Designer needs a saner way to organize taxes for her preparer.

June --

I do any sort of 'design' job someone ask for. Initially schooled in graphic design (pre-computer) then fell into Photostyling. That led to jobs that required architectural drawing know how, and took that to do home remodels and interior design. Have taught myself computer graphics and do some of that now too. Been doing this all for 35 years...only 15 of those as someone else's employee. Sole Proprietor status now for 13 years.

I am on your contact list and devour your newsletters. Needing a saner way to organize my taxes for my preparer. Why does this seem so overwhelming??

Thank you for the deduction list in advance. Hoping this helps. One thing I would love is a checklist or 'method' that I could use as I begin 'the big receipt sort'. I know there are computer software/programs and am willing to commit to one if I knew what was best for someone like me.

Thank you!
Lou Ann
WayAppleton, WI

Hi Lou Ann,

Way, way back when computers took up almost your entire desk top everyone was gung-ho to do their bookkeping on computer. They thought it meant an instant solution to the pile of receipts stashed in the shoe boxes. Well, doesn't work that way. A computer program doesn't work if there isn't a manual system first.

My manual method is The Most Simple System. Clients have been using it for decades. It works regardless of amount of income. It's simple. It misses no deductions, It does not require a computer. Your tax preparer will love the results. It will take her less time to do your return so her fees may be less.

I've put the entire system into a 75 page PDF that includes worksheets for your 2010 tax return. It's The Confident Indie: Five Easy Steps. Check it out.

Best,
June

Tax & Marriage

Hi June,

I attended your session at CFC last year. I'm a Chicago graphic designer (sole prop) and have been in business for 10 years. I recently got married and am wondering if you have any specific advice regarding how to approach taxes now that I'm married (I checked your website but didn't see anything relating exactly).

Thanks for any insight you can offer!
lidia


Hello Lidia,

First, let me wish you joy and happiness and good wishes on your marriage.

Assuming you and your husband do not work together in your design business then marriage has no impact on your sole proprietorship graphic design business tax, per se.

However, being married may have a profound impact on your overall tax. For instance, a married couple with taxable income of $100,000 will pay less tax than a single person with $100,000 taxable income. Yet, two single people each with $50,000 taxable income may pay less tax than a married couple with $100,000 taxable income.

As I explained here Taxes: Which ones and how much do I pay? and here Estimated Taxes your tax is based on yours and your husband's entire income and deductions. That includes earned income, investment income, medical deductions, etc.

-- June

Deductions in a Fifth Wheel

June,

My husband is an Union Electrician and I am a self-employed JAMMON (jack of many – master of none) who works from home with my S-Corp – run solely by myself with the occasional help from a consultant. Due to the lack of construction work in the Indianapolis area (the last 18 months) we recently sold EVERYTHING that we owned, purchased a fifth wheel and will travel the country following work that my husband can obtain with the IBEW (International Brotherhood of Electrical Workers). I will continue to work from the fifth wheel as all I need to operate is a computer and cell phone (I do bookkeeping, graphic design, data analysis, high level admin, etc).

We would like to maximize our write-offs and albeit we don’t have many expenses these days aside from a fifth wheel payment, campground fees, cell phone and internet – we want to maximize.

I will be writing off my cell phone and internet as well as other office supplies and operating expenses, but what about other expenses such as the fifth wheel payment and its maintenance costs? Campground fees?

Mileage for my husband from the fifth wheel to his job site and back? Me from the fifth wheel to my clients and back (provided I am in the same State as my client at the moment),

What about items purchased for the fifth wheel such as storage bins, baskets, lawn chairs, propane, etc?

Any advise you give for the travel employee / traveling small business owner would be greatly appreciated.

My husband has associated with many other traveling electricians who write EVERYTHING off, but our small town accountant isn’t on the same page.

J What can we do? Thanks!
Courtney


Dear Courtney,

Generally I don't advise corporations via my blog, however, since much of what you ask applies to a lot of indies I'll see what I can do here to help you out.

If you live out of your fifth wheel [trailer or camper hooked to your vehicle] you must allocate any deduction for its use the same way you would for any home office -- exclusive use on a regular basis. Read these posts home office or studio . All supplies for the running an maintenance of the fifth wheel would be governed by the home office rules.

Supplies exclusively for your business, such as storage bins, would be 100% deductible.

Since you move around all the time I would allow only mileage from one business location to another. That means if you can establish a home office in the fifth wheel then driving from it to a client would be business miles. Here's some auto expense posts expenses -- auto-transportation .

If you pretty much stay in once place and move only when a job comes up, read these posts for possible deductions temporary worksite .

Hope that helps. And don't write-off "EVERYTHING." That doesn't go over well with the guys at the IRS. And, if you know better they may look at it as fraud.

BTW -- I also hope that your small town accountant had a really good reason to have you complicate your life by forming an S-corp.

Happy Trails!
June

Alert!! New Recordkeeping Burden for Indies

Hi June,

Here is a current article that I thought may be of interest to you and indies such as me. The article states that the new healthcare reform bill contains a provision that requires the issuing of a 1099 to every vendor from which you make a purchase.

Quote from the article: "But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases." Health care law's massive, hidden tax change.

This provision really annoys me. It really sounds nutty that an Indie such as myself is going to have to 1099 everyone I do business with. Is this really the case?

How can we start to prepare for this dramatic increase in paperwork? Thought this may be a good topic of discussion in one of your emails or for your blog.

Thanks for your consideration.
Elle DeeCompany: Indie Graphic Designer


Alas! Alack! 'Tis correct. What an added burden to indies.

Indies must now issue a 1099 to a corporation and thanks to the "Patient Protection and Affordable Care Act" they must also issue a 1099 for any $600 or more paid for property or services.

A 1099 was always required when $600 or more in services was paid to an independent contractor -- another indie. It was not required if you paid a corporation for services.

It appears that the IRS is trying to rein in the cash economy. I don't know how it can be implemented. To send a 1099 you must have the federal ID # of the recipient. It's difficult enough to get those #s from other indies or childcare providers, getting this info from the iMac store or Staples or your local garage sale where you bought that wonderful antique desk will be challenging if not impossible.

Keep in mind that the IRS will issue clarifying regulations. So, please. Elle, alert your colleagues. If all of us indies let our representatives know about this unenforceable burden we can have an impact.

-- June

Food Write-offs

June --

I have been a freelance graphic designer for more than 2 years. I live in Boulder, Colorado.

I belong to several networking groups. I joined the groups to meet others in my field, help find potential clients, and to learn about running my business from other business people. Some groups have members in businesses related to mine (ie people who might refer clients to me or that I might subcontract work to). Some groups have members in a variety of businesses (ie potential clients).

Most of the groups do not require dues, but we meet at restaurants and each person pays for their own meal and drinks.

At the meetings, we may or may not discuss business beyond exchanging business cards and talking a bit about what each person does.

Is the cost of my meal deductible?

What about potluck networking events? Some of the groups meet at members' homes, and everyone is expected to bring a dish to share. Can I deduct the cost of the dish?

Does it make a difference if the majority of the time is spent on business related topics? I learn a lot and meet great people at these events, but I would be eating more cheaply if I stayed at home!

Betty


Dear Betty,

Good food questions.

First know that business meals and/or entertainment [M&E] are deductible if you discuss business before, during or after the meal or event. The amount of time spent on business does not matter as long as the purpose of the meal or event was business not personal.

However, you may deduct the cost of the meal or event only if you pay the cost for your business associate as well as for yourself. So it you attend a networking luncheon and pay for your lunch only, no M&E deduction. You may deduct the cost of getting to and from the luncheon if you came and went between another business activity.

A potluck? Well, if you are like most people who bring something to a potluck you bring more than enough for one person. So in that case I would deduct the cost of the potluck meal.

Here are more posts on expenses -- meals and entertainment .

-- 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

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

Recent Grads Need Help With Taxes and Recordkeeping

This is from Jess and came as a comment to my post Designers Dozen: Tax Saving Tips for the Graphic Artist . Since it is typical of questions I receive from recent graduates I decided to give it more attention.

Graphic design students head out upon graduation, most of them toward freelancing, without a clue about how to handle income and expenses.

From Jess ... Thanks for this great article. I graduated from a graphic design school 3 weeks ago and have just started working full time as a graphic designer.

I have the receipts from the expenses during school, my mac, books, the course itself and going along to design based events. Can I claim any of these items? I use the same mac bought at school in my current position and I look at the books I have? I was also wondering if you knew about phones and phone bills if used for business?

THANKS HEAPS for your time! It is wonderful being able to access this information.
Jess


Congratulations, Jess, on both graduation and the work you got.

If you were not working or actively seeking work while in school you cannot deduct as business expenses any of the costs you incurred.

You can, however, deduct assets. In your case, assets are things -- computer, books, any kind of equipment. Your cost-basis for deducting these things -- in other words, the amount considered your business expense -- is not what you paid for them but their fair-market-value on the day you started your business. That means the day you started looking for work.

For instance, the fair-market-value of your Mac would be what some other graphic designer would pay you for it on that day.

The same with your books. Think of it as: On the day you tossed your cap in the air and said you were ready for clients, what would an incoming freshman pay you for your books? That amount is the fair-market-value of the books and your basis for deduction.

Hope that helps.

And thanks. Happy that my is helpful.

-- June

More On EINs (Employer Identification Number)

Use may use your Social Security Number as your sole proprietorship’s identifying number, unless:

• You must withhold taxes from a subcontractor you've hired.
• You hire one or more employees.
• You set up a self-employed retirement plan (does not include a SEP).
• You are an LLC
• You deal in products that require you to file a Federal excise, or alcohol, tobacco and firearms return.

If one or more of the above applies to your business, you will need to get a nine-digit employer identification number (EIN). An employer identification number, as with many IRS terms, is incorrectly named. All employers must have an EIN but, as you can see from the list above, it's not only employers who must have one.

In the United States everyone must have a Social Security number. Hospitals give them out when a child is born. Think of an EIN as a Social Security number for a business.

Many of you have asked whether you need to get an EIN. Here's a cheat sheet to guide you. The links take you to the EIN application process.

You will need an EIN if you answer "yes" to any of the following questions. If you answer "yes" go here to learn How to apply for an EIN or click the YES .

Do you have employees? YES NO

Do you operate your business as a corporation or a partnership? YES NO

Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms? YES NO

Do you withhold taxes on income, other than wages, paid to a non-resident alien? YES NO

Do you have a self-employed pension plan other than a SEP? YES NO

Are you involved with any of the following types of organizations? Trusts, Exempt Organizations, Estates, Farmers' cooperatives? If yes. talk with a tax pro.

Note that the IRS now requires an LLC operating as a sole proprietorship to have an EIN.

Here's a couple questions on EIN from my readers.

Hi June! (it's my mother's name, too!)

I am an Actor-Filmmaker living in New York City and have been an indie for 8 years. I am getting married in September and I will be taking my husband's last name. However, I would like to keep my maiden name so I can keep my stage name, accept checks, sign contracts, etc. I am thinking of filing a DBA form. Is that the right move? If I do, do I need a Tax Identification Number from the IRS (this was an option for an additional fee on LegalZoom.com and I'm not sure I need it)? I guess I'm also confused how to use the DBA with my bank account and keeping tax records.

Any advice for a struggling artist?

Thank you so much for supporting us indies! Your support means a lot! I look forward to hearing from you.

All the best,
Sarah


Dear Sarah,

I have many clients who use a maiden name as well as a married name or a hyphenated name with both. Some guys use both a birth name and a stage name. No DBA is required.

Check with your banks and see what they require.

It's a legal situation so best to check with a lawyer, however, I suggest signing contracts with both names.

No you do not need an EIN to use both names.

Happy September wedding!
June

}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}

Hi,

I went on Amazon.com to find a book to help me with taxes. I saw your book, and plan on getting it. However, I have a few questions that may not be in your book, because they have to do with my occupation and a Fictitious Name. I'm thinking of doing graphic/website design here in Florida, generating work from an office in my home. I would perhaps have clients in various parts of Florida and perhaps out of state, via the Internet. The business would be just me; no employees.

Someone suggested that I use my social security number for tax purposes, rather than get an EIN number. And, I'd rather have a Fictitious name, other than mine, appear on my business cards, letterhead, and such.

Is it possible to work as a graphic/website designer without the need of an EIN number, and have a fictitious name?

I look forward to reading your book, since the reviews are all positive.

Sandra


Dear Sandra,

The feds do not require you to have an EIN for a fictitious name. However, since you will have checks made out to you in your business name, your bank may require it .

Best,
June

Audit Choice

Hi June,

Graphic design / music. Three years.

I'm being audited by the IRS this year for 2006. I don't know why. I made nothing. My accountant says it's because I made $1000 but we deducted $3000. It was the year I bought my laptop. I'm so glad I purchased your book, Self-employed Tax Solutions, a year ago.

I've been gathering my receipts and realized that about 5 of the important receipts i used for 2006 actually are dated jan-mar of 2007. If didn't use them for 2007 tax year, is it okay to have used them in 2006? I should have looked more carefully.

Best,
Sandy


Hi Sandy,

Just about all audits are randomly chosen. You might also think of them as chosen from batches. An unmarried photographer with a loss for a several years may be in one batch. Another photographer with several years of loss but married to a high-earning spouse may be in another batch because the situation may look like a home-made tax shelter -- an expensive hobby supported by a spouse. So, none of us laymen knows why you were chosen. I doubt your accountant is correct.

You are a cash-basis taxpayer -- explained here. You cannot use 2007 receipts for 2006. Yes, you should have been more careful. As careful as you would be were you designing my promo material and had to approve proofs before having 5000 printed.

Best,
June

Unemployment Compensation

"W-2 people" is my shorthand for employees who receive wages or a salary.

Someone can be both an employee and self-employed. For instance, someone works 9 to 5 for the local pet shop and is pet sitter by night and weekends.

I have received many questions from former W-2 people about receiving unemployment compensation and how it impacts self-employment. And vice versa. Here are two typical emails followed by my response.


Hi -
I have an odd question... I was laid off from a tv station in June 2007.. got unemployment for 20 weeks - when it ran in December of 2007 I was still unable to find full time work but did pick up
several short term (independent contract) gigs last year.

I got notice that unemployment insurance was extended in June 2008 but since I had some short term projects I didn't enroll. When those projects dried up - I did enroll and am back on Unemployment Insurance extended for the next 20 weeks.

My question is: When I do my taxes for 2008, if I file as a self-employed will that create a problem with the current unemployment that I am collecting?

Just not sure what to do.
Dee


June --

I am from Portland, Maine. I am a graphic designer/editor. Just started as an indie.

My question is with regard to unemployment insurance, taxes and self-proprietorship. When I was laid off last year, I began to collect unemployment insurance. This year, I have started an indie biz as a freelance designer/editor. I have a small amount of money coming in, but it does not cover my start-up and operating expenses.

Can I continue to collect my unemployment insurance payments while I get the biz off the ground?

What are the tax implications of this?

My unemployment benefits will run out before the end of the year. Is it possible/advisable to postpone payments from clients until the benefits run out, and if so, how do I report it on quarterly estimated tax payments?

Michael
Portland, Me


Unemployment Compensation -- let's call it UC -- is a benefit provided by both the federal and state governments. That means that the Feds as well as each state has a say in how it is regulated.

The intention of UC is help W-2 people who are temporarily unemployed due to work-related circumstances which are beyond their control.

Typically state laws require that someone requesting UC meet the following conditions:
** is not currently employed
** is able to work
** is available for work
** is actively seeking work

If you are self-employed you are you own employer. That means that even though you may not be making any money you are working. You are currently employed by yourself. So you are not currently unemployed.

An odd job to pick up some money does not make you a self-employed in business. Read these posts being self-employed for more info.

Your circumstances and your state's laws determine which conditions must be met.

For instance, if yours is a temporary layoff from your job and you have a reasonable expectation of being recalled, you may not be required to seek work.

If the work you did is no longer in demand, and you are not trained to do anything else, the state agency may provide you with vocational training and your work search requirements may be waived so that you may collect unemployment while going to school.

And, some states will pay UC while you start a business of your own.

Call or log onto your state agency and get an explanation of the benefit requirements. Know before you act so that you don't mess up.

Tax treatment for indies, whether on or off self-employment, is the same. One does not alter the other.

June

Home Office When Sharing the Rent

Hi June,

I'm a graphic designer living in Brooklyn, NY. I entered the indie world last October. I'm very green in the indie world and your book has proven to be quite helpful.

My question concerns deducting home office expenses when living in a rental unit with roommates. How does one determine the total area of his home? In my scenario: • 3 roommates live in a rented apartment, each with their own bedroom. • We share a common space that consists of the living room, kitchen, etc... • I pay a higher portion of the total rent for the largest bedroom, half of which I use exclusively for business. My concern is correctly determining the total area of my home for the IRS form. What I think is fair is: Area of my bedroom + 33% of shared space = Total area of my home Will that fly with the IRS? Do I have to include the entire common area even though the 3 of us pay for it?

Thank you,
Sunil


Dear Sunil,

Your way is fine. It gives you a little bit extra deduction. But more easily understood by an IRS guy whose math may not be top notch is to take the total area of all the common space as well as your room as your total square feet of living space and then take your office area.

More posts on home office are here home office or studio (24) .

-- June

Unemployment Benefits for the Self-employed

Hi,

I am graphic designer/cartographer in San Francisco, CA and have been self employed on and off for over 12 years, including the last 3 years (prior to that, was employed by my dad's marketing llc). I am currently just a sole proprietor, paid by 1099s, haven't even done a DBA since I am just using my own name.

I did search the site and read many of your posts, which are extremely informative and helpful--thanks! I didn't see a specific answer to this question, although there was some info in the posts about LLCs.

I am getting increasingly nervous about unemployment, as people are dropping all around me (aunt, uncle, cousin, best friend). I currently do most of my work with one company and they are starting to cut back. I do know that I should be getting at least $20,000 next year, based on work I have started but not billed for yet. So my question--Can I structure my business so that I can pay into, and therefore be eligible for, unemployment insurance?

Would the simplest way be to set up an LLC, and pay myself through payroll? Is there any other way?

thanks
jennie


Dear Jennie,

I just spoke with the IRS to confirm what I am about to tell you. It was surprisingly easy to get through to them. I suppose there's not a lot of people thinking about taxes on the day before Christmas.

Unemployment benefits are a combination of federal and state regulation. Were you to be an employee of your own S-corporation or C-corporation you would pay into the federal unemployment system. You would need to check with California to see if there were any state restrictions on receiving unemployment benefits as the only employee of your own corporation.

You might want to consider the cost and hassle of incorporation as well as corporate recordkeeping, and that as employer you will pay into the system versus the small amount of unemployment benefit you would receive after only a year of income of about $20,000.

Happy Holidays!
June

Graphic Artist in London

Dear June,

First, thank you for taking the time to help me with my questions and concerns.

I am a freelance artist and designer, I have been freelance for about 20 years.

This coming June 2009, I will be going to London, where my son will attend school for 1 year. Because I used to live there as I was married to an Englishman, and my other two sons are already there with dad, I have the ability to work in London legally.

So my question is about taxes. Will I have to pay taxes to the US on the money that I will be earning in the UK, as well as paying taxes to the UK on the same money? If I have to pay taxes to both countries, I will end up with very little, so I am not sure at all about these tax rules.

I would appreciate any help that you can provide about this situation.

Sincerely,
Adrienne
Winter Springs, FL


Dear Adrienne,

This is how it works from the US side.

You must pay Self-employment [SE] tax on your net self-employed earnings. (Take a look at these posts for more info on SE tax -- taxes -- self-employment tax (7) .)

Since you will be out of the country for a relatively short time you must pay income tax just as you would were you living in the States.

If you were out of the country for an extended period of time -- think of it as almost a year, and the time can straddle years -- close to $90,000 of your income would not be subject to US income tax. But, you must still pay SE tax.

If you must pay income tax to the country you are in then the US will give you credit for taxes paid to that country. That means you will not be doubly taxed. Each country has its own tax laws so you must ask the taxing authorities in the UK what are your tax obligations.

Also be aware that the US has reciprocal tax agreements with many countries.

You might want to take a look at these posts foreign situations (7) .

And, you are welcome!

Best,
June

File jointly or separately?

Hi June,

I'm a fan of your blog, and have not been able to find an answer to this question.

I'm a graphic designer who has been working as an independent contractor for a small publishing company/printer for almost 4 years. I also do other freelance work from time to time. Until a couple months ago, I also had a part time job as a regular w-2 employee at night, a job I quit after I had a baby in August.

My question is, I just got married in May and my husband has a regular w-2 job. How should we file? jointly or separately? Where would we get our biggest advantage?

Last year I did my own taxes online. I usually owe money, and deduct as many things as I can including home office and mortgage interest, etc. while my husband does a 1040 ez and has been getting a refund. I know one of us will probably get a refund because of the baby too. I'm just not sure who should claim her if we file separately.

confused, Jessica
Winter Park, FL

Dear Confused Jessica,

Without actual numbers there is no way to determine whether filing jointly or separately would be more or less beneficial. Generally it is more beneficial to file jointly.

Every money transaction that ends up on your tax return and to whom that transaction applies impacts your total tax.

Things such as:
** Investment income and which spouse owns the account
** Who owns the house on which you are deducting interest and real estate tax
** How much is student loan interest and who is paying off a student loan
** Who has higher medical expenses, if any
** What are the costs of child care
** How much does each give to charity

Best,
June

Assistants Working Abroad

Hello June,

Thank you for the great site! I've just ordered your book, Self-employed Tax Solutions, from Amazon and cannot wait to read it.

I've read almost every post on your blog and found a question similar to mine, but there is a difference so i still wanted to ask. I do freelance web and graphic design. I order illustrations for my projects from an artist friend. She is not US resident, she lives in Israel. I pay her through PayPal or sometimes cash. Can i deduct the fees?

And if yes what kind of receipts/records do i need? Are PayPal receipts enough?

In your answer to Charles (Cruise Entertainer...) you say: "His payments to them are business deductions and all he must do is keep a record of payment. No 1099 is required. This is because the work is being performed outside the US."

But in my case, while her part of work is performed outside the US, me and my clients are in the US... What should i do?

Thank you so much,
Rina

New York


Dear Rina,

Glad you like my site. Thanks for letting me know. And I'm sure you will get lots out of my book.

Yes, you may deduct the fees. Print out your PayPal receipts and also keep a written record, of what you paid her for -- perhaps a copy of the illustration.

There is paperwork to do -- but of course! Be sure to read my post When your subcontractors are in India for guidelines.

Best,
June

Home office? No deduction for Thighmaster.

Hello June!

Thank you so much for your blog! The pieces of information that you put together for us are always extremely helpful for us! Thank you, thank you, thank you!

I am a Graphic Designer -- 5 years -- from Huntington Beach, CA.

I was hoping to ask you a question today about setting up a home gym for my sole proprietorship.

This comes after I found this piece of information on the Internet: 3. Your Corporate Gym: Unfortunately, the IRS won’t let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that you’ve seen on television – not to mention free weights, a work out bench, etc – are all tax deductible through your company. Source: http://articles.webraydian.com/article1204-Ten_Golden_Tax_Deduction_Secrets.html

Now, my question is this: I see that a corporation is able to take an expense for gym equipment that they purchase for its corporate gym for employees. Is the same deduction allowed for a sole proprietor setting up a home gym for its owners? I am not in the business of fitness, and the home gym is solely to maintain my physical fitness and well being. I also have a couple follow up questions assuming that the answer above is "not deductible." If I were to convert my sole proprietorship to a LLC, would I be able to take the home gym that I create as a deductible business expense?

Thank you again for your blog, and your considerations on this tax question.

Kind regards,
Hiro


Hiro sent the above question to me quite a while ago. Researching for the correct answer took much time and reading and analysis. The answer may seem simple, seems simple to me, too, now. But, as with so much of the tax code, there is rarely an uncluttered path to a clear understanding.

Here's the scoop:

Whether you are a corporation or a sole proprietorship, the same rules apply regarding the deductibility of gym and exercise equipment or athletic facilities, such as pools and tennis courts, for the use of your employees, their spouses, and children. If the equipment or facility is in a building owned or leased by the employer and there are no residential facilities connected to the gym, then the costs are deductible business expenses.

Here's some examples:

Callous Corporation has a gym and pool for employees in the basement of corporate headquarters. Deductible.

Callous Corporation has a gym and pool for employees in a building a block away from corporate headquarters. Deductible.

Callous Corporation owns a resort where guests may stay overnight. On the premises is a gym and pool for the exclusive use of the employees back at corporate headquarters. No deduction because the gym is adjacent to residential facilities.

Let's use those same examples for an indie with a sole proprietorship.

Victor Visual owns or rents a building in town where he has his studio and a gym for employees. One of the employees is his wife. Deductible.

Victor Visual has a home studio. He owns a building down the block where he stores supplies and also has set up a room with gym equipment for his employees. Deductible.

Victor Visual has a home studio. He set up a gym in basement for his employees. No deduction because of the proximity of residential facilities.

Under no circumstances may Victor deduct the costs of gym equipment or facilities if he has no employees.

If the setup allows for Victor to take the deduction for the gym, then that is a non-taxable benefit to his employee(s).


There were 10 "Golden Tax Deduction Secrets" on the site Hiro refers to. There are problems with a number of them. Take note that one of the two ads on that site is for home athletic equipment.

Indies, be careful. So many tax tips, tax secrets, save thousands, make millions are just a lot of hogwash -- especially on the web. There is no quick fix to low taxes any more than there is a quick fix to fat thighs.

Best,
June

PS to Hiro: Read my posts on LLCs

Independent Creative Services

Dear June,

I am a graphic artist, writer and musician - sometimes separately, sometimes in combination. Currently, I make revenue from all three endeavors, but only profit from two. Do you think these three activities make sense as a single business?

I was thinking "independent creative services" might be the ticket. Am I on the right track or way off base?

Thank you for your help!

Jamie
Los Angeles, CA


Hello Jamie,

Yes, you are not only on the right track you're on the right train. And independent creative services is a perfect business description.

So many people in the arts combine many creative endeavors. Their thinking, supplies, equipment, business acquaintances, clients, books, and more cannot be separated into different businesses.

Don't get too creative though by trying to combine dog walking with graphic design.

This post Jack or Jane of All Trades: How does an indie define a business? will give you more info.

Best,
June

Incorrect 1099

June --

Three years as graphic designer. A client sent me a 1099 with $19324 in field #7. But I provided my services for a fixed $1500/month rate. This 2007 I received 24 checks (every 2 weeks for $750 each) but he told me he counted more and that he would double check. That was like 3 weeks ago and he hasn't respond my emails since that. I stopped working for him last December and I would like to know what I can do. If he doesn't correct that 1099 I will end up paying more taxes for the almost $1500 I never got.

Thanks!
Javier from Los Angeles, CA

Hello Javier,

Paid every two weeks ... sounds to me like wages not self-employed income.

Also every two weeks means 26 payments per year. Twice a month would be 24 payments. So the first thing to do is check your records.

If you are right and the client is wrong, then send a letter, return receipt requested. Tell the client you will include a copy of your letter and the incorrect 1099 with your tax return. That should get his attention. If not, then on your tax return include as income only the amount you received.

The hitch here: As I said, the method of payment sounds like wages so be sure you can substantiate your self-employed status.

-- June

Don't let them force you to incorporate!

June --

I have been a designer, illustrator, children's book author for 3 years as a sole proprietor.

A company I've been freelancing with for years has just requested I incorporate so they can write a check to me as a business instead of writing a check to me as an individual.

I've looked into S-corp and LLC, but before I spend the money I was wondering the following:

1. Will the combination of a DBA and an EIN do the same thing as an LLC in terms of my personal information (such as SS# and name) not being disclosed to the company and instead appearing as a business?

2. What are the main advantages/disadvantages of S-corp v. LLC

Cambria from Brooklyn


Hello Cambria,

Yes, a business name and an EIN will not expose your name nor your social security number. It's a terrific way to get around the request of your client. For example checks can be made out to Design Delights, ID# 22-1111111.

You may apply for an instant EIN -- stands for employer identification number -- here.

WARNING!! Do not incorporate.

OK. Now that I've said that I'll review a couple things I've already said on this blog and elsewhere.

An LLC is a Limited Liability company. Note that the “C” means “company” not “corporation.”

Be aware than an LLC is not a Federal tax entity but a legal business structure set up under the laws of each state. Because LLCs are formed under 50 different sets of state law, regulations governing an LLC depend upon the state of organization. The legal treatment of an LLC may vary from state to state. If your business is an LLC it has liability protection similar to that enjoyed by a corporation. You are not personally liable for the debts or liabilities of the LLC. That means a disgruntled supplier could go after your office equipment (a business asset) as payment for a delinquent invoice but could not confiscate your kitchen appliances (personal assets).

The legal entity, LLC, may be set up for tax purposes as a sole proprietorship, a partnership or a corporation.

Go here for my various posts on LLCs.

Be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.

Best,
June