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