June --
I am from Summerville, SC. I've been a handyman for 7yrs.
My question is: I do work for 2 local companies. They are independent and have workers compensation insurance. I do just about anything for them. I have never had workers compensation insurance because it costs so much. They are now saying that I need to have WC insurance myself because their wc carrier says so.
Where do I find out the 'law' of SC so that I don't spend money that might not be needed.
Shannon
Dear Shannon,
Every state differs on it workers compensation regulations. Every state differs on a lot of regulations affecting indies. There are many routes to getting information.
Contact your local what used to be called the Department of Labor. Read my post Homeland Security or Jobs 'n' Things which was about the NC Department of Labor and you'll see what I mean about the title of the agency.
If nobody there can help call your local Small Business Development Center -- often located at a community college, or your local chapter of SCORE.
I googled "South Carolina Workers Compensation " and came up with South Carolina Where Business Connects . There are many sources there.
Hope this points you and other indies in the right direction.
-- June
Wednesday, January 30, 2008
Deduct the cost of a husband-wife business meal?
June --
I am a consultant on higher education . When husband and wife are professionals with separate self-employed businesses, can they deduct costs of meals where they go out to dinner to get away from household distractions and discuss each other's work. For example, where one spouse acts as an editor/critic of the other's research paper to be submitted for for-profit publication?
Any IRS cases that you can cite on this?
Velma from California
Dear Velma,
Neither I nor my tax service could find any IRS case or regulation prohibiting the deduction of the meal if the circumstances meet all the meals & entertainment requirements.
In my book, Self-employed Tax Solutions, I explain it this way:
A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband, an ad agency guy, she explains the timetable for her new business, gets his input on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.
-- June
I am a consultant on higher education . When husband and wife are professionals with separate self-employed businesses, can they deduct costs of meals where they go out to dinner to get away from household distractions and discuss each other's work. For example, where one spouse acts as an editor/critic of the other's research paper to be submitted for for-profit publication?
Any IRS cases that you can cite on this?
Velma from California
Dear Velma,
Neither I nor my tax service could find any IRS case or regulation prohibiting the deduction of the meal if the circumstances meet all the meals & entertainment requirements.
In my book, Self-employed Tax Solutions, I explain it this way:
A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband, an ad agency guy, she explains the timetable for her new business, gets his input on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.
-- June
Tuesday, January 29, 2008
Don’t Do Your Own Tax Return
Some indies do their own tax returns. By far the most common reason is to avoid paying a tax preparation fee. The least common reason is for the pure fun of it.
As most of you who have read my work or heard me speak know: I believe indies should do their best to develop an indie business mindset. They need to understand the business side of their indie ventures. That doesn't mean they need to do or perform, on their own, every aspect of their business.
I've always advised self-employeds against preparing their own returns. Not because they will make some ghastly mistake that will cost thousands of dollars -- although it could -- but because any tax pro/accountant/CPA worth her hire will provide advice on taxes, pensions, income and deductions that’s worth far more than the amount of the fee.
IRS laws and regulations are complicated and completing a tax return in a way most advantageous to the indie takes a lot of training and experience. Preparing a tax return is not just about finding the correct line to put an entry on.
As I wrote in an earlier post encouraging indies to file after April 15:
Most taxpayers think there is only one way to prepare a tax return. Tax pros know that income and deductions can be treated in a variety of ways. If your tax preparer understands the self-employed life, she is equipped to make choices to your tax advantage. And many of her choices for your 2007 return may depend upon your income and expenses in 2008. The later into 2008 the more you’ll know about 2008. For instance, a substantially higher income in 2008 than in 2007 may warrant a fuller deduction in 2008 for equipment purchased in 2007. Or, with a high 2007 income you may want to make a hefty contribution to your self-employed pension. If you don’t have the money right now to put into that pension, an extension gives you until October 2008 to come up with your 2007 pension contribution.
When I get a new client, I customarily ask to see his previous years' tax returns, so in the course of 25 years I have been able to see a number of returns that clients did on their own. My clients one and all are uncommonly bright, highly talented, vigorously entrepreneurial, capable of levels of creativity and accomplishments that I could never hope to match. But I have never seen a single tax return prepared by a client that could not have been more advantageously prepared by me or another tax pro who understands indie business.
Whatever skills and imagination indies have, they have not studied the IRS Tax Code (currently 67,000 pages in length) as I have, and they don’t have a clue about the many, many procedures, all of them completely aboveboard, that would reduce their taxes to Uncle Sam and to the 41 states that levy a personal income tax.
One recent Amazon reviewer of Self-employed Tax Solutions has quite the opposite opinion. As part of a review that was almost grudgingly positive – he had earlier emailed comments to me that were considerably more positive -- he contends that when you read my book you’re 95% of the way to being ready to prepare your tax return so why not go all the way and do it yourself?
To me that’s like saying, you've put a lot of research time into the design of your new kitchen cabinets – why not go the rest of the way and build your own?
The research time is necessary to ensure that the outcome will be the best possible – and part of that research time should be spent finding the craftsperson with the expertise to do the best job for you.
Recordkeeping and taxes are indispensable elements of an indie business and the entrepreneur is a partner in that process, but not the partner with tax expertise. To have that depth of expertise you would have to put your time into learning the intricacies of tax regulations rather than into developing your business. Self-employed Tax Solutions is written with the aim of saving indies time, not of imposing more burdens upon them – to free them by means of learning recordkeeping and tax basics (the word basics pops up in the subtitle) so that they can pursue their talents without worrying about the IRS.
As savvy indies know: delegate whenever possible. Do the research on who is the best to handle what you need but don’t waste your time doing it yourself. If you are a master plumber hire someone to design your website. If you are a graphic artist don’t try to fix your own furnace.
As you may know I have a background in science and math. I really understand computers. But right now, I gotta run. My computer guru is here to fix my computer.
... June
As most of you who have read my work or heard me speak know: I believe indies should do their best to develop an indie business mindset. They need to understand the business side of their indie ventures. That doesn't mean they need to do or perform, on their own, every aspect of their business.
I've always advised self-employeds against preparing their own returns. Not because they will make some ghastly mistake that will cost thousands of dollars -- although it could -- but because any tax pro/accountant/CPA worth her hire will provide advice on taxes, pensions, income and deductions that’s worth far more than the amount of the fee.
IRS laws and regulations are complicated and completing a tax return in a way most advantageous to the indie takes a lot of training and experience. Preparing a tax return is not just about finding the correct line to put an entry on.
As I wrote in an earlier post encouraging indies to file after April 15:
Most taxpayers think there is only one way to prepare a tax return. Tax pros know that income and deductions can be treated in a variety of ways. If your tax preparer understands the self-employed life, she is equipped to make choices to your tax advantage. And many of her choices for your 2007 return may depend upon your income and expenses in 2008. The later into 2008 the more you’ll know about 2008. For instance, a substantially higher income in 2008 than in 2007 may warrant a fuller deduction in 2008 for equipment purchased in 2007. Or, with a high 2007 income you may want to make a hefty contribution to your self-employed pension. If you don’t have the money right now to put into that pension, an extension gives you until October 2008 to come up with your 2007 pension contribution.
When I get a new client, I customarily ask to see his previous years' tax returns, so in the course of 25 years I have been able to see a number of returns that clients did on their own. My clients one and all are uncommonly bright, highly talented, vigorously entrepreneurial, capable of levels of creativity and accomplishments that I could never hope to match. But I have never seen a single tax return prepared by a client that could not have been more advantageously prepared by me or another tax pro who understands indie business.
Whatever skills and imagination indies have, they have not studied the IRS Tax Code (currently 67,000 pages in length) as I have, and they don’t have a clue about the many, many procedures, all of them completely aboveboard, that would reduce their taxes to Uncle Sam and to the 41 states that levy a personal income tax.
One recent Amazon reviewer of Self-employed Tax Solutions has quite the opposite opinion. As part of a review that was almost grudgingly positive – he had earlier emailed comments to me that were considerably more positive -- he contends that when you read my book you’re 95% of the way to being ready to prepare your tax return so why not go all the way and do it yourself?
To me that’s like saying, you've put a lot of research time into the design of your new kitchen cabinets – why not go the rest of the way and build your own?
The research time is necessary to ensure that the outcome will be the best possible – and part of that research time should be spent finding the craftsperson with the expertise to do the best job for you.
Recordkeeping and taxes are indispensable elements of an indie business and the entrepreneur is a partner in that process, but not the partner with tax expertise. To have that depth of expertise you would have to put your time into learning the intricacies of tax regulations rather than into developing your business. Self-employed Tax Solutions is written with the aim of saving indies time, not of imposing more burdens upon them – to free them by means of learning recordkeeping and tax basics (the word basics pops up in the subtitle) so that they can pursue their talents without worrying about the IRS.
As savvy indies know: delegate whenever possible. Do the research on who is the best to handle what you need but don’t waste your time doing it yourself. If you are a master plumber hire someone to design your website. If you are a graphic artist don’t try to fix your own furnace.
As you may know I have a background in science and math. I really understand computers. But right now, I gotta run. My computer guru is here to fix my computer.
... June
PS be sure to read the later post Two Parts to Finding the Tax Professional Right for You
Saturday, January 26, 2008
Art as an Expense
June --
Embroidery Digitizer -- 2 yrs.
I have to purchase "clipart" and "artwork" from artists. This consists of either the artwork itself in the form of "clipart" or a licensing agreement for work I can download from their website. This is not artwork that I look at for "inspiration" but I actually take the picture of say the "dog" and make that dog in embroidery form.
What expense does this fall under, and is it subject to the certain percentage of what I made as profit??
This is my first year really working at this as a "true" business that I want to file on, and I have definitely put more into buying my initial artwork than I made last year in profit.
Abbie from Bloomington, IN
Dear Abbie,
To us it is obvious that you are not purchasing art for inspiration but that may not be as clear to the IRS. Because the IRS is firm on the no-deduction-for-art rule you will need to keep an especially accurate record of your art purchases. Were you audited you will need to show the direct relationship of your art purchase to your product.
There are a number of ways that your art expense may be treated. The final determination is up to your tax pro.
You may treat your art purchases as production costs. If I understand your work correctly, then I assume you do not know how many pieces of your work you will make to sell from one art purchase. So you need to pick a reasonable amount of time over which you will sell the "dog" piece. Then have your tax pro use that amount of time -- let's say 3 years -- to amortize the costs of your art. That means that $900 in art purchases would get you a $300 deduction over 3 years.
If you know the actual number of pieces you will make based on one art purchase your tax pro will set up a different method for tracking inventory and production costs.
Be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.
Best,
June
Embroidery Digitizer -- 2 yrs.
I have to purchase "clipart" and "artwork" from artists. This consists of either the artwork itself in the form of "clipart" or a licensing agreement for work I can download from their website. This is not artwork that I look at for "inspiration" but I actually take the picture of say the "dog" and make that dog in embroidery form.
What expense does this fall under, and is it subject to the certain percentage of what I made as profit??
This is my first year really working at this as a "true" business that I want to file on, and I have definitely put more into buying my initial artwork than I made last year in profit.
Abbie from Bloomington, IN
Dear Abbie,
To us it is obvious that you are not purchasing art for inspiration but that may not be as clear to the IRS. Because the IRS is firm on the no-deduction-for-art rule you will need to keep an especially accurate record of your art purchases. Were you audited you will need to show the direct relationship of your art purchase to your product.
There are a number of ways that your art expense may be treated. The final determination is up to your tax pro.
You may treat your art purchases as production costs. If I understand your work correctly, then I assume you do not know how many pieces of your work you will make to sell from one art purchase. So you need to pick a reasonable amount of time over which you will sell the "dog" piece. Then have your tax pro use that amount of time -- let's say 3 years -- to amortize the costs of your art. That means that $900 in art purchases would get you a $300 deduction over 3 years.
If you know the actual number of pieces you will make based on one art purchase your tax pro will set up a different method for tracking inventory and production costs.
Be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.
Best,
June
Are all expenses deductible in the year they are paid?
Hi June,
I am a cartoonist from Parsippany, NJ --5 years.
I have 3 little questions that all seem to fall under the category of "Are all expenses deductible in the year they are paid?"
1) I usually pay my PO Box fees in the year I use the PO Box, but because of a rise in fees, the Post Office encouraged me to pay ahead, so I have paid for 18 months in 2007, but only used it for 12 months.
2) Advertising: I bought business cards, stickers, and other small items for advertising my business, including Holiday Cards (featuring my artwork). Is the total cost deductible as advertising, even if I have inventory left over? It will take me years to hand out a thousand business cards!
3) Software: I thought that you had mentioned somewhere that software had to be amortized over several years, but cannot find that reference now. Can I deduct the cost of software and software upgrades as supplies in the year purchased?
I truly appreciate your advice, and your time.
Thank you very much in advance,
John
Hi John,
Hello to Parsippany. I lived in NJ much of my life. And my husband covered Parsippany-Troy Hills for a local newspaper way back when.
As a cash-basis taxpayer, yes you may deduct all the expenses you question as current, in the year paid. At one time software had to be amortized -- cost spread over a number of years -- but no more. Take the cost as a supplies expense.
A reminder about cash-basis: It's income when you get it, not when you bill it. It's an expense when you pay it, not when you receive the bill.
Another reminder about December expenses: Paid by check or bank credit card, then it's considered paid regardless of when your check clears or when you pay your credit card.
Best,
June
I am a cartoonist from Parsippany, NJ --5 years.
I have 3 little questions that all seem to fall under the category of "Are all expenses deductible in the year they are paid?"
1) I usually pay my PO Box fees in the year I use the PO Box, but because of a rise in fees, the Post Office encouraged me to pay ahead, so I have paid for 18 months in 2007, but only used it for 12 months.
2) Advertising: I bought business cards, stickers, and other small items for advertising my business, including Holiday Cards (featuring my artwork). Is the total cost deductible as advertising, even if I have inventory left over? It will take me years to hand out a thousand business cards!
3) Software: I thought that you had mentioned somewhere that software had to be amortized over several years, but cannot find that reference now. Can I deduct the cost of software and software upgrades as supplies in the year purchased?
I truly appreciate your advice, and your time.
Thank you very much in advance,
John
Hi John,
Hello to Parsippany. I lived in NJ much of my life. And my husband covered Parsippany-Troy Hills for a local newspaper way back when.
As a cash-basis taxpayer, yes you may deduct all the expenses you question as current, in the year paid. At one time software had to be amortized -- cost spread over a number of years -- but no more. Take the cost as a supplies expense.
A reminder about cash-basis: It's income when you get it, not when you bill it. It's an expense when you pay it, not when you receive the bill.
Another reminder about December expenses: Paid by check or bank credit card, then it's considered paid regardless of when your check clears or when you pay your credit card.
Best,
June
Moving Expenses
June,
I am so pleased to find your website and I have just purchased your book, and Four Steps for recordkeeping.
I have been an indie since 2003, after spending 20+ years in corporate America doing what I do now: providing employee benefits consulting advice to mid-sized and larger companies. I started my business in my home in Illinois and moved it to Smyrna, TN.
My question is, as a sole proprietor can I deduct my moving expenses? The move was more than 50 miles and I did not cease doing business during the move.
Thanks very much,
Pam
Hello Pam,
Only the business portion of your move may be deducted as a business expense. The balance, if it meets certain minimums may be deducted as a personal expense.
If you don't have separate invoices from the mover or a specific way to calculated the business portion you need to review everything you moved. If your business equipment and files filled about 10% of the truck, then take 10% of the cost. Some really organized indies, or those who have been really messed up by movers in a previous experience, keep an itemized list of everything that went into the truck. If you did that, then use your list to come up with a percent for business.
Best,
June
I am so pleased to find your website and I have just purchased your book, and Four Steps for recordkeeping.
I have been an indie since 2003, after spending 20+ years in corporate America doing what I do now: providing employee benefits consulting advice to mid-sized and larger companies. I started my business in my home in Illinois and moved it to Smyrna, TN.
My question is, as a sole proprietor can I deduct my moving expenses? The move was more than 50 miles and I did not cease doing business during the move.
Thanks very much,
Pam
Hello Pam,
Only the business portion of your move may be deducted as a business expense. The balance, if it meets certain minimums may be deducted as a personal expense.
If you don't have separate invoices from the mover or a specific way to calculated the business portion you need to review everything you moved. If your business equipment and files filled about 10% of the truck, then take 10% of the cost. Some really organized indies, or those who have been really messed up by movers in a previous experience, keep an itemized list of everything that went into the truck. If you did that, then use your list to come up with a percent for business.
Best,
June
Don't let them force you to incorporate!
June --
I have been a designer, illustrator, children's book author for 3 years as a sole proprietor.
A company I've been freelancing with for years has just requested I incorporate so they can write a check to me as a business instead of writing a check to me as an individual.
I've looked into S-corp and LLC, but before I spend the money I was wondering the following:
1. Will the combination of a DBA and an EIN do the same thing as an LLC in terms of my personal information (such as SS# and name) not being disclosed to the company and instead appearing as a business?
2. What are the main advantages/disadvantages of S-corp v. LLC
Cambria from Brooklyn
Hello Cambria,
Yes, a business name and an EIN will not expose your name nor your social security number. It's a terrific way to get around the request of your client. For example checks can be made out to Design Delights, ID# 22-1111111.
You may apply for an instant EIN -- stands for employer identification number -- here.
WARNING!! Do not incorporate.
OK. Now that I've said that I'll review a couple things I've already said on this blog and elsewhere.
An LLC is a Limited Liability company. Note that the “C” means “company” not “corporation.”
Be aware than an LLC is not a Federal tax entity but a legal business structure set up under the laws of each state. Because LLCs are formed under 50 different sets of state law, regulations governing an LLC depend upon the state of organization. The legal treatment of an LLC may vary from state to state. If your business is an LLC it has liability protection similar to that enjoyed by a corporation. You are not personally liable for the debts or liabilities of the LLC. That means a disgruntled supplier could go after your office equipment (a business asset) as payment for a delinquent invoice but could not confiscate your kitchen appliances (personal assets).
The legal entity, LLC, may be set up for tax purposes as a sole proprietorship, a partnership or a corporation.
Go here for my various posts on LLCs.
Be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.
Best,
June
I have been a designer, illustrator, children's book author for 3 years as a sole proprietor.
A company I've been freelancing with for years has just requested I incorporate so they can write a check to me as a business instead of writing a check to me as an individual.
I've looked into S-corp and LLC, but before I spend the money I was wondering the following:
1. Will the combination of a DBA and an EIN do the same thing as an LLC in terms of my personal information (such as SS# and name) not being disclosed to the company and instead appearing as a business?
2. What are the main advantages/disadvantages of S-corp v. LLC
Cambria from Brooklyn
Hello Cambria,
Yes, a business name and an EIN will not expose your name nor your social security number. It's a terrific way to get around the request of your client. For example checks can be made out to Design Delights, ID# 22-1111111.
You may apply for an instant EIN -- stands for employer identification number -- here.
WARNING!! Do not incorporate.
OK. Now that I've said that I'll review a couple things I've already said on this blog and elsewhere.
An LLC is a Limited Liability company. Note that the “C” means “company” not “corporation.”
Be aware than an LLC is not a Federal tax entity but a legal business structure set up under the laws of each state. Because LLCs are formed under 50 different sets of state law, regulations governing an LLC depend upon the state of organization. The legal treatment of an LLC may vary from state to state. If your business is an LLC it has liability protection similar to that enjoyed by a corporation. You are not personally liable for the debts or liabilities of the LLC. That means a disgruntled supplier could go after your office equipment (a business asset) as payment for a delinquent invoice but could not confiscate your kitchen appliances (personal assets).
The legal entity, LLC, may be set up for tax purposes as a sole proprietorship, a partnership or a corporation.
Go here for my various posts on LLCs.
Be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.
Best,
June
Tuesday, January 22, 2008
Define Your Business Creatively and Carefully
Hi, June:
I'm a self-employed musician in Denver, Colorado. I started my music career in 2004 and became fully self-employed in the fall of 2005.
I took interest in the Jack or Jane of All Trades: How does an indie define a business? post on your blog and would like to know how an indie treats several "irons in the fire" that are more difficult to combine under one heading.
In my case, I currently make very little money from music efforts and so I clean houses to pay my bills (sort of the introvert's version of waiting tables). I find and work for my own clients so I pay my own taxes on the housecleaning income just like I do on the music income.
It seems like a bit of a stretch for me to combine music and housecleaning under one heading unless I say this: because many of my music endeavors focus on healing (prayer services, hospice music therapy, rituals of celebration, etc.), and some of the performances I offer also take place in homes, the best I could argue would be that I create spaces of health and well-being through music, decluttering, and cleaning services.
But if this seems too far-fetched, could you offer a brief explanation of how I would declare both streams of revenue (music + housecleaning) on Schedule C?
Best wishes,
Rebecca
Wow, Rebecca! You are great. You are thinking just the way an indie should think -- creatively and in a businesslike fashion.
However, yes it is too much of a stretch. you must keep the two indie businesses separate. That means two set of records -- one that tallies income and expenses for your music business and another that records income and expenses for you cleaning service.
Your tax pro will need to file two Schedules C. A loss from one may be subtracted from the profit of the other when she calculates your taxable income.
Keep up your creative thinking!
Best,
June
I'm a self-employed musician in Denver, Colorado. I started my music career in 2004 and became fully self-employed in the fall of 2005.
I took interest in the Jack or Jane of All Trades: How does an indie define a business? post on your blog and would like to know how an indie treats several "irons in the fire" that are more difficult to combine under one heading.
In my case, I currently make very little money from music efforts and so I clean houses to pay my bills (sort of the introvert's version of waiting tables). I find and work for my own clients so I pay my own taxes on the housecleaning income just like I do on the music income.
It seems like a bit of a stretch for me to combine music and housecleaning under one heading unless I say this: because many of my music endeavors focus on healing (prayer services, hospice music therapy, rituals of celebration, etc.), and some of the performances I offer also take place in homes, the best I could argue would be that I create spaces of health and well-being through music, decluttering, and cleaning services.
But if this seems too far-fetched, could you offer a brief explanation of how I would declare both streams of revenue (music + housecleaning) on Schedule C?
Best wishes,
Rebecca
Wow, Rebecca! You are great. You are thinking just the way an indie should think -- creatively and in a businesslike fashion.
However, yes it is too much of a stretch. you must keep the two indie businesses separate. That means two set of records -- one that tallies income and expenses for your music business and another that records income and expenses for you cleaning service.
Your tax pro will need to file two Schedules C. A loss from one may be subtracted from the profit of the other when she calculates your taxable income.
Keep up your creative thinking!
Best,
June
Per Diem Often Advantageous for Business Travel
Hi June,
I have been a marketing consultant for three years. I have an obscure question on business expenses.
When I travel to Washington DC to visit a client and prospects I stay with my sister because it is nicer and less expensive than staying in a hotel. As a thank you, I take her and my brother-in-law out to dinner one night. Total bill has ranged from $100-$150. (I typically stay two or three nights). Should I classify this as deductible meals and entertainment which is limited to 50% of the expense or as a gift which is limited to only $25? Or something else or nothing?
Best regards,
Suzanne ... from Dutchess County, NY
Dear Suzanne,
It is clearly a thank-you gift and so is limited to a $25 deduction. For it to be a business meals & entertainment expense you must discuss business before, during or after the meal or the entertainment.
However, are you aware that when traveling you may deduct a per diem amount for meals and incidentals rather than use actual expenses? I explain it this way in my book, Self-employed Tax Solutions:
Alternative Travel Records
For most of your travel expenses you will have receipts of some sort – cancelled checks, credit cards slips, or cash receipts. Well, after its own fashion the IRS has tried to make recordkeeping for travel easier. Yet, as is ever the case with IRS regulations, it is not self-employeds for whom easier recordkeeping was set up but for employers and employees; the self-employed just happen to benefit from the crumbs that fall from the table.
The IRS has issued per diem (per day) charts. These charts list the maximum amounts allowed to be deducted without receipts for “LODGING” and for “MEALS + INCIDENTALS.” Self-employeds may use the amounts listed for MEALS + INCIDENTALS only.
So, if you do not have receipts for all of your travel meals, then be sure to ask your tax pro about using the alternative per diem method. In your case, a two day/two night stay in Washington DC would get you a $71 X 2 = $142 M&E deduction [2009 rate] as well as your gift to your sister.
Here is the link for the IRS domestic per diem chart .
Best regards,
June
Monday, January 21, 2008
Define Your Business Broadly: music is music is music
Hi June,
I love your book, it has given me so many ideas.
I have a question about something mentioned in an early chapter, about defining your career as "broadly and honestly" as possible. I'm an aspiring singer-songwriter and am taking guitar and singing lessons, as well as purchasing truckloads of music, equipment, and attending lots of concerts, in the hope of becoming a true professional.
For a "day job" I teach piano. As you can imagine, I would love to write off as many of my music expenses as possible, however, I've yet to earn any "income" as a singer-songwriter. While I can make the case that all these expenses inspire me as a musician and have honestly given me ideas as a piano teacher, I do not consider them to be indispensable to my piano teaching. Is there any justification for deducting these expenditures, or would you recommend against it?
Kristin from Mountain View, CA
Hi Kristin,
This is a great question. So many indies have the same dilemma when there really should be no doubt at all.
First of all, forget about calling your piano teaching your "day job." I have a client who is a jazz drummer. His love is free jazz but he gets bigger audiences and so makes more money when he plays Dixieland. Do you think he should not think of those performances as part of his music business?
If a song writer writes a jingle for a commercial -- not his love but it pays the rent. Should he not consider that part of his music business?
Is there no connection between your teaching music and your writing music?
You are a music business. Everything you do to make money or to try to make money that involves music is part of your business.
And, thank you for your generous comment about Self-employed Tax Solutions. Please tell your friends and colleagues. Sing all about it!
All the best,
June
I love your book, it has given me so many ideas.
I have a question about something mentioned in an early chapter, about defining your career as "broadly and honestly" as possible. I'm an aspiring singer-songwriter and am taking guitar and singing lessons, as well as purchasing truckloads of music, equipment, and attending lots of concerts, in the hope of becoming a true professional.
For a "day job" I teach piano. As you can imagine, I would love to write off as many of my music expenses as possible, however, I've yet to earn any "income" as a singer-songwriter. While I can make the case that all these expenses inspire me as a musician and have honestly given me ideas as a piano teacher, I do not consider them to be indispensable to my piano teaching. Is there any justification for deducting these expenditures, or would you recommend against it?
Kristin from Mountain View, CA
Hi Kristin,
This is a great question. So many indies have the same dilemma when there really should be no doubt at all.
First of all, forget about calling your piano teaching your "day job." I have a client who is a jazz drummer. His love is free jazz but he gets bigger audiences and so makes more money when he plays Dixieland. Do you think he should not think of those performances as part of his music business?
If a song writer writes a jingle for a commercial -- not his love but it pays the rent. Should he not consider that part of his music business?
Is there no connection between your teaching music and your writing music?
You are a music business. Everything you do to make money or to try to make money that involves music is part of your business.
And, thank you for your generous comment about Self-employed Tax Solutions. Please tell your friends and colleagues. Sing all about it!
All the best,
June
Indies: Learn the difference between self-employed and employee!
June --
I am considered self-employed; however, I was issued a W-2 rather than a 1099.
Will this be a problem when I file my income tax?
Thanks!
Brenda from New Bern, NC
Brenda, It's a big problem!!
Read these posts on 1099s and also these posts on employee vs self-employed.
-- June
I am considered self-employed; however, I was issued a W-2 rather than a 1099.
Will this be a problem when I file my income tax?
Thanks!
Brenda from New Bern, NC
Brenda, It's a big problem!!
Read these posts on 1099s and also these posts on employee vs self-employed.
-- June
Wife Helps Plumber Husband
June --
We have had a plumbing business for 3 years.
My husband does the plumbing and I do all the scheduling of jobs, and bookkeeping. We have no employees. We each take a salary, this year our tax preparer wants me to do a W2 for myself and my husband, I'm not sure about this. Wouldn't this put us in the category of a employee?
Diane in Payson, AZ
Oh My Goodness!!! Diane. If you are giving me the straight scoop -- meaning you are accurately telling me what your tax preparer said, then there is a whole lot wrong here.
Since you did not say that you are incorporated I assume your plumbing business is your husband's sole proprietorship. He cannot be his own employee in a sole proprietorship and so he does not get a salary and would not get a W2.
If someone is an employee then certain registration must be done at the start of the employee relationship. And various payroll forms must be filed with the feds and often the state as well during the year. You don't decide at the end of the year, oh well, guess I'll do a W2.
You need to talk with a tax professional who knows what she's doing. Perhaps your local Small Business Development office can help you.
Best,
June
We have had a plumbing business for 3 years.
My husband does the plumbing and I do all the scheduling of jobs, and bookkeeping. We have no employees. We each take a salary, this year our tax preparer wants me to do a W2 for myself and my husband, I'm not sure about this. Wouldn't this put us in the category of a employee?
Diane in Payson, AZ
Oh My Goodness!!! Diane. If you are giving me the straight scoop -- meaning you are accurately telling me what your tax preparer said, then there is a whole lot wrong here.
Since you did not say that you are incorporated I assume your plumbing business is your husband's sole proprietorship. He cannot be his own employee in a sole proprietorship and so he does not get a salary and would not get a W2.
If someone is an employee then certain registration must be done at the start of the employee relationship. And various payroll forms must be filed with the feds and often the state as well during the year. You don't decide at the end of the year, oh well, guess I'll do a W2.
You need to talk with a tax professional who knows what she's doing. Perhaps your local Small Business Development office can help you.
Best,
June
Thursday, January 17, 2008
Clothes Today, Gone Tomorrow
Hi June,
We have a small remodeling business that began in 2002. Typically one man jobs are what we do. Received "Tax Solutions" in mail 1/14/08 and now in Chap 13 (no skipping around).
My question is, how subject are we to interpretation when it comes to a given deduction i.e. work clothes "clothing must not be suitable for taking the place of your regular clothing"[from your book] in today's world anything goes, in my world today's new clothes tomorrow have paint,caulk, oil, etc. etc. etc.on them and therefore are "Work Clothes."
Do we win or lose this battle and or is it somewhat of a crap shoot? I will try to apply the spirit of your answer to other deductions.
Thank-you.
Brad from Shelton, WA
Hi Brad,
No it's not a crap shoot. It is specific.And you lose. If you can wear them in everyday situations you may not deduct them unless they have your company name or logo on them.
Were the IRS to use your reasoning then everyone could deduct all clothes worn to work because they all wear out one way or another. Whether pantyhose or ink on shirts or wine spilled at a business lunch.
What about buying a bunch of T-shirts and pants with the Brad company name on them? The extra cost of cheap printing may be more than saved if you could write off the clothes and their laundering.
Here's two blog posts on work clothes.
Any other questions that arise from my book, Self-employed Tax Solutions, please send them along.
Best,
June
We have a small remodeling business that began in 2002. Typically one man jobs are what we do. Received "Tax Solutions" in mail 1/14/08 and now in Chap 13 (no skipping around).
My question is, how subject are we to interpretation when it comes to a given deduction i.e. work clothes "clothing must not be suitable for taking the place of your regular clothing"[from your book] in today's world anything goes, in my world today's new clothes tomorrow have paint,caulk, oil, etc. etc. etc.on them and therefore are "Work Clothes."
Do we win or lose this battle and or is it somewhat of a crap shoot? I will try to apply the spirit of your answer to other deductions.
Thank-you.
Brad from Shelton, WA
Hi Brad,
No it's not a crap shoot. It is specific.And you lose. If you can wear them in everyday situations you may not deduct them unless they have your company name or logo on them.
Were the IRS to use your reasoning then everyone could deduct all clothes worn to work because they all wear out one way or another. Whether pantyhose or ink on shirts or wine spilled at a business lunch.
What about buying a bunch of T-shirts and pants with the Brad company name on them? The extra cost of cheap printing may be more than saved if you could write off the clothes and their laundering.
Here's two blog posts on work clothes.
Any other questions that arise from my book, Self-employed Tax Solutions, please send them along.
Best,
June
Tuesday, January 15, 2008
An indie business lies dormant for a year due to illness.
Hi June,
I have your book, Self-employed Tax Solutions, and it has answered a lot of the tax questions I've had in the past. Thank you!
However, I'm in a bit of a unique situation for 2007. I've had a part-time photography business since 2003. Due to some serious personal issues with my child in 2006, I had no photography income. I had a website, but didn't actively market my business in other ways.
I did not file a schedule C with my 2006 taxes as I had no photography income.
Now, fast forward to 2007. During this year, I've sold my home in Florida, moved to Tennessee, and am attempting to turn my former part-time photography business into a full-time venture. I've purchased a lot of equipment this year and have about $18-20K in business expenses. My income has been minimal. Do you think my expenses in 2007 are defensible as "expanding the existing business" or will the IRS consider them start-up costs because I had no 2006 photography income and didn't file a Schedule C?
HELP!
Cheryl from Tennessee
Dear Cheryl,
Glad you like my book. Thanks for letting me know.
I just spoke to the IRS about your question because, although I was pretty sure of the answer, I thought it best to confirm.
In 2007 yours is an existing not a new business. You simply had a hiatus due to illness for 2006.
I don't give tax preparation how-to instruction but you need to be aware, or your tax pro needs to be aware, that if you took a certain kind of depreciation on any of your equipment between 2001 and 2005 then there is an amount of that depreciation that should have been included as income on your 2006 tax return. Just mention IRS code section 179 to your tax preparer and she will know what to do.
Happy to hear that health problems have been resolved and you are back in business.
As a photographer you might want to check out my son's photo blog at http://thatcherkeats.blogspot.com/ .
Best,
June
I have your book, Self-employed Tax Solutions, and it has answered a lot of the tax questions I've had in the past. Thank you!
However, I'm in a bit of a unique situation for 2007. I've had a part-time photography business since 2003. Due to some serious personal issues with my child in 2006, I had no photography income. I had a website, but didn't actively market my business in other ways.
I did not file a schedule C with my 2006 taxes as I had no photography income.
Now, fast forward to 2007. During this year, I've sold my home in Florida, moved to Tennessee, and am attempting to turn my former part-time photography business into a full-time venture. I've purchased a lot of equipment this year and have about $18-20K in business expenses. My income has been minimal. Do you think my expenses in 2007 are defensible as "expanding the existing business" or will the IRS consider them start-up costs because I had no 2006 photography income and didn't file a Schedule C?
HELP!
Cheryl from Tennessee
Dear Cheryl,
Glad you like my book. Thanks for letting me know.
I just spoke to the IRS about your question because, although I was pretty sure of the answer, I thought it best to confirm.
In 2007 yours is an existing not a new business. You simply had a hiatus due to illness for 2006.
I don't give tax preparation how-to instruction but you need to be aware, or your tax pro needs to be aware, that if you took a certain kind of depreciation on any of your equipment between 2001 and 2005 then there is an amount of that depreciation that should have been included as income on your 2006 tax return. Just mention IRS code section 179 to your tax preparer and she will know what to do.
Happy to hear that health problems have been resolved and you are back in business.
As a photographer you might want to check out my son's photo blog at http://thatcherkeats.blogspot.com/ .
Best,
June
Forced to be an employee!
Hi June:
I hope this note finds you well.
I consider myself lucky to have found your site on the web -- it seems like a terrific resource.
In all cases, here is my situation. I formed a Limited Liability Company (that is treated as a Schedule C for tax purposes) about two years ago to perform technology consulting services. I have since enjoyed a fair amount of income, expenses and profit through a variety of projects.
One of my newest clients, for a very lucrative project, refuses to pay me on an invoice basis, based on what I consider an irrational fear of becoming responsible for some kind of tax liability by my being reclassified as an employee. I will likely not prevail against this perception without losing the client altogether. Basically, I'm being offered a paycheck/W2, or no contract at all.
So here is my question-- As you can imagine, this is not an ideal situation -- is it better for me to just walk away, or can I fix this somehow on the "back end" on my return at the end of the year or through creative accounting? I am most certainly going to incur unreimbursed expenses for this project (which is located in another state). What options will I have to offset those unreimbursed expenses, along with my other, general business overhead against income received on a W2?
Will the IRS use their W2 to make a case that I am not self-employed after all, and cause all my business expenses to be disallowed?
Can my income by W2 be offset by a loss on my schedule C?
What are your comments?
Best: Tom from Wheeling, WV
Hello Tom,
Yes, your note finds me well. Thank you for asking. I have just returned from several weeks in New York and New Jersey, seeing clients and family. I flew out of an 8 degree Santa Fe and landed in a 59 degree Newark, NJ!
You situation is not unique. Just another example of indies not being taken seriously and/or businesses and their tax advisors not being aware of the tax regs as they apply to indies. If you can deal with not taking this client -- don't. If you must here's the situation:
** You must separate W2 expenses from indie expenses. That includes phone, computer, software, publications -- everything!
** Depending on your tax picture -- high income or no kids or no mortgage -- you will probably lose the deductibility of any expenses against the W2 income.
** If that is your only client and that client takes up much of your time the IRS could very well question your independence.
** Yes, a loss from a your indie business [Schedule C] may be deducted against any other income.
Best regards,
June Walker
I hope this note finds you well.
I consider myself lucky to have found your site on the web -- it seems like a terrific resource.
In all cases, here is my situation. I formed a Limited Liability Company (that is treated as a Schedule C for tax purposes) about two years ago to perform technology consulting services. I have since enjoyed a fair amount of income, expenses and profit through a variety of projects.
One of my newest clients, for a very lucrative project, refuses to pay me on an invoice basis, based on what I consider an irrational fear of becoming responsible for some kind of tax liability by my being reclassified as an employee. I will likely not prevail against this perception without losing the client altogether. Basically, I'm being offered a paycheck/W2, or no contract at all.
So here is my question-- As you can imagine, this is not an ideal situation -- is it better for me to just walk away, or can I fix this somehow on the "back end" on my return at the end of the year or through creative accounting? I am most certainly going to incur unreimbursed expenses for this project (which is located in another state). What options will I have to offset those unreimbursed expenses, along with my other, general business overhead against income received on a W2?
Will the IRS use their W2 to make a case that I am not self-employed after all, and cause all my business expenses to be disallowed?
Can my income by W2 be offset by a loss on my schedule C?
What are your comments?
Best: Tom from Wheeling, WV
Hello Tom,
Yes, your note finds me well. Thank you for asking. I have just returned from several weeks in New York and New Jersey, seeing clients and family. I flew out of an 8 degree Santa Fe and landed in a 59 degree Newark, NJ!
You situation is not unique. Just another example of indies not being taken seriously and/or businesses and their tax advisors not being aware of the tax regs as they apply to indies. If you can deal with not taking this client -- don't. If you must here's the situation:
** You must separate W2 expenses from indie expenses. That includes phone, computer, software, publications -- everything!
** Depending on your tax picture -- high income or no kids or no mortgage -- you will probably lose the deductibility of any expenses against the W2 income.
** If that is your only client and that client takes up much of your time the IRS could very well question your independence.
** Yes, a loss from a your indie business [Schedule C] may be deducted against any other income.
Best regards,
June Walker
A "donation" received for a product or service is income.
June --
I'd like take the whole question of hobby vs business and turn it on it's ear. I'm considering starting a side business which will offer computer software for free but accept donations. Using the guidance in your book, it seems to fall into the hobby category, mainly due to a lack of profit motive.
So the question is: Can my received donations be taxed and if so can I deduct expenses?
Thanks, Fraser from Colorado
Dear Fraser,
Be careful. Instead of turning something on its ear you could end up on your rear!
If you don't have a profit motive, then it's not a business and you may deduct certain expenses only up to the amount of income. The expenses are not a direct deduction and so they may end up giving you no actual deduction at all.
The "donations" are fully taxable to you as income. Something is a "gift" and not taxable as income only when the giver gives of his or her own free will and gets nothing in return . Not so in your case. The giver is getting software.
Stay upright!
June
I'd like take the whole question of hobby vs business and turn it on it's ear. I'm considering starting a side business which will offer computer software for free but accept donations. Using the guidance in your book, it seems to fall into the hobby category, mainly due to a lack of profit motive.
So the question is: Can my received donations be taxed and if so can I deduct expenses?
Thanks, Fraser from Colorado
Dear Fraser,
Be careful. Instead of turning something on its ear you could end up on your rear!
If you don't have a profit motive, then it's not a business and you may deduct certain expenses only up to the amount of income. The expenses are not a direct deduction and so they may end up giving you no actual deduction at all.
The "donations" are fully taxable to you as income. Something is a "gift" and not taxable as income only when the giver gives of his or her own free will and gets nothing in return . Not so in your case. The giver is getting software.
Stay upright!
June
Saturday, January 12, 2008
The Many Advantages of Hiring Your Spouse
Oh man. The rumors are flying. The “Small Business and Work Opportunity Tax Act of 2007” has stirred up a lot of indies. Confusion reigns about how this legislation impacts a husband-and-wife working relationship. Is opportunity really knocking?
There are several posts on my blog about how best to set up a business when husband and wife have a joint venture or when one spouse helps the other. I’m now going to explain those husband-wife arrangements in detail that goes beyond previous posts. It’s somewhat complicated though, so don’t listen to White Stripes and read this at the same time.
Here are some excerpts of questions I've received.
From Cliffside Park, NJ:
I have a question regarding hiring a spouse. You advise doing it...however, don't you have to pay for their FICA and Medicare? Also, how is it beneficial to one to do this? How do you get health care insurance for them and also get it for yourself?
A graphic designer from La Center, WA:
I have been self-employed for 33 years, and most of that time my wife has helped me (proof reading, accounting, taxes, etc.) while she was also teaching. Now she has left teaching and I want to take advantage of the new husband and wife partnership clause in the 2007 tax laws. But I am not sure how to do that or if it is better than taking her on as my employee. She is only 56 and wants to continue earning social security credits.
Website designer from Rio Rancho, NM:
I found a discussion online that states that if you live in a community property state and you're in a 50/50 husband/wife partnership SE taxes won't apply to one spouse if they have another job? Am I getting this right? I live in New Mexico which I read is a community property state and I was thinking about going into a partnership with my husband. I wanted to establish my web design business as an LLC and I would be doing 100% of the work. My husband has his own separate career which he loves and has great health care so employing him instead is not really a consideration. If we established a 50/50 partnership would only my half of the income be taxed instead of his too since we live in a community property state? Or would it be best to go solo?
Let’s look at a few scenarios based on situations of my own clients.
1. Husband and wife work jointly and equally, although each has unique skills, in a business that specializes in the IT implementation of a specific software for hospitals.
2. Husband is a technical producer for television and writes about and consults on electronics for live performances, schools, and the environment. Wife is a researcher, editor, writer in the same field.
3. Wife is a sculptor and husband builds her display cases, does all her recordkeeping and manages her show schedule.
Think of the first scenario as a 50/50 work split;
The second as the husband’s share is 70% and the wife’s is at 30%;
The last as the wife at 80% and the husband at 20%.
In each of those work relationships the structure that is the most tax-advantageous, the least complex, and costs the least in accounting fees is: One spouse has a sole proprietorship business with the other spouse as employee.
Tax situation
I’m going to use scenario #3 -- the 80/20 split -- to explain the tax advantages. If the sculptor has a net self-employed income of $50,000 and from that she pays her husband wages of $10,000 for his services, then they are simply moving the $10,000 income from one place on the tax return to another. There is no savings of income tax. And there is no savings in SE tax. (Remember, SE tax is Medicare and social security tax, also known as FICA.) The husband’s wages from his wife’s business count toward his social security credits.
Tax advantages
*** If the husband has already paid the maximum social security (that was $97,500 in 2007) through his regular job he will not have to pay social security tax on the wages paid to him by his wife.
*** The wife may provide him and his family with medical, and dental coverage. If he already has coverage through his job she may provide him with supplemental coverage. Or if coverage from his job does not include his spouse and/or children, she can fill that gap with additional coverage. These are business deductions for the wife and not taxable to the husband.
The insurance may be in the name of either spouse. It does not have to be purchased by the business or in a business name. You may keep the medical insurance you already have.
*** The wife may provide the husband with life insurance. Premiums are deductible from her business .
*** She may give her husband-employee a pension. The tax savings from this could be substantial depending on the type of pension and whether her husband has pension coverage at another job, also whether they have extra money to contribute.
Hubby may contribute his entire salary toward his pension. In this example, that would mean that the $10,000 she paid him is not taxable income. And wife-employer may contribute an additional very large employer’s share toward her husband’s pension. That, too, is a deductible business expense.
*** Were he not her employee and he accompanied her on a business trip, as helper, they could not deduct his travel expenses. As her employee, the husband’s expenses are her business deductions.
*** An employer-employee relationship simplifies the deduction of many business expenses, especially auto and home office.
Complexity and Accounting Fees
Tax preparation for a sole proprietorship is part of your individual tax return.
Recordkeeping for a sole proprietorship is easier than for any other business structure. Remember, a sole proprietorship may be an LLC. Read about it here Sole Proprietor as an LLC
Now, what about that Tax ACT ?
If a husband and wife jointly own a business and the business is not incorporated they do not have to file a partnership return. They may file as a sole proprietorship, using a Schedule C as part of their personal tax return. They split the income and the SE tax based on each one's share of income.
Prior to January 1, 2007 only those who lived in a community property state could file as solos. A husband-wife business in other states had to file as a partnership.
So if a couple were to have a 50/50 business with a net income of $50,000 then each would pay tax on $25,000. There is no income tax savings. If either spouse were over the maximum for social security tax then that spouse would not pay SE tax on his or her self-employed income.
To answer the questioner from Rio Rancho: The Tax Act states that in order to split the income each spouse must materially participate. “Materially participate” means that each spouse must do some of the work. If the wife has no connection to the business but has met the social security maximum via another job don’t get crafty by saying that this business is 95% the wife’s and only 5% the husband’s. The beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.
OK. Now you may listen to White Stripes.
There are several posts on my blog about how best to set up a business when husband and wife have a joint venture or when one spouse helps the other. I’m now going to explain those husband-wife arrangements in detail that goes beyond previous posts. It’s somewhat complicated though, so don’t listen to White Stripes and read this at the same time.
Here are some excerpts of questions I've received.
From Cliffside Park, NJ:
I have a question regarding hiring a spouse. You advise doing it...however, don't you have to pay for their FICA and Medicare? Also, how is it beneficial to one to do this? How do you get health care insurance for them and also get it for yourself?
A graphic designer from La Center, WA:
I have been self-employed for 33 years, and most of that time my wife has helped me (proof reading, accounting, taxes, etc.) while she was also teaching. Now she has left teaching and I want to take advantage of the new husband and wife partnership clause in the 2007 tax laws. But I am not sure how to do that or if it is better than taking her on as my employee. She is only 56 and wants to continue earning social security credits.
Website designer from Rio Rancho, NM:
I found a discussion online that states that if you live in a community property state and you're in a 50/50 husband/wife partnership SE taxes won't apply to one spouse if they have another job? Am I getting this right? I live in New Mexico which I read is a community property state and I was thinking about going into a partnership with my husband. I wanted to establish my web design business as an LLC and I would be doing 100% of the work. My husband has his own separate career which he loves and has great health care so employing him instead is not really a consideration. If we established a 50/50 partnership would only my half of the income be taxed instead of his too since we live in a community property state? Or would it be best to go solo?
Let’s look at a few scenarios based on situations of my own clients.
1. Husband and wife work jointly and equally, although each has unique skills, in a business that specializes in the IT implementation of a specific software for hospitals.
2. Husband is a technical producer for television and writes about and consults on electronics for live performances, schools, and the environment. Wife is a researcher, editor, writer in the same field.
3. Wife is a sculptor and husband builds her display cases, does all her recordkeeping and manages her show schedule.
Think of the first scenario as a 50/50 work split;
The second as the husband’s share is 70% and the wife’s is at 30%;
The last as the wife at 80% and the husband at 20%.
In each of those work relationships the structure that is the most tax-advantageous, the least complex, and costs the least in accounting fees is: One spouse has a sole proprietorship business with the other spouse as employee.
Tax situation
I’m going to use scenario #3 -- the 80/20 split -- to explain the tax advantages. If the sculptor has a net self-employed income of $50,000 and from that she pays her husband wages of $10,000 for his services, then they are simply moving the $10,000 income from one place on the tax return to another. There is no savings of income tax. And there is no savings in SE tax. (Remember, SE tax is Medicare and social security tax, also known as FICA.) The husband’s wages from his wife’s business count toward his social security credits.
Tax advantages
*** If the husband has already paid the maximum social security (that was $97,500 in 2007) through his regular job he will not have to pay social security tax on the wages paid to him by his wife.
*** The wife may provide him and his family with medical, and dental coverage. If he already has coverage through his job she may provide him with supplemental coverage. Or if coverage from his job does not include his spouse and/or children, she can fill that gap with additional coverage. These are business deductions for the wife and not taxable to the husband.
The insurance may be in the name of either spouse. It does not have to be purchased by the business or in a business name. You may keep the medical insurance you already have.
*** The wife may provide the husband with life insurance. Premiums are deductible from her business .
*** She may give her husband-employee a pension. The tax savings from this could be substantial depending on the type of pension and whether her husband has pension coverage at another job, also whether they have extra money to contribute.
Hubby may contribute his entire salary toward his pension. In this example, that would mean that the $10,000 she paid him is not taxable income. And wife-employer may contribute an additional very large employer’s share toward her husband’s pension. That, too, is a deductible business expense.
*** Were he not her employee and he accompanied her on a business trip, as helper, they could not deduct his travel expenses. As her employee, the husband’s expenses are her business deductions.
*** An employer-employee relationship simplifies the deduction of many business expenses, especially auto and home office.
Complexity and Accounting Fees
Tax preparation for a sole proprietorship is part of your individual tax return.
Recordkeeping for a sole proprietorship is easier than for any other business structure. Remember, a sole proprietorship may be an LLC. Read about it here Sole Proprietor as an LLC
Now, what about that Tax ACT ?
If a husband and wife jointly own a business and the business is not incorporated they do not have to file a partnership return. They may file as a sole proprietorship, using a Schedule C as part of their personal tax return. They split the income and the SE tax based on each one's share of income.
Prior to January 1, 2007 only those who lived in a community property state could file as solos. A husband-wife business in other states had to file as a partnership.
So if a couple were to have a 50/50 business with a net income of $50,000 then each would pay tax on $25,000. There is no income tax savings. If either spouse were over the maximum for social security tax then that spouse would not pay SE tax on his or her self-employed income.
To answer the questioner from Rio Rancho: The Tax Act states that in order to split the income each spouse must materially participate. “Materially participate” means that each spouse must do some of the work. If the wife has no connection to the business but has met the social security maximum via another job don’t get crafty by saying that this business is 95% the wife’s and only 5% the husband’s. The beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.
OK. Now you may listen to White Stripes.
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