Unemployment Compensation

"W-2 people" is my shorthand for employees who receive wages or a salary.

Someone can be both an employee and self-employed. For instance, someone works 9 to 5 for the local pet shop and is pet sitter by night and weekends.

I have received many questions from former W-2 people about receiving unemployment compensation and how it impacts self-employment. And vice versa. Here are two typical emails followed by my response.


Hi -
I have an odd question... I was laid off from a tv station in June 2007.. got unemployment for 20 weeks - when it ran in December of 2007 I was still unable to find full time work but did pick up
several short term (independent contract) gigs last year.

I got notice that unemployment insurance was extended in June 2008 but since I had some short term projects I didn't enroll. When those projects dried up - I did enroll and am back on Unemployment Insurance extended for the next 20 weeks.

My question is: When I do my taxes for 2008, if I file as a self-employed will that create a problem with the current unemployment that I am collecting?

Just not sure what to do.
Dee


June --

I am from Portland, Maine. I am a graphic designer/editor. Just started as an indie.

My question is with regard to unemployment insurance, taxes and self-proprietorship. When I was laid off last year, I began to collect unemployment insurance. This year, I have started an indie biz as a freelance designer/editor. I have a small amount of money coming in, but it does not cover my start-up and operating expenses.

Can I continue to collect my unemployment insurance payments while I get the biz off the ground?

What are the tax implications of this?

My unemployment benefits will run out before the end of the year. Is it possible/advisable to postpone payments from clients until the benefits run out, and if so, how do I report it on quarterly estimated tax payments?

Michael
Portland, Me


Unemployment Compensation -- let's call it UC -- is a benefit provided by both the federal and state governments. That means that the Feds as well as each state has a say in how it is regulated.

The intention of UC is help W-2 people who are temporarily unemployed due to work-related circumstances which are beyond their control.

Typically state laws require that someone requesting UC meet the following conditions:
** is not currently employed
** is able to work
** is available for work
** is actively seeking work

If you are self-employed you are you own employer. That means that even though you may not be making any money you are working. You are currently employed by yourself. So you are not currently unemployed.

An odd job to pick up some money does not make you a self-employed in business. Read these posts being self-employed for more info.

Your circumstances and your state's laws determine which conditions must be met.

For instance, if yours is a temporary layoff from your job and you have a reasonable expectation of being recalled, you may not be required to seek work.

If the work you did is no longer in demand, and you are not trained to do anything else, the state agency may provide you with vocational training and your work search requirements may be waived so that you may collect unemployment while going to school.

And, some states will pay UC while you start a business of your own.

Call or log onto your state agency and get an explanation of the benefit requirements. Know before you act so that you don't mess up.

Tax treatment for indies, whether on or off self-employment, is the same. One does not alter the other.

June

More on Business Expenses

I sent Christine my complimentary list of business expenses. She received it and here are her questions on business expenses. As most of you know I have a full-time accounting practice which serves wacky, wonderful indies. And so, because it's tax season, I am going to do the quick-answer mode for Christine. I EMBEDDED my response below ... June


Thank you very much.... YOU ARE WELCOME!

I plan on purchasing your book so I can look further into what I may deduct. SMART MOVE.

My main job as a Nurse Practitioner I am employed at a private practice but I also sub-contract for a physician at a local prison and I need to find some deductions for that. UNLESS YOU COMPLETELY SHUT-OFF WORK WHEN YOU ARE NOT AT THE PRISON YOU MUST HAVE SOME DEDUCTIONS. AND WHAT ABOUT TRANSPORTATION WHEN GOING FROM ONE WORK PLACE TO ANOTHER?

I have an office in my house with a computer and furniture that I do my research and continuing education in. WOW! I SEE LOTS OF DEDUCTIONS RIGHT THERE.

My husband keeps telling me that I can not deduct part of that as an expense IF THERE IS AN AREA USED EXCLUSIVELY FOR YOUR WORK THEN YOUR HUSBAND IS WRONG. AND WHERE DID YOU SAY YOUR HUSBAND STUDIED ACCOUNTING? I beg to differ with him, my accountant in the past has not been too much on some deductions but with the sub-contractor part I need to find some deductions. I

also have cleaning ladies that clean my house but also they clean my office how do I deduct that as part of an expense? I guess what I am asking is how I deduct part of the utilities, house payment, insurance or what percentage I guess would be a better question. YOU MAY FIND THE ANSWER IN THESE POSTS home office or studio (25). IF NOT THEN HOME OFFICE DEDUCTION IS COMPLETELY EXPLAINED IN MY BOOK.

Thank you I found that your website was very insightful.

Christine
Elida, OH

To deduct or not to deduct.

Hi.

I'm a small business owner online retailer for 1 year.

Is it wiser to spend more money through my business and claim legitimate deductions, than to spend less? If you spend less of your business income, or "save money", then the IRS is going to get a larger portion of the unspent money as taxable income, so why not just spend more through the business? You can spend more on what you want, while reducing your taxable income at the same time.

Any downsides to this?

Jamie
El Paso Texas


Hi Jamie,

This is a confusing question. I am not sure what you are asking. However, here is what you and every indie should do regarding business expenses: Deduct every single legitimate business expense you possibly can. Don't cheat by deducting personal expenses.

A business deduction typically saves 1/3 in taxes. So a $900 expense save $300 in taxes. Could be less. Could be more.

The upside to a low income: Helps when applying for school financial aid or government benefits.

The downside to low income: It make it more difficult to get a mortgage or other loan or credit card.

Be sure to read Is it a deductible Business Expense? on my website.

And visit here for a complimentary List of 100+ Indie Business Expenses .

-- June

Home Office When Sharing the Rent

Hi June,

I'm a graphic designer living in Brooklyn, NY. I entered the indie world last October. I'm very green in the indie world and your book has proven to be quite helpful.

My question concerns deducting home office expenses when living in a rental unit with roommates. How does one determine the total area of his home? In my scenario: • 3 roommates live in a rented apartment, each with their own bedroom. • We share a common space that consists of the living room, kitchen, etc... • I pay a higher portion of the total rent for the largest bedroom, half of which I use exclusively for business. My concern is correctly determining the total area of my home for the IRS form. What I think is fair is: Area of my bedroom + 33% of shared space = Total area of my home Will that fly with the IRS? Do I have to include the entire common area even though the 3 of us pay for it?

Thank you,
Sunil


Dear Sunil,

Your way is fine. It gives you a little bit extra deduction. But more easily understood by an IRS guy whose math may not be top notch is to take the total area of all the common space as well as your room as your total square feet of living space and then take your office area.

More posts on home office are here home office or studio (24) .

-- June

What To Do With a Business Loss

Hi June,

I saw today the following quote about tax cuts in the new stimulus bill: "Money-losing small businesses could use their losses to offset profits made in the previous five years, instead of two, making them eligible for tax refunds. The provision is limited to businesses with annual revenues under $15 million..."

Naturally, given the economic downturn, many of us "indies" are experiencing business losses for the first time. Does this new provision apply to sole proprietors? i.e. Can losses in 2009 offset taxes due for 2008?

If this is a dumb question, answer me privately. If you think it might be useful to others, maybe it's good for your blog.

Thanks.
Jolene



Hi Jolene,

There is a procedure to handle losses. In tax jargon it's called an NOL -- an acronym for "net operating loss." It's complicated and depends on many elements of someone's tax return. But what it boils down to is: If your entire income [not just your indie business] with lots of adjustments and modifications results in a loss you may carryback that loss to previous years or carry it forward to future years.

You must make the backward/forward choice by looking at your past and future income as well as into your crystal ball -- with the help of your accountant, of course -- and determine which direction would save you the most tax money.

This procedure has been around for a very long time. The amount of time to go back and forward has changed over the years. This is a complicated exercise and must be done by a knowledgeable tax pro.

Thanks for asking a good question.

Best,
June

Indie Time-Travel: Reconstruct 2008

Hi June --

I'm a reset merchandiser, less than 1 year as an indie. I'm frustrated and confused because I have made some serious mistakes as an indie meaning I didn't hold onto my receipts and now I don"t think I can get my write-offs. Is there anyway I can still get my 1. mileage 2. my uniform 3.tools HELP THIS INDIE NEWBIE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Melanie
St Berryville, Va


Hello Melanie,

All is not lost. You just need to do some time travel through 2008. Open your date book or computer calendar and relive last year. Recall what you did.

Regarding mileage, you must go through calendars and appointment books perhaps phone records as well, anything that will refresh your memory as to where you drove for business during last year. You may estimate but you'll need something to substantiate your estimates -- client business cards, an invitation to an event, emails still on your computer that you could print out.

For uniforms and tools if you paid by check or credit card it is easy enough to contact the bank and have copies of statements and cancelled checks sent to you. Take pictures of the tools and uniforms to help substantiate your purchases.

Learn from your past mistakes.

Best,
June

You get good-guy points for donating your services.

June --

I am an Athletic Trainer/Strength & Conditioning Specialists as an indie for 3 years.

I had a question and I could not find the answer on your blog so I was hoping that you might be able to shed some light on something for me. I am an independent contractor, indie, and I donate my time to a not for profit organization. At times this takes me away from scheduled appointments and on out of town trips were I miss my work...can I claim this time as a loss? I know that I cannot deduct my time, but I am losing profit in order to donate my time to the non profit.

Thanks for all of the other great information that you provide on your blog.

Matt
Charleston, WV


Hello Matt,

No deduction. Just extra good-guy points.

Read these posts expenses -- donated services or products .

Best,
June

US Citizen Working Abroad

Hi June,

Firstly let me say your book is amazing, very well written, a joy to read and I was so happy to find it. The book answered most of my questions on self employment but also made me question if I actually am self employed?

Below are my specifics, if you could give me your opinion I would be very grateful.

Background: I work part time for a German company as a sales rep selling to the US stores on the US Military bases in the UK. I have business cards from the company with my name on them, a company e-mail address and am listed on the company org chart as a manager. I go to company sales meetings am told what needs to be done but pretty much left alone as to how I execute the programs in my territory (the UK) and have no other clients don’t advertise etc etc. However the company requires me to submit invoices monthly for services rendered and also pays any expenses and travel costs I incur.

As I live outside of the US I claim these as Foreign Earned Income on my 1040 and have always thought I was an employee and have always filed as such even though the German company said I was a contractor. I am not provided a W-2 or a 1099.

My problem, question is I guess a grey area:
1) Am I actually an employee or self employed?
2) If I am an employee then how do the Social Security Taxes get paid or are they even required as the company is German and has no US office?
3) If I am self employed I will have to re-file from previous years to pay my social security taxes, but then can claim all the deductions associated.

But by following your tests I’m not sure the IRS will agree I’m self employed but as it’s a German company I’m pretty much lost and have not had any luck finding anyone with a clue? Until I found your book that is, hopefully you can answer a few questions and point me in the right direction.

Anyway you must get lots of letters like this but thank you again for writing such a great book.

Regards,
Grant
Frankfurt, Germany


Dear Grant,

Thank you for your generous comment on my book.

I do get lots of letters but those that are multi usually multi-state not multi-country!

You are an employee and your employer should be treating you as such with the appropriate withholding.

I have clients in Germany who are US citizens who are self-employed. I also have clients in Germany who are US citizens who are employees of German companies. I have no experience with a US citizen living in the UK working in Germany. I do not know about reciprocal tax agreements between the UK and Germany and that may come into play here. That said, here's as far as I can point you:

Those clients who are employees of the German companies have German taxes withheld -- Germany's equivalent of our Social Security and Medicare Tax [self-employment tax for an indie -- SE Tax] as well as German income tax. On their US tax return they get credit for German income tax paid. If they qualify they also get the foreign earned income exclusion. There is an option to voluntarily pay Social Security tax to the US.

If you choose not to confront your employer on this then you must pay your own SE Tax to the US government same as a US citizen living in the States. Check out these posts taxes -- self-employment tax for more info on SE tax. Also be sure to read my blog post How are your plumber and the Treasury Secretary nominee alike?

Yes, you can, and should, file amended tax returns.

You might try the embassy for a tax pro recommendation.

I wish you success!

Best regards,
June

Another Pianist's Dad

Hi June,

Helpful site!

I was lead here looking at what the valid deductions would be for self employment in the case of my son. He plays piano for Sunday School each week for the past 3 years and this year the church decided to start paying him $100/month. He has been taking piano lessons for the past 10 years and is very proficient.

Is it legit to deduct as his expenses items that technically were paid by his mother and me (like piano lessons and tuning and music)? Do we need to have him start paying for these expenses himself and just "gift" him money to cover these items?

Thanks,
Cliff


Dear Cliff,

Glad to know my site is helpful. Thanks for letting me know.

In order to give you an in-depth answer I'd need a lot more info. Such as: How old is your son? Do you claim him as an exemption on your tax return? Is he doing this to make money or is this volunteer work that turned into a paying gig?

Here's a general answer that may help you. If money is gifted to someone with no strings attached then that someone may use the money however he or she wishes. If the money is spent on a deductible business expense then the deduction may be taken on the someone's tax return.

Best,
June

Indies: Steer Clear of Tax Prep Programs

The advertising for tax preparation software gets heavy during tax season and this year it seems like a heavier barrage than usual. Turbo Tax and other tax programs are blitzing the Internet with promotion, some of it well disguised. For instance, Turbo Tax has an arrangement with Comcast, describing itself as “the official tax software of Comcast.net.” Comcast’s articles, which are ostensibly written to give you tax tips and alert you to deductions -- the same tired, old tips and deductions you’ve heard before -- are simply plugs for Turbo Tax. These guys are slick.

I have warned indies against using tax preparation software in the past, see these posts on Turbo Tax . A recent story on Fox News quotes a Turbo Tax spokesperson as saying: "There's a lot of time that's put in to make sure that the product is easy to use for the average American." Well, as you know: Indies are not average Americans. Wage-earners and employees may be but not the self-employed.

The software is probably adequate to handle relatively straightforward tax returns for somebody who collects a weekly paycheck, but self-employed tax returns are not Taxes 101, they are complicated. Many CPAs don’t have a clue about how to do taxes for self-employed people. So can a software program handle returns that are nuanced and complicated by the continuous interplay of business and personal that exemplifies the indie life?

An aside here: the Turbo Tax program supposedly geared to indies costs $79.95. My tax prep program costs several thousand dollars every year and I use it with the benefit of 30 years’ experience. And I educate my clients in good, simple, accurate recordkeeping.

It’s not that these cheap software programs are “wrong.” The program may operate correctly if the data input is done right. The question is whether an indie knows what questions should be asked of the program. Many brilliant indies aren’t aware of the business aspects of what they do. Software is like any tool; if you know how to handle it and use it properly, it ought to work. But does an indie who puts all her time and effort into her indie business know enough about the rules of home office deductions to choose the right prompts?

The experience of Timothy Geithner, see my post How are your plumber and the Treasury Secretary nominee alike? , paints a sorry picture of a guy who deals with the most arcane financial matters (He’s our Treasury Secretary now!) but apparently couldn’t figure out how to do his indie tax return using Turbo Tax.

Take a look at TurboTax’s Home and Business. Billed as the program for sole proprietors, it says: "Biggest Refund For You and Your Business.”

The word “refund” is used seventeen additional times in the copy. “Watch your refund add up as you complete your return,” is one inducement to buy the software. Savvy indies who read my blog know that a refund means you’ve just loaned Uncle Sam a chunk of your money, for a whole year, interest free!

The goal for indies – as it should be for all taxpayers – is to have the lowest tax liability legitimately possible; to have paid about that much over the course of the year; and to not get a refund, but owe a wee bit. That way you’ve used Uncle Sam’s money interest free!

It shows that Turbo Tax is more interested in its own profits than in the financial well-being of indies. It shouldn’t be programming you or any other taxpayer to get refunds.

Incidentally, the company is suffering through a public-relations embarrassment, as many purchasers of the software complain about serious glitches in the program.

I know I’ve given you a daunting task: Find an indie-savvy tax pro. Take a look at this post, Two Parts to Finding the Tax Professional Right for You .

A less daunting task is to learn the basics of self-employed taxes and recordkeeping. You can start here on my blog and on my website and in my book.

Best,
June

Cash Basis

June --

I am an RN case manager.

In 2008, I received one check that went on a 1099, however, I became an employee of the same company on Jan 1.

Am I right in assuming that I can't deduct any expenses for that check since it was earned in Dec, 2007?

Mary
Knoxville, TN


Dear Mary,

I think I understand your question but am not sure so I'll just give you some info that may help you out.

You are a cash basis taxpayer. That means that you deduct the expense in the year incurred. You claim the income in the year received. If you had self-employed expenses in 2007, that's when you should have deducted them. If you were paid in 2008, that's when you claim the income.

There are ways to change your accounting method from cash basis to accrual. In your situation it doesn't seem worth it.

-- June

Selling on Ebay? Fear be gone!

Ms. Walker,

Thanks so much for the business expenses list!

I started selling on eBay in December, trying to make some extra money to pay off some bills. I still have a full-time (45-50 hr/wk) "W-2" job.

Since I began to consider selling on eBay, the IRS has never been far from my thoughts! My Dad (now retired) had his own business for as long as I can remember, and my Mom handled the bookkeeping. Everything went well for many years, then in about 1969 some of the paperwork was done incorrectly, and we were audited. This was in the time before the "kinder, gentler IRS", and it didn't end well for us. I was only about 10 years old at the time, but I can still clearly remember what a horrible time this was! I remember that my Dad had bought a brand new 1968 VW Beatle for my Mom for her birthday in December, and shortly after that came the audit. Needless to say, the Beatle was lost. A very difficult time for my family!

I follow several personal finance blogs and sent in a question to one blog (Moolanomy) concerning eBay and taxes, and they recommended your book. I immediately went to the library and found the book. It is excellent!

Thanks so much! It has really put my mind at ease. I had been saving all my receipts, but really didn't know what else to do. And now I know!

Ruth
Texas


Dear Ruth,

Thank you so much for giving me a peek into your indie world. I find that the real experiences of real indies help other self-employed get a better perspective on their solo ventures.

40 years is a long time to have the black-cloud fear of the IRS hanging over you! Time to clear the sky. That is what I hope my writing and seminars accomplish: Give clear and simple explanation of complex tax rules and regs. By giving indies a basic understanding of taxes and money they will have the confidence to push away fear of audits and the IRS.

All the best,
June Walker

Pianist's Dad

Isn't it interesting how certain events happen at just the right time? I have many, many questions from my readers sitting in my DO bin. I answer as quickly as time allows and pretty much in the order received. But this one from Carlos I received this morning and it fits so well with yesterday's post Writer's Mom that I wanted to juxtapose in order to further my point to parents of indies.

A while back I received a request for my business expense list from Carlos, a Pianist/Organist/Cantor. He mentioned in the request that he was blind. When I sent him the expense list I asked if he were blind or were he using that to mean blind to understanding taxes. Here's his response.

Good Morning June,
Thank you for sending me the expenses list for musicians. Actually, my father always help me prepare my tax and he was the one who recommended me to send you an email because your website helped him to discover what are the expenses that could be legally deduct on my income tax as a self-employed musician. He didn't know this before because we only have a tax preparer not a tax adviser or advocate like you do. Even I don't prepare my own income tax, it is nice to learn things about taxes and the legal things around it. Sorry to mention my being blind in one of your questionaire, it really has no relation on your advice. I have read some of your advice to the indies like me, I could compare you to my spiritual director who only advise me for the good of my soul. No cutting corners. God bless you, you are one of a kind.

carlos
Fairfax, VA


Hi Carlos,

Thanks for getting back to me. You have a good -- and smart -- father. I am glad he had you contact me. So many parents think that the way to help their children -- even kids in their 20s and 30s -- is to do for them instead of teaching them how to do. Check out this most recent blog post "Writer's Mom" at http://junewalkeronline.blogspot.com/2009/02/writers-mom.html .

I am mailing you -- and your dad -- a gift. Listen and learn.

Thank you for your blessing. I very much appreciate it.

Best regards,
June Walker

Writer's Mom

Hi June,

My question is about a new business venture of my son's. This spring he will graduate from college here in the Twin Cities with a degree in creative writing. He hopes to one day become a novelist or comic book author who can support himself via this trade. In the meantime he has discovered an interesting business. He creates funny video reviews of bad comic books written by others.

These reviews are posted on sites that include advertising with the video, and then he is paid by the advertising revenue that is generated. He isn't making enough money to live on (yet) but it is possible he will be making enough to support himself sometime in 2009.

My question is this: he spends approximately $40/month on comic books. He has been doing this for years due to his interest in the medium. But it seems to me that at least a part of that expense is now a legitimate business expense. I'm trying to figure out what is reasonable. He has to buy a comic book and read it before he can determine that it is a good book for review (not all of them are). So should he only include the comic books that he makes into reviews? Or perhaps he should avoid claiming any of it as an expense as the IRS will probably think it is too odd to be a business?

Thanks in advance for your advice!
Avonelle


Dear Good-Mom Avonelle,

As accountant and mother of four my first advice is that from now on your son should be asking the tax and business questions himself. That's an important part of his education as an indie.

I would direct him to read certain of my posts on business expenses there's about 80 of them on this blog. After a little research he would come up with the statement: Of course, I must read all kinds of comics to determine which are right for review and which are not. So, of course every comic I buy is a business deduction.

I would also have him look at his library. There may be a very large business expense deduction sitting on his book shelves. He should read this post Converting from Personal Use to Business Use .

Many of my clients and many in my family are writers. It is not an easy money-making endeavor. Your son should start now to learn about every deduction available.

Best,
June

Childcare is not a business expense.

Hello June -

I started a home business 1 1/2 years ago in Forest Park, IL. I hand paint wood items for kids rooms (plaques, frames, etc...)

I was wondering if I can deduct my babysitting expenses? I spent approx. $1200 last year for a babysitter to watch my son while I worked.

I just found your website. I plan to go pick up your book this week!

Kelly
Forest Park, IL


Dear Kelly,

Babysitting cannot be deducted as a business expense.

You may be eligible for a childcare tax credit if the following two conditions apply:

-- You have a profit from your indie business or you have earned income from a job. If you are married then your spouse must also have earned income.

-- Your sitter or daycare must be legitimate. If it's a service or school you will need an employer identification number. If you pay a babysitter then you must have a social security number for your sitter and the sitter must claim the income.

If you are a budding indie then you will find my book, Self-employed Tax Solutions useful. The least expensive place to purchase it is right here.

Best,
June