June --
I am from Summerville, SC. I've been a handyman for 7yrs.
My question is: I do work for 2 local companies. They are independent and have workers compensation insurance. I do just about anything for them. I have never had workers compensation insurance because it costs so much. They are now saying that I need to have WC insurance myself because their wc carrier says so.
Where do I find out the 'law' of SC so that I don't spend money that might not be needed.
Shannon
Dear Shannon,
Every state differs on it workers compensation regulations. Every state differs on a lot of regulations affecting indies. There are many routes to getting information.
Contact your local what used to be called the Department of Labor. Read my post Homeland Security or Jobs 'n' Things which was about the NC Department of Labor and you'll see what I mean about the title of the agency.
If nobody there can help call your local Small Business Development Center -- often located at a community college, or your local chapter of SCORE.
I googled "South Carolina Workers Compensation " and came up with South Carolina Where Business Connects . There are many sources there.
Hope this points you and other indies in the right direction.
-- June
Wednesday, January 30, 2008
Deduct the cost of a husband-wife business meal?
June --
I am a consultant on higher education . When husband and wife are professionals with separate self-employed businesses, can they deduct costs of meals where they go out to dinner to get away from household distractions and discuss each other's work. For example, where one spouse acts as an editor/critic of the other's research paper to be submitted for for-profit publication?
Any IRS cases that you can cite on this?
Velma from California
Dear Velma,
Neither I nor my tax service could find any IRS case or regulation prohibiting the deduction of the meal if the circumstances meet all the meals & entertainment requirements.
In my book, Self-employed Tax Solutions, I explain it this way:
A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband, an ad agency guy, she explains the timetable for her new business, gets his input on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.
-- June
I am a consultant on higher education . When husband and wife are professionals with separate self-employed businesses, can they deduct costs of meals where they go out to dinner to get away from household distractions and discuss each other's work. For example, where one spouse acts as an editor/critic of the other's research paper to be submitted for for-profit publication?
Any IRS cases that you can cite on this?
Velma from California
Dear Velma,
Neither I nor my tax service could find any IRS case or regulation prohibiting the deduction of the meal if the circumstances meet all the meals & entertainment requirements.
In my book, Self-employed Tax Solutions, I explain it this way:
A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband, an ad agency guy, she explains the timetable for her new business, gets his input on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.
-- June
Tuesday, January 29, 2008
Don’t Do Your Own Tax Return
Some indies do their own tax returns. By far the most common reason is to avoid paying a tax preparation fee. The least common reason is for the pure fun of it.
As most of you who have read my work or heard me speak know: I believe indies should do their best to develop an indie business mindset. They need to understand the business side of their indie ventures. That doesn't mean they need to do or perform, on their own, every aspect of their business.
I've always advised self-employeds against preparing their own returns. Not because they will make some ghastly mistake that will cost thousands of dollars -- although it could -- but because any tax pro/accountant/CPA worth her hire will provide advice on taxes, pensions, income and deductions that’s worth far more than the amount of the fee.
IRS laws and regulations are complicated and completing a tax return in a way most advantageous to the indie takes a lot of training and experience. Preparing a tax return is not just about finding the correct line to put an entry on.
As I wrote in an earlier post encouraging indies to file after April 15:
Most taxpayers think there is only one way to prepare a tax return. Tax pros know that income and deductions can be treated in a variety of ways. If your tax preparer understands the self-employed life, she is equipped to make choices to your tax advantage. And many of her choices for your 2007 return may depend upon your income and expenses in 2008. The later into 2008 the more you’ll know about 2008. For instance, a substantially higher income in 2008 than in 2007 may warrant a fuller deduction in 2008 for equipment purchased in 2007. Or, with a high 2007 income you may want to make a hefty contribution to your self-employed pension. If you don’t have the money right now to put into that pension, an extension gives you until October 2008 to come up with your 2007 pension contribution.
When I get a new client, I customarily ask to see his previous years' tax returns, so in the course of 25 years I have been able to see a number of returns that clients did on their own. My clients one and all are uncommonly bright, highly talented, vigorously entrepreneurial, capable of levels of creativity and accomplishments that I could never hope to match. But I have never seen a single tax return prepared by a client that could not have been more advantageously prepared by me or another tax pro who understands indie business.
Whatever skills and imagination indies have, they have not studied the IRS Tax Code (currently 67,000 pages in length) as I have, and they don’t have a clue about the many, many procedures, all of them completely aboveboard, that would reduce their taxes to Uncle Sam and to the 41 states that levy a personal income tax.
One recent Amazon reviewer of Self-employed Tax Solutions has quite the opposite opinion. As part of a review that was almost grudgingly positive – he had earlier emailed comments to me that were considerably more positive -- he contends that when you read my book you’re 95% of the way to being ready to prepare your tax return so why not go all the way and do it yourself?
To me that’s like saying, you've put a lot of research time into the design of your new kitchen cabinets – why not go the rest of the way and build your own?
The research time is necessary to ensure that the outcome will be the best possible – and part of that research time should be spent finding the craftsperson with the expertise to do the best job for you.
Recordkeeping and taxes are indispensable elements of an indie business and the entrepreneur is a partner in that process, but not the partner with tax expertise. To have that depth of expertise you would have to put your time into learning the intricacies of tax regulations rather than into developing your business. Self-employed Tax Solutions is written with the aim of saving indies time, not of imposing more burdens upon them – to free them by means of learning recordkeeping and tax basics (the word basics pops up in the subtitle) so that they can pursue their talents without worrying about the IRS.
As savvy indies know: delegate whenever possible. Do the research on who is the best to handle what you need but don’t waste your time doing it yourself. If you are a master plumber hire someone to design your website. If you are a graphic artist don’t try to fix your own furnace.
As you may know I have a background in science and math. I really understand computers. But right now, I gotta run. My computer guru is here to fix my computer.
... June
As most of you who have read my work or heard me speak know: I believe indies should do their best to develop an indie business mindset. They need to understand the business side of their indie ventures. That doesn't mean they need to do or perform, on their own, every aspect of their business.
I've always advised self-employeds against preparing their own returns. Not because they will make some ghastly mistake that will cost thousands of dollars -- although it could -- but because any tax pro/accountant/CPA worth her hire will provide advice on taxes, pensions, income and deductions that’s worth far more than the amount of the fee.
IRS laws and regulations are complicated and completing a tax return in a way most advantageous to the indie takes a lot of training and experience. Preparing a tax return is not just about finding the correct line to put an entry on.
As I wrote in an earlier post encouraging indies to file after April 15:
Most taxpayers think there is only one way to prepare a tax return. Tax pros know that income and deductions can be treated in a variety of ways. If your tax preparer understands the self-employed life, she is equipped to make choices to your tax advantage. And many of her choices for your 2007 return may depend upon your income and expenses in 2008. The later into 2008 the more you’ll know about 2008. For instance, a substantially higher income in 2008 than in 2007 may warrant a fuller deduction in 2008 for equipment purchased in 2007. Or, with a high 2007 income you may want to make a hefty contribution to your self-employed pension. If you don’t have the money right now to put into that pension, an extension gives you until October 2008 to come up with your 2007 pension contribution.
When I get a new client, I customarily ask to see his previous years' tax returns, so in the course of 25 years I have been able to see a number of returns that clients did on their own. My clients one and all are uncommonly bright, highly talented, vigorously entrepreneurial, capable of levels of creativity and accomplishments that I could never hope to match. But I have never seen a single tax return prepared by a client that could not have been more advantageously prepared by me or another tax pro who understands indie business.
Whatever skills and imagination indies have, they have not studied the IRS Tax Code (currently 67,000 pages in length) as I have, and they don’t have a clue about the many, many procedures, all of them completely aboveboard, that would reduce their taxes to Uncle Sam and to the 41 states that levy a personal income tax.
One recent Amazon reviewer of Self-employed Tax Solutions has quite the opposite opinion. As part of a review that was almost grudgingly positive – he had earlier emailed comments to me that were considerably more positive -- he contends that when you read my book you’re 95% of the way to being ready to prepare your tax return so why not go all the way and do it yourself?
To me that’s like saying, you've put a lot of research time into the design of your new kitchen cabinets – why not go the rest of the way and build your own?
The research time is necessary to ensure that the outcome will be the best possible – and part of that research time should be spent finding the craftsperson with the expertise to do the best job for you.
Recordkeeping and taxes are indispensable elements of an indie business and the entrepreneur is a partner in that process, but not the partner with tax expertise. To have that depth of expertise you would have to put your time into learning the intricacies of tax regulations rather than into developing your business. Self-employed Tax Solutions is written with the aim of saving indies time, not of imposing more burdens upon them – to free them by means of learning recordkeeping and tax basics (the word basics pops up in the subtitle) so that they can pursue their talents without worrying about the IRS.
As savvy indies know: delegate whenever possible. Do the research on who is the best to handle what you need but don’t waste your time doing it yourself. If you are a master plumber hire someone to design your website. If you are a graphic artist don’t try to fix your own furnace.
As you may know I have a background in science and math. I really understand computers. But right now, I gotta run. My computer guru is here to fix my computer.
... June
PS be sure to read the later post Two Parts to Finding the Tax Professional Right for You
Saturday, January 26, 2008
Art as an Expense
June --
Embroidery Digitizer -- 2 yrs.
I have to purchase "clipart" and "artwork" from artists. This consists of either the artwork itself in the form of "clipart" or a licensing agreement for work I can download from their website. This is not artwork that I look at for "inspiration" but I actually take the picture of say the "dog" and make that dog in embroidery form.
What expense does this fall under, and is it subject to the certain percentage of what I made as profit??
This is my first year really working at this as a "true" business that I want to file on, and I have definitely put more into buying my initial artwork than I made last year in profit.
Abbie from Bloomington, IN
Dear Abbie,
To us it is obvious that you are not purchasing art for inspiration but that may not be as clear to the IRS. Because the IRS is firm on the no-deduction-for-art rule you will need to keep an especially accurate record of your art purchases. Were you audited you will need to show the direct relationship of your art purchase to your product.
There are a number of ways that your art expense may be treated. The final determination is up to your tax pro.
You may treat your art purchases as production costs. If I understand your work correctly, then I assume you do not know how many pieces of your work you will make to sell from one art purchase. So you need to pick a reasonable amount of time over which you will sell the "dog" piece. Then have your tax pro use that amount of time -- let's say 3 years -- to amortize the costs of your art. That means that $900 in art purchases would get you a $300 deduction over 3 years.
If you know the actual number of pieces you will make based on one art purchase your tax pro will set up a different method for tracking inventory and production costs.
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
Embroidery Digitizer -- 2 yrs.
I have to purchase "clipart" and "artwork" from artists. This consists of either the artwork itself in the form of "clipart" or a licensing agreement for work I can download from their website. This is not artwork that I look at for "inspiration" but I actually take the picture of say the "dog" and make that dog in embroidery form.
What expense does this fall under, and is it subject to the certain percentage of what I made as profit??
This is my first year really working at this as a "true" business that I want to file on, and I have definitely put more into buying my initial artwork than I made last year in profit.
Abbie from Bloomington, IN
Dear Abbie,
To us it is obvious that you are not purchasing art for inspiration but that may not be as clear to the IRS. Because the IRS is firm on the no-deduction-for-art rule you will need to keep an especially accurate record of your art purchases. Were you audited you will need to show the direct relationship of your art purchase to your product.
There are a number of ways that your art expense may be treated. The final determination is up to your tax pro.
You may treat your art purchases as production costs. If I understand your work correctly, then I assume you do not know how many pieces of your work you will make to sell from one art purchase. So you need to pick a reasonable amount of time over which you will sell the "dog" piece. Then have your tax pro use that amount of time -- let's say 3 years -- to amortize the costs of your art. That means that $900 in art purchases would get you a $300 deduction over 3 years.
If you know the actual number of pieces you will make based on one art purchase your tax pro will set up a different method for tracking inventory and production costs.
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
Are all expenses deductible in the year they are paid?
Hi June,
I am a cartoonist from Parsippany, NJ --5 years.
I have 3 little questions that all seem to fall under the category of "Are all expenses deductible in the year they are paid?"
1) I usually pay my PO Box fees in the year I use the PO Box, but because of a rise in fees, the Post Office encouraged me to pay ahead, so I have paid for 18 months in 2007, but only used it for 12 months.
2) Advertising: I bought business cards, stickers, and other small items for advertising my business, including Holiday Cards (featuring my artwork). Is the total cost deductible as advertising, even if I have inventory left over? It will take me years to hand out a thousand business cards!
3) Software: I thought that you had mentioned somewhere that software had to be amortized over several years, but cannot find that reference now. Can I deduct the cost of software and software upgrades as supplies in the year purchased?
I truly appreciate your advice, and your time.
Thank you very much in advance,
John
Hi John,
Hello to Parsippany. I lived in NJ much of my life. And my husband covered Parsippany-Troy Hills for a local newspaper way back when.
As a cash-basis taxpayer, yes you may deduct all the expenses you question as current, in the year paid. At one time software had to be amortized -- cost spread over a number of years -- but no more. Take the cost as a supplies expense.
A reminder about cash-basis: It's income when you get it, not when you bill it. It's an expense when you pay it, not when you receive the bill.
Another reminder about December expenses: Paid by check or bank credit card, then it's considered paid regardless of when your check clears or when you pay your credit card.
Best,
June
I am a cartoonist from Parsippany, NJ --5 years.
I have 3 little questions that all seem to fall under the category of "Are all expenses deductible in the year they are paid?"
1) I usually pay my PO Box fees in the year I use the PO Box, but because of a rise in fees, the Post Office encouraged me to pay ahead, so I have paid for 18 months in 2007, but only used it for 12 months.
2) Advertising: I bought business cards, stickers, and other small items for advertising my business, including Holiday Cards (featuring my artwork). Is the total cost deductible as advertising, even if I have inventory left over? It will take me years to hand out a thousand business cards!
3) Software: I thought that you had mentioned somewhere that software had to be amortized over several years, but cannot find that reference now. Can I deduct the cost of software and software upgrades as supplies in the year purchased?
I truly appreciate your advice, and your time.
Thank you very much in advance,
John
Hi John,
Hello to Parsippany. I lived in NJ much of my life. And my husband covered Parsippany-Troy Hills for a local newspaper way back when.
As a cash-basis taxpayer, yes you may deduct all the expenses you question as current, in the year paid. At one time software had to be amortized -- cost spread over a number of years -- but no more. Take the cost as a supplies expense.
A reminder about cash-basis: It's income when you get it, not when you bill it. It's an expense when you pay it, not when you receive the bill.
Another reminder about December expenses: Paid by check or bank credit card, then it's considered paid regardless of when your check clears or when you pay your credit card.
Best,
June
Moving Expenses
June,
I am so pleased to find your website and I have just purchased your book, and Four Steps for recordkeeping.
I have been an indie since 2003, after spending 20+ years in corporate America doing what I do now: providing employee benefits consulting advice to mid-sized and larger companies. I started my business in my home in Illinois and moved it to Smyrna, TN.
My question is, as a sole proprietor can I deduct my moving expenses? The move was more than 50 miles and I did not cease doing business during the move.
Thanks very much,
Pam
Hello Pam,
Only the business portion of your move may be deducted as a business expense. The balance, if it meets certain minimums may be deducted as a personal expense.
If you don't have separate invoices from the mover or a specific way to calculated the business portion you need to review everything you moved. If your business equipment and files filled about 10% of the truck, then take 10% of the cost. Some really organized indies, or those who have been really messed up by movers in a previous experience, keep an itemized list of everything that went into the truck. If you did that, then use your list to come up with a percent for business.
Best,
June
I am so pleased to find your website and I have just purchased your book, and Four Steps for recordkeeping.
I have been an indie since 2003, after spending 20+ years in corporate America doing what I do now: providing employee benefits consulting advice to mid-sized and larger companies. I started my business in my home in Illinois and moved it to Smyrna, TN.
My question is, as a sole proprietor can I deduct my moving expenses? The move was more than 50 miles and I did not cease doing business during the move.
Thanks very much,
Pam
Hello Pam,
Only the business portion of your move may be deducted as a business expense. The balance, if it meets certain minimums may be deducted as a personal expense.
If you don't have separate invoices from the mover or a specific way to calculated the business portion you need to review everything you moved. If your business equipment and files filled about 10% of the truck, then take 10% of the cost. Some really organized indies, or those who have been really messed up by movers in a previous experience, keep an itemized list of everything that went into the truck. If you did that, then use your list to come up with a percent for business.
Best,
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
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
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