June –
I am a nuclear engineer from Knoxville, Tennessee. I just started December 3, 2007. I would like to start off without calling attention to the IRS.
I assume I need to pay quarterly estimated taxes but am not sure how to estimate them.
When was the last update of your book, Self-employed Tax Solutions?
If I use Schedule C must I also fill out the SE Form?
Your help would be appreciated.
Thanks,
Max
Hi Max,
I am not sure what you mean by “without calling attention to the IRS.” And if you mean you don’t want to call attention to yourself in the eyes of the IRS, I am still unsure.
Every new indie -- such as you – needs to get as much information about self-employment income, expenses and taxes as possible. Your goal should be to pay the least tax legitimately possible and to avoid missed deadlines and payments so that you don’t get stuck paying penalties and interest.
As in nuclear energy, the aim is economy, simplicity and doing it right. Rather than thinking of your task as an indie in terms of keeping the government off your back or out of your business affairs, think in terms of avoiding mistakes and delays that would cause problems and overpayment of taxes – in other words, learn how to do it right.
Here is my post on how to calculate and pay Estimated Taxes .
Yes, a Schedule C: Profit or Loss from Business, and a Form SE: Self-employment Tax, are part of your tax return.
My book, Self-employed Tax Solutions, just went into its 6th printing. My purpose in writing it is to give indies an understanding of how the IRS looks at self-employment and also to give them a basic foundation in income, taxes, expenses, and recordkeeping. The book does that and will always do that.
Other than an adjustment to the treatment of start-up costs the tax laws have not changed since the book was published in 2005. As you may know from reading my material or attending one of my seminars I advise indies to have a professional prepare their returns. So, when I say that the tax laws haven’t changed I mean, for example, that the method of recording and calculating business miles remains the same. Yes, the per mile amount allowed by the IRS changes every year. That is something your tax pro knows or you can look up on the IRS site. But, what your tax pro probably has not told you, nor has it changed, is that you should write down your odometer reading in your calendar on New Year’s Eve before you go out to party.
Get the idea? Hope that helps.
Best,
June
Friday, March 28, 2008
Friday, March 21, 2008
File an extension. It's the smart thing to do.
This post originally ran last April.
Tax deadline ... Relax ... File in October instead of in April
Your sister has a spring wedding planned and you’re the maid-of-honor. The April tax filing deadline is just around the corner, but there’s no time to think taxes right now.
Or…When you and Gail broke up last week, you left your tax records at her house. You’d prefer to let the storm pass before you stop by to pick up your things.
Or… The project you've been working on has taken so long that you haven’t found time even to look at your mail much less get your tax records together.
Will any of these reasons for filing late pass muster with the Internal Revenue Service? An unnecessary question, because you don’t need a reason to file your return after the April deadline. You can wait as late as October 15!
THE BENEFITS OF FILING AFTER APRIL 15
Ignore the old husbands’ tale that filing an extension triggers IRS computer screens to flash “Audit this return!” Not so. An extension gives you more time to collect and review your material. And, even if you have your return completed by the end of February, it’s better for you to hold that return for a little marination.
Here’s why: 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.Take your time and talk with your tax professional about creating a favorable tax scenario.
HOW DOES AN EXTENSION WORK?
Tax returns are due April 15. The IRS offers you an extension that gives you until October 15 to file your return. You may also need to file a state extension.
Be aware than an extension gives you more time to file your return – but does not give more time to pay your taxes. Your taxes for 2007 are due by April 15, 2008.
Automatic Extension Form 4868 must be filed by April 15. You can file online, by phone, or by mail. If you file an extension you have until October 15 to file your return.
To complete the extension, estimate your total tax liability for 2007 using tax returns of previous years as a guide. For instance, if you made 25% more in 2007 than in 2006, pay at least 25% more in taxes. If you made less, pay less. It’s best to overestimate the tax you’ll owe.
Pay the balance due or as much of it as you can. If you can’t pay the full balance due when filing your extension, or if you underestimate your tax liability, you will be charged penalty and interest on the amount owed when you file your return. Always file an extension, even if you cannot pay the full balance due.
And, come return filing time, if you still don’t have the money, don’t file your return late. File on time and you can pay your tax later. If you file your return late, in addition to any late payment penalties and interest you could also be hit with a late filing penalty.
Some anxious people rush to pay their income tax by taking cash advances on credit cards. That’s a foolish move. MasterCard and Visa finance charges are higher than Uncle Sam’s.
Federal extension form 4868 can be downloaded here.
You can get most state extensions on line. Search by your state name and the words "tax return extension."
Tax deadline ... Relax ... File in October instead of in April
Your sister has a spring wedding planned and you’re the maid-of-honor. The April tax filing deadline is just around the corner, but there’s no time to think taxes right now.
Or…When you and Gail broke up last week, you left your tax records at her house. You’d prefer to let the storm pass before you stop by to pick up your things.
Or… The project you've been working on has taken so long that you haven’t found time even to look at your mail much less get your tax records together.
Will any of these reasons for filing late pass muster with the Internal Revenue Service? An unnecessary question, because you don’t need a reason to file your return after the April deadline. You can wait as late as October 15!
THE BENEFITS OF FILING AFTER APRIL 15
Ignore the old husbands’ tale that filing an extension triggers IRS computer screens to flash “Audit this return!” Not so. An extension gives you more time to collect and review your material. And, even if you have your return completed by the end of February, it’s better for you to hold that return for a little marination.
Here’s why: 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.Take your time and talk with your tax professional about creating a favorable tax scenario.
HOW DOES AN EXTENSION WORK?
Tax returns are due April 15. The IRS offers you an extension that gives you until October 15 to file your return. You may also need to file a state extension.
Be aware than an extension gives you more time to file your return – but does not give more time to pay your taxes. Your taxes for 2007 are due by April 15, 2008.
Automatic Extension Form 4868 must be filed by April 15. You can file online, by phone, or by mail. If you file an extension you have until October 15 to file your return.
To complete the extension, estimate your total tax liability for 2007 using tax returns of previous years as a guide. For instance, if you made 25% more in 2007 than in 2006, pay at least 25% more in taxes. If you made less, pay less. It’s best to overestimate the tax you’ll owe.
Pay the balance due or as much of it as you can. If you can’t pay the full balance due when filing your extension, or if you underestimate your tax liability, you will be charged penalty and interest on the amount owed when you file your return. Always file an extension, even if you cannot pay the full balance due.
And, come return filing time, if you still don’t have the money, don’t file your return late. File on time and you can pay your tax later. If you file your return late, in addition to any late payment penalties and interest you could also be hit with a late filing penalty.
Some anxious people rush to pay their income tax by taking cash advances on credit cards. That’s a foolish move. MasterCard and Visa finance charges are higher than Uncle Sam’s.
Federal extension form 4868 can be downloaded here.
You can get most state extensions on line. Search by your state name and the words "tax return extension."
Home Office Warrior: Hire Your Spouse
June,
I saw your guest post on Home Office Warrior and had a follow-up question.
You mention hiring your spouse and providing "generous" employment benefits, such as health insurance coverage. I'm wondering whether my spouse has to work for me as a full-time employee for that to work.
My wife does a few things for me, but it's nothing near full-time. Health insurance and copays are eating our lunch. Can I hire her and provide her "family" benefits if she only works about 10 hours a week?
Todd Smith, Attorney at Law
Austin, TX
todd@appealsplus.comSource
Dear Todd,
Your wife may work for you for as few or as many hours as you choose. Her pay must be comparable to others in your geographic or virtual area who do the same kind of work .
This is not a place to be creative. Your spouse must really work for you and you must set it up formally. You must ...
File all federal employment and state employment forms and pay your wife by check or direct deposit into her account.
Set up a health benefit plan for her -- referred to as a Plan 105 for IRS code section 105. You can get more info on Section 105 at BizPLan or contact John Gill at BizPlan 800.422.4661 ext 4345 or John@tasconline.com. I have no financial relationship with John or BizPLan. I use their services for my clients. They are good, and John explains this well. Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
There is more information on this here in my blog in the category payroll -- spouse as employee .
Best,
June
I saw your guest post on Home Office Warrior and had a follow-up question.
You mention hiring your spouse and providing "generous" employment benefits, such as health insurance coverage. I'm wondering whether my spouse has to work for me as a full-time employee for that to work.
My wife does a few things for me, but it's nothing near full-time. Health insurance and copays are eating our lunch. Can I hire her and provide her "family" benefits if she only works about 10 hours a week?
Todd Smith, Attorney at Law
Austin, TX
todd@appealsplus.comSource
Dear Todd,
Your wife may work for you for as few or as many hours as you choose. Her pay must be comparable to others in your geographic or virtual area who do the same kind of work .
This is not a place to be creative. Your spouse must really work for you and you must set it up formally. You must ...
File all federal employment and state employment forms and pay your wife by check or direct deposit into her account.
Set up a health benefit plan for her -- referred to as a Plan 105 for IRS code section 105. You can get more info on Section 105 at BizPLan or contact John Gill at BizPlan 800.422.4661 ext 4345 or John@tasconline.com. I have no financial relationship with John or BizPLan. I use their services for my clients. They are good, and John explains this well. Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
There is more information on this here in my blog in the category payroll -- spouse as employee .
Best,
June
Saturday, March 15, 2008
New Mexico Gross Receipts Tax
Hi.
I'm writing for state specific advice. I've been a freelance part-time alternative builder, sometimes handyman for years. I've been out of the tax system for years also, but now I'm going to reenter. That's not the question though.
My residence is here New Mexico and I did a few small jobs this fall. I have already e-filed my federal (only SE tax due), and was starting to do the same for state when I saw, to my horror, that New Mexico appears to charge a "Gross receipts tax" Gross is the word ! It's a tax on all services (not just goods), it appears.
My question is this: Do micro biz independents really have to pay this too? No exemptions that I'm missing? I earned $4000 last year and it appears that even though I'm at half the poverty level, I have to pay 7.25% on every dollar I charged, BEFORE my expenses. I'm shocked. I'm already paying the 15% SE tax. That brings up my second question: Do you know how the state determines one's presence here? I travel a lot (mostly recreation) and one could say I'm here more or less, depending on what's best... do they have a way of checking?
Thanks, Steve
New Mexico
Hi Steve,
New Mexico Gross Receipts Tax -- NMGRT -- is a bit like sales tax and it gets paid to the state of New Mexico only once on a service or product.
Think of it this way: If you fix my window you charge me NMGRT on your fee for labor. You send that tax to NM.
If you purchase a new window to install for me then you would charge me tax on both the window and your labor. However, when you bought the window, were you legit, you would give the window seller a certificate to show that his selling you the window was not the final sale because you were then going to sell it to me so you would not have to pay NMGRT on that purchase.
And, yes, you do have to pay the tax. If you intentionally don't pay it it's fraud. How will they find you? Well, what if that window repair you did for me was for my office and I wrote off the expense on my tax return? And then I was audited. Besides, you drive on the roads that that tax helps to maintain.
My friend, Shirley George Frazier, has a good blog post on state sales tax in general. Check it out here.
Cheers!
June
I'm writing for state specific advice. I've been a freelance part-time alternative builder, sometimes handyman for years. I've been out of the tax system for years also, but now I'm going to reenter. That's not the question though.
My residence is here New Mexico and I did a few small jobs this fall. I have already e-filed my federal (only SE tax due), and was starting to do the same for state when I saw, to my horror, that New Mexico appears to charge a "Gross receipts tax" Gross is the word ! It's a tax on all services (not just goods), it appears.
My question is this: Do micro biz independents really have to pay this too? No exemptions that I'm missing? I earned $4000 last year and it appears that even though I'm at half the poverty level, I have to pay 7.25% on every dollar I charged, BEFORE my expenses. I'm shocked. I'm already paying the 15% SE tax. That brings up my second question: Do you know how the state determines one's presence here? I travel a lot (mostly recreation) and one could say I'm here more or less, depending on what's best... do they have a way of checking?
Thanks, Steve
New Mexico
Hi Steve,
New Mexico Gross Receipts Tax -- NMGRT -- is a bit like sales tax and it gets paid to the state of New Mexico only once on a service or product.
Think of it this way: If you fix my window you charge me NMGRT on your fee for labor. You send that tax to NM.
If you purchase a new window to install for me then you would charge me tax on both the window and your labor. However, when you bought the window, were you legit, you would give the window seller a certificate to show that his selling you the window was not the final sale because you were then going to sell it to me so you would not have to pay NMGRT on that purchase.
And, yes, you do have to pay the tax. If you intentionally don't pay it it's fraud. How will they find you? Well, what if that window repair you did for me was for my office and I wrote off the expense on my tax return? And then I was audited. Besides, you drive on the roads that that tax helps to maintain.
My friend, Shirley George Frazier, has a good blog post on state sales tax in general. Check it out here.
Cheers!
June
Friday, March 14, 2008
Listen to June speak about tax pros, deductions and more.
Listen to June speak on Startup BizCast #35 - Small Business Taxes Pt. 1 (June Walker) and Startup BizCast #36 - Small Business Taxes Pt. 2 (June Walker)
Host of Startup BizCast, Steve Mullen says: Because it’s tax season, I wanted to make sure you all get a heavy dose of advice about taxes for your small business. So, I’ve decided produce Startup BizCast’s first two part episode. My guest for the next two programs is June Walker.
In the first episode, June and I spend a good bit of time talking about how to choose a tax professional to work with you this year. We also discuss the all-important deductions that will help save you money.
In the second episode, Startup BizCast #36 - Small Business Taxes Pt. 2 (June Walker) June gives us advice on business structure and how it affects your tax liability.As I did last week, I’ve devoted the entire episode to my conversation with June, preempting Biz Cast Brief. The small business news segment will return next week!
Host of Startup BizCast, Steve Mullen says: Because it’s tax season, I wanted to make sure you all get a heavy dose of advice about taxes for your small business. So, I’ve decided produce Startup BizCast’s first two part episode. My guest for the next two programs is June Walker.
In the first episode, June and I spend a good bit of time talking about how to choose a tax professional to work with you this year. We also discuss the all-important deductions that will help save you money.
In the second episode, Startup BizCast #36 - Small Business Taxes Pt. 2 (June Walker) June gives us advice on business structure and how it affects your tax liability.As I did last week, I’ve devoted the entire episode to my conversation with June, preempting Biz Cast Brief. The small business news segment will return next week!
Thursday, March 13, 2008
Bootstrapper: Lots of Info for Freelancers
Bootstrapper has listed this blog as one of the best 100 blogs for freelancers. The other 99 could be a very useful resource, too. You might want to take a look.
Wednesday, March 12, 2008
A Terrific Mother-in-Law
June--
My future son-in-law is a full time student. He plays with a band most every weekend. To his surprise, the band gave him a 1099 MISC. He of course had no clue this was going to happen and had not paid any taxes.
I figure the band is treating him as a self-employed musician. I'm trying to help him reduce his taxes. Can we deduct the expenses of the silly suits he had to buy for the band and the microphone he had to buy? What about mileage to and from the gigs? Am I overlooking anything else? He uses his computer for school, but also to communicate with the band and get the music to practice. Can he deduct part of the cost of the Internet? Anything else?
Thanks!
Deborah
Baton Rouge, LA
Deborah ... "to his surprise the band gave him a 1099-MISC." Did he think that because music is so loved in this country that musicians are exempt from paying taxes? No way. Big tax credits and loopholes are only for the very rich. How naive of him.
You say "the band is treating him as a self-employed musician." Well, that's because he is a self-employed musician
Click here for a complimentary list of 100+ Indie Business Expenses to get started on knowing what expenses he may deduct.
You'll be a terrific mother-in-law!
Best,
June
My future son-in-law is a full time student. He plays with a band most every weekend. To his surprise, the band gave him a 1099 MISC. He of course had no clue this was going to happen and had not paid any taxes.
I figure the band is treating him as a self-employed musician. I'm trying to help him reduce his taxes. Can we deduct the expenses of the silly suits he had to buy for the band and the microphone he had to buy? What about mileage to and from the gigs? Am I overlooking anything else? He uses his computer for school, but also to communicate with the band and get the music to practice. Can he deduct part of the cost of the Internet? Anything else?
Thanks!
Deborah
Baton Rouge, LA
Deborah ... "to his surprise the band gave him a 1099-MISC." Did he think that because music is so loved in this country that musicians are exempt from paying taxes? No way. Big tax credits and loopholes are only for the very rich. How naive of him.
You say "the band is treating him as a self-employed musician." Well, that's because he is a self-employed musician
Click here for a complimentary list of 100+ Indie Business Expenses to get started on knowing what expenses he may deduct.
You'll be a terrific mother-in-law!
Best,
June
Sunday, March 9, 2008
Self-employed in more than one state
June --
I have 14 yrs as a contract electrical engineer (electronic hardware designs).
You touched upon this topic at June's Blog but you didn't get into the detail I'm curious about. I am self employed and live in CT. For the first time, I might take a client company in the neighboring state (MA). For my previous long term client located here in CT, I worked from my home office and visited their facility (3 hrs round trip) maybe about 15 days out of a year.
If I work in a similar manner for a company out of state, what criteria should be used to determine how I report income to each state. Would I only report MA income for the days I traveled to MA, and the rest is CT income? Of course, the full income from this client would be reported on their 1099 showing they're an MA company, possibly without a CT facility.
Also, while hired under contract by a local office here in CT, I had to go to their corporate office in another state to work for a few weeks. I reported all income as CT income that year. Was that reasonable?
Brian
Windham, CT
Hello Brian,
All your net self-employed income -- and all your other income as well -- is taxable to the state in which you live. That's your "resident" state. In your case, Connecticut.
Here's how it works ... or here's what the non-resident states want you to do:
If you work in other states -- that means actually work there not just go there to pick up the work -- then you are working in a non-resident state. You must pay tax to the non-resident state on the income made in that state. If you pay income tax to the non-resident state you will get a credit on your resident state tax return for the tax paid to the non-resident state.
If your income can easily be identified as done in one state rather than the other, then allocate by actual income. Or, figure your income in each state by # of days worked to # of days worked in the non-resident state.
Here's an example:
As an engineer you grossed $100,000 self-employed income. $80,000 earned in resident state, CT; $20,000 was earned in non-resident state, MA.
You had $40,000 expenses which left you a net income of $60,000.
Since 20% of your gross income was from MA, then 20% of your net $12,000 is taxable to MA.
If your expenses were such that they could be easily identifiable to each state then your portioning of income would be actual rather than as a percent.
Best, June
I have 14 yrs as a contract electrical engineer (electronic hardware designs).
You touched upon this topic at June's Blog but you didn't get into the detail I'm curious about. I am self employed and live in CT. For the first time, I might take a client company in the neighboring state (MA). For my previous long term client located here in CT, I worked from my home office and visited their facility (3 hrs round trip) maybe about 15 days out of a year.
If I work in a similar manner for a company out of state, what criteria should be used to determine how I report income to each state. Would I only report MA income for the days I traveled to MA, and the rest is CT income? Of course, the full income from this client would be reported on their 1099 showing they're an MA company, possibly without a CT facility.
Also, while hired under contract by a local office here in CT, I had to go to their corporate office in another state to work for a few weeks. I reported all income as CT income that year. Was that reasonable?
Brian
Windham, CT
Hello Brian,
All your net self-employed income -- and all your other income as well -- is taxable to the state in which you live. That's your "resident" state. In your case, Connecticut.
Here's how it works ... or here's what the non-resident states want you to do:
If you work in other states -- that means actually work there not just go there to pick up the work -- then you are working in a non-resident state. You must pay tax to the non-resident state on the income made in that state. If you pay income tax to the non-resident state you will get a credit on your resident state tax return for the tax paid to the non-resident state.
If your income can easily be identified as done in one state rather than the other, then allocate by actual income. Or, figure your income in each state by # of days worked to # of days worked in the non-resident state.
Here's an example:
As an engineer you grossed $100,000 self-employed income. $80,000 earned in resident state, CT; $20,000 was earned in non-resident state, MA.
You had $40,000 expenses which left you a net income of $60,000.
Since 20% of your gross income was from MA, then 20% of your net $12,000 is taxable to MA.
If your expenses were such that they could be easily identifiable to each state then your portioning of income would be actual rather than as a percent.
Best, June
Trading stock options is not self-employment
Hi June,
First, I just finished your book “Self-employed Tax Solutions” and was impressed how clearly you presented a tax code that is so screwed up, it is an embarrassment to anyone associated with writing or enforcing it. Your book answered most of my questions on self-employment and I thank you for that.
I do have a question, though, on being self-employed. I lost my job as a supervisor last year due to the plant closing and have been living off the profit I am making on trading stock options.
My wife has a part time job, however, all our living is coming off my investments.
At tax time, can I just state that I am unemployed and pay regular taxes on my investment income or do I need to pay SE tax and treat the trading as a business?
I am 54 and living in PA and would not have many deductions if I were forced to list my trading as a business. Any thoughts on this or maybe claiming early retirement?
Thanks for any help,
Bob
Hi Bob,
You are unemployed and enjoying the fruits of your previous labor. You are not self-employed. Here's a question from another trader If you are your only client ... you're not self-employed.
Glad you found my book to be so accessible. Thanks for letting me know.
June
First, I just finished your book “Self-employed Tax Solutions” and was impressed how clearly you presented a tax code that is so screwed up, it is an embarrassment to anyone associated with writing or enforcing it. Your book answered most of my questions on self-employment and I thank you for that.
I do have a question, though, on being self-employed. I lost my job as a supervisor last year due to the plant closing and have been living off the profit I am making on trading stock options.
My wife has a part time job, however, all our living is coming off my investments.
At tax time, can I just state that I am unemployed and pay regular taxes on my investment income or do I need to pay SE tax and treat the trading as a business?
I am 54 and living in PA and would not have many deductions if I were forced to list my trading as a business. Any thoughts on this or maybe claiming early retirement?
Thanks for any help,
Bob
Hi Bob,
You are unemployed and enjoying the fruits of your previous labor. You are not self-employed. Here's a question from another trader If you are your only client ... you're not self-employed.
Glad you found my book to be so accessible. Thanks for letting me know.
June
Tuesday, March 4, 2008
What happens at the end of an indie business?
Hi June,
This website has been a great resource for me - thanks for all you do!
I haven't seen my question addressed on your blog. What is the tax liability for closing a business? I'm a photographer, and might want to keep some of the items I purchased while my business was operational. If I keep a camera/lens for personal use, for example, what is the tax implication of that? And how would I report the dollars generated by the items I sell?
Thanks so much,
Cheryl D
Franklin, TN
Hi Cheryl,
I assume you are a sole proprietorship. If so when you close up shop there are no tax consequences other than the treatment of equipment. And, since I don't give specific tax return instruction in my posts I'll give you an overview of what happens.
If you sell a piece of equipment for more than its cost basis then you have a taxable capital gain; for less than its basis, you have a capital loss. In this instance cost basis means what you paid minus depreciation taken.
For equipment that you "expensed" in its year of purchase, even if you do not sell it when you close the business you must "recapture" some of the cost if the depreciation period has not expired. For instance, if you bought and expensed a $10,000 Hasselblad less than 5 years ago, you'll have to claim some income.
This website has been a great resource for me - thanks for all you do!
I haven't seen my question addressed on your blog. What is the tax liability for closing a business? I'm a photographer, and might want to keep some of the items I purchased while my business was operational. If I keep a camera/lens for personal use, for example, what is the tax implication of that? And how would I report the dollars generated by the items I sell?
Thanks so much,
Cheryl D
Franklin, TN
Hi Cheryl,
I assume you are a sole proprietorship. If so when you close up shop there are no tax consequences other than the treatment of equipment. And, since I don't give specific tax return instruction in my posts I'll give you an overview of what happens.
If you sell a piece of equipment for more than its cost basis then you have a taxable capital gain; for less than its basis, you have a capital loss. In this instance cost basis means what you paid minus depreciation taken.
For equipment that you "expensed" in its year of purchase, even if you do not sell it when you close the business you must "recapture" some of the cost if the depreciation period has not expired. For instance, if you bought and expensed a $10,000 Hasselblad less than 5 years ago, you'll have to claim some income.
Ebay Selling
June --
I am a self-employed call center agent and work out of my home on my computer where I get 97% of my income.
In between calls, while waiting for the phone to ring, I sell items on Ebay. I am at a total loss on how to treat my ebay income, and what to do about expenses. I dont know how to treat the ebay income on my taxes, or how to allocate the expenses. Some of the items are items I purchased to sell on ebay, and some of them are things I have had laying around the house and am selling just to get rid of.
Donna
Spearfish, SD
Hello Donna,
If you are selling items on Ebay just to pass the time while waiting for the phone to ring then you're engaged in a hobby.
If you are selling on Ebay to make money, then you're engaged in a self-employed business. Your income is self-employed income. All the things I've said on this blog about deducting expenses apply to you.
To figure your "cost" on an item depends on how you came in possession of the item.
** If you bought it solely to sell, then your cost basis is what you paid, including shipping.
** If you bought the item and used it for personal use then your cost is the lower of what you paid or what you can sell it for. What you can sell it for is called "fair-market-value."
**** If you paid $30 for a book and sell it for $20, then its cost basis is $20. That's called its fair-market-value. You have no gain or loss on that sale.
**** If you paid $30 for a book that is now out of print and so you sell it for $50 its cost to you is $30.You have a profit of $20 on that book.
Remember you must split the cost of your computer and ISP based on usage for the two businesses -- 97% to 3% ??
Hobby vs Business is explained in my book Self-employed Tax Solutions .
Best,
June
I am a self-employed call center agent and work out of my home on my computer where I get 97% of my income.
In between calls, while waiting for the phone to ring, I sell items on Ebay. I am at a total loss on how to treat my ebay income, and what to do about expenses. I dont know how to treat the ebay income on my taxes, or how to allocate the expenses. Some of the items are items I purchased to sell on ebay, and some of them are things I have had laying around the house and am selling just to get rid of.
Donna
Spearfish, SD
Hello Donna,
If you are selling items on Ebay just to pass the time while waiting for the phone to ring then you're engaged in a hobby.
If you are selling on Ebay to make money, then you're engaged in a self-employed business. Your income is self-employed income. All the things I've said on this blog about deducting expenses apply to you.
To figure your "cost" on an item depends on how you came in possession of the item.
** If you bought it solely to sell, then your cost basis is what you paid, including shipping.
** If you bought the item and used it for personal use then your cost is the lower of what you paid or what you can sell it for. What you can sell it for is called "fair-market-value."
**** If you paid $30 for a book and sell it for $20, then its cost basis is $20. That's called its fair-market-value. You have no gain or loss on that sale.
**** If you paid $30 for a book that is now out of print and so you sell it for $50 its cost to you is $30.You have a profit of $20 on that book.
Remember you must split the cost of your computer and ISP based on usage for the two businesses -- 97% to 3% ??
Hobby vs Business is explained in my book Self-employed Tax Solutions .
Best,
June
Sunday, March 2, 2008
Another Misinformed Tax Pro about Husband & Wife Business
June --
My husband has been self employed architect since 1991.
Since its inception, we have had a small business health insurance plan NOT INDIV with me as one employee.
Each year I issue a small paycheck to myself for my bookkeeping services and pay payroll taxes on it. The cost of the premiums has always been deducted as a business expense a NOT PERSONAL DEDUCTION.
For reasons unknown to me, our accountant of 3-4 years abruptly declined to list our health insurance as a business expense this year although nothing has changed. He just said that unless my W2 equals the annual premium, then forget it. I do not wish to change the way I file my health insurance after 15 years? What gives?
Rosemary & Michael
Culpeper, VA
Rosemary --
"What gives" is that your accountant was doing it wrong for 3 or 4 years and didn't want to tell you.
Often health insurance plans will call a spousal assistant an employee. However, just because you have a group health insurance policy that treats you as an employee does not make you an employee.
You cannot deduct health insurance premiums from business income unless that health insurance is provided by the business for a legitimate employee.
Here's how it works:
Husband [or wife, doesn't matter] has a sole proprietorship. Wife is made an employee via the registration and filing of all federal and state employment forms. Wife is paid by check or direct deposit from the husband's business.
Husband sets up health plan benefits for his employee. It's called a Plan 105. This must be formally done. You can get more info on Section 105 from BizPLan at http://www.tasconline.com/products/bizplan/ or I can give you the person to contact. [I have no quid pro quo on this arrangement.] There is also a lot of information on my blog in the category payroll -- spouse as employee .
Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
If your accountant hasn't told you all this -- in greater detail than I can do here -- or does not say he will research and get back to you -- then fire him and get a new accountant!
1/2/11: A new regulation is in effect regarding the deductibility of health insurance premiums by all self-employed. This deduction is not for spousal employees only. So be sure to talk with your tax pro about this.
Best,
June
JW Revised 1/2/11
My husband has been self employed architect since 1991.
Since its inception, we have had a small business health insurance plan NOT INDIV with me as one employee.
Each year I issue a small paycheck to myself for my bookkeeping services and pay payroll taxes on it. The cost of the premiums has always been deducted as a business expense a NOT PERSONAL DEDUCTION.
For reasons unknown to me, our accountant of 3-4 years abruptly declined to list our health insurance as a business expense this year although nothing has changed. He just said that unless my W2 equals the annual premium, then forget it. I do not wish to change the way I file my health insurance after 15 years? What gives?
Rosemary & Michael
Culpeper, VA
Rosemary --
"What gives" is that your accountant was doing it wrong for 3 or 4 years and didn't want to tell you.
Often health insurance plans will call a spousal assistant an employee. However, just because you have a group health insurance policy that treats you as an employee does not make you an employee.
You cannot deduct health insurance premiums from business income unless that health insurance is provided by the business for a legitimate employee.
Here's how it works:
Husband [or wife, doesn't matter] has a sole proprietorship. Wife is made an employee via the registration and filing of all federal and state employment forms. Wife is paid by check or direct deposit from the husband's business.
Husband sets up health plan benefits for his employee. It's called a Plan 105. This must be formally done. You can get more info on Section 105 from BizPLan at http://www.tasconline.com/products/bizplan/ or I can give you the person to contact. [I have no quid pro quo on this arrangement.] There is also a lot of information on my blog in the category payroll -- spouse as employee .
Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
If your accountant hasn't told you all this -- in greater detail than I can do here -- or does not say he will research and get back to you -- then fire him and get a new accountant!
1/2/11: A new regulation is in effect regarding the deductibility of health insurance premiums by all self-employed. This deduction is not for spousal employees only. So be sure to talk with your tax pro about this.
Best,
June
JW Revised 1/2/11
Husband & Wife IT Indies: Joint Filers
Hi June,
We have been web designers and web programmers for 2 years. I would like to know the following. I am married and we both work together out of the house. How do we file our taxes - self-employed jointly???
Thanks.
Elizabeth
Las Vegas, NV
Elizabeth __
Self-employment has nothing to do with whether you file jointly or separately. If you are married you may file your personal tax return in one of two ways: Married-filing-jointly or married-filing-separately.
If you are both self-employed in different professions then you must each file various forms for each business. These forms are part of your personal tax return.
If you are both self-employed in the same profession then you have choices as to how you treat the business portion of your return. But the business portion is still filed as part of your personal return.
Read this The Many Advantages of Hiring Your Spouse to learn about the different ways to handle a husband/wife business.
-- June
We have been web designers and web programmers for 2 years. I would like to know the following. I am married and we both work together out of the house. How do we file our taxes - self-employed jointly???
Thanks.
Elizabeth
Las Vegas, NV
Elizabeth __
Self-employment has nothing to do with whether you file jointly or separately. If you are married you may file your personal tax return in one of two ways: Married-filing-jointly or married-filing-separately.
If you are both self-employed in different professions then you must each file various forms for each business. These forms are part of your personal tax return.
If you are both self-employed in the same profession then you have choices as to how you treat the business portion of your return. But the business portion is still filed as part of your personal return.
Read this The Many Advantages of Hiring Your Spouse to learn about the different ways to handle a husband/wife business.
-- June
Saturday, March 1, 2008
Tax Prep Software is Not a Substitute for Knowledge
Here's an email from Eliza. Apologies to Eliza I cleaned it up a little to help my readers understand the situation better.
Hi there,
I am an environmental educator, doing many odd jobs throughout the year so that I can spend my summers doing environmental programming in the woods.
I graduated from college in '06, and so had very little income in that year (around $6000), and received refunds on all my taxes.
In 2007, however, I worked in a variety of capacities throughout the year, and ended up earning about $16,000 in wage income plus the tax refunds from the year before, plus about $3,400 in investment interest.
Of the $16,000 in wage income, about $6,500 of it was as an independent contractor, and I've received two 1099-MISC forms to account for it.
June says: Remember, "wage" is not synonymous with earnings. You earned $16,000. $6,500 was self-employment income. The balance, $9,500 was wage or W2 income.
On Turbo Tax, it asked me to set up a "business entity" and taxed me twice for that income, telling me that I would owe $1500 in federal taxes. When, out of frustration, I deleted the "business entity" line on the Turbo Tax worksheet, my tax liability dropped to an $86 refund.
June says: 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.
What gives? I thought single people making $16,000 were not supposed to have heavy tax burdens? I mean, I almost qualify for the EITC!
June says: [Earned Income Tax Credit. That's money the government gives you if you have a low income.] Do I really need to pay that much tax? It's half of what I managed to save all year! 0
June says: If you read my website column Taxes: Which ones and how much do I pay? you'll see that you pay approximately 15% of your net self-employed income as SE tax. Assuming no expenses deducted from your $6,500 income that's $975 tax. Add income tax to that.
I didn't document my auto expenses, etc., well enough to specifically deduct them, but I can guesstimate.
June says: In my book, Self-employed Tax Solutions, there's an explanation of which expenses may be estimated.
I guess I'll be really careful about that in the future, and I hope your free deduction worksheet will help. This is really the first time I've filed full taxes on my own, but I do have some help from my parents' local accounting firm, as they've handled that investment income up until now.
June says: And, of course you know what I say over and over again about tax pros: Get one who understands the indie tax situation.
I hope there's a short answer to this long question! Thank you so much.
--Eliza from Northampton, MA
Hi there,
I am an environmental educator, doing many odd jobs throughout the year so that I can spend my summers doing environmental programming in the woods.
I graduated from college in '06, and so had very little income in that year (around $6000), and received refunds on all my taxes.
In 2007, however, I worked in a variety of capacities throughout the year, and ended up earning about $16,000 in wage income plus the tax refunds from the year before, plus about $3,400 in investment interest.
Of the $16,000 in wage income, about $6,500 of it was as an independent contractor, and I've received two 1099-MISC forms to account for it.
June says: Remember, "wage" is not synonymous with earnings. You earned $16,000. $6,500 was self-employment income. The balance, $9,500 was wage or W2 income.
On Turbo Tax, it asked me to set up a "business entity" and taxed me twice for that income, telling me that I would owe $1500 in federal taxes. When, out of frustration, I deleted the "business entity" line on the Turbo Tax worksheet, my tax liability dropped to an $86 refund.
June says: 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.
What gives? I thought single people making $16,000 were not supposed to have heavy tax burdens? I mean, I almost qualify for the EITC!
June says: [Earned Income Tax Credit. That's money the government gives you if you have a low income.] Do I really need to pay that much tax? It's half of what I managed to save all year! 0
June says: If you read my website column Taxes: Which ones and how much do I pay? you'll see that you pay approximately 15% of your net self-employed income as SE tax. Assuming no expenses deducted from your $6,500 income that's $975 tax. Add income tax to that.
I didn't document my auto expenses, etc., well enough to specifically deduct them, but I can guesstimate.
June says: In my book, Self-employed Tax Solutions, there's an explanation of which expenses may be estimated.
I guess I'll be really careful about that in the future, and I hope your free deduction worksheet will help. This is really the first time I've filed full taxes on my own, but I do have some help from my parents' local accounting firm, as they've handled that investment income up until now.
June says: And, of course you know what I say over and over again about tax pros: Get one who understands the indie tax situation.
I hope there's a short answer to this long question! Thank you so much.
--Eliza from Northampton, MA
Incorrect 1099
June --
Three years as graphic designer. A client sent me a 1099 with $19324 in field #7. But I provided my services for a fixed $1500/month rate. This 2007 I received 24 checks (every 2 weeks for $750 each) but he told me he counted more and that he would double check. That was like 3 weeks ago and he hasn't respond my emails since that. I stopped working for him last December and I would like to know what I can do. If he doesn't correct that 1099 I will end up paying more taxes for the almost $1500 I never got.
Thanks!
Javier from Los Angeles, CA
Hello Javier,
Paid every two weeks ... sounds to me like wages not self-employed income.
Also every two weeks means 26 payments per year. Twice a month would be 24 payments. So the first thing to do is check your records.
If you are right and the client is wrong, then send a letter, return receipt requested. Tell the client you will include a copy of your letter and the incorrect 1099 with your tax return. That should get his attention. If not, then on your tax return include as income only the amount you received.
The hitch here: As I said, the method of payment sounds like wages so be sure you can substantiate your self-employed status.
-- June
Three years as graphic designer. A client sent me a 1099 with $19324 in field #7. But I provided my services for a fixed $1500/month rate. This 2007 I received 24 checks (every 2 weeks for $750 each) but he told me he counted more and that he would double check. That was like 3 weeks ago and he hasn't respond my emails since that. I stopped working for him last December and I would like to know what I can do. If he doesn't correct that 1099 I will end up paying more taxes for the almost $1500 I never got.
Thanks!
Javier from Los Angeles, CA
Hello Javier,
Paid every two weeks ... sounds to me like wages not self-employed income.
Also every two weeks means 26 payments per year. Twice a month would be 24 payments. So the first thing to do is check your records.
If you are right and the client is wrong, then send a letter, return receipt requested. Tell the client you will include a copy of your letter and the incorrect 1099 with your tax return. That should get his attention. If not, then on your tax return include as income only the amount you received.
The hitch here: As I said, the method of payment sounds like wages so be sure you can substantiate your self-employed status.
-- June
Travel Expenses for Husband & Wife
June --
I have been a self-employed historian, located in Columbus, Ohio, since retirement from my teaching position at Ohio State University.
My income comes from book royalties, lecture honoraria, and contracting to teach seminars and workshops. My question is this: If my wife accompanies me on a research trip to an out-of-town library or archives, engaging in research on my behalf, can I deduct her expenses in any way other than by formally hiring her as an employee (and incurring the obligation to pay into her social security, etc.)?
Can I pay her as an independent contractor, obligated to report her own income and pay her own social security and deducting her own expenses?
Can I simply deduct her expenses as if they were my own?
Sincerely,
Michael
Wow! Michael, you are the first self-employed historian to send me a question. My husband is a historian. Here's two of his books A Battle for the Soul of New York and 1929: America Before the Crash.
On to your question: The only way to deduct travel expenses for a spouse is if the spouse is your employee.You say, "incurring the obligation to pay into her social security." Well, unless your income is greater than the year's required amount your combined social security costs will be the same whether she is an employee or not.
And if she is an employee you may deduct her travel expenses. So there may be a tax benefit and yet cost you nothing but time.
Be sure to read my posts in this category payroll -- spouse as employee to learn more about the advantages of hiring your spouse.
Best,
June
I have been a self-employed historian, located in Columbus, Ohio, since retirement from my teaching position at Ohio State University.
My income comes from book royalties, lecture honoraria, and contracting to teach seminars and workshops. My question is this: If my wife accompanies me on a research trip to an out-of-town library or archives, engaging in research on my behalf, can I deduct her expenses in any way other than by formally hiring her as an employee (and incurring the obligation to pay into her social security, etc.)?
Can I pay her as an independent contractor, obligated to report her own income and pay her own social security and deducting her own expenses?
Can I simply deduct her expenses as if they were my own?
Sincerely,
Michael
Wow! Michael, you are the first self-employed historian to send me a question. My husband is a historian. Here's two of his books A Battle for the Soul of New York and 1929: America Before the Crash.
On to your question: The only way to deduct travel expenses for a spouse is if the spouse is your employee.You say, "incurring the obligation to pay into her social security." Well, unless your income is greater than the year's required amount your combined social security costs will be the same whether she is an employee or not.
And if she is an employee you may deduct her travel expenses. So there may be a tax benefit and yet cost you nothing but time.
Be sure to read my posts in this category payroll -- spouse as employee to learn more about the advantages of hiring your spouse.
Best,
June
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