Indies Who Collect Social Security

Hi Ms. Walker,

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

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

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

What would you suggest in our situation?

Thank you,Mike


Hello Mike,

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

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

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

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

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

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

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

Best,
June

An under-the-table relationship

June --

I don't know if you can help me or not but I hope you can!! I am fixing to start a job that is going to be paying me under-the-table so therefor I will have to pay my own taxes!!

I don't know how that works! Can you tell me what I need to do and how much would estimate that I would need to hold out of each week's check. Like if I was to bring home, let's say 500 a week, how much should I put back for taxes? How often do I pay in or do I wait til the end of the year??

Jennifer
Maryville, TN


Dear Jennifer,

Words have specific meanings. Something that is often forgotten in our hurry-up-instant-message society. "Sharing an awesome relationship" can mean that you've had a wonderful marriage for a lot of years or you ran into an old friend and had a good cup of coffee while waiting for the train. For your financial well-being, I am hoping you have used the wrong words. The phrase, "under-the-table" is a way of saying income that is not claimed on a tax return. Hiding income is fraud punishable by penalties and even jail depending on the situation. To understand more, read these posts on cheating .

If you mean instead that you will be paid as a self-employed, then the answers to your questions are beyond the scope of a quick blog post. I again urge you to do some reading. Start with my posts on taxes -- estimated . And then for an idea of the kinds of expenses you may deduct get your complimentary List of 100+ Indie Business Expenses right here on my website .

Best,
June

To deduct or not to deduct.

Hi.

I'm a small business owner online retailer for 1 year.

Is it wiser to spend more money through my business and claim legitimate deductions, than to spend less? If you spend less of your business income, or "save money", then the IRS is going to get a larger portion of the unspent money as taxable income, so why not just spend more through the business? You can spend more on what you want, while reducing your taxable income at the same time.

Any downsides to this?

Jamie
El Paso Texas


Hi Jamie,

This is a confusing question. I am not sure what you are asking. However, here is what you and every indie should do regarding business expenses: Deduct every single legitimate business expense you possibly can. Don't cheat by deducting personal expenses.

A business deduction typically saves 1/3 in taxes. So a $900 expense save $300 in taxes. Could be less. Could be more.

The upside to a low income: Helps when applying for school financial aid or government benefits.

The downside to low income: It make it more difficult to get a mortgage or other loan or credit card.

Be sure to read Is it a deductible Business Expense? on my website.

And visit here for a complimentary List of 100+ Indie Business Expenses .

-- June

Inaccurate Mortgage Applications

Hi June,

I'm on my 4th year of owning a marketing firm as a sole proprietor & work from home when I'm not traveling for business.

I just bought my first home and had to make certain my adjusted income on my 2007 tax return was high enough to qualify for the mortgage. So in order to achieve this I did not write off thousands of business expenses on my return and owe A LOT. Someone suggested I send an addendum to the IRS on my return to lessen what I owe now that I have the new house. Should I do this or would this trigger an audit?

Help! I want to do the right thing for my hard earned money!

Thanks in advance - Ali (Texas)


Dear Ali,

You have probably heard the adage: You can't have your cake and eat it, too. Well, in the same way, you can't have high income for one purpose and then lower income for tax purposes.

When you applied for a mortgage you probably signed a form that allowed the lender to request copies of your tax returns from the IRS. In a bank audit, the auditors can get a copy of a borrower's return from the IRS and compare it to the return presented by the borrowed during the application process. You cannot file a return with one set of numbers to the IRS and another set of numbers to the lender. Well, you can but it can get you in big trouble.

-- June

Dad is wrong. Don't cheat.

Hey June!

I am a profession ballet dancer and teacher. This is my first year as an indie.

My question for you has to do with audits. Since I get 1099s that my employer fills out, what should I do if they are wrong (i.e. too short)? I asked my dad and he said not to worry because if I get audited they can only go by the 1099 and whatever amount is written on there. But I worry because that almost sounds too good to be true. If I get audited, is there any way that they can prove I made more money than my 1099 states? Help!!! AM I being too paranoid?

Tiffany
Fayetteville, GA


Well, Tiffany, Dad is wrong.

Hiding income is fraud. You are breaking the law if you do not claim all your income.

Hiding income does not give a positive, professional image of your business. It raises questions, such as whether you are a legitimate business. Do you want to be looked upon with respect in your business community?

There are many ways for the IRS to verify income. In an audit of an indie, the IRS does not simply look at 1099s. Every bank statement is reviewed and must match income. If the money coming in on the statements doesn't match the income on your tax return you must be able to explain why. If your lifestyle is Porsche but your income is Hyundai, then the IRS digs deeper.

Let's say that Dana's Dance school hired you to teach and Dana's bookkeeper incorrectly completed your 1099 with $500 income instead of $5,000. In an audit Dana would use $5,000 as her teaching expense. And she can prove it via checks or fees from her students. If the enterprising IRS auditor decided to check your return and found only $500 claimed as income you'd be in trouble. Is Dad going to pay your penalties and interest for you?

I say in my book, Self-employed Tax Solutions : The IRS is not a morality agency, it is a monetary agency. It doesn't care what you do for a living as long as you pay taxes on the income you make doing it. If you make your living as a hit man or a lady of the night or a drug dealer, be sure to pay the IRS its fair share. Remember the Chicago mobster, AI Capone? He wasn't sent to prison for murder, bootlegging or racketeering; he was convicted of tax evasion for not reporting the money he earned in his self-employed endeavors.

When the IRS calls for an audit its only purpose is to collect more tax money with some interest and penalty to boot. Criminal activity is not suspected. But if you are caught in outright cheating -- particularly in deliberately failing to report a significant amount of income -- the IRS will not hesitate to prosecute you.

If you are ever audited, and the IRS refuses to accept some of your deductions, you will have to pay the additional tax on the lost deductions and interest on that additional tax amount. You also may have to pay a late payment penalty of up to 25% of the tax owed. You'll be out some money, but you've simply had a legitimate disagreement with the IRS about a deduction: you will not be hit with criminal charges or fraud penalties.

A fraud penalty can be as high as 75% of the tax owed. That is in addition to the tax owed plus interest.

I think you better have a talk with Dad. Or maybe buy him my book for his birthday.

Best,

June

PS: The people who pay you are not your employers. Only employees have employers. Employees receive W-2s not 1099s.

Do it right!

June ...

I just recently found your blog and cant wait to run out and buy your book!

I am a sole proprietor operating out of my home within Philadelphia. As you probably know, Philadelphia has the highest business taxes in the country. My business is new and I have yet to pay these taxes (not even sure I can afford them).

Anyway, onto my question ... does it make sense to setup my business outside of the city at, say, my in-law's address? I'm not sure this is legal or not. I'm sure you'll advise me. If I'm able to do this, will this prohibit me from taking a home office deduction? I'm sure there are a ton of negatives I'm not considering, but the taxes in the city are out of control!!! and I cannot move until the housing market comes back up.

thanks so much. jason.


Hello Jason,

So glad you found my blog! I know Philadelphia. I have clients and a daughter there.

Using an address strictly to avoid taxes is fraud. Don't do it. Your best defense against high taxes is information. So, instead of finagling, learn as much as you can about business deductions and other indie financial tax and money matters. . It's a new "business" you're starting. Do it the right way. Legitimately. And people will treat you -- and pay you -- as a legitimate business.

And please, do run out -- really quickly -- and buy my book, Self-employed Tax Solutions.

Best,
June

Cheating

Hello,

I have a problem with my summer employers from last summer. They paid me "under the table" for three and half months last summer.

This year, 2 days before taxes were due, I received 1099s and a note apologizing for the lateness and the new need to file taxes due to fear of being audited.

I was being paid $400 per week even though I worked late nights and overtime frequently. I don't think it's fair that they are suddenly deciding to report my income as freelance contracting even though I never signed anything or agreed to it in the first place. I'm a student who was hired as a "summer intern", all parties agreed that it was supposed to be a learning experience for me, that's why I was paid so little to begin with. I would like to be filed as a W2, but I'm not sure what my rights are. When I brought up the fact that I wasn't able to plan or budget for these unexpected taxes, they asked that I "work off" the taxes. I don't think this is fair.

Please let me know what I can do in this situation.

Thanks, Viny


Hello Viny,

When you were growing up your mama probably told you: Don't cheat. It's wrong and you'll get in trouble. That's just what happened to you. And it could have been a lot worse.

Being paid, or paying someone else, under-the-table, off-the-books or in-the-parking-lot is fraud. You are hiding income. Breaking the law.

You said your summer job "was supposed to be a learning experience." It was more of a learning experience than you bargained for. Look at it as a valuable lesson, learned early. Pay the taxes and think of it as a 4 credit college course.

Best regards,
June Walker

1099 Forms and the Unpaid Taxes

Hey 1099ers and Indies!

The government is owed $300 billion in taxes. And they want to collect it – now! Are you one of the culprits? You might be because the IRS says 80% of the tax is owed by individuals, not corporations. And guess which individuals they say owe most of that money. An article in Friday’s New York Times, Democrats Seek Unpaid Taxes, reports that according to the IRS almost all of the tax owed on unreported business income is due “from sole proprietors, like painters, plumbers, dry cleaners, florists, limousine drivers and restaurant owners.”

The IRS thinks you are cheating. You’re hiding income. You get paid in the parking lot or under the table and so you don’t report the income.

That may be so. Some indies do hide income. But I think the bigger problem is that indies don’t know what to do with 1099s that they receive. They stick them in a drawer … for later. Or often an indie doesn’t receive a 1099, and she thinks that since she were paid, let’s say $6,000, and her expenses were more than that, why bother to file a tax return.

Here’s a figure that’ll get you shaking your laptop: When someone you worked for sends a Form 1099-MISC for $6,000 to you and to the government, that form notifies the federal and state government that you earned the money. The Feds then expect about $2,000 from you in taxes.

That’s right! If you deduct no expenses from your freelance income, you should plan on paying about about 30% to 40% of your income as taxes. Here’s an explanation about how that works: Taxes: Which ones and how much do I pay?

Even with no 1099 the government can learn about your income – and their methods of detection keep getting easier. One way, for example: If you design a website for me I’m going to deduct the expense, even if I didn’t send you a 1099 or even if I paid you in cash. And if I’m audited, the IRS now knows about you.

If you get a 1099 the government gets one too. And the government knows only about your income, it knows nothing of your business expenses. That means, they are expecting that 30% to 40% tax payment. So, to pay less tax: File a tax return, claim all your income, and deduct every business expense possible.

Click here for a complimentary copy of the Self-employed Business Expenses List.

Home Office and the Fiancee'

Dear June,

I don't know whether or not to take the home office deduction. I'm stuck on the "exclusivity" part of the definition. I have a little room in my basement where I have a PC. I use it to administer my business (which includes using the Internet). I certainly pass the "regular use" part of the definition. However, I do go down there to surf the web and check email also.

I talked briefly with a CPA, and he said to go for it, because he didn't think the government would come around, looking into my window to see what I was doing. TECHNICALLY speaking, I do other "little" things in there besides administer my business. Does the IRS come into your office to see what's in it?

What do you think? Should I just forget it, or perhaps do my surfing elsewhere in the house and deduct the home office next year?

Thanks.
Mark from Virginia


Hi Mark,

A lot of tax law isn't as murky as some folks think. There are certain areas -- not many, but some -- where you can apply logic or common sense. So let's see how these same questions would apply to some other part of your life.

I'm stuck on the "exclusivity" part of the definition.
Every once in a while my fiancee dates her old boyfriend. Is this an exclusive relationship?

I certainly pass the "regular use" part of the definition.She sees me most of the time.

TECHNICALLY speaking, I do other "little" things in there besides administer my business.
Technically speaking she's engaged to me so the other guy isn't really important.

Does the IRS come into your office to see what's in it?I wouldn't have even know she dated the other guy, but a friend of mine saw her and told me.

We're talking a few thousand dollars in deductions here.I'm in my 40s and really think it's time to get married.

I talked briefly with a CPA, and he said to go for it, because he didn't think the government would come around, looking into my window to see what I was doing.
My mom is concerned that I'll never get married and she really wants grandkids. And who's to know about the other guy anyway?

Now to answer your question: The office must be exclusively used. The IRS could and does visit home offices, although not unannounced -- unless you fall into the Al Capone category of taxpayer. So, as Al would say: For this year, forget about it.

By the way, inventory storage does not require exclusive use. Also, every indie struggles with answering business and personal email on the same computer. There is no practical way to separate them. I know of no court case dealing with that situation. Were I your tax pro, I would look at the legitimacy of your entire solo business before making a decision on home office.

For more on working from home be sure to read the Home Studio post.

And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .

Cheers,
June