Saturday, June 27, 2009

Only suckers pay taxes!

In these strained economic times we are again inundated with books that advocate going into a self-employed business as a terrific way to pay no tax. Think of it as, self-employment as tax shelter.

Promotions for these worse-than-worthless and wrongheaded books are all over the web and at supermarket check-outs.

The epitome of this approach to self-employment is a self-appointed money guru, Jeff Schnepper, author of How To Pay Zero Taxes, who glibly promises that "you can magically turn personal expenses into tax deductions." His online bag-of-tricks invariably shows that outsmarting the IRS is a piece of cake and that any taxpayer armed with his book and some wit can't lose.

Writers and pluggers of these books are more interested in tax consequences than in an indie business. That's putting the cart before the horse, at best. At worst it may suggest to gullible readers that they can set up a sham business to cut taxes -- a move that could be a big mistake.

These books advocate self-employment as a tax-avoidance device -- promising that with a little ingenuity one can reduce taxes down to zero.

In more than one book the authors' contrivances feature a W-2 person who creates a self-employed sideline that allows him to convert personal expenses into business write-offs. An alternative scenario has one spouse with a W-2 job and the other spouse fabricates the self-employed job. As to which spouse is self-employed, it is determined exclusively by which spouse can generate higher deductions.

In real life, decisions about self-employment are not made that way - one spouse may have a W-2 job for the sake of regular and steady income or health insurance coverage while the other tries a hand at the riskier and more irregular income of self-employment. Don't get me wrong -- I'm for taking every deduction legally possible, but going into business for that purpose is not what made America great or made any business succeed. Do you think Bill Gates or Oprah or Mark Zuckerberg got started in business in order to deduct their personal expenses?

The Schnepper approach is blatantly recommended in Robert A. Cooke’s book, Doing Business Tax-Free. He writes on page 3:

“How then can you reduce your taxes to zero? You will need to operate your own business. Then you will need to operate that business in such a way that expenses of operating the business will offset all other income, or a substantial part of it. As this is the only method of tax elimination that is practicable and legal for most of us, it is the method to which most of the rest of the book is devoted.”

Cooke’s advice appears to violate the IRS rule that in order for you to be engaged in a business rather than a hobby the goal must be to make a profit. It sounds, however, like Cooke does not have profit in mind, but tax avoidance.

It's the glib but muddled counsel of the tax shelter promoters that gets the IRS breathing down our necks and gives us, the legitimate self-employed, a bad name. Remember, for the IRS to consider your activity a business you must have a profit motive not a tax reduction motive!

If you want to learn more, here are some related posts from my blog.

Hobby or Business: Are you a professional artist?

Profit Motive: You're OK as long as you want to make a buck.

Exotic Dancer and more ...

June Walker

revised 1/12/11

Friday, June 26, 2009

Media Liability Insurance

Hi June,

Great information!

1. I don't have your book yet, Self-employed Tax Solutions. If I purchase edition 2 then I don't need edition 1, right?

How different is this book from the Creative Visual Artist version? I am a freelance B2B Technology Copywriter - Would I want to also or instead look at the Creative version?

2. I currently am a sole proprietor. I am looking for liability insurance. Specifically for copyrighting laws/infringement, blogging, any of the web liability. Does your book cover this type of Insurance? If not can you provide me with a source that I can research?

Thank you for your time.

Hi Deb,

Glad you like my info. Please tell your indie friends and colleagues . They need as much help as they can get.

This post
Self-employed Tax Solutions 1st Edition explains both editions .

Tax Solutions for Creatives is a CD not a book. Indies tell me the CD is really helpful and that just listening is so easy, not intimidating.

My book explains the different types of insurance. It's basic info. Anyone who presents advice and information to the public faces the potential of having someone misinterpret what is said or written. That presents the possibility of a lawsuit. Sounds as if you are seeking media liability insurance. It's a kind of errors and omissions policy and is hard to find and very expensive with quotes starting at $2,500 for sole proprietors. Please, if you find more information from your insurance agent about this kind of insurance, let me know.

[revised 1/15/10]

Thursday, June 25, 2009

A Primer on Estimated Taxes


Ive been working as a therapist since the beginning of this year. I know that I will miss today's quarterly taxes filing deadline because Im not sure how to estimate what I will need to pay and afraid I will not have the funds to pay it until my next paycheck. I dont get taxes taken out of my checks because I am an independent contractor but know that/figure that I need to make quarterly tax payments.

Please let me know if you can provide any assistance in helping me file at some point this week or at the least help me figure out how much I owe.

Bowie, MD

Keida --

Your answer is in this post: Estimated Taxes . It starts out this way ...

I am getting lots of questions on estimated taxes, so I thought an overview necessary.
Here 'tis.Federal income tax, Social Security tax and Medicare tax are pay-as-you-go taxes; that is, the tax must be paid as income is earned. Dennis Dubya-two, shipping clerk for Toys 'n' Things, receives a paycheck every week. Each week Toys 'n' Things withholds all applicable taxes from Dennis’ pay and forwards them to various government agencies. At the end of the year Dennis receives a W-2 which shows income earned and taxes paid.

Self-employeds must follow the same pay-as-you-go method as do wage earners like Dennis. As an entrepreneur brings in income he withholds taxes from himself -- that is, he puts money aside -- and then sends his taxes to the government via estimated tax payments.

Not every self-employed has to make estimated tax payments.
It’s the overall tax liability of a self-employed that determines whether estimated tax payments are required. An indie’s total tax liability is made up of
... continue here

State tax info needed? Contact your state tax department.

Hello June,

I am getting mixed messages and wanted to get your thoughts as well. I am a virtual assistant in ABQ. I am starting to get clients outside of NM. Do I charge them ABQ gross receipts tax?

Thank you for your help.

Hi Sandy,

Other than advice on state taxes in general I do not give specific state tax guidance. 50 states. 50 mean different sets of state tax regs. You, and anyone needing state tax advice should contact your state directly.

You're in luck. Today I had to call NM about a client's gross receipts tax. The # is 505.827.0951.


Husband & Wife with More Than One Business

Hi June.

I love your site. I will be buying your book from your site.

My questions is this. I setup an LLC to run my business expenses through. I have several ventures: Podcast, Web Design and support, my wife makes mosaics and sell them at Festivals, and we are working on a book.

Do I keep the income and expenses for each of these separate? Or can I track them all together?

Thank you for your support and excellent web site.
Cedar Park, TX

Hi Terry,

So glad you like my site. Please tell your indie friends and colleagues. They all need simple, clear info.

If it were possible to make all these activities fit into one business then the most tax advantageous structure is to have one of you as the sole proprietor employer and the other as the employee.

If you cannot have your wife's ceramics fit into what you do then you need two sole proprietorships. And then, depending on the subject of the book, one of you would be the employee of the other. Let's say your book were about ceramics and you were helping your wife with the tech part then you would be her employee. This would be done by setting up a payroll with all attendant forms and filings. You might want to read these posts for more info on husband/wife businesses -- husband-wife business .

Sorry, don't know what the heck you mean when you say that you "setup an LLC to run my business expenses through." An LLC is a legal entity not a tax structure. And no business entity is set up to run expenses through. I strongly urge you to read my most recent issue of Ways through the Maze. This month's column is "LLC? Incorporate?" Check it out at Maze archives here.


Monday, June 22, 2009

Indies Who Collect Social Security

Hi Ms. Walker,

My Dad and I run an internet website business selling music education products.

We, or I should say he has been in business since 2000 as he is the sole proprietor. I'm 29 and have basically been non-existent in the eyes of the IRS since 2003 after I came home from college to help Dad out with the business. He is now taking his Social Security so he cannot make over $14,000 of income. So he said it's time to incorporate the business, in my name for that reason and for protection reasons (a trust to protect me from crazy relatives who may try to take a piece of the business and all of the scenarios that can happen in that realm).

I recall reading some info about Social Security Administration getting suspicious if they think a family member is simply funneling income to another family member, but still working. Is this a myth?

What would you suggest in our situation?

Thank you,Mike

Hello Mike,

I can't advise about the crazy relatives. That's a legal question and I strongly urge you to contact an elder care or estate attorney and talk over your dad's situation.

If your dad is a sole proprietor and you work for him the most simple and least expensive solution is for you to become his employee.

You didn't give me any numbers so I'll pull some out of the air to give you an idea of how it works.

Dad's indie business grosses $100,000 and his expenses are $20,000 which leaves a profit of $80,000. Dad wants to work less and play more golf or go hiking in India and so you do about 85% of the work. He pays you a salary of $68,000 a year which, when subtracted the business profit of $80,000, gives him a net income of $12,000. That's below the Social Security limit.

Things you must keep in mind:
-- You really must do 85% of the work.
-- You set up the payroll according to the rules.
-- You claim all your income.

Other advantages:
Dad could set up a pension plan for you as well as give you medical benefits.

Something else for you and all indies to keep in mind:
Many self-employeds cheat themselves because they don't know all the possibilities in structuring an indie business. They think that keeping business under-the-table or "non-existent in the eyes of the IRS" is the smart tax-saving way to do things. It's not smart. Often it costs you more than were you doing business on the up-and-up. And it could be considered fraud. Which is really not good.


Wednesday, June 17, 2009

New Indies Need Basic Information

Hello June.

My name is Gilbert and I just wanted to let you know that the information in your website was so helpful to me that I just bought your $13 book thru PayPal. I just retired after 35 years at Texas Instruments and am looking to become a software consultant to TI next year once my LOA is over. I have been searching for info on consulting and tax ramifications for indies in the net, but your site was the most helpful to me. I am going thru DBM transition services but even they cannot compare to your expertise.

Thank you so much and I hope the book gives me the answers I need to start my own sole proprietorship consulting business.

Sherman, TX

Dear Gilbert,

Thanks you so much for your generous comments. I am traveling in upstate NY right now but I know my staff will get your copy of Self-employed Tax Solutions to you quickly.

SOLUTIONS will give you a complete understanding of the basics of being self-employed. After 35 years as an employee you will find that being self-employed requires a different mindset as well as new knowledge of your tax and recordkeeping responsibilities. After reading my book you will have the confidence of a firm foundation on which to build your new business.


Reimbursements & SE Tax

June --

I have been a
Consultant for 10 years.

Saw your comments on expenses going on a 1099. Yes you can deduct from your income tax but must pay SS and Medicare! 15.3% If you want to be fully reimbursed you have to ask for 18.1% more! Which I do. Pays for the extra SS/medicare tax on the extra amount being reimbursed!

What say?

Jerry --

I say get the extra 18% if you can but your reasoning is incorrect.

You do not pay self-employment [SE] tax on gross income but on net self-employed income. Therefor you do not pay SE tax on reimbursements included on a 1099. This is how it works:

10,000 gross income
1,000 non-reimbursed expenses get subtracted from your gross income
2,500 reimbursed expenses do NOT get subtracted from your gross income
9,000 net income on which you pay SE tax

12,500 gross income
1,000 non-reimbursed expenses get subtracted from your gross income
2,500 reimbursed expenses get subtracted from your gross income
9,000 net income on which you pay SE tax

In states where there is a gross receipts tax read my posts on reimbursements and talk with your tax pro about special recordkeeping.

-- June