Graphic Artist in London

Dear June,

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

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

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

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

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

Sincerely,
Adrienne
Winter Springs, FL


Dear Adrienne,

This is how it works from the US side.

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

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

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

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

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

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

And, you are welcome!

Best,
June

Taxpayer Advocates Help with IRS Problems

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

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

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

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


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

Self-employed Tax Solutions 1st Edition

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

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

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

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

Best,
June
[revised 1/15/10]

Is charity work a business?

Hi June,

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

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

Could this be considered a hobby?

I appreciate any advice you are able to provide.

Thank you.
Nancy


Hello Nancy,

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

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

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

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

BY "net proceeds" I assume you mean profit.

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

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

Good luck. I hope you make it work.

Best,
June

June's Seminars & CDs

June --

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

Teresa


Dear Teresa,

Thanks for your interest in attending one of my seminars.

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

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

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


Other CDs are in the works.

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

Best,
June

An Indie Business Mindset Regarding Pensions

Hi June,

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

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

Frank
Franklin Square, NY


Dear Frank,

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

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

Best,
June

Where are you getting your info?!

June --

Software Developer in my 3rd year.

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

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

Paul
Westminster, CO


Paul --

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

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

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

Income earned before incorporating is not income to the corporation.

Best,
June

You cannot deduct personal expenses when on a business trip.

Hi.

I'm a business owner online retailer.

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

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

Thanks!
Jamie
El Paso Texas


Dear Jamie,

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

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

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

Best,
June

No Profit Needed As Long As You Have A Profit Motive

June,

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

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

Thanks.
Lou


Hi Lou,

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

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

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

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

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

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

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

-- June