June,
Thank you so much for your eLetter Ways Through the Maze.
Your book has been very helpful. What a blessing. I was reading the section in the book on home business deduction. Under rule #2, Used on a regular basis. What do they consider regular?
I'm asking cause last year I had to leave town on family emergency for a month. Additionally, I do consulting in IT. So, sometimes business is slow, other times busy. But even in slow times, we still have to do administrative tasks, including remote support of clients, maintenance, dealing with issues as they transpire.
Thanks for you perspective on this,
-Adam
Hello Adam,
Thanks for letting me know that my writing is helpful to you.
Sounds to me as if you have a home office. An emergency leave of absence from your home office does not disqualify your deduction; nor does any occasional voluntary leave of absence disqualify the deduction. And if once in a while you leave the office to work wireless by the pool in order to keep an eye on the kids, that doesn't disqualify the home office either.
On the other hand, occasional use does not qualify it as a home office. Here's an example from my book:
Allmost Sargent has a rented studio in town. He also has great light in a back room of his house. The room is always locked and seldom used. Once in a while he brings a potential buyer to his home to look at a painting and he uses the back room for the viewing. This is not regular use and so he cannot deduct the use of that room as a business expense.
Although you didn't ask, just let me mention: were Uncle Sydney to sleep on your home office sofa during his occasional pass through town that would disqualify the room as a home office deduction.
Best,
June
Saturday, May 23, 2009
Saturday, May 16, 2009
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
Friday, May 15, 2009
There may be opportunity for your business. Check around.
June,
Your book, website, and blog have been very helpful, but I have a question that I don't think you have covered.
My husband and I have owned a construction company in Virginia Beach, VA since 2008. We are registered as a partnership (federal, state, and local) with my husband as the primary or responsible party, but we have not filed any taxes as such yet. The majority of our business is currently in my husband's name, but in the future, we would like to become SWAM certified, which requires me to have the majority ownership.
My question is: now that we know we should not be a partnership and one of us should be an employee, how do we decide who it should be? We would like Jason to be the employee, but that would require changing everything.
Also, is going from owner to employee acceptable to the IRS?
Thank you for your help.
Thesha
Hi Thesha,
If there were no income to the partnership in 2008 you may be able to dissolve it. Have a partnership return filed with zero income and marked as final and have your husband file as a sole proprietor claiming all income.
There is no tax problem in switching business entities. If you manage the business and your husband does the manual labor that might make you the boss. However, you should check with a local tax pro who understands SWAM -- Small, Women- and Minority-owned Business requirements. You don't want to be disqualified because it may look as if the business really belongs to your husband but you are the minority and so that's why you're doing the switch.
Be sure to use someone who has SWAM experience.
I'm pleased my writing has been helpful.
Best,
June
Thursday, May 14, 2009
Plan on 30% to 40% of net income going for taxes.
June, thanks for your response, Cruising Both Ways . In reply, I absolutely knew I would owe money to the IRS but this year seems to be particularly outrageous. I have no problem paying my taxes (as I have done for my entire working life - the last nine on cruise ships)...as long as it seems within reason.
I made $21,000 last year and only $8,000 of that was from 1099s from the cruise ship job. The remaining income was from my land based job I worked for 9 months and from which all my taxes were deducted.
What I find unbelievable is that I owe $1,800 in taxes!!! And how is it that I am being taxed on income ($11,000 from my land based job) that I've already paid taxes on?
How can someone who makes so little money owe so much? My tax guy said it's because of my land job that I owe so much as it put me in a higher tax bracket. What??? I made $21,000!!! That's nothing! I just can't believe that someone living close to the poverty level would be liable for so much. So, in essence, doesn't $1,800 on $8,000 seem a bit much?
Thanks for your time.
Regards,
Paige
Dear Paige,
I understand your incredulity. Let me explain. Although I may make it clear I can't make you feel better. Wish I could.
Income tax is calculated on entire income. Wages, dividends, alimony, net self-employment income, jury duty pay, etc. are all added together. Were someone to receive a lot of dividends [not this year, of course] or alimony, no tax would have been withheld on that income. If no estimateds had been paid tax would be owed at year-end.
Let's say you made $20,000 in salary but your withholding were incorrectly set for a $10,000 income. You'd owe taxes at year-end. Or conversely were you over withheld as if you were earning $40,000 a year -- you'd get a refund at year-end.
In your case, nothing was withheld on your $8,000 freelance income. If your income tax rate is 7 1/2 % then you'd owe $600 income tax on the $8,000 income.
In addition to that you must pay Medicare and social security tax on your freelance income. That's approximately 15%. $8,000 times 15% = $1,200.
Add them up you get: $600 + $1,200 = $1800.
As a general rule of thumb, I suggest that indies plan to pay 30% to 40% of their net self-employed income on taxes.
Here's more info on taxes .
Best,
June
I made $21,000 last year and only $8,000 of that was from 1099s from the cruise ship job. The remaining income was from my land based job I worked for 9 months and from which all my taxes were deducted.
What I find unbelievable is that I owe $1,800 in taxes!!! And how is it that I am being taxed on income ($11,000 from my land based job) that I've already paid taxes on?
How can someone who makes so little money owe so much? My tax guy said it's because of my land job that I owe so much as it put me in a higher tax bracket. What??? I made $21,000!!! That's nothing! I just can't believe that someone living close to the poverty level would be liable for so much. So, in essence, doesn't $1,800 on $8,000 seem a bit much?
Thanks for your time.
Regards,
Paige
Dear Paige,
I understand your incredulity. Let me explain. Although I may make it clear I can't make you feel better. Wish I could.
Income tax is calculated on entire income. Wages, dividends, alimony, net self-employment income, jury duty pay, etc. are all added together. Were someone to receive a lot of dividends [not this year, of course] or alimony, no tax would have been withheld on that income. If no estimateds had been paid tax would be owed at year-end.
Let's say you made $20,000 in salary but your withholding were incorrectly set for a $10,000 income. You'd owe taxes at year-end. Or conversely were you over withheld as if you were earning $40,000 a year -- you'd get a refund at year-end.
In your case, nothing was withheld on your $8,000 freelance income. If your income tax rate is 7 1/2 % then you'd owe $600 income tax on the $8,000 income.
In addition to that you must pay Medicare and social security tax on your freelance income. That's approximately 15%. $8,000 times 15% = $1,200.
Add them up you get: $600 + $1,200 = $1800.
As a general rule of thumb, I suggest that indies plan to pay 30% to 40% of their net self-employed income on taxes.
Here's more info on taxes .
Best,
June
Tuesday, May 12, 2009
A Reporter's Confusion
There are so many elements to SV's email below that I am going to embed my responses as an aid to clarity. Her confusion is not unique, so my explanation may help a lot of you.
Hi June,
I'm a full-time reporter and just started freelancing this year.
I received a 1099-MISC and am confused about whether I should enter that in a Schedule C or just along with my total income? This tells me that SV is preparing her own return and I don't give specific tax preparation instruction. So I am going to rephrase her question. Think of it this way: I am freelancing. I received a 1099-MISC that stated the amount of my freelancing income. Is that income the same as my wages as a reporter and if it is may I combine it with my wages income? Or is it self-employed income to be treated as self-employed income on my tax return? Well, asked this way, it's a little more clear that the income is self-employed income not wages and must be treated as such on SV's tax return.
It seems that's for a sole proprietorship, not a proprietor. Self-employed income makes you a sole proprietor -- fait accompli.
but according to you a 1099-MISC is for an employee, I never said that. Check your sources.
By the way, a reporter always thrice checks sources. I know because my husband was a reporter for a long, long time. And, as reporters know: Don't let what you want to be the outcome of the story influence how you investigate your story. You may think the guy's a crook but you must investigate to see all sides of the situation. You don't want to pay more in taxes but you must look at the possibility that you may and not interpret to fit your desired outcome.
I was originally working with Turbo Tax You are doing exactly what Timothy Geithner our treasury Secretary did. He didn't know his self-employed income was self-employed income and so he answered the TurboTax question incorrectly. Read these posts Turbo Tax and Tax Prep Programs (8) .
but got a queasy feeling that something was just not quite right about the fact that one way I was asked to pay several hundred dollars, and the other way I was given a refund of a few hundred dollars. On your wages as a reporter you have already paid social security and Medicare tax. You have not paid those taxes on your freelance income. Combined -- called self-employment tax -- they are approximately 15% of your net self-employed income. That's why you owe taxes.
I don't want to get in trouble but I can't afford an expensive tax preparer, especially if I will be paying several hundred dollars in taxes (and yes, I put enough aside but I feel as though if I were more savvy I would probably would not be paying as much...) I believe I should have deductions for clothing, makeup, car use and home office, but I'm not sure where to put that. It seems most tax preparers are not well-versed in helping people in my situation. You need to educate yourself. As a reporter you wouldn't write a story knowing nothing about the subject. You know nothing about the business side of being self-employed and so you should not expect to be able to write about it -- doing your own tax return. Start by reading more of my blog posts. For instance, you'll see in the explanation of expenses that you cannot deduct makeup unless it were purchased for a business special event only. For a basic understanding of self-employed taxes and recordkeeping check out my book Self-employed Tax Solutions. In it there's Rick Reporter. Rick has both wages as a reporter and freelance income, just as you do.
Do you know of a good "indie" accountant in the DC/Maryland area? No one. These posts might help tax pros - tax prep fees - tax returns .
Thanks so much!
SV
Largo, MD
You are welcome.
June
Hi June,
I'm a full-time reporter and just started freelancing this year.
I received a 1099-MISC and am confused about whether I should enter that in a Schedule C or just along with my total income? This tells me that SV is preparing her own return and I don't give specific tax preparation instruction. So I am going to rephrase her question. Think of it this way: I am freelancing. I received a 1099-MISC that stated the amount of my freelancing income. Is that income the same as my wages as a reporter and if it is may I combine it with my wages income? Or is it self-employed income to be treated as self-employed income on my tax return? Well, asked this way, it's a little more clear that the income is self-employed income not wages and must be treated as such on SV's tax return.
It seems that's for a sole proprietorship, not a proprietor. Self-employed income makes you a sole proprietor -- fait accompli.
but according to you a 1099-MISC is for an employee, I never said that. Check your sources.
By the way, a reporter always thrice checks sources. I know because my husband was a reporter for a long, long time. And, as reporters know: Don't let what you want to be the outcome of the story influence how you investigate your story. You may think the guy's a crook but you must investigate to see all sides of the situation. You don't want to pay more in taxes but you must look at the possibility that you may and not interpret to fit your desired outcome.
I was originally working with Turbo Tax You are doing exactly what Timothy Geithner our treasury Secretary did. He didn't know his self-employed income was self-employed income and so he answered the TurboTax question incorrectly. Read these posts Turbo Tax and Tax Prep Programs (8) .
but got a queasy feeling that something was just not quite right about the fact that one way I was asked to pay several hundred dollars, and the other way I was given a refund of a few hundred dollars. On your wages as a reporter you have already paid social security and Medicare tax. You have not paid those taxes on your freelance income. Combined -- called self-employment tax -- they are approximately 15% of your net self-employed income. That's why you owe taxes.
I don't want to get in trouble but I can't afford an expensive tax preparer, especially if I will be paying several hundred dollars in taxes (and yes, I put enough aside but I feel as though if I were more savvy I would probably would not be paying as much...) I believe I should have deductions for clothing, makeup, car use and home office, but I'm not sure where to put that. It seems most tax preparers are not well-versed in helping people in my situation. You need to educate yourself. As a reporter you wouldn't write a story knowing nothing about the subject. You know nothing about the business side of being self-employed and so you should not expect to be able to write about it -- doing your own tax return. Start by reading more of my blog posts. For instance, you'll see in the explanation of expenses that you cannot deduct makeup unless it were purchased for a business special event only. For a basic understanding of self-employed taxes and recordkeeping check out my book Self-employed Tax Solutions. In it there's Rick Reporter. Rick has both wages as a reporter and freelance income, just as you do.
Do you know of a good "indie" accountant in the DC/Maryland area? No one. These posts might help tax pros - tax prep fees - tax returns .
Thanks so much!
SV
Largo, MD
You are welcome.
June
Monday, May 11, 2009
Check your sources BEFORE you act!
June --
IT consultant. Thank you for taking my comment.
I have been an independent contractor for 7 years.
The problem I have now is that I have been trying to purchase a house and the person helping with my loan advised me to amend my 2007 taxes and take no deductions and even had me add some income to it to make the numbers for the loan as my AGI was low due to the deductions.
He also advised me to file 2008 with no deductions and add some income to that as well.
Now my problem is that I have not received financing and am stuck with a huge tax liability as I did not take my deductions.
I am not sure where to go now.
Any help is appreciated.
Vipul
Vienna, VA
Dear Vipul,
As I alert indies all the time: Know the source of the info you use. Even though they are both trades people, would I ask my plumber to fix an electrical problem? Did the person helping you with the loan know anything about taxes? Did you ask him?
Inflating income to get a federal loan is fraud. Yup. It's really bad.
You need to go to a legitimate tax professional experienced with self-employed taxes and have her file amended tax returns for 2007 and 2008.
In my book, Self-employed Tax Solutions, I warn about just such a situation. Sammy Segar the clueless CPA advises the musician Miles Mingus just as your loan guy advised you.
Best,
June
IT consultant. Thank you for taking my comment.
I have been an independent contractor for 7 years.
The problem I have now is that I have been trying to purchase a house and the person helping with my loan advised me to amend my 2007 taxes and take no deductions and even had me add some income to it to make the numbers for the loan as my AGI was low due to the deductions.
He also advised me to file 2008 with no deductions and add some income to that as well.
Now my problem is that I have not received financing and am stuck with a huge tax liability as I did not take my deductions.
I am not sure where to go now.
Any help is appreciated.
Vipul
Vienna, VA
Dear Vipul,
As I alert indies all the time: Know the source of the info you use. Even though they are both trades people, would I ask my plumber to fix an electrical problem? Did the person helping you with the loan know anything about taxes? Did you ask him?
Inflating income to get a federal loan is fraud. Yup. It's really bad.
You need to go to a legitimate tax professional experienced with self-employed taxes and have her file amended tax returns for 2007 and 2008.
In my book, Self-employed Tax Solutions, I warn about just such a situation. Sammy Segar the clueless CPA advises the musician Miles Mingus just as your loan guy advised you.
Best,
June
Tuesday, May 5, 2009
Auto Arithmetic
Hello June,
I found you through a Google Search. If you don't mind, I've got a question I'm sure you could answer.
So, I am starting a home based business as a sole proprietor, and I am using my personal vehicle for business as well.
If I am to take my car out to two locations on the same trip, one being for personal purposes and the other for business purposes, how do I determine the number of miles to attribute to each?
For example, let's say I'm starting from home and drive 10 miles to the mall to shop for personal, then drive an extra 5 miles to the bank for business, and then 15 miles home. How do I split up the miles? [June's calling this SCENARIO 1.]
Another scenario would be if I, again, start from home and drive 10 miles to the bank for business, and then an extra 5 miles to the mall to shop for personal purposes, and then 15 miles home. How do I split up these miles? [June's calling this SCENARIO 2.]
Thank you June, in advance.
Sincerely,
Sarah
Hello Sarah,
From your total miles for the trip you subtract what would be your personal miles were you to have done only personal errands. What's left are business miles. Think of it as a grade-school arithmetic problem. It's not more complicated than that.
SCENARIO 1:
30 miles = total trip
20 miles = personal miles to the mall and back, as if mall were the only errand
10 miles = business
SCENARIO 2:
30 miles = total trip
20 miles = business, as if if business were the only errand
10 miles = personal, additional miles going to the mall
-- June
I found you through a Google Search. If you don't mind, I've got a question I'm sure you could answer.
So, I am starting a home based business as a sole proprietor, and I am using my personal vehicle for business as well.
If I am to take my car out to two locations on the same trip, one being for personal purposes and the other for business purposes, how do I determine the number of miles to attribute to each?
For example, let's say I'm starting from home and drive 10 miles to the mall to shop for personal, then drive an extra 5 miles to the bank for business, and then 15 miles home. How do I split up the miles? [June's calling this SCENARIO 1.]
Another scenario would be if I, again, start from home and drive 10 miles to the bank for business, and then an extra 5 miles to the mall to shop for personal purposes, and then 15 miles home. How do I split up these miles? [June's calling this SCENARIO 2.]
Thank you June, in advance.
Sincerely,
Sarah
Hello Sarah,
From your total miles for the trip you subtract what would be your personal miles were you to have done only personal errands. What's left are business miles. Think of it as a grade-school arithmetic problem. It's not more complicated than that.
SCENARIO 1:
30 miles = total trip
20 miles = personal miles to the mall and back, as if mall were the only errand
10 miles = business
SCENARIO 2:
30 miles = total trip
20 miles = business, as if if business were the only errand
10 miles = personal, additional miles going to the mall
-- June
Monday, May 4, 2009
Law School: Not a Business Expense
June:
Thank you for your email and the list of business expenses.
I am looking forward to getting your book, Self-employed Tax Solutions. I have a question below -- but if it is already on your website please just direct me there. I can't seem to find the answer anywhere. It's a deduction question. I want to find a way to deduct my law school educational expenses from my new real estate business. I have a law degree without a license to practice law (yet), and I don't know if I will sit for the bar exam again. So, I am not a lawyer, but I can do my own formation and corporate formalities paperwork, maneuver in the court system, and facilitate my own land sale contracting. My education helps me to understand judicial foreclosure process and land sale contracting. I can do my own title searches too. So, can I find a way to pay for my law school expenses (now in loan repayment mode) under the IRC education expense section, or under "reasonable and necessary"?
Entity situation: I will probably choose an LLC-C for the entity because of the "Dealer" issue, and also the additional benefits available to me and my family if I hire my husband and 3 kids to help me. My husband works full time and supports our family. The business functions will include judicial foreclosures, tax lien certificates, and probate property wholesaling. I would like to gradually weave in some income upstreaming from diverted services rendered to a second LLC created for real estate investment (holding rentals) in which this LLC-C business would be the managing member.
Thanks.
Dawnelle
Hi Dawnelle,
You are welcome.
The way I understand your question: You attended law school and want to know if you can deduct as a business expense your student loan payments. No, you cannot. My book has a complete chapter on education expenses. In case I misunderstood your question, read that chapter and see if your situation fits the deductibility requirements.
If by LLC-C you mean an LLC [Limited Liability Company] formed as a corporation. That's overkill. If you must be a corporation for liability purposes you don't need to also be an LLC.
You do not need to be a corporation to hire your spouse and children as employees.
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
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