Dear June,
I feel more confident than ever about how I file my taxes after reading your book, Self-employed Tax Solutions.
Do you ever "review" past filings (especially during the off season!) to evaluate any areas of concern or improvement?
-- Lisa
Dear Lisa,
You've sent me several emails and questions and suggestions. That's you in the Bravo Indies! column. Thank you. I appreciate your input.
You're right; knowledge breeds confidence. That's my goal in my work with indies. I am putting together a series of small publications and am searching for a "confidence" title. Titles are not my area of expertise. Ugh.
On your question, a tax return is not a thing-to-do or a chore. It is a collaboration between you and your tax pro, the result of a process. That process starts with the indie getting as much info as possible, using that knowledge throughout the year, treating the work that she does as a business by being in what I call that indie-business-mindset, employing a recordkeeping method that fits her style and is also accurate, and then taking that information to an indie-savvy tax professional who will use that information to prepare the tax return.
Unless there were a glaring mistake, a later review of the tax return would not tell me -- nor any other accountant -- what went into that end result. That could happen only if there were a review of the process.
Best,
June
Thursday, September 24, 2009
Checks from Uncle Sam
June --
A couple times in the past 5 years I have gotten checks from the IRS after I thought I was square with them.They never send any information about where i made my mistake. How does one go about finding out that information?
-- Lisa
Lisa --
Call the IRS at 800.829.1040. Have the tax return for the year of the payment right there in front of you when you call. Also call early in the morning. That's when the IRS is least busy. Have a cup of coffee, too, because you may be on hold a while.
Usually there is a year noted in the upper right corner of the check, for instance December 2007 lets you know it was for something that happened in 2007. If you cashed the check and don't know what year, have your three back years' returns by the phone.
-- June
A couple times in the past 5 years I have gotten checks from the IRS after I thought I was square with them.They never send any information about where i made my mistake. How does one go about finding out that information?
-- Lisa
Lisa --
Call the IRS at 800.829.1040. Have the tax return for the year of the payment right there in front of you when you call. Also call early in the morning. That's when the IRS is least busy. Have a cup of coffee, too, because you may be on hold a while.
Usually there is a year noted in the upper right corner of the check, for instance December 2007 lets you know it was for something that happened in 2007. If you cashed the check and don't know what year, have your three back years' returns by the phone.
-- June
Wednesday, September 23, 2009
You are a business. Treat what you do as a business.
June --
I live overseas and I have been working as an independent consultant for three years. in May of 2009, I accepted a job as a subcontractor to a subcontractor (a research wing of a foreign university in Eastern Europe). The project was a disaster and the lead contractor has essentially hogged every cent and has not paid the subcontractor--very shady!
I am not getting paid. I have fought and continue to fight but without taking drastic more expensive actions, I think I'm just screwed. It is ill advised and expensive to go to court here and I don't want to make this battle so public in such a small place. I am owed 10,000 dollars, which is no small money for me, as the job ended early (I was originally expecting to earn 20,000 from it). Now I am getting 0 AND it cost me some money to actually do my work as an environmental consultant.
I don't want to go to court to resolve this, as it will cost me more money and time and this is a foreign court that is unpredictable.
My question is, can I deduct my losses (the $10,000 I was supposed to get paid) against the taxes owed on the $8000 in earned income for 2009.
I have a signed contract and stop work order I issued when it became clear I was going to be paid squat. What would I need for documentation to prove I'm not getting paid? . Also, now that everything has gone so sour, no one will issue anything in writing anymore so if I need a piece of paper that says, there's no way in heck you are getting paid, that might be difficult to obtain.
Secondly, how would I claim these losses--is there a particular US gov form for losses. Thirdly, how much more likely get audited will I be by deducting big losses against my measly 2009 earnings.
Lets say I finally and surprisingly get paid next year at some point--what would I do if i had already deducted in from my 2009 taxes.
Is this common for independent contractors to find themselves in such a position, where it is too expensive and hard to go to court and the Indie just comes to terms with not getting paid.
Dejected and Taken Advantage of Indie, Jennifer
Dear Jennifer, A Dejected and Taken Advantage of Indie,
I apologize for cutting so much from your email. I wanted to make it accessible to my readers because yours is not an uncommon situation. Many indies get stuck for the bill. I am sorry this happened to you and to so many others.
What you don't want to hear is that you allowed yourself to be taken advantage of. If it were a $1000 job I could understand your doing the work before getting paid. But $20,000!! And doing $10,000 worth of work with no payment. In all that paperwork that you have you should have included a payment schedule. Something like: 1/4 of the work done, get paid 1/4 of the money. No more work until you get paid.
So, it happened to you once. Don't let it happen again. You are a business. Treat what you do as a business.
And the other thing you don't want to hear. You are a cash basis taxpayer -- explained in these posts -- so you can do nothing with the loss. You cannot deduct it. You may deduct any expenses that you incurred.
Best,
June
I live overseas and I have been working as an independent consultant for three years. in May of 2009, I accepted a job as a subcontractor to a subcontractor (a research wing of a foreign university in Eastern Europe). The project was a disaster and the lead contractor has essentially hogged every cent and has not paid the subcontractor--very shady!
I am not getting paid. I have fought and continue to fight but without taking drastic more expensive actions, I think I'm just screwed. It is ill advised and expensive to go to court here and I don't want to make this battle so public in such a small place. I am owed 10,000 dollars, which is no small money for me, as the job ended early (I was originally expecting to earn 20,000 from it). Now I am getting 0 AND it cost me some money to actually do my work as an environmental consultant.
I don't want to go to court to resolve this, as it will cost me more money and time and this is a foreign court that is unpredictable.
My question is, can I deduct my losses (the $10,000 I was supposed to get paid) against the taxes owed on the $8000 in earned income for 2009.
I have a signed contract and stop work order I issued when it became clear I was going to be paid squat. What would I need for documentation to prove I'm not getting paid? . Also, now that everything has gone so sour, no one will issue anything in writing anymore so if I need a piece of paper that says, there's no way in heck you are getting paid, that might be difficult to obtain.
Secondly, how would I claim these losses--is there a particular US gov form for losses. Thirdly, how much more likely get audited will I be by deducting big losses against my measly 2009 earnings.
Lets say I finally and surprisingly get paid next year at some point--what would I do if i had already deducted in from my 2009 taxes.
Is this common for independent contractors to find themselves in such a position, where it is too expensive and hard to go to court and the Indie just comes to terms with not getting paid.
Dejected and Taken Advantage of Indie, Jennifer
Dear Jennifer, A Dejected and Taken Advantage of Indie,
I apologize for cutting so much from your email. I wanted to make it accessible to my readers because yours is not an uncommon situation. Many indies get stuck for the bill. I am sorry this happened to you and to so many others.
What you don't want to hear is that you allowed yourself to be taken advantage of. If it were a $1000 job I could understand your doing the work before getting paid. But $20,000!! And doing $10,000 worth of work with no payment. In all that paperwork that you have you should have included a payment schedule. Something like: 1/4 of the work done, get paid 1/4 of the money. No more work until you get paid.
So, it happened to you once. Don't let it happen again. You are a business. Treat what you do as a business.
And the other thing you don't want to hear. You are a cash basis taxpayer -- explained in these posts -- so you can do nothing with the loss. You cannot deduct it. You may deduct any expenses that you incurred.
Best,
June
I don't want the hassle of a payroll.
June --
I am from Vancouver, Washington I work for a Supported Living Agency.
Just starting as an indie. I am starting a 16 voice, Male Choral Ensemble here in Vancouver. I had hoped to pay my singers and director a percentage of net sales from each concert series. I thought I could treat them as independent contractors and only have to issue a 1099. I had hoped to do this mostly to avoid all the payroll expenses associated with having employees. I am finding that the IRS would not allow such a classification.
I am now looking for alternative solutions to this dilemma. I am operating as a sole proprietor currently, but wonder if there is another structure that would allow me to pay my people, but avoid the workers comp,unemployment and any other expenses that would take money away from the business. Is there a way to have contracted singers even though the compensation is minimal and would not in the beginning even cover minimum wage?
Matthew
Dear Matthew,
The structure or entity setup of your business is not the determining factor in how someone is paid. The determining factor is the kind of work relationships there are between the person or business doing the hiring -- that's you -- and the people working for you.
Those relationships determine whether it's an employer-employee work arrangement or an independent work arrangement. Read this column from my website for a better understanding: It's all about relationships: Are you an employee or are you self-employed?
-- June
I am from Vancouver, Washington I work for a Supported Living Agency.
Just starting as an indie. I am starting a 16 voice, Male Choral Ensemble here in Vancouver. I had hoped to pay my singers and director a percentage of net sales from each concert series. I thought I could treat them as independent contractors and only have to issue a 1099. I had hoped to do this mostly to avoid all the payroll expenses associated with having employees. I am finding that the IRS would not allow such a classification.
I am now looking for alternative solutions to this dilemma. I am operating as a sole proprietor currently, but wonder if there is another structure that would allow me to pay my people, but avoid the workers comp,unemployment and any other expenses that would take money away from the business. Is there a way to have contracted singers even though the compensation is minimal and would not in the beginning even cover minimum wage?
Matthew
Dear Matthew,
The structure or entity setup of your business is not the determining factor in how someone is paid. The determining factor is the kind of work relationships there are between the person or business doing the hiring -- that's you -- and the people working for you.
Those relationships determine whether it's an employer-employee work arrangement or an independent work arrangement. Read this column from my website for a better understanding: It's all about relationships: Are you an employee or are you self-employed?
-- June
Thursday, September 17, 2009
Be generous but do not cheat yourself!
In my September Ways Through the Maze I presented info on indies donating their time, services or products. You can read it here.
Today I received the following questions on that the topic.
Hazel, of Organized for Life, asks:
Someone I know "donates" services by arranging that the organization will pay her and that she will return the payment to them in the form of a donation.
Is that smart, or is it just cheating?
Beth, of Pilotone Music, asks:
Occasionally I have performed a service for a non-prof, been paid for it, then donated the check back to the organization. Isn't that a write-off or deduction?
Nancy, of Graphic Interpretations, asks:
Could this nonprofit have been confused with the state Enterprise Zone status? The State of Colorado offers this to nonprofits who apply and qualify. People who donate money and those, like myself who donate graphic design services, file paper work and may take a 25% deduction off the state income tax. I have done this for two nonprofit clients. In one instance, I did $2,000 worth of work and received a $500 tax credit off the bottom line for state income taxes.
Let me answer Nancy first.
A deduction is a subtraction from income.
A tax credit reduces your taxes.
For instance, a $1,000 business expense deduction might save you about $330 in taxes. While a $1,000 tax credit reduces your tax by $1,000.
A business expense deduction – something like supplies or postage -- is not at all like a state tax credit. Nor is it like a federal tax credit.
For instance, you can get a federal tax credit for spending money on child care but you cannot deduct childcare as a business expense. You can get a tax credit for being elderly or disabled but you can’t subtract old-age as a business expense.
Just as the fed has tax credits so does every one of the 50 states. And no state necessarily offers what any other state offers.
A self-employed may not deduct any amount of money from her business income for time or services donated to a non-profit. States may offer incentives to donate. That's a separate issue. Good for Colorado!!
My answer to Hazel is: Yes, it’s cheating. You are cheating yourself. Here’s why. And, this applies to Beth as well.
If you donate $2,000 worth of services and the non-profit pays you $2,000 you will pay federal income tax and self-employment tax on that income. Depending on the state you may also have to pay state income tax, sales tax, gross receipts tax, or unincorporated business tax.
Were you to then deduct that $2,000 as a personal charitable deduction on your federal tax return you might be able to save on federal income tax. I say "might" because you may not have met the threshold for personal deductions and so you'd lose the benefit of the deduction.
Since it is not a business expense you would not reduce your self-employment tax, approximately 15%. That’s a cost to you of $300. [2000 x .15]
Depending on your state there is a good chance you would get no personal deduction for your personal contribution and had you been liable for sales tax, gross receipts tax, or unincorporated business tax absolutely no deduction there. So the tax you paid would stay in the hands of the various state agencies.
All in all, by claiming the $2,000 as business income and then using it as a personal deduction you would have cost yourself a considerable amount in taxes.
Help out everybody: Please forward this post to the non-profits.
-- June Walker
Today I received the following questions on that the topic.
Hazel, of Organized for Life, asks:
Someone I know "donates" services by arranging that the organization will pay her and that she will return the payment to them in the form of a donation.
Is that smart, or is it just cheating?
Beth, of Pilotone Music, asks:
Occasionally I have performed a service for a non-prof, been paid for it, then donated the check back to the organization. Isn't that a write-off or deduction?
Nancy, of Graphic Interpretations, asks:
Could this nonprofit have been confused with the state Enterprise Zone status? The State of Colorado offers this to nonprofits who apply and qualify. People who donate money and those, like myself who donate graphic design services, file paper work and may take a 25% deduction off the state income tax. I have done this for two nonprofit clients. In one instance, I did $2,000 worth of work and received a $500 tax credit off the bottom line for state income taxes.
Let me answer Nancy first.
A deduction is a subtraction from income.
A tax credit reduces your taxes.
For instance, a $1,000 business expense deduction might save you about $330 in taxes. While a $1,000 tax credit reduces your tax by $1,000.
A business expense deduction – something like supplies or postage -- is not at all like a state tax credit. Nor is it like a federal tax credit.
For instance, you can get a federal tax credit for spending money on child care but you cannot deduct childcare as a business expense. You can get a tax credit for being elderly or disabled but you can’t subtract old-age as a business expense.
Just as the fed has tax credits so does every one of the 50 states. And no state necessarily offers what any other state offers.
A self-employed may not deduct any amount of money from her business income for time or services donated to a non-profit. States may offer incentives to donate. That's a separate issue. Good for Colorado!!
My answer to Hazel is: Yes, it’s cheating. You are cheating yourself. Here’s why. And, this applies to Beth as well.
If you donate $2,000 worth of services and the non-profit pays you $2,000 you will pay federal income tax and self-employment tax on that income. Depending on the state you may also have to pay state income tax, sales tax, gross receipts tax, or unincorporated business tax.
Were you to then deduct that $2,000 as a personal charitable deduction on your federal tax return you might be able to save on federal income tax. I say "might" because you may not have met the threshold for personal deductions and so you'd lose the benefit of the deduction.
Since it is not a business expense you would not reduce your self-employment tax, approximately 15%. That’s a cost to you of $300. [2000 x .15]
Depending on your state there is a good chance you would get no personal deduction for your personal contribution and had you been liable for sales tax, gross receipts tax, or unincorporated business tax absolutely no deduction there. So the tax you paid would stay in the hands of the various state agencies.
All in all, by claiming the $2,000 as business income and then using it as a personal deduction you would have cost yourself a considerable amount in taxes.
Help out everybody: Please forward this post to the non-profits.
-- June Walker
Wednesday, September 9, 2009
Backup! Backup! Backup!
June --
I'm a Brooklyn, NY muscian - filing as self-employed for about 5 years.
I have been filing with the IRS as self-employed but for 2008, records of my gigs and how much they pay got destroyed as they were on my hard-drive and I didn't have a paper copy. What are my options?
Thank you!
Jeremy
Hi Jeremy,
First, make sure that you have proof of the hard-drive's destruction. Then go about reconstructing your life for 2008.
For instance, printout a page from a club's website where you played. Estimate your income. Ask the guys you played the gigs with for any records they have. If the clubs advertise in print get copies. Go take pictures of the clubs. Use the previous or following year as a guide.
For expenses, ask your credit card companies for back statements. Do the same with your bank.
Very important to know for you and all indies: Something logged in a computer -- in Word or Excel, or Quicken -- is not proof to the IRS. Any just slightly clever person can make the records say anything he or she wants them to say. You must have proof. Documents. The document can be on computer but it must be something that proves income or an expense -- cancelled check; credit card receipt; store receipt.
-- June
I'm a Brooklyn, NY muscian - filing as self-employed for about 5 years.
I have been filing with the IRS as self-employed but for 2008, records of my gigs and how much they pay got destroyed as they were on my hard-drive and I didn't have a paper copy. What are my options?
Thank you!
Jeremy
Hi Jeremy,
First, make sure that you have proof of the hard-drive's destruction. Then go about reconstructing your life for 2008.
For instance, printout a page from a club's website where you played. Estimate your income. Ask the guys you played the gigs with for any records they have. If the clubs advertise in print get copies. Go take pictures of the clubs. Use the previous or following year as a guide.
For expenses, ask your credit card companies for back statements. Do the same with your bank.
Very important to know for you and all indies: Something logged in a computer -- in Word or Excel, or Quicken -- is not proof to the IRS. Any just slightly clever person can make the records say anything he or she wants them to say. You must have proof. Documents. The document can be on computer but it must be something that proves income or an expense -- cancelled check; credit card receipt; store receipt.
-- June
Saturday, September 5, 2009
Get an EIN for Security Reasons
Hi June,
LOVE your website and blog. Not only is it informative, but it's damn entertaining as well.
I have a quick question about EIN's. I'm an independent consultant for large companies and firms. I usually go to a company, teach a 2 day-long seminar to its employees and then move on to the next job. I've only been doing this for about 2 years now, but I find that when invoicing for my work, I'm constantly giving out my Social Security number to every company that pays me.
I'm starting to think that from an identity theft standpoint it might be smart to get an EIN to use for my business activities. Should I?
And if I do, can I still use my Social Security number for other reasons (medical forms, year-end taxes, dealing with the Social Security administration when it's time to collect SS benefits, etc.)
Thanks very much, and keep up the good work!
Josh
Hi Josh,
Glad you like my stuff. Thanks.
Yes, by all means get an EIN. Use it for all your business papers. Your EIN and your social security number will be used on your tax return. Both will appear on your federal Schedule C: Profit (Loss) From Business.
You would still use your social security number for all personal paperwork such as medical, etc.
Here's some more info on EINs and how to get one EIN-employer identification # .
Cheers,
June
LOVE your website and blog. Not only is it informative, but it's damn entertaining as well.
I have a quick question about EIN's. I'm an independent consultant for large companies and firms. I usually go to a company, teach a 2 day-long seminar to its employees and then move on to the next job. I've only been doing this for about 2 years now, but I find that when invoicing for my work, I'm constantly giving out my Social Security number to every company that pays me.
I'm starting to think that from an identity theft standpoint it might be smart to get an EIN to use for my business activities. Should I?
And if I do, can I still use my Social Security number for other reasons (medical forms, year-end taxes, dealing with the Social Security administration when it's time to collect SS benefits, etc.)
Thanks very much, and keep up the good work!
Josh
Hi Josh,
Glad you like my stuff. Thanks.
Yes, by all means get an EIN. Use it for all your business papers. Your EIN and your social security number will be used on your tax return. Both will appear on your federal Schedule C: Profit (Loss) From Business.
You would still use your social security number for all personal paperwork such as medical, etc.
Here's some more info on EINs and how to get one EIN-employer identification # .
Cheers,
June
Wednesday, September 2, 2009
Recordkeeping not a bank balance is the real indicator of an indie's financial status.
Visionary Accounting For Entrepreneurs said...
June,
I love your book. I love your passion. However I politely disagree with your advice to have one bank account. Business owners need clarity with regard to the distinction between business and personal. Commingling funds should be avoided if at all possible. Maintaining a separate bank account for business activities enables this to occur for most all transactions. Loans between the owner and the business can be tracked in an Owner's Draw account, to be reconciled at year-end. Keep up the awesome job! You rock !
August 20, 2009 5:22 PM
Hello Visionary!
What a great name.
Thanks for your generous comments about Self-employed Tax Solutions. And, I don't know if I "rock" but I sure love rock 'n' roll and I love to dance.
Regarding a business checking account, keep in mind that I am talking about only sole proprietors who are not LLCs.
They include writers, graphic designers, poets, musicians, composers, web developers, handy men -- and women, astrologers, psychologists, photographers, landscapers, theatre critics. To name just a few of the independent professionals I work with. They are not small businesses. They are not widget makers.
They typically do not have funding for their professions. What do they do? They write. They sculpt. They photograph. They advise. They cut grass.
For many of these people their lives are their work. My goal is to help them distinguish between personal and business. That is a learning process and not one that forces them to make a decision, at a bookstore for example, as to whether the book is being bought for private leisure reading or as a business purchase. That decision can be made during the recordkeeping process.
In a sole proprietorship the owner is the business. The business is the owner. One's money is no different than the other's. There is no loan from one to the other because there is no other.
There is no owner's draw for sole proprietorships. There is for corporations. There is no reconciliation. It is not the balance in a bank account that is the determining factor. It is the recordkeeping that determines the profit or loss and that gives indies the information they need when they need it.
Depending on how timely he or she wants to be, the indie can keep records on a weekly basis, a monthly basis, or once a year on an annual basis. As to method, he or she can keep those records manually, or use software like Quicken, or have the records kept by a bookkeeper. Timeliness, recordkeeping method and of course accuracy are what provide an indie with the information needed to determine where the venture is financially.
Thank you for contributing to a discussion that is worthwhile to indies.
Best,
June
June,
I love your book. I love your passion. However I politely disagree with your advice to have one bank account. Business owners need clarity with regard to the distinction between business and personal. Commingling funds should be avoided if at all possible. Maintaining a separate bank account for business activities enables this to occur for most all transactions. Loans between the owner and the business can be tracked in an Owner's Draw account, to be reconciled at year-end. Keep up the awesome job! You rock !
August 20, 2009 5:22 PM
Hello Visionary!
What a great name.
Thanks for your generous comments about Self-employed Tax Solutions. And, I don't know if I "rock" but I sure love rock 'n' roll and I love to dance.
Regarding a business checking account, keep in mind that I am talking about only sole proprietors who are not LLCs.
They include writers, graphic designers, poets, musicians, composers, web developers, handy men -- and women, astrologers, psychologists, photographers, landscapers, theatre critics. To name just a few of the independent professionals I work with. They are not small businesses. They are not widget makers.
They typically do not have funding for their professions. What do they do? They write. They sculpt. They photograph. They advise. They cut grass.
For many of these people their lives are their work. My goal is to help them distinguish between personal and business. That is a learning process and not one that forces them to make a decision, at a bookstore for example, as to whether the book is being bought for private leisure reading or as a business purchase. That decision can be made during the recordkeeping process.
In a sole proprietorship the owner is the business. The business is the owner. One's money is no different than the other's. There is no loan from one to the other because there is no other.
There is no owner's draw for sole proprietorships. There is for corporations. There is no reconciliation. It is not the balance in a bank account that is the determining factor. It is the recordkeeping that determines the profit or loss and that gives indies the information they need when they need it.
Depending on how timely he or she wants to be, the indie can keep records on a weekly basis, a monthly basis, or once a year on an annual basis. As to method, he or she can keep those records manually, or use software like Quicken, or have the records kept by a bookkeeper. Timeliness, recordkeeping method and of course accuracy are what provide an indie with the information needed to determine where the venture is financially.
Thank you for contributing to a discussion that is worthwhile to indies.
Best,
June
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