the least amount of taxes legally possible. The entire Table of Contents can be seen here.

Self-employed Tax Solutions is a book of basics and none of the basics has changed since the original publication in 2005. So let me assure you that the second edition of Self-employed Tax Solutions has everything contained in the earlier 2005 edition. Nothing has been left out. Nothing has been added. Year references in examples, of course, have been updated as has the method for deducting start-up costs. Those of you with the original edition don’t need to spend your money on the new edition. Of course, you may want to alert an indie colleague who doesn't have a copy of my book that both the 1st edition --- on sale at a discount on my site -- and the 2nd edition are available.

Best,
June
[revised 1/15/10]

Is charity work a business?

Hi June,

A number of friends and I would like to start a venture whereby we sell handmade products and donate 100% of net proceeds to a well-established charitable organization. We do not plan to make any profit.

I have questions regarding tax implications on us and if we should or have to form a business structure (and which one is right for us). If we all handle our own activities individually, would this be taxable to us? It seems that it shouldn't be since the sole purpose is to donate to charity.

Could this be considered a hobby?

I appreciate any advice you are able to provide.

Thank you.
Nancy


Hello Nancy,

If you and your friends were to simply make the products and give them to the charity to sell you would not be engaged in a business nor a hobby. You'd be engaged in charitable activities. There is no paperwork nor registration you must do.

Any out-of-pocket expenses you would have for things like supplies, phone calls, driving around, would be deductible as "personal gifts to charity other than cash" on your tax return. You would need to keep a record of your expenses.

If you and your friends want to sell the products and give the proceeds to charity the least costly, although not the most simple, way is to form a not-for-profit organization. You would need to do that with an accountant familiar with non-profits.

If you treated it as a partnership or as individual self-employed ventures you would need to pay self-employment tax on your profit even if you donated the profit to charity.

BY "net proceeds" I assume you mean profit.

Other than those choices, as far as I know, there is no way to sell for a profit and give away the profits to charity and avoid self-employment tax. Because your purpose is to make a profit you are a business. You just happen to want to give your profits to a charity rather than use them for other purposes.

Speak to the money people of the charity for which you want to do this. Maybe they will have an idea.

Good luck. I hope you make it work.

Best,
June

June's Seminars & CDs

June --

I am from Jefferson City, MO. I am a self-employed medical transcriptionist from my home and have been for about 10 years and still have lots of questions about taxes,etc. Where can I find a schedule of your seminars?

Teresa


Dear Teresa,

Thanks for your interest in attending one of my seminars.

Because of business commitments I have put my seminar schedule on hold. Meanwhile, I’m working on new learning tools to enhance the knowledge of self-employed people all over the country who can’t make it to my seminars. When I return to the seminar circuit I’ll announce it on my site and my blog.

FYI -- my CD, Tax Solutions for Creatives, covers a good part of the material presented in my basic seminar.

The topics are:
1. Introduction
2. Self-employed in Business
3. Three Ways to Deductions [Listen]
4. Expenses in General
5. Office-in-the-Home
6. Auto & Transportation
7. Travel or Transportation
8. Meals & Entertainment
9. Income
10. Taxes
11. Recordkeeping
12. A Final Caution


Other CDs are in the works.

Be sure to check both my blog and my website there's lots of info for indies and you might find the answers to your tax questions.

Best,
June

An Indie Business Mindset Regarding Pensions

Hi June,

I'm a sole proprietor who has contributed to SEP IRAS for the past 10 years. Currently, I joined a credit union that doesn't offer SEP IRAs, but has some attractive CD rates for a traditional IRA. I was wondering if I could take some of my money out of my SEP IRA at the brokerage house [It is invested in a money market fund.] and roll it over to a traditional IRA at the credit union. [I would invest it in a CD.]

I would still continue future SEP IRA contributions to the brokerage account.

Frank
Franklin Square, NY


Dear Frank,

Very clever. Yes, you may roll over any kind of pension into an IRA. You can't mix and match ROTH IRAs with traditional IRAs, though.

If, as an indie, you are looking to contribute more to a pension, consider a UNI-k. Also known as a solo-k, individual 401-k or a solo-k.

Best,
June

Where are you getting your info?!

June --

Software Developer in my 3rd year.

I am currently a solo proprietor and would like to incorporate to avoid some of the self employment taxes.

If I do this in 2008 can ALL my income for 2008 fall under the incorporation or just the income that was earned after the incorporation?

Paul
Westminster, CO


Paul --

What do you mean by "avoid some of the self-employment tax?" Where did you ever get the idea that you would not have to pay self-employment [SE] tax if you incorporate? You haven't been getting tax advice from Aunt Tillie. Have you?

SE tax is made up of Social Security Tax and Medicare tax. You pay it on earned income whether you are self-employed or an employee -- even an employee of your own corporation.

Some people think that if they form an S-corporation and they make, let's say $40,000 as an IT consultant, that they claim only $10,000 of that as earned income and the rest as corporation profit. In that way they pay Social Security tax and Medicare tax on only the $10,000. That's cheating. And in legal circles it's called fraud.

Income earned before incorporating is not income to the corporation.

Best,
June

You cannot deduct personal expenses when on a business trip.

Hi.

I'm a business owner online retailer.

Is it possible to deduct expenses like gas mileage, meals, etc on Saturdays and Sundays if I'm conducting business in the US?

For example, I travel from New York to California for business meetings on Friday and Monday. Can I deduct my weekend expenses in between? If the answer is yes, then I have 2 concerns: 1. If I wanted to go to the park or zoo on Saturday of my business trip, may I deduct my parking fees and meals at the park/zoo? 2. May I deduct all the mileage for that weekend, even though I'm not conducting any business (such as driving from the hotel, to the zoo, to a restaurant, and back to the hotel)?

Thanks!
Jamie
El Paso Texas


Dear Jamie,

If I understand you correctly, then you travel from NY to California on Friday for a Friday business meeting. You stay in California for the weekend in order to attend a business meeting on Monday. On Monday you return to NY.

If that is so you may deduct the cost of getting to and from CA. All the meals and lodging while traveling to and from, and while in CA, are business expenses and deductible. You may not deduct any personal expenses such as costs to attend or get to the Zoo or a show.

There's more info on travel expenses in these posts expenses -- travel (14) .

Best,
June

No Profit Needed As Long As You Have A Profit Motive

June,

I am An internet Sports Card Dealer in Gainesville, FL and have had my business for 6 years and have not made a profit to date.

I read your book Self-employed Tax Solutions. It is very helpful and you did an excellent job. While reading it, I remember a section that dealt with getting tax advisor advice to not report expenses to show a profit. You did not recommend that approach. However, I am trying to find that specific section to re-read it. Please let me know the Chapter and page.

Thanks.
Lou


Hi Lou,

It's Chapter One: Self-employed -- What does That Mean? It's the section: For Fun or Profit: Is your endeavor a hobby or a business? Starts on page 8.

Glad you like my book. Thanks for letting me know.

For those of you who don't have my book, I'll give an overview of what Lou refers to.

To be a business in the eyes of the IRS you don't need to make a profit, you need show only that you have a profit motive. In Self-employed Tax Solutions, I say:

"A number of books advise entrepreneurs that the best way is to just “show a profit.” That’s like telling Miles Mingus to make the charts with a hit song three years out of five … or, if that doesn’t happen, the mahogany-office accountant, Sammy Seegar, CPA, suggests that Miles forget about a lot of his expenses, pretend he made a profit and pay Uncle Sam more than is his due. Pretty bad advice!

"If you know that your self-employed business is going to make you rich someday (even though you’ve had a loss every year since you started your new venture) how do you prove to the IRS that your goal is to make a profit?"

You'll find a good part of the answer in these posts.

-- June

A new, growing indie business? Get more info.

Hi Indies,

Here's some questions from an indie with a growing business. All his questions are already answered on my blog. This applies to lots of questions indies send in. The answers are here, just takes a little work on your part. Remember the SEARCH facility in the upper-left corner of the screen. I welcome all comments on better ways of making it easier for you to reference specific questions and topics.

To Kevin I say don't go to a tax pro knowing nothing. How will you know if the guy knows what he's talking about if you know nothing? Read-Read-Read! Start here tax pros - tax prep fees - tax returns (21) , My answers to your questions are below in red. The number indicates how many posts there are on that topic.

-- June


Hello June,

My name is Kevin, and I have been self employed since November of 2007. I started a reselling business out of my parents house in Austin,TX a few months after I graduated from college, and have watched it grow exponentially.

My business revolves around sales through eBay and my own website. In 2007 my taxes were almost nothing considering I had just started the business and recently graduated from school. In 2008 my business began to grow on a monthly basis, and my tax obligation grew with it.

I have considered finding an accountant to ask numerous questions, but since I found your site, maybe you can shed some light for me.

1) I am currently a sole proprietorship, from a tax perspective, would it make sense for me to become an LLC, incorporate, or become a corporation?
Look here business entity (21)
and here business entity -- incorporation (4)
business entity -- LLC (12)

2) Do I need to make quarterly tax payments, and if I haven't made any yet this year will I have to pay a tax penalty? In 2007 I paid less than 500 in taxes.
Look here taxes -- estimated (11)

3) Do you have any other recommendations or advice I could put to use to make my business as profitable as possible? Self-employed Tax Solutions

Thanks for your time!
Kevin

Less Tax vs Higher Pension Contribution

June,

I am employed full-time but have been a part-time indie for the last 20 years (consulting psychologist).

My question is about my SEP IRA. One of the problems, as I see it, with a SEP IRA is that the more you deduct from your gross self-employment income, the LESS you can contribute because the allowable contribution is a percentage (20 or 25%?) of your self-employment income AFTER expense deductions.

It would seem that the less you deduct for expenses, the more you can save!

How does one crunch the numbers to see what the best way to go is?

By the way, how would you rate the SEP IRA vs the new Roth 401(k)?

Mark
Fairfax Station, VA


Dear Mark,

Good questions. You are into the "indie business mindset" way of thinking.

Let me overview here for some of my readers. The allowed contribution to any pension plan for a self-employed is limited by the net self-employed income. Therefore the more business expenses you have the less your net income and so the less you may contribute to your indie pension.

Here are some actual numbers to look at: Let's assume a 15% federal income tax and 15% SE tax. That means that deducting a $1,000 expense saves you $300 -- 30% X $1000.

In a SEP, because your self-employed income was reduced by $1000, you may contribute $200 less to your pension.

You are looking at a tax savings of $300 versus putting $200 less into your pension.

It makes more sense to take the tax savings and do one of two things:
1. Put the $300 into another kind of non-pension savings. Talk to your investment broker about what would be best.
OR
2. Change to a different kind of indie pension. There are many to choose from, and at my earliest opportunity I will write about the choices you have. Fort the interim, ask your personal tax advisor to explain your choices.

You can have ROTHs of any kind, e.g. SEP, 401-K. The younger you are and the less concerned you are about paying less tax NOW the more advantageous a ROTH.

Best,
June

You must get receipts for meals.

June --

When traveling for work meals are deductible at 50% for the location and time period in question without showing receipts.

If I do photography for an organization at a place where meals and lodging are included, can one still take the meal deduction? Or does the rule, "You can't deduct what you did not pay for" hold?

And what if the meals and lodging -- and perhaps travel -- are in lieu of monetary payment?

Thank you.

Miriam
New York


Hello Miriam,

All deductible business meals -- whether while traveling or not -- are deductible at 50%. However, I think you picked up some misleading info somewhere. You must have a receipt for all business meals and entertainment.

You do not need receipts for meals while traveling if you choose to use the per diem method of deduction.

If meals are included you may not deduct the cost of meals.

If you receive meals and lodging or travel in lieu of payment, then the value of the meals, lodging and travel is income to you. You may then deduct your expenses from that income.

Best,
June

Home Office Exclusivity & Estimated Taxes

Hello,

I do admin type work for a non-profit. It is very straight forward. I send them an invoice for the time I spend doing various things, and I get a check for that amount. I get a 1099 for my taxes. I don't have expenses really. I don't travel, use up office supplies, etc.

I am finding your website helpful, but wanted clarification on one of the archived topics: Office in the home expense. I use the office in our house to do my work. My children do look at books in the office, but it is because it's the only place the bookcase fits. My husband uses the computer to check email a couple of times a week, but other than that, I am the only one that uses it frequently. Can I claim that? It is where I do my work.

Most - about 95% - of Internet use is me working. Can I claim that?

I just end up sending so much of what I make to the government. I would have to save two or 3 checks to pay the taxes in April. I don't have a steady income, so estimated payments won't work. During the summer I combine a month or two of invoices, just because it barely worked. I hope I am not rambling - sorry!

Any help is appreciated.

Thank you.
Kasey
Fort Worth, TX


Hello Kasey,

For starters, it sounds as if you are really an employee who happens to work at home. The non-profit is your employer.

But let's look at the situation as you describe it.

If your children treat your office as part of their home you may not take the entire room as a home office. You may take only the area of the room that is off-limits to the children. Keep in mind that a home office does not have to be an entire room.

If your husband comes into your office to use your computer then the office is not exclusively used for your business and so it is not a deductible office-in-home expense for you. Since you use the internet 95% for business you would be allowed to deduct 95% of its cost. If you use the computer 95% for business then you may deduct 95% of the cost of the computer.

Since money is tight think of some way for your husband to check his email elsewhere. Of course, if it's a laptop you could bring it into the kitchen for him. Or, see how much a home office would save you in taxes. It might save enough to warrant buying him a really cheap, basic computer just for emailing.

As far as estimated taxes, you might want to try this: Look at last year's tax return. If, for instance, 30% of your income went toward taxes, then, take 30% of every check and put it aside -- into a separate bank account if necessary. Then on estimated payment due dates, pay whatever is in that set-aside-account as your tax payment.

Hope that helps a little.

Best,
June

1929: America Before the Crash

Economic mayhem. Do you understand what's going on? Most of us don't. And even more disturbing, we fear that those who are supposed to understand do not.

Life savings and retirement plans dropping in value. What's a trillion dollars anyway? Unemployment at 5%. During the Great Depression it was 25%. So it's not so bad now. Right?

What does the viability of an insurance company like AIG have to do with whether I can use my credit card for a cash advance?

Are we really heading toward another Great Crash like the one in 1929?

Well, you know my big push is always toward educating yourself. Learn as much as you can. The best single place to find out what it was like in 1929 and to see what similarities there are to now is to read Warren Sloat’s remarkable book, 1929: America Before the Crash.

The book has a long history. When originally published to critical acclaim in 1979, the Chicago Tribune called it “a powerful and dramatic history of the times” and the New York Times said it had “all the ingredients of a story to match – or outmatch – Watergate.” As its reputation continued to grow, 1929 has recently been republished as a trade paperback. Only recently Newsweek cited the book as an example of how a writer can encapsulate the story of a pivotal year in history.

Sloat takes us up to the Crash. We all attend a party on October 21, 1929 given by Henry Ford in honor of Thomas Edison and the 50 year anniversary of the invention of the lightbulb. The partygoers honoring Edison included President Herbert Hoover, Orville Wright, Madame Marie Curie, John D. Rockefeller, Jr. Enjoying the height of success and prosperity they were blind to the destiny that waited only days hence in the caverns of Wall Street.

Sloat's book is a sweeping narrative that includes portraits of many of the leading figures of the era, from an elderly Thomas Edison to a young Charles Lindbergh, it depicts the US on the brink of disaster. It’s instructive yet fun to read.

By the way -- the author is my husband.

Recently Warren received an email from a 30-something reader. “Your book is filling in all sorts of holes about our current economic and business zeitgeist,” he wrote.

If you're interested in learning more about then, and perhaps now, you can purchase 1929 here.

June Walker
The Author's Wife

File jointly or separately?

Hi June,

I'm a fan of your blog, and have not been able to find an answer to this question.

I'm a graphic designer who has been working as an independent contractor for a small publishing company/printer for almost 4 years. I also do other freelance work from time to time. Until a couple months ago, I also had a part time job as a regular w-2 employee at night, a job I quit after I had a baby in August.

My question is, I just got married in May and my husband has a regular w-2 job. How should we file? jointly or separately? Where would we get our biggest advantage?

Last year I did my own taxes online. I usually owe money, and deduct as many things as I can including home office and mortgage interest, etc. while my husband does a 1040 ez and has been getting a refund. I know one of us will probably get a refund because of the baby too. I'm just not sure who should claim her if we file separately.

confused, Jessica
Winter Park, FL

Dear Confused Jessica,

Without actual numbers there is no way to determine whether filing jointly or separately would be more or less beneficial. Generally it is more beneficial to file jointly.

Every money transaction that ends up on your tax return and to whom that transaction applies impacts your total tax.

Things such as:
** Investment income and which spouse owns the account
** Who owns the house on which you are deducting interest and real estate tax
** How much is student loan interest and who is paying off a student loan
** Who has higher medical expenses, if any
** What are the costs of child care
** How much does each give to charity

Best,
June

Temporary Work Assignment

Brenda from Palatine, IL is an indie who provides organizational development and learning and instructional design consulting. She inquired: "Recently, I have picked up 2 clients in Virginia and DC that have provided me with 1-year contracts, which in essence has required me to stay in the area." "I want to be sure that while I am working for these clients in the area, that my lodging expenses are deductible. My permanent residence is in Illinois."

I have had many questions about the deduction of expenses related to what is known in tax jargon as “temporary assignment" or "temporary worksite.” For instance, if you regularly work at one place -- called your tax home -- and also work at another location, it may not be practical at the end of each work day to return to your tax home from this other location. You may need to "live" at this other location for a while. What is deductible? Here's a guide:

A job assignment may be temporary or indefinite. Which one it is makes a big difference in the amount of expenses you may deduct.

If your other work location qualifies as a temporary work site then you may deduct related travel expenses. And, as you can read here, travel expenses can mount up. A temporary work site or assignment is, generally, work at a single location that is realistically expected to last (and does in fact last) for one year or less.

If, on the other hand, your work assignment or job is indefinite, you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year.

You must determine whether your assignment is temporary or indefinite when you start work. If you realistically expect an assignment or job to last for one year or less, it is temporary.

An assignment that is initially temporary may become indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment.

Be sure to check out the long list of travel expenses on my website.

Reimbursed Expenses Included on a 1099

Hi June,

I just discovered your site today.. am I glad!!

I have been an independent consultant since Oct 2006.

I received a 1099 which includes all my reimbursed expenses. My question has to do with the meals deductions: in using Turbo tax, it appears that only 50% of my meals are deductible. That would mean that 50% of meals becomes ordinary taxable income.

Am I wrong?

Claudia
San Mateo, CA


Dear Claudia,

It is not you who are wrong. Turbo Tax is wrong.

When an indie is reimbursed for expenses and those reimbursements are included on a 1099, the indie may deduct all the reimbursed expenses.

Reimbursed meal & entertainment expenses are not subject to the 50% reduction. I put them on the "Other Expenses" line on the Schedule C and label them "Expenses included in 1099 income above."

The person or company who reimbursed you is subject to the 50% reduction. They often try to get around that by including the reimbursement on a 1099 to an unsuspecting or unknowing indie.

The regulation sounds this way in tax jargon: A nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement.

For those of you wanting to argue this with your tax pro: This is IRS Code Section 274(n)(2)(A) and Notice 87-23.

You see. I told you all I read a lot of those thousands of pages of tax code!!

Cheers,
June

Assistants Working Abroad

Hello June,

Thank you for the great site! I've just ordered your book, Self-employed Tax Solutions, from Amazon and cannot wait to read it.

I've read almost every post on your blog and found a question similar to mine, but there is a difference so i still wanted to ask. I do freelance web and graphic design. I order illustrations for my projects from an artist friend. She is not US resident, she lives in Israel. I pay her through PayPal or sometimes cash. Can i deduct the fees?

And if yes what kind of receipts/records do i need? Are PayPal receipts enough?

In your answer to Charles (Cruise Entertainer...) you say: "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."

But in my case, while her part of work is performed outside the US, me and my clients are in the US... What should i do?

Thank you so much,
Rina

New York


Dear Rina,

Glad you like my site. Thanks for letting me know. And I'm sure you will get lots out of my book.

Yes, you may deduct the fees. Print out your PayPal receipts and also keep a written record, of what you paid her for -- perhaps a copy of the illustration.

There is paperwork to do -- but of course! Be sure to read my post When your subcontractors are in India for guidelines.

Best,
June

Expenses Must Be Separated by Profession

Hello,

I am have just gotten my first role in film as an actor & stunt man and I imagine I will be having more roles.

I have also been accepted in to the teamsters union. Both acting and trucking for film pay about $800 / day. However the jobs only last a short duration. I will be taxed at a very high rate and it want to get it back. I pay a fortune for classes, associations, union affiliations, agents, head shots, wardrobe, travel associated with classes or interviews, and all sorts of other things.

I have just set up a bank account named "sag and teamster" can I put all of my deductibles on that and send in the bank statement and use the whole thing as a deduction?

I have never filed an itemized tax return.

Thank you,
Jonathan
Angel Fire, NM


Dear Jonathan,

Congratulations! Hope you get a lot more acting work.

Where or how you track expenses does not determine whether the expense is a business deduction.

You must keep acting expense separate from trucking expenses. Also know that acting expenses go on a different part of the return than do trucking expenses.

Your question indicates that you know very little about taxes. So to get the best tax benefit you should not prepare your own tax return.

Best,
June

You cannot deduct the price of something you did not pay for.

Dear June,

As an independent composer, one of my revenue sources is from the sale of my sheet music. I occasionally give away copies of my sheet music as a way of nurturing relationships with prospective commissioning clients. Digital technology makes this a simple and inexpensive way for me to reach out and keep my name out there. Can I claim a deduction for the retail value of the sheet music I give away?

Thanks so much!
Rick
State College, PA


Dear Rick,

No, you may deduct cost only.

The same would apply to musicians who give away their CDs as promotion.

The same would apply were a musician to give a free performance for a charitable organization. The only deductible expense would be any out of pocket costs.

The reason. You cannot deduct the price of something you did not pay for.

Best,
June

Warning about Quicken 2008! and more.

Good day.

I bought both of your books through your website using my husband's PayPal account. We are both indies and I was wondering when setting up categories on quicken if we should have two major categories of Diane and John and then subcategorize like entertainment - all this to make sure that we know who has what deductions. Also if you could send any updates or information to my email in addition to my husband's as i am the one responsible for bookkeeping and I am sure my husband won't even open an email about all this!

Thanks!
Diane


Hello Diane,

I just returned from a business trip in NJ where I worked with a client helping her set up her medical practice. I spent close to 11 hours on the phone with Quicken tech people. So, had I responded to you before that experience, my answer would be quite different.

I have worked with Quicken for 20 or so years. I have found that there is rarely a reason to upgrade to a new version of Quicken other than the Quicken Big Boys forcing it upon us. The new versions with their bells and whistles create more work and cost more money for us indies with no benefit.

That said, there is an insurmountable problem with Quicken 2008. The tech people insisted that it wasn't the program but with my experience I know they're wrong. The problem lies in what used to be called classes and is now called tags. In the 2008 program Quicken changed the procedure on classes and messed up the works. Stay away from 2008! [ A search on the web shows many many other problems with 2008, too.]

I'll give you two methods for your situation, one for an older version of Quicken and an alternative to use for 2008.

For 2007 or earlier:
When you have a reason to separate expenses by business or clients the class method is easiest. You set up a class -- similar to setting up a category -- for each business, in your case Diane and John.

Let's say you split supplies up into software and general office and some were for you and some were for John. Entries would look like this:
Supplies:Software/Diane .................. $200.23
Supplies:Software/John .................... $103.45
Supplies:General/Diane ..................... $20.40
Supplies:General/John ...................... $101.33
When you look at any of your reports you can customize by heading the column as "Class." You'd have a column for you and one for your husband. It works like a charm.

For 2008:
Classes, now Tags, don't work. One alternative is to make Diane and John a sub-sub category of every expense. That could be redone when Intuit fixes the problem
The above would look like this:
Supplies:Software:Diane .................. $200.23
Supplies:Software:John .................... $103.45
Supplies:General:Diane ..................... $20.40
Supplies:General:John ...................... $101.33

Another alternative would be your suggestion, making both Diane and John a major category and then make everything else subcategories.

I have tried to upgrade 2008 but every time Quicken's server has been down. If I find out there's a solution I'll post it.

Best,
June

Working for yourself by any name is still self-employment.

June --

Advertising; New York, NY; 8 years.

What is the point of registering as a sole proprietor business (thus paying self employment tax) versus just being a freelancer and paying regular taxes on 1099s?

All of the sudden there's an item on the tax return that has me paying $13k in self employment tax - beyond the regular taxes!

Should I just forget the "company" and just be me? (FYI, there are no employees in the company - it's me).

Many thanks.
Katie

Oh, Katie, you are so mixed up!! Read this response carefully and also check out and read some of my posts under business entity and here employee vs. self-employed

First of all: A sole proprietor and a freelancer are the same thing.

Your choices are: Employee or a self-employed. There is no middle ground where you work for yourself but pay no self-employment tax.

"Company" does not have a specific meaning.

Whether you call yourself a 1099 worker, sole proprietor, freelancer, subcontractor, free agent, or or independent professional you are self-employed. As a self-employed you are subject to self-employment tax.

If you work as a self-employed and do not form another business entity such as a partnership or a corporation then you are a sole proprietor. You do not need to register as one. You are one. And no matter what term you attach to your self-employment, be it freelancer or 1099er, you must pay self-employment tax!

-- June

Partners Buying a Home

June --

I have a partner, and we are buying a house together. We are both going to be on the loan. I have been making in excess of $110,000 the last couple of years, and she is only making around $70,000. Can the mortgage interest deduction be split according to the amount that she or I pay?

I thought I had read that it could be split 50/50, but I make more than she, and she can take head-of-household/child credit deductions depending on the tax year as a settlement of her divorce. I know of "joint tenants with right of survivorship," but I am not sure how to go about this. Are there better alternatives? Should I be listed first on the mortgage since I make more and could potentially take the entire deduction?

Dee
Ohio


Dear Dee,

A home purchase may be the biggest financial transaction of your life. There's a lot more to it than who gets to deduct the mortgage interest and real estate taxes. When purchasing jointly with someone who is not your spouse it is important to have everything spelled out in a legal document. What happens if one of you dies? If one is unable to work and not share expenses? If one chooses to leave the relationship? Should you have insurance to cover such situations?

You need to go over all of these possibilities with an attorney.

Here's a very quick wrap up on ownership. This info is not in lieu of your talking with an attorney. It's meant to give you a starting point.

Tenants-in-common ownership:
-- deduct taxes and interest by the percent of ownership
-- if one dies her % goes into her estate
-- the survivor keeps her %

Joint-tenants with right of survivorship:
-- deduct taxes and interest by whoever pays them
-- if one dies, all belongs to the other; there are tax consequences

Enjoy your new home!
-- June

Self-employed? Determined by facts, not choice.

June --

I am a software engineering consultant working as a W-2 hourly employee of a consulting company. I am on assignment at an insurance company. I report my hours to the consulting company, they bill the client, and give me a paycheck. I make currently make $54/hour. I receive medical benefits and 401(k) benefits (up to 3% match).

I am wondering if I can switch to a 1099, with the consulting firm contracting the work out to me as a subcontractor? I would bill the consulting firm, and they would bill the client. Is this allowed since I am already on assignment at the client. The billing relationships would change, but I would be doing the same work.

Dee
Alpha, Ohio



Hello Dee,


Whether you are self-employed or an employee is determined by the circumstances of your work relationship. It is not a matter of choice or changing the billing method.


You are an employee. Take a look at my post Employee vs. Self-employed .


-- June

New wife a tax cheat?

June --

Private Investigator for 16 years. This question is actually in regard to my new wife.

She's a licensed PI in CA. She has mentioned on more than one occasion that she pays no taxes, that her "expenses" exceed her income.

This sounds highly fishy, ahem, improbable to me. She seems to make about 25-35K. We have separate accounts so... Am I incorrect to be worried that she might be committing tax fraud?

Carlos
Sonoma, CA


Dear Carlos,

It is quite possible to have $25,000 to $35,000 in income and have more than that amount in expenses.

That said there is a bigger question here: How open is the relationship between you and your new wife? Don't be "worried" about tax fraud. Find out!

You say you have separate accounts. If you file a joint tax return you must both sign the return . Your signature attests to the accuracy of the return. That means that by signing you pretty much say that all the figures are accurate -- hers and yours. So it is time for you and your wife to talk money.

Ask you wife to explain her expenses to you and to show you her recordkeeping method. A client of a private investigator pays expenses as well as a fee. Perhaps your wife had one client with a $5,000 fee and $20,000 expenses. That would show as $25,000 income and immediate expenses of $20,000. Then there's all her non-reimbursable expenses.

It's not clear from your email whether you, too, are a PI. If you are, maybe you are missing a lot of expenses. You might learn some useful methods from your wife. Then again, you might about something that you will need to fix.

I'd like to hear back from you on how this goes. Your contact info will not be exposed.

Best,
June

More on Tax Prep Programs

Hi June,

I am a Validation Consultant new to the indie world and want to know if it's better to hire a tax pro to prep/file my taxes or is it just as good to do it with something like Turbo Tax?

Is the IRS suspicious of indies who do their own taxes, as opposed to having a certified pro prepare them? The Turbo tax software (Business version for consultants/contractors)so far is straightforward and thorough enough it seems for me to do on my own.

Thanks for all your great advice!

Richard
Alameda, CA


Hello Richard,

You sent this in a while ago so you may already have filed your return using a program rather than a pro.

In my post Tax Prep Software is Not a Substitute for Knowledge I say that Turbo Tax, like any other tool , is just that. It's a tool. No tool works if you don't have the knowledge. Photoshop doesn't give someone the talent and skill of an artist. Family Lawyer doesn't give someone the education of an attorney.

Just as there is more than one way to design a business card or write a contract there is also more than one way to prepare a tax return for an independent professional. What you put into the program is what you get on your return. If you are savvy enough about indie tax regs you will end up with a satisfactory tax return. Keep in mind that the program will not give you advice. That you'll need to get elsewhere.

I recommend an indie savvy pro over a tax preparation program.

The IRS isn't "suspicious." It looks for cheaters -- randomly and with a vision. Don't cheat the IRS. Don't cheat yourself. As you may have read on my site or in my book, if you keep records using my Most Simple System you never need fear an audit.

Best,
June

Husband-Wife Business: No cheating!

I have been sent many questions about husband and wife working together in a business. A good place to start for info on such joint ventures is my post The Many Advantages of Hiring Your Spouse then follow up with the posts in the category husband-wife business .

Below are some recent questions on the subject.

Dan, from Colorado, has paid the maximum social security limit through his salaried position. Dan’s wife has a home-based business that nets about $50,000 per year. Dan’s CPA , who reminds me of Sammy Segar, the clueless accountant in my book, Self-employed Tax Solutions , has suggested that Dan and his wife file a joint Schedule C: Profit and Loss from Business. This way they could split the profit 50/50.

As you know, you must pay self-employed (SE) tax on your profit. For Dan’s wife that would be about $7,500 [15% of $50,000]. If half that income were Dan’s and had he already met the SE tax maximum that would save them about $3,700. Good idea were it legit.

Dan said: “In the evenings and weekends I work with her on her business.” That doesn’t sound like 50% of the work to me. Maybe 5%. I think the beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.

Sammy Segar came up with another idea for Dan. And I must tell you that this is another one of those let’s-not-treat-indies-like-real-business-people approaches that really make my indie blood boil. Dan reports: “Another comment he made is we might want to go the partnership route and file a partnership return for the business ... he mentioned this because of some statistic he read that says the IRS is greatly increasing their audits of returns filed with a schedule C, something like 1 in 7 are now getting audited.”

OK, let’s see, Sammy is telling Dan to lie about how much work he puts into his wife’s business and put that lie in writing into an expensive partnership return that will benefit the CPA’s bank account and give no honest tax advantage to Dan and his wife.

And a 1 in 7 audit rate! Oh, come on. And even if it were correct, which it is not, honest-to-goodness indies should never fear an audit.

By the way, Dan purchased my book, hoping that the pros and cons of a husband-wife business would be covered. Sorry to say, that topic is not addressed in the basics of Self-employed Tax Solutions. Maybe in the next book!



Mary, a personal trainer / Pilates instructor from San Rafael, CA, has been self-employed since October 2007. In June 2008, her husband reactivated his contractor's license for drywall construction.

Here is Mary’s question as sent to me:

“We are now both self-employed, operating our businesses from our home. We both have a designated room/office for our businesses. I was told that it is ‘better’ from a tax standpoint for one of us to be an employee and one to be self- employed."

Mary then asked something about Social Security tax that I don't quite understand and she also asks if there are any "other other advantages/disadvantages” to the husband-wife business.

Apparently it's not just indies who are confused about SE tax. Sammy Segar, CPA has it all messed up too. SE tax is a combo of Social Security and Medicare tax. In 2008 you pay Social Security tax on income up to $102,000. There is no limit on Medicare tax. You pay Medicare tax on whatever earned income you make.

If you have a job that pays $102,000 you will have met your Social Security tax maximum. If you then make another $100,000 as an indie you are not required to pay any Social Security tax on that income. You will still pay Medicare tax.

So in a husband-wife business SE tax is saved only if the employee-spouse has earned enough income elsewhere to reach the maximum Social Security limit (as in Dan’s situation above). To form a husband-wife business to avoid paying Social Security tax is a fraudulent practice.

I am legitimately creative but I have a hard time figuring out how to make one business of a drywall contractor and a Pilates instructor -- if indeed that’s what Mary is asking.

I didn't print Mary's entire question because it was unclear, which brings me to something I have stressed in all my writing and speaking: Think before you ask – whether speaking or in writing. Make your question as clear as possible. If you don’t, you will not get a clear answer.

-- June

Home office use must be exclusive.

Hi June,

Thank you for your blog - it has been very helpful for small business owners like us. We have an S Corporation in New York, NY, under which we do a few different things - web design as well as making paper goods. We've had the business for a few years, but I only recently was able to begin working full time on the business.

I have a question about the home office deduction - I am working from home and by my square footage calculations, about 12.5% of our home is fully dedicated to office use.

However, on our tax return this year, our accountant deducted an amount that is equivalent to 25% of our home for the home office. I asked her about it, and she said that she included items other than just the home office (utilities, etc), and said that we are allowed to deduct a percentage of "common areas" for home office use as well (eg, we sometimes use the living room as a staging/drying area for the silk-screen prints that we make). Is this okay to do?

Thank you for your help!
Anna


Hello Anna,

Glad you find my blog useful. Thanks for letting me know.

I like your question. It is seldom that an indie questions her accountant taking too big a deduction.

You accountant is wrong. Your example of the living room is just like the example in my book, Self-employed Tax Solutions . There Lily Legal uses the dining room table to go through her legal briefs. No deduction.

To be eligible for a home office deduction the area must be used exclusively for business.

The only exception is for home day care business and inventory storage.

-- June

If you tax pro has an IRS reg showing something different for an S-corp, please ask her to pass it along.

Jeans as a "uniform." You are kidding!

Hi June,

First, I just want to say your blog is so helpful. Your advice is top notch.

I have a quick question, as a colleague of mine does this, and he has a personal accountant who says this okay to do. We both are freelancers who edit promos for television in New York City, and we basically wear whatever we please to our studio.

According to him (or his accountant), he writes off his outfits that he wears to the office as a business deduction - a uniform if you will. His "uniform" normally consists of jeans, sneakers, and a t- shirt.

So my question is, is this legit?

Can someone write this off considering this is clothing that is worn outside of our respective place of work, nor is it advertising his business?

Thanks,
Evan E.

No way!! Here's a lot of reasons why expenses -- workclothes-uniforms-costumes-hair/make-up .

-- June