Sole proprietorships may not deduct a charitable donation as a business expense.

June --

Massage therapist , 1 year.

If I raise money doing massage and then write a check to a non-profit for the amount of the proceeds, is this considered a charitable gift and tax deductible if I am a sole proprietor (a personal deduction instead of a business deduction)?

Linda
Newton, MA


Dear Linda,

The money you receive for doing massage is self-employed income.

The money you give to a charity is a personal charitable deduction not a business expense.

There's a lot more info here expenses -- donated services or products .

-- June

Take Charge

June --

After an extensive web search fiasco, it seems you are "the best-of-the-best" when it comes to answering tax questions for the self-employed artist! (CONGRATS! lol) I'm trying to learn ASAP what I need to do in my situation. I am a graphic artist.

I worked for the same company for 10 years. W-2 / $1000 every 2 weeks ...some months had 3 pay periods. I brought home approx. $850 every paycheck. NOW they want to 1099 me for a straight $2000 each month. So that's a pay cut.

I do work from home in my own office, but never took the deduction. I haven't a CLUE where to begin.

I bought a better house & cars not too long ago, so don't have a lot of money set aside...2 little girls...live-in fiancé altho the IRS doesn't know he lives with me because he owes them.

I was able to receive a decent earned income credit my accountant says. She's never charged me more than $100 to do my return.

Can't believe they are doing this to me after 10 years. I need to know how I can maximize this $2000 a month at taxtime or we aren't going to make it. I'm not sure how much to keep out for the IRS. Do I HAVE to pay quarterly or can I pay at the end of the year?

I just don't know what to do to keep my family afloat without getting punished by the IRS later. Liiving in Central IL doesn't offer much advice without a hefty pricetag. Any advice would be GREATLY appreciated.

Sincerely,
Becky
Illinois


Wow, Becky! I understand your fear, confusion, and not knowing which way to turn. Let's break this down into small pieces as you presented them. Then, as the mother of two, you need to take charge and deal with each piece.

The company you work for cannot legitimately switch you from an employee to a self-employed without making any other changes. Please read this post Employee vs. Self-employed. The company is doing it to save money and in the process will cheat you.

As an employee you were earning $26,000 per year [$1000 X 26 weeks]. As a self-employed you will earn $24,000 per year [$2000 X 12 months.] That save the company $2000. In addition to that, by paying you as a self-employed rather than employee, the company will save an additional 20% to 30% in payroll taxes and benefits. That's a minimum of $4800 [$24,000 X .2]. So the company is
saving approximately $6800.

It is fraud. Usually I suggest posts to read. I insist you read this post Homeland Security or Jobs 'n' Things . After you read it decide whether you want to pursue kicking this company in the rear or going along with it because you must keep the work. You say that you "Can't believe they are doing this to me after 10 years." People and businesses mostly do to you only what you allow them to do.

You have a "live-in fiancé altho the IRS doesn't know he lives with me because he owes them." How much does he contribute to the household? Anything? A fiancé may become a husband. His IRS problems then become yours. Yes, yours! He must take care of that now. Time for both of you -- or you alone -- to take on the responsibility of clearing up the financial part of your relationship with your future husband.

Is the father of the children paying any child support? If not, talk with the agency in your state of Illinois that will help you with that.

You also say that you may get "punished by the IRS." Where did that come from? Punished? The IRS collects the same taxes from you, from me, from every indie and from all employees. Don't blame the IRS because a company is engaging in fraudulent business practices.

If you accept the company's offer and do become self-employed you will find the answers to all the questions you asked above as well as how to get the lowest tax possible, how to keep records, and how to calculate and pay estimated taxes on this blog, on my site and in my book, Self-employed Tax Solutions.

You are not the victim. You are responsible for three lives -- yours and your two daughters. You need to review and take charge of the circumstances you are currently in. Women are tough. You can do it.

All the best,
June

Health Insurance Deductions / Income: Indies Be Careful!

Hi,

I'm a freelance writer/consultant in San Francisco, finishing my taxes, and would greatly appreciate a small bit of help/clarification.

As a full-time freelancer with no employer health plan, can I deduct the full cost of my health insurance payments? I have no access to a partner's plan or COBRA.

Last year I deducted one-fourth of health insurance as a business expense, but can I deduct the full amount?

One more question if I can: do I need to report any payments under $400 from clients, if I didn't get a 1099?

Thank you very much for your assistance,
Chris


Hello Chris,

There's a special place in my heart for writers. My husband is a writer. Many friends are writers. So here's my special caution to you.

A writer's accuracy is his credibility.

Everything you do goes out with a byline. I assume you are sure of the facts before you put your name on something you offer for publication.

You don't say whether you're a sportswriter or science writer or a generalist. If you're a sportswriter you sure as heck better understand the game. If a science writer you'd better be comfortable in a physics or chemistry lab.

Just as being a specialist in any field requires education and experience so too does tax preparation for indies require education, research, experience.

Your tax return is a document that you sign, attesting to the accuracy and truthfulness of what's on that paper. You must know what you're signing.

Your two questions point out why indies should not do their own tax returns. Your questions are Indie Tax 101.

Health insurance premiums are not a business expense deduction.They are deducted as an adjustment to income. Same place you'd deduct alimony payments.

Payment to you for your freelance writing is taxable. All of it. Whether you get a 1099 or you're paid in cash and nobody sees the transaction or you're paid in chickens. And if you don't claim the income it's fraud.

Don't mess yourself up by getting into trouble with the IRS. Learn more. Read. A good place to start your education: Go to your library and check out my book Self-employed Tax Solutions .

Best,
June

Meal Expenses For House Sitters

Hi June,

My name is Megan and I'm from Portland, OR. I've recently ordered your book and am looking forward to receiving it.

I've worked on the side as an indie house and petsitter off and on since 2001. I mostly move into people's houses for several nights or weeks and take care of their houses and furry kids while they are away. In recent years I've done this once every month or more, depending on the season.

I may be grasping at straws here but want to cover all of my bases...I'm wondering if my meals while I'm on the job are deductible as a business expense? I go grocery shopping and cook in the home that I'm staying in. If they are deductible and I don't have my receipts from last year, would it be appropriate to use the Standard Meal Allowance?

Thanks,
Megan


Dear Megan,

Meals are deductible as a business expense in only two situations.

1. You may deduct the cost of the meal if you take a business associate to a restaurant, you pay for yourself and the associate and there is a business reason for the meal.

2. You may deduct all costs of your own meals and snacks while traveling. You may use actual cost or the IRS per diem amount. Travel may be simply defined as staying overnight away from your tax home for a business reason . Tax home is the area where you live and generally work.


Were you my client I would not take a deduction for meals even though you stay overnight if you are pet or house sitting in the neighborhood, your town, close by. If you were a substantial distance from your tax home, then I would take meals deductions.

Other tax pros may take a more aggressive approach and deduct all meals while overnight.

Best,
June

Income & Gifts

Hi June!

Graphic Designer ... 3 years.

I'm in the process of reading your book, Self-employed Tax Solutions, fabulous resource!

I have a question for you. I have a restaurant client that has wonderful food, around the holidays I typically will ask them for a few gift cards and sometimes food for my clients. I write that amount off of their invoice for the month but I'm not sure how to take advantage of the gift deduction.

Hoping I wouldn't have to bill them as normal and then pay them for the above items. Is there an easier way?

Also, I just returned home from a week stay at Disney World. I saved all of my receipts while I was there with my husband. Would it be possible to deduct my portion of the trip if it was for creative renewal/inspiration?

Thank you so much for breaking this all down to bite size pieces of information. You're the best!

Sincerely,
Kristen
Midlothian, VA


Hi Kristen,

I am so pleased you're using my book as a resource. Resource and reference for indies was my intention.

Think of your restaurant/gift situation this way...

Kate's Cafe owes you $1000.
Were Kate to pay you you $1000 in money you'd have $1000 income.
Were you then to give Kate a $200 check for gift cards -- and here it gets a little tricky -- here's how it would work.

You would get to deduct as a business expense $25 per business associate to whom you gave the gift cards. [That's per year. Yes, $25 per year, per associate.]

If you gave $25 gift cards to 8 people, you get a $200 business deduction.

A $200 gift card to one person would get you only a $25 deduction .
Deduction categories in your recordkeeping would look like this:
Business Gift .................. $ 25
Business Gift Excess .... $175

Or ...

Kate pays you $800 and gives you $200 worth of gift cards.
Your income is still $1000.
Your deductions would be the same as above.

You do not have to exchange checks with Kate but you must keep the records on the income and expenses.

BTW -- Kate would have a $1000 expense if she paid you in money and gift cards. A little less were she to pay you in money and food.

On Disney: Can't deduct inspiration.

Best,
June

Employee and self-employed income and expenses must be kept separate.

Hi June,

Question. My wife, who is an INDIE, started working part-time this year for a company that will issue her a W-2 at the end of the year. They are also doing the withholding taxes. She is still doing her independent contractor work with several other clients, usually in the morning before she goes to the part-time work location (out of her home office).

How do we report her W-2 income? I think she gets a 1099 from her other clients. The simplest for us would probably be to keep it within her sole proprietor business tax forms.

Thanks, we are enjoying your book, but couldn't find this question in it.

Dan


Dear Dan,

Glad you are enjoying my book, Self-employed Tax Solutions. Thanks for letting me know.

You didn't find the specific answer to your question in Self-employed Tax Solutions because yours is a how-to question regarding tax return preparation I do not encourage indies to prepare their own returns and my book doesn't explain how to prepare a tax return for a self-employed.

You will find the following in my book:
Simply stated: if taxes are withheld it's W-2 income; and if no taxes are withheld it's self-employed income...
... It is important to understand the distinction and to keep them separate in your records. Why? Because they are treated differently on your tax return and the tax you pay on each is not the same.

Tax returns for indies are complex. Your question indicates a lack of basic understanding of the difference between the two types of income. If you do your own return you'll very likely cheat yourself.

Now to answer your question:
You cannot combine the two. You must keep the income and expenses related to W-2 income completely separate from the indie business income and expenses. Although on the same 1040 tax return each kind of income uses different forms within that 1040 return.

Use a tax pro or go to H&R Block. Don't mess yourself up.

Best,
June

No indie business means no indie business expenses to deduct.

Hi June,

Structural drafter for 20 + years , I have been self-employed for the last 6 years up till June 2009 when I lost my self-employment business and had to seek a part-time as a temp employee.

I lost that job in August, now I am unemployed.

My question is, will I still be able to write-off any expenses after losing my self-employed business while I seek work?, Like supplies, transportation for interviews etc.

cesar
fairfield, ca


Hello Cesar,

First, be sure to read this post Unemployment Compensation .

You may deduct self-employed expenses that occurred only during your period of self-employment. If you were no longer self-employed you may not deduct any indie business costs.

-- June

More on Spousal Employees

June --

I've been working from home for about six years and the momentum finally hit and now I have contractors of my own.

I was reading the pre-release of The Freelancing Mom and read your interview and when I read the part where I could hire my husband and give him insurance I jumped for joy. Between being over 230lbs. (albeit terribly healthy) and pregnant...health insurance is not an option for me - or so I found after calling company upon company. But if I could give it to my husband and he insured his spouse + kids, viola!

The only problem is...I know how to work with contractors and have a bookkeeper/tax professional that takes care of the 1099s and the taxes. But...how do I hire someone? Can I do it as just me or do I have to incorporate or set up a DBA first? Is this answered in your book that I'm about to order after I hit send? Once I order the book will I have access to the Most Simple System forms?

Thank you so much, I'm terribly glad to have found you :)

Lisa
Plainfield, NJ


Dear Lisa,

A sole proprietor -- which you are -- may hire employees. You do not need to incorporate.

As long as your husband really works for you -- that is, you are not paying him $400 a week to take out the trash -- then you need to setup a payroll and pay him. There are initial federal and state filings and then quarterly filings that must be done. I suggest you talk with your tax pro who can set up a payroll for you or check out payroll services such as Paychex or ask your bank if it provides a payroll service.

If I understand you correctly, then you said that you cannot get health insurance. Your eligibility for insurance coverage is in not way influenced by your husband being on your payroll and his having health insurance.

If you, the employer, provide a medical plan for your spousal employee then all your employee's family health costs are reimbursed to him by your business. That makes your family health costs -- items such as medical insurance, doctors, hospital, dental, eyeglasses, RX, etc. -- a business deduction for your business.

The medical plan must meet certain IRS requirements. To set up this plan -- it's IRS Code Section 105 -- I suggest you check out BizPlan online. Then call John Gill -- (309) 826-9610 -- at BizPlan to get even more info.

You may also provide your spousal employee with dental coverage, life insurance and a pension.
The advantages of having a spousal employed are too broad to go into in a post. Your personal tax professional should be able to provide you with all the particulars. If not, then find a new pro.

Best,
June

Tax Return Do-Overs: Must be done within 3 years

June, June, June.....WHY didn't I discover your site, 10 years ago. For most of those 10 years, I used a guy to do my taxes who obviously knows nothing of the tax code. He indicated to me that a large % of my deductions were not tax deductible because I was reimbursed for them. BUT I was reimbursed on a 1099 NOT separately on a W-2, expenses were included in my income. How far back can I go to correct past tax returns and maybe, reduce the dollars I owe to the IRS??

Thank you sincerely for your attention to my question.
Anna
Mcallen, TX


Dear Anna,

You may file an amended return up to three years after the deadline of April 15. So, a 2007 return filed on or before April 15, 2008 has until April 15, 2011 to be amended.

If you filed later than April 15 -- on a valid extension -- you have until 3 years after the filing date.

Anyone wishing more info on reimbursed expenses might want to read these posts: expenses -- reimbursed .

Best,
June

You create it. You sell. You pay tax.

Hi June,

I am a web designer ... 8+ years.

Hi June. I was directed to your site from a friend who spoke very highly of your tax knowledge for the self-employed :) Anyway, I have a situation where a website I created/owned was sold to an individual in Australia for a fairly substantial amount of money. Its come time where I need to file taxes, and I was wondering what you thought might be the best way to claim the sale.

I've been told either: long-term capital gain or self-employment income. The situation is fairly sketchy, as the person I sold to is unlikely to report the sale, so I have no forms, etc. I'd obviously like to be taxed the least amount possible :)

FYI: I ran the site for fun for about 1.5 years before the sale. It was an online deal-finding site, with social elements.

Thanks!
Pete
Palo Alto, CA


Dear Pete,

I assume you are a self-employed web designer. The site you sold is your creation and so it is taxable self-employed income to you.

Couple other things: The fact that nobody is going to get any paper saying that you sold it for $XX does not mean it's not taxable. If you don't claim the income it's fraud. That's really not good.

And, you guys got to watch out for all that tax advice you get from Aunt Tillie. Capital gains income. Good golly!

Check out this similar question: Indies: Your creation is your work and is subject to SE tax.

Best,
June

Keeping a Record of Subway & Bus Costs

Dear June,

My daughter is a free-lance visual artist in New York City, who spends about $100 a month for a subway pass that entitles her to unlimited trips. The primary use of the pass is to get to work, but it is also used for personal transportation. Is there any way she can deduct part of the expense?

Thanks,
Martha


Dear Mom,

Your daughter needs to keep a transportation record for a typical month. Then, for instance, if 62% of her trips were for business she may deduct $62 of every subway pass she purchases. If there is no typical month or it changes then she needs to keep records for, let's say, seasonal months and extrapolate from there, perhaps 6 months at one % and the other 6 months at a different %.

Keep in mind that commuting from home to work is not a business deduction. Going from one work place to another is. So only if she has a legitimate home office is her trip from home to a client deductible.

I assume that since you are writing for your daughter she is young and new to the business / working world. Time for her to learn about taxes. No 21st century woman is allowed tax-ignorance. You might want to suggest that she take a look at my blog and my book, Self-employed Tax Solutions.

Here's a post I know she will find helpful, Designers Dozen: Tax Saving Tips for the Graphic Artist.

-- Another Mom with 4 kids

Indies: Your creation is your work and is subject to SE tax.

Hi June,

I'm typographer, graphic artist for 10+ years.

What a great website and I will look at your books/CDs.

I have a question. I make fonts. Other people sell my fonts on their websites. They send me royalty checks. Do I pay self employment tax on that royalty income? Most of my time is spent making fonts but I also do some logos and design work if that makes any difference.

Thank you SO much.
Rae
Madison, WI


Dear Rae,

Glad my site is helpful to you.

Yes, your income from font design is self-employed income and is subject to self-employment tax. Same with a musician who wrote a song and sold it or a writer who wrote a book and sold it. It's what you do to earn a living. It's your earned income.

Any royalties a self-employed artist receives for his work is self-employed income.

If you sold the wagon or bike cluttering your garage -- not self-employed income.

-- June

Pension info every indie should know.

June --

I am from Long Island City (Queens), NY I am an Information Architect/Interaction Designer (web development) I have been independent (1099 sole proprietor) less than one year.

I am wondering if you could advise me on issues surrounding a retirement fund. I am interested in the Freelancers Insurance 401k plan. The limit for contribution is $16,500 but there is a profit sharing option which allows you to contribute as much as $49,000. How do I determine if I am eligible for profit sharing?

Daniel


Dear Daniel.

Here's a simple view of how pensions work for self-employeds:

You have a net income. Depending on your income and how much of that income you don't need for immediate living expenses [sometimes called discretionary income] you contribute money to your pension.

You can choose a pension that allows the contribution to be deducted from your income thereby reducing your current income tax. Years from now, when you withdraw the money from your pension you will pay tax on the amount withdrawn.

Or you can choose a pension that does not allow a deduction from income now. So there is no immediate tax deferral. And that means you will not have to pay tax on the money when you withdraw it years from now. These are ROTH versions of a pension account. For instance, you've probably heard of an IRA. This would be a ROTH IRA.

When you are 59 1/2 years old you may start withdrawing from your pension with no penalty. If you withdraw before age 59 1/2 you will have to pay a 10% penalty. There are some exceptions.

There are many different types of pension plans that a self-employed may have. The most flexible and the one that allows the largest contribution is a UNI-K, also know as a SOLO-K or one-person 401-k.

In 2009, if your income is high enough, you may contribute $16,500 plus 20% of your net income. This is not a requirement, this is a maximum. As long as you have a net income you may set up a UNI-K. There are additional contributions allowed if you are 50 years old or older.

To qualify for 2009, the plan must be set up before December 31, 2009. However, you have until you file your 2009 tax return to make the contribution. That could be as late as October 15, 2010.

You set up the plan at a brokerage house, for instance Raymond James or Schwab. Should cost about $ 75 or $100 per year. Be sure to use a brokerage house that allows complete flexibility in investment products. Some houses limit the investments for UNI-Ks.

There are other plans that allow for much greater contribution amounts and cost much more to set up and maintain. They are called Defined Benefit plans. I suggest them to clients who are at least 45 years old and who make a lot of money.

Here are a few other posts I've done on pensions.

Best,
June

Husband/Wife Business Benefits Social Security

Dear June,

My husband is a sole proprietor with an average yearly income of $80k. I am age 58, retired, and drawing a pension from my former employer and from my 401(k). My husband will be 62 in September and would like to file for social security but his income is too high.

Would there be any advantage to his hiring me (I am very active in his business) as an employee and paying me a salary thereby decreasing his income so that he is eligible for his full social security benefit? If so, how would be go about implementing?

Renee


Dear Renee,

Yes, there is an advantage to your husband hiring you. Of course it must be legitimate and not just a clever tax scheme.

He may hire you, give you full medical benefits as well as insurance and a pensions. All costs would be deducted from his business income, possibly reducing his income enough to not affect his social security payments.

You would start by setting up a payroll. Instructions for that are beyond the scope of an email.

Best,
June

Donating Time: 10 Cents A Minute

Hello June,

I am from Medford, OR and although I work full time at a commercial printer, I wrote a book on college choices and am selling it for profit on top of my regular job. I just began.

I read your answer to "You Asked ... Q&A No.7: No deduction for donated work or services" but I have a further question: what if I took time off of work (and lost money I could have earned) to speak at to high school students about college. Even though I lost income to do so, is it still not deductible?

Thanks,
Crystal


Hello Crystal,

A while ago there was a cell phone commercial that advertised 24/7 calling for only 10 cents a minute. And throughout the ad people would pop up with questions such as: Even on weekends? Response: Yes, 10 cents a minute. Then another pop up would ask: What about at three in the morning? Response: Yes, 10 cents a minute. And what about if I call while travelling? Response: Yes, 10 cents a minute.

It's the same with the questions I get about donating time. Doesn't matter if Attila Attorney works at the battered women's shelter and forgoes $600 an hour income or Lorenzo Landscaper cuts the grass for the church and is out thirty bucks an hour. NO DEDUCTION for their time for either of them.

You might want to read all these posts on donating time expenses -- donated services or products.

Best,
June

How does an indie pay Social Security Tax?

June --

I'm an independent military advisor ... have been for 3.5 weeks.

I have had one gig as an indie. I think I am going to be OK on income taxes. But I have searched your website, how do I make Social Security payments from my indie check? I tried to search your site to find the answer w/o bothering you, never could. I

Thanks in advance for you assistance,
Dean
Colorado Springs, CO


Hello Dean,


Good question. On their earned income, self-employeds, just as do employees, must pay three different taxes to the feds: income tax; social security tax ; medicare tax. Employees have these taxes withheld by their employers. The employer sends the withheld tax to the government.

For self-employeds social security tax and medicare tax are combined into self-employment tax. That's SE tax.

On a self-employed's federal tax return in addition to other forms there is a Form SE on which SE tax is calculated. SE tax is then combined with income tax liability to come up with total tax liability.

The calculation is done on the 1040 tax return and is paid via the tax return.

Be sure to read this post Estimated Taxes.

Best,
June