Cruising Both Ways

Hi June!

I need help! Here's one for you: I am a cruise ship employee from Manasquan, NJ and I've worked for Choppy Cruises for over 4 years.

My issue is that, technically, I am not self-employed but I get a 1099 from Choppy every year. I pay my taxes but this year I owe a ridiculous amount and I'm frustrated!

I have to pay a self-employment tax but I am an employee of Choppy. I wear their uniforms, abide by their contracts and rules of the ship. They pay my flights and feed and house me. I work outside of the USA but my pay is wired directly into my bank account out of their USA bank account. I save my receipts and write off as much as I can. I know some other Americans from the ship who don't pay taxes on their income.

Am I an idiot?

Is there some maritime tax law I don't know about? Is there any way to get around paying the self employment tax?

Please help!!
Paige


Hi Paige,

"Am I an idiot?" My guess is that you are not an idiot. But you do want to have your cake and eat it too. Apparently, you weren't concerned about the probable misclassification as a self-employed until it was disadvantageous to you.

You must decide whether you want to educate yourself on self-employed status and then whether or not you want to take action based on what you learn.


Be sure to read my post Cruise Ship Entertainer Gets No Tax Breaks

By the way, the folks not claiming income are committing fraud. Not good.

I changed the name of your cruise company ... just in case.

Best,
June

Freeworld and Aquent

Hi June,

I'm a graphic designer from Los Angeles, CA and I've been a freelancer for 3 years. I had a question I was curious if you could address on your blog. I recently discovered a site through a motion graphics forum called Freeworld (http://www.hellofreeworld.com/) that claims to allow freelancers to change their work status from 1099 to W2 while enjoying the benefits of both (in other words, they claim you are still able to take business deductions). From everything I've read from you, it seems like this is some sort of scam or perhaps the found a hidden loophole? I remain skeptical, but the guy who started it is a rather respected individual in my industry. What do you think?

Frederick
Los Angeles, CA


Hi Frederick,

A little skepticism is good.

I don't know Freeworld but I do know Aquent. I assume they are similar in structure . Aquent is a reputable organization and has been around a good while. I wrote for them about 10 years ago.

If I remember correctly Aquent was started In Boston by a guy in college hiring out his fellow students who were well versed in MACs to businesses in need of people who knew what they were doing. From that Aquent grew into a multinational corporation. Aquent screens the talent -- graphic designers, ITs, etc and matches them with businesses that need that talent for a long or short period of time. Very similar to temp agencies, however, their workers -- the talent -- are in specific areas of graphic design, technology and marketing.

The talent is an employee of Aquent not of the company for which the work is done.

As an employee the talent can deduct all business expenses BUT the expenses cannot be deducted in the same place that indies deduct their expenses. So, although in theory they are deductible the expenses are always reduced and often lost completely.

Best,
June

1099 Basics

June --

If I pay out referral fees of $200.00 per person and it totals over $1,000 per year, do I need to 1099 those people?

Thanks,
Mary


Mary --

1099-MISC reports nonemployee compensation -- that is, what you pay to indies who work for you.

Whether or not a 1099 is required is based on what you pay to each person. If you pay an indie $600 or more then you must file a 1099-MISC for that indie.

It is not based on the total you pay to all indies who work for you.

-- June

Child Care Expense

Hi June,

I ordered your book yesterday and can't wait till it arrives.

Question: My spouse and I deduct for child and dependent care expenses for our joint return. The care providers were out of the home, primarily day care or day camp facilities. I have also used someone to care for my children after school in our home, while I am working in my home office until my spouse gets home to take over the care. Is this expense deductible for my business. I wouldn't double count it of course for both my business and the child and dependent care expense IRS form 2441.

Thanks,
Dan
Atlanta, GA


Hello Dan,

Doesn't matter where child care takes place -- in or out of the home. It is deductible on your tax return if both spouses have income and if it is legitimately paid. In other words paying the babysitter "off-the-books" does not get you a deduction.

Child care is not a business deduction.

Were you a corporation there are some provisions for deducting child care. However, child care alone is not a reason to incorporate.

Best,
June

File an extension. It really is the smart thing to do.

June:

I saw your post on Turbo Tax, and I am now completely confused. I own a small web programming company (sole prop) LLC in Ohio, and I would usually use Turbo Tax… What do you recommend now? It’s such a late date, and I am sure most accountants are too busy for a new account.

Please let me know what you recommend!

Jeremy


Hello Jeremy,

First of all there is no need to rush. Read my post File an extension. It's the smart thing to do. If you file an extension you'll have until October 15 to file your tax return. That'll give you time to find a tax pro.

In the interim, learn as much as you can. Read my blog and the columns on my website. Be sure to check out my posts on finding the right tax pro.

Best, June

Is this what they mean by "do the math?"

In response to my post To deduct or not to deduct. Jamie sent back the following really good question:

Thanks for responding June.

In regard to your comment about it being a confusing question, let me explain. Say my business grosses $100,000 a year. After payroll, vendor bills, utilities, supplies, and other business related expenses, I'm left with $40,000.

The government is going to say "Okay, you have $40,000 left over. We're going to take a percentage of that." My concern is choosing between lowering my taxable income, and saving the money that I make.

So if I buy tissue paper for my office bathroom, should I be conservative and get the cheaper brand? Or should I buy the name brand because any money I would have saved getting the cheaper brand will be taxed by the government?

Or if there is a business convention coming up and the entire trip costs $3000, should I take the trip and not get taxed on the $3000? Or should I "save money" but still get taxed on it by the government?

I guess it's like a catch 22: If you spend more of your income, you may not have much left over for other interests. But if you're "saving money" by not spending it on legitimate business deductions, then the IRS will take a larger percentage of the unspent money.

I hope this made some sense. If it does, then my question is: Is it wiser to spend more through your business to reduce your taxable income than to try to save money and get taxed on the unspent money?

Thank you.
Jamie.


OK, all you indies. Follow this for I hope it will give you insight into answering your own questions because I think Jamie could answer his own question were he to simplify it.

What if I said to Jamie: Would you want me to give you $100 to deposit into your savings account or would you prefer I give you a percentage of $100 for you savings account?

Or if I gave Jamie, or you, the following choices, which would be the better pick? Keep in mind that you pay approximately 30% of your net income to taxes or reduce your tax by 30% of every business deduction.

OK, Jamie. You've got $200 in your pocket.

First choice: Spend $200 on a large supply of soft expensive toilet tissue. You save $60 in taxes. You put the $60 into your savings account.

Second choice: Spend $100 on a large supply of scratchy cheap toilet tissue. You save $30 in taxes. You put $130 -- that's the $30 tax savings + the $100 you did not spend -- into your savings account.

The smart shopper or the smart indie-business chooses to buy the less expensive toilet tissue -- the second choice -- unless there is a business reason to buy the more expensive toilet tissue. The Hilton buys the more expensive the Heartbreak Hotel buys the cheaper.

Jamie mentions a $3,000 conference. You do the arithmetic. If you choose to attend the conference there better be a really good business reason why that conference will make your business more successful or more productive because if you go it's $2000 out of your pocket. [Did you get the correct answer?]

OK. Math lesson over. By the way, I used to tutor math in the old days back when they thought girls could count but weren't quite up to multiplication and division.

Cheers,
June

Is credit card interest a business deduction?

Hi June,

Thank you for sending the Expense List. I am so glad I found your website.

One of my questions has already been answered from your blog but I have another question that I cannot find the answer to. Can I deduct all of the credit card interest charged to my business credit cards each month, even though most of the interest is for balances from two previous years?

I am sending a check for your book and CD. Thanks for being there for all of us Indie's!

Best regards,
Bonnie


Hello Bonnie,

I, too, am glad you found me. Please tell your indie friends and colleagues. They need all the help they can get in these rough times.


You may deduct credit card interest as a business expense whether you have a business card or personal credit card if and this is a really big if you used the card for a business expense and the finance charge is for that expense. If you use a card for both business and personal expenses then you must allocate the interest expense.

A card used 100% for business since you got the card is easy. All interest is a business deduction.

If you had mixed use then you need to do some arithmetic. Tally the business vs the personal. If 40% were personal then you may deduct 60% of the interest as a business expense. Even if for past business purchases.

Because if you have to go back a couple of years this can take some time then you will need to decide if it is worth the time. A $300 interest charge may not be worth your time to figure out. $15,000 is worth the time for the calculation.

Remember that every $100 business deduction can save you $30 -- more or less -- in taxes.

Also be aware that credit card companies have a lot of names for interest: Late fee; finance charge; late penalty. Interest by any other name is still interest expense.

Best,
June

SE Tax: There's No PLace To Hide

June,

I have a question that I think is probably quite common. Is it wise to incorporate for the purpose of saving the 15% self-employment tax?

I have been operating as a self-employed person for a couple of years now and have read your book which says that most people don't need to incorporate, but I am confused now because many folks in my professional circle are saying they save money by incorporating because of this. I live in California.

What do you think?
Alexis


Hello Alexis,

There is a misconception about self-employment [SE] tax and incorporation. Actually there's a lot of cheating regarding SE tax and incorporation and the IRS is making headway to deal with it.

I know from previous correspondence with you that you are a web designer. So I will use you as an example with some oversimplified numbers and situaions.

If you work at your computer designing away for 40 hours a week at $50 per hour. You have gross income of $2000 a week. If you have $1000 a week expense you have a net income of $1000 a week. Let's say $50,000 per year. On that $50,000 you must pay SE tax whether you are an indie or an employee of your own corporation.

If you owned a domain name -- let's say gogreen.com -- that you bought for $100. That is an asset of your business. If a conservation organization bought it from you for $1000 you would have a $900 gain. You would not have to pay SE tax on that gain.

So you see the difference.

When people incorporate often they pretend that the income is not earned as it is with you sitting in front of your computer but that it is similar to the gain on the sale of the domain name. And that is how they avoid paying SE tax. In IRS circles it's called fraud.

Of course there is income that an indie may earn because of her reputation or her "name" that would not be subject to self-employment tax. In that case incorporation might be worthwhile.

Let's say web designers typically charge $50 per hour. But, you, Alexis Web Design, are known throughout the region and everyone wants Alexis as designer. So you raise your fee to $500 per hour. Then some of your income, were you incorporated, would not be subject to SE tax.

As I said, that is an oversimplified explanation but I hope it will give you a basic understanding.

-- June

Meals Deductions: A Quick Overview.

June --

After 20+ years as an executive and employed consultant, I had an opportunity to go on my own last year as an independent. It was a successful year. I provide program management services in the technology implementation space.

I was on a temporary project assignment that has now concluded. I read the tips on your site on deductibility of meals using the IRS per diem meal allowance. As an independent and self-employed, if I use the per diem amount in lieu of actuals, is the per diem amount subject to the 50% limit. Example: per diem rate for 2008 Washington DC is $64. Do I use $64 or $32?

Please advise.

Thank you.
Jason
Bethel Park, PA


Jason --

Here's a quick overview.

Food and beverages offered to the general public are 100% deductible. That means if an artist has a gallery opening and invites the public or if an IT indie invites the community to his new office, then the food and drink is served at these events is a 100% deductible meals expense.

All other meals, whether calculated as actual amount paid or taken from the per diem table, are deducted at 50%.

If not traveling you may deduct meals only when you paid for yourself plus someone with whom you have a business connection and dined for a business reason.

When traveling you may deduct all meals and snacks for yourself; no business associate need be with you. Although all travel meals are deductible they, too, may be deducted at only 50%.

Hope that clears it up for you.

-- June