Learn how to deduct medical costs as a business expense.

Hi June,

I'm a software/controls/simulation engineer. Indie for 6 months.

Your web site has been a fantastic resource for me. Thank you. I read recently about deducting medical expenses and I contacted TASC about setting up a plan, which I expect will save me a good chunk on taxes.

I wanted to let you know your link is not working on your page http://junewalkeronline.com/index.asp?sPG=80.

Here's a link that works: https://www1.tasconline.com/buytasc/bizplan/page/whatisbizplan.

Thank you for the great web site !

Regards,
Rob
Pleasanton, CA


Hi Rob,

The guys to talk with at BizPlan are John Gill and Marino Alcorta-Narvaez.

How much you'll save depends on your total medical costs. There have also been some changes due to the new small business tax act that may have an impact on medical insurance deductions.

Thanks about the link -- been fixed -- and for your generous comments about my site.

Please let me know how BizPlan works out.

I just signed with Xynergy to develop my a new website and online marketing. Hope to have things up and running by Christmas or earlier. As a one-person info source I need to figure out how to spread the word more efficiently.

-- June

Indies: Stand up for yourselves

Hi again, June,

Well, today is a big indie day, isn't it? The President signed the Small Business Jobs Act.

But I, for one, am confused about capital expenditures vs "bonus depreciation".

I am a consulting psychologist in private practice [for 25 years], and was going to buy a new computer. I seem to remember that the IRS has had a maximum amount of business expense you can write off all at once, as opposed to having to depreciate it. I have always depreciated my computers/printers, etc. How does the new law affect us indies?

Can I now write off the whole thing in one tax year?

Thanks,
Mark
Fairfax Station, VA


Hi Mark,

I gather you are the same Mark who sent me this Q&A Software Cannot Replace Experience a while ago. And, I gather you did not take my advice -- still doing your own tax return. Right? Big mistake unless you absolutely cannot afford a pro or there is not one available to you.

You can write off the cost of your entire computer as long as the cost was $250,000 or less. You get a better deduction if ,instead, you take advantage of the bonus depreciation feature. However, the deduction must be spread out over time. Which method is better for you depends on your entire financial picture at the moment and predicted for the future. Which is why you need a pro.

Go back and read that experience post of mine. Please. I think it might save you some money.

And while you're reading I suggest this one too, What's a small business? Yes, it is an important day for small business. Could have been a lot more important had we had some more congress people willing to help the likes of you rather than the likes of those who make a lot more money than you.

I don't know yet how the new Small Business Act will impact indies. Once it's signed it then must be interpreted. Then the interpretation must be understood and agreed upon.

Indies, please pay attention to who votes for what and who advocates for which kind of tax change. That you can now deduct 100% of your health care costs and may deduct for a home office as well as have another work location are tax changes that came about because of the work and attention of your fellow indies.

You are 40 million strong. You have the power and the clout.

-- June

What's the difference between a tax bracket and a tax rate?

We are all hearing a lot of hype about tax cuts and tax hikes for the middle class, for the rich, for everybody, for nobody.

But, has any pundit or pol explained how taxes work? No. No more than anyone explains what is a small business?

So here's something with which to regale your friends at the next cocktail or tea party -- a little tax savvy.

What’s your tax bracket? It's the same thing as your marginal tax rate. As your taxable income increases so does your federal income tax rate. The rate at which you end up is called your tax bracket. Another term for tax bracket is marginal tax rate.

Tax bracket and marginal tax rate both mean the percentage at which your next dollar of income is taxed. If you’re in a 15% tax bracket, for instance, on the next $100 of taxable income you will pay $15 in income tax. If in a 28% bracket, then $28 of the next $100 taxable income will go to the Feds.

Advancing to a higher tax bracket does not mean that all your taxable income is taxed at the higher rate. It means that any income from that point on is taxed at that rate.

Gross income, age and filing status -- married, single, widow(er), etc. -- determine whether you must file a tax return.

Taxable income is what's left after all deductions have been subtracted. Taxable income determines the rate at which tax is paid

Let's look at Gary Graphic -- single, owns a house, gives a lot to charity.

Gary grossed $250,000 in his design business [Wow! that's a lot.] After deducting business expenses his net income for the design business was $195,000.

Among the deductions from the $195,000 were Gary's self-employed pension contribution, mortgage interest, real estate taxes, and charitable contributions. After all subtractions he had $100,000 taxable income.

Here's how his tax is calculated:
The first $ 8,350 …… is taxed at 10% = $ 835
the next $ 25,600 ….. is taxed at 15% = $ 3,840
the next $ 48,300 ….. is taxed at 25% = $12,075
the last $ 17,750 ...... is taxed at 28% = $ 4,970
Total Income: $100,000 Total Tax: = $21,720

Gary is in a 28% tax bracket. That is his marginal tax rate.

Gary's real tax rate -- we tax pros call it his effective tax rate -- is: just about 22%. Meaning that about 22% of Gary's taxable income went toward federal income taxes.

How did I get that: Divide 21,720 by 100,000

Keep in mind that in this example Gary started with $250,000 income. The tax talk about taxing the rich who make more than $250,000 is not about Gary or most of you unless you are one of the top 3% earners in the country.

If Danworth Design's taxable income were a half million dollars his federal income tax would be $152,684. That is a little more than 30% of his taxable income.

End of today's tax lesson.

June Walker

What's a small business?

Indies, you know that I frequently tell you that you are a business. That you must think like a business. That you must have an indie-business mindset. You also know that your business is small. Your business may be you and only you. You may call yourself a "small business" because you are.

There’s lots being said right now about tax credits, tax hikes, what’s good and what’s bad for small business.

Well, what exactly is a small business?

I think it will come as no surprise, that there is no "exactly." Let me give you some examples from our ever-present source: The IRS.

If Caitlin Caterer, who has three women working for her, or Lorenzo Landscaper, who has a couple guys help him out, were looking to take advantage of the "health care credit for small business," they’d qualify because, for this tax credit, small business is defined as any business having 25 or fewer employees.

If graphic designer Victor Visual wanted to carry-back the business loss he had this year in order to recoup some of the taxes he paid in previous years he’d be allowed to do that as long as his small business had gross income of not more than $5,000,000 per year over the last three years (yup, that’s five million dollars). Doesn’t matter how many employees Victor has as long as he didn't gross five million dollars.

If Sid System wanted to set up a medical savings account for the two techies who are his employees he’d be allowed to do that. Why? Because for the Archer medical savings plan the definition of small business is 50 employees or less.

And then there’s a whole lot of other “definitions” of small business. And this is where size really counts.

Based on the North American Industry Classification System (NAICS) the following are considered small businesses if their income is equal to or less than:
agricultural industries ---------------- $750,000.
heavy construction industries ----- $33,500,000.
trade contractors -------------------- $14,000,000.
retail and service industries -------- $7,000,000.

Or their number of employees is equal to or less than:
for most manufacturing and mining industries -- 500. employees
for all wholesale trade industries ----------------- 100. employees

(For complete list of size standards, see the Small Business Administration's Table of Small Business Size Standards.)

So indies, please be careful when people with an agenda throw around terms that have different meanings.

According to the IRS, in 2007 [most recent statistics available] 94% of businesses were S-corporations, partnerships, and sole proprietorships. I don’t want to boggle your mind but all those business entities pay taxes at the individual tax rates. Yes, that is so.

I’m a sole proprietor. I pay tax at an individual rate. If I hook up with another accountant and we form a partnership and split the profit, then we each pay tax at an individual rate. The same would be true if we formed an S-corp.

Randy Neugebauer, a Republican who represents the 19th District of Texas, as a guest blogger of Townhall.com, wrote on July 29, 2010, that "Ninety-four percent of small businesses will face higher taxes under the Democrats' plan."

Randy is using 94% to confuse us. You and I are part of the 94% of small businesses out there. So is just about everyone who visits my site. And! Most of us do not have at least $250,000 in taxable income.

I see Randy as intentionally muddying the water. Some may say it’s a lie. The Democratic plan is to keep individual tax rates as low as they currently are, except for those individuals with taxable income over $250,000.

Unless Mr. Neugebauer refers to small businesses such as retail manufactures with gross receipts of $7-million or trade contractors with a gross of $14-million he is deliberately misleading indies.

Indies send me lots of questions about the fear-instilling emails they receive that threaten tax hikes that will wipe them out. Don’t listen to that propaganda. Tell your indie colleagues not to be terrorized by this intentional misrepresentation. Get more information.

June Walker

Stage Mom -- sort of -- asks the questions for child model

Ms. Walker,

I bought your book Saturday night (Self Employed Tax Solutions - 2nd Edition) and highlighting stuff as I go, LOVE IT!!!!! I am only on page 52, soaking up every word you say!
Great to know. Thank you.

I HAVE TWO MAIN QUESTIONS:

I am in a really strange situation and can find ABSOLUTELY NO BOOKS ON THE SUBJECT MATTER! I have a daughter who is 13 and studying to be an actor/model. All the contracts we have signed say she is an "independent contractor". I understand that means she is responsible for own taxes, at the age of 13. ??? Yes.

Okay her taxes? or my taxes? Her taxes.

If she does a job for a client, the client pays the agent, the agent pays my daughter and then daughter has to pay a percentage (as stated in our contract) to her talent manager. Is there book on this stuff? Not sure what you're asking. If you're asking is there a book on this subject. yes, mine. The one you are reading. Your daughter is self-employed.

If you are asking about expenses, then the payment to the talent manager is a business expense against your daughter's self-employed income paid to her by her agent.

Holy cow! My head is spinning. This is our first year and how no idea what to expect when tax season rolls around.

And since I am paying the Talent Manager a commission, no taxes removed, is there something I need to worry about there? Your daughter, that is using her name and social security #, must send a Form 1099 to the talent manager at year-end. Here's some info 1099s W2s W4s W9s .

And are they deductible in the year occurred or year actually paid, When paid because your daughter is a cash-basis taxpayer. Read this post Cash vs Accrual Recordkeeping .
as most of the work here in South Florida is done October through March.

If for some reason she gets no work this year (2010) and I am told most of her work will probably be in January (2011), do I have expenses I can deduct? Yes. 2010 expenses are deducted in 2010 even if there is no income.

I am keeping records best I can but now after reading only half your book, I see I missed a lot of expenses - DUH! Keep on reading.

Thank you.
Annette


Annette, you had many, many more questions. Stop spinning. After you've finished reading my book, go talk with a tax pro. Ask your daughter's agent or talent manager to recommend someone.

Best,
June

Lots Of Travel Expense Info

Katie had requested my Self-employed Business Expenses list. On the request form I ask: Where do you get most of your tax advice? Katie's response was "I don't... :( "

My response: "Please don't say 'I don't ...?' Your homework: Read my site or blog 15 minutes a day!"

I advise that to any indie who doesn't get any simple and accurate tax or recordkeeping advice.

Katie sent the following:
Thank you so much for all the information you have provided me! I've been reading your site everyday for a good 15 mins... or more!

I'm still confused on travel expenses for my field of work. As a free lance stage manager, I often go to other cities for weeks at a time. (Mobile, AL for 4 weeks, Tulsa, OK for 9 weeks, etc.). They often house me, but I drive there and around the city as well as provide my own meals when out of town. There usually is not much or no kitchen available to me and I end up eating out most of my time there. Can I deduct my mileage while I am there and driving around? Also, am I allowed to take the IRS per diem? I was unclear what exactly I am able to deduct while I'm out of town.

Thanks for any help that you could provide! (I'm working on getting your book at the library and look forward to reading it!)

Katie
Shawnee, KS


Dear Katie,

Take a look at these posts expenses expenses -- travel (17) and these expenses -- travel-per diem-temporary worksite (10) . I think you'll find you answers there. If not please let me know.

-- June

Writers, beware: A royalty is different than a royalty.

June,

Thank you for your wonderful book. It has been a useful resource in the past year since I purchased it.

I am writing to you with a question I hope you can answer. Early this year, I published my first book. I am receiving royalty checks for the book this year. I am also working on another book (no advance or payment for the text--I'll just get royalties for that one too).

I have been an indie for many years first as a performer and more recently running a martial arts school, but writing is new for me.

I am quite puzzled about how to report royalty income. The IRS schedule E is for reporting income from royalties. However, there is a single sentence in the instructions that says "if you are self-employed as a writer, report your royalty income on a schedule C instead." My question is, what standard does the IRS use to determine if I am self-employed as a writer? On the one hand, it seems that anyone who is receiving royalty income from a book is, sort of by definition, self-employed as a writer. Is the difference whether or not I write off my writing expenses as business expenses? Is the difference whether I have another stream of income? This point has me quite confused, and it seems likely that it could make a difference of hundreds if not thousands of dollars in my tax liability, since schedule C income then gets reported on a schedule SE, whereas schedule E income does not. Any feedback you have on this would be most welcome. I welcome your comment.

Jonathan
Saint Paul, MN


Hello Jonathan,

Congratulations on getting published!

My "wonderful book." Oh, how I love to hear that. Thank you.

I don't usually get into tax preparation and tax forms on my blog but because so many accountants screw up on just the question you ask I want to address it here and alert writers to know at least this much about the actual preparation of their tax returns. So here goes:

How much income you make, whether you have other income, whether you write off expenses -- none of those come into play regarding the classification of royalty income. Read these two examples.

With a very little amount of money a regular Jon or Jane could invest in an oil well. Many do through their investment brokers. Many who do don't even know that they've invested in an oil well. At year end they get a Form K-1 from the oil company that says, hey Jon, you made $700 in royalty income. That royalty income goes on federal Schedule E. John didn't do anything to get that $700 other than invest some money.

With a whole lot of blood, sweat and tears Jon writes a book. It is published. Jon's publisher receives the money from the sales of the book. Then the publisher pays Jon his portion of that sale income. At year-end Jon receives a Form 1099 saying that Jon made $700 from the sales of his book. That income goes on federal Schedule C. Because Jon worked his butt off for two years writing the book that royalty is self-employed income and Jon will pay self-employment tax on whatever is left of that income after business expenses are deducted.

Royalty income from a publisher is the same kind of income as a fee for writing a magazine piece or a column for a blog.

The same applies to musicians who get a royalty on their compositions.

It's all self-employed income. Be sure your tax pro treats it as such.

Best,
June

Easy Recordkeeping

Hi June,

I live in Philadelphia, PA. I'm a calligrapher and journalist and I've been an indie for 5 years (and I'm originally from Santa Fe!)

I wanted to ask about the worksheets you provide on your website. What format are these in? Excel? PDFs?

Are they meant to replace an accounting method or are they intended to use at the end of the year for tax time?

I'm having a hard time finding simple accounting software and was wondering if you have any suggestions for Excel spreadsheets (other than me making my own). I was going to go in any copy the system you suggest in the book but I just wanted to make sure these sheets don't already exist for purchase.

QuickBooks is just way too complicated for my needs...

Many thanks,
Mara


Hi Mara,

Just returned from vacation in Jemez Springs. Being an ex Santa Fean I assume it's an area you know And, BTW, my daughter lives in Philly.

I am not sure what you refer to when you say worksheets that I provide on my website. On my site I offer for sale my 2010 manual recordkeeping how-to guide:The Confident Indie: Five Easy Steps. It has my worksheets in it.

Five Easy Steps shows indies the most simple way to keep records -- manually. In the 75 page publication are the worksheets which I developed over more than 20 years of working with indies.

The worksheets are PDFs; they are not in Excel. They are your means of presenting your self-employed tax information to your preparer.

Accompanying each worksheet, if necessary, is a description or instructions. Some of the worksheets follow the format of an actual IRS form but modify it in such a way as to make it more understandable and useful to you and your tax preparer.

First comes the recordkeeping; then come the worksheets.

Excel is not a recordkeeping program. It is simply a spreadsheet. Just like those old systems that had you putting things in little boxes then adding them up. Excel does the addition for you. It does nothing more regarding recordkeeping.

I agree with you, QuickBooks is too complex. It's for professional bookkeepers and accountants. It's a double entry system not for the layman. If you want to keep records manually, I strongly recommend you buy Five Easy Steps and follow my Most Simple System method. If your want to keep your records on computer I highly recommend Quicken -- just ignore all the latest bells and whistles. As one of my Learning Tools I did have a pub on adapting Quicken for indies. [Quicken is really is for W-2 people and small businesses.] However, it's out of date re the Quicken version I reference and I haven't yet revised it.

Hope that helps. Please let me know.

Best,
June