Indies Pay Less SE Tax In 2011

Hi June,

Wondering if the Payroll Tax Cut will affect Indies, too--i.e. will our Self-employment taxes go down for 2011? I think your readers would like to know!

Thanks,
Jolene


Hi Jolene,

"Enjoyed" my morning coffee reading the regs on the new tax act. We in the tax business know it as "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, H.R. 4853." I would much rather have been reading Harpers or The New Yorker. Or even The Economist.

Anyway, to your question:

For 2011 only the social security rate is reduced by 2% for employees and for the self-employed.

For example, if you are self-employed with net income subject to SE tax, instead of paying $1,530 SE tax, you will pay $1,330.

If you have employees, you must reduce the Social Security withholding from his or her paycheck by 2%. So instead of withholding 6.2% you are to withhold 4.2%,

That means if you pay someone $100 and for Social Security and Medicare Tax you were withholding $7.65 [the employees 1/2] you will now withhold $5.65. The employer's share is still $7.65. The total = $13.30.

Time for more coffee!
June

Sometimes I just have to show the question.

Hi June Walker,

My name is Copeland and I have a Franchised Cleaning Business and I've been in business for 2 years and my question to you is the food I buy from the Grocery store is that a tax write off.

Copeland
Middletown, DE


Copeland --

Why in the world would you think your food is a business deduction? everybody has to eat.

-- June

Where To Get Health Insurance

June --

Psychotherapist since 2000. I welcome your comment

After COBRA, where do I find the best health insurance for the Indie???

Kathryn
Rolling Hills Estates, CA

Dear Kathryn,

Taxes are easy. Insurance is difficult! Start by asking for a recommendation from the insurance agent who handles your auto or home insurance. He or she will know the recent changes in your state and which coverage is the best for you.

I do not recommend NASE -- the National Association for the Self-employed.

-- June

Deductible Refinancing Costs

June,

I was wondering if refinancing a mortgage loan - points, appraisal fee, broker fee, escrow fee. are those deductible?

Thanks,
Justin

Justin --

Non-finance charge costs when refinancing are added to the cost-basis of your home.

Finance charges -- "points" -- are amortized as a mortgage interest expense over the life of the loan.

For instance, a 30 year mortgage refi taking place on January 2 with $3,000 in points gets a $100 [3000/30] mortgage interest deduction per year.

-- June

No Deduction For House-sitter

June --

Truck driver for 25 years. We have finally hired a house sitter for when we are gone trucking. Is the $15 a day we pay her considered a deduction?

Patricia
Toledo, WA

Dear Patricia,

No deduction for the house-sitter.

-- June

Selling A Website or Business Equipment

June,

I contacted you 3-4 years ago regarding my website business that is a sole proprietorship and 1099s. I have another question. I sold my main revenue generating website. It used to make me money through advertising. I'm going to give a simple rundown to clarify things. Let's say it made $1,000 every year. This was posted with a yearly 1099 by my web sponsor. [I think he means that the guy who paid him the $1000 per year sent him a 1099 stating the income.] However, this year I got a buyer that wanted to pay me $10,000 for it. So I sold it.

My question is: the website includes the domain, website assets, and full ownership of the website. Does that $10,000 become a capital gains tax? Also, I've worked on this website and filed taxes on it since 2006, so does this mean it becomes a long term capital gains tax?

Thanks!
Justin

And another …


June –

I do music composition/instrument sales. Question: I re-sell some instruments and sometimes there is a profit other times a loss. End of the year I have a net loss. Do I owe social security tax [I think he means self-employment tax] on those items sold for profit.

If there is a profit from the total sale of instruments BUT after including business expenses there is a net loss - do I owe social security tax on the profit sales?

Thanks for your time.
Jeff
St. Louis, MO


Hi Guys,

Earned income is money you receive for services you perform or products you sell. It is on your net earned income that you pay self-employment (SE) tax.

Justin, you sold a website. Unless you are in the business of selling websites or domain names the income from that sale is not earned income. It is gain from the sale of an intangible -- can't pick it up in your hand -- business asset. It is long term. It is not part of your self-employed income.

Jeff, you say that you are in music composition and instrument sales. If you write music and then simply sell instruments that you don't use anymore then the sale of that "equipment" is not part of your earned income. You would have a capital gain or loss on your tax return. That gain or loss is not part of your self-employed income.

If,however, you are in the business of buying and selling musical instruments, then they are the products you offer for sale and any income or loss is part of your self-employed income. It is subject to SE tax.

-- June

Your Vote Is Needed

Hi Indies, a quick note:

Please take a look at my earlier review of The Wealthy Freelancer .

I just heard from author and colleague, Ed Gandia. The book is in the running for the "Small Business Trends Reader's Choice."

Please take a moment to read my review and if you like what you've read, vote for Ed's book right here: http://bookawards.smallbiztrends.com/entrepreneurship/the-wealthy-freelancer/ . Just hit the vote button. It really takes only 2 seconds to vote.

Thanks.
June

Self-employment is about credibility.

I work with retirement plan advisors to help my clients set up complex self-employed pension plans. In correspondence about a client that I said is no longer self-employed I received the following question from one of those pension guys and decided to bring you in on my response.

Pension Pete asked: So when you say the client is no longer self employed I’m wondering what you mean. In other words, if he delivered newspapers in the morning or sold pencils in the park wouldn’t he be self employed? Isn’t the notion of being self employed more of an intellectual exercise rather than factual (although maybe deductions wouldn’t be allowed if zero net in 2 out of 5 years???)? I am both self-employed and a common-law employee. Although I usually earn a little in my SE practice annually, allowing me to deduct other stuff, even if I don’t have any net earnings I would consider myself to be SE.


I answered Pete: Someone may be both an employee and self-employed. So, yes, he may be an employee of a pension company and legitimately sell pencils as his indie business.

However, self-employment is absolutely not an "intellectual exercise." There are specific IRS regs that determine self-employment. Take a look here for an overview: It's all about relationships: Are you an employee or are you self-employed?

The corporations that are kicking out employees through the front door and then bringing them back in through the rear door as "consultants" are breaking the law. Saves the corporation a whole lot in payroll taxes and benefits -- approximately 25% to 30% of salary. The IRS is trying to crack down on that but not doing a good job at it.

Or, let's look at -- wife earns $300,000 a year at her corporate job. Hubby is into photography. Wife pays for all the expensive photo equipment and the travel to the Amazon, New Zealand, and Peru for nature photo shoots. Oh, says their CPA, Sammy Segar, I think hubby is in the business of photography. Get him to sell a couple photos to friends for a few hundred dollars and we can write off all his photo expenses because he is self-employed. Here we've got a home-made tax shelter -- albeit a fraudulent one.

Sammy's shenanigans damage the credibility of legitimate photographers who happen to have a bad financial year. Why? Because it's much easier for the IRS to go after individuals than to pursue entire companies or industries. And the IRS lumps hubby together with the legitimate wedding photographer, Billy Bridesnapper.

And, any of you who follow my writing know that any 2 or 3 year profit rule is ... well You must have a profit in 3 out of 5 years: Hogwash!!

Cheers,
June

Quicken for Recordkeeping

June --

From Olathe, KS. ... Automotive Training Consultant ... 20 years as an indie.

What bookkeeping software do you recommend? Or do you recommend using software for bookkeeping. I have the Dome software which works somewhat. Would Quicken be better?

-- James


Hi James,

If you want to keep records on computer then I strongly recommend Quicken. It is the easiest and most flexible of all the bookkeeping software I've used. It was introduced to me by an electrician 20 or more years ago, back when very few indies were using software for recordkeeping.

Since then it's developed a lot of unnecessary bells and whistles. I have not yet used the 2011 updated version. I recommend the basic Quicken Starter Edition 2011. You can always upgrade if you really get into all the added features.

For a guide on adapting Quicken's expense categories to an independent professionals business go to my website and under Places To Visit select Quicken Categories For Indies.

Best,
June

International Freelancers Day

If your life has been as hectic as mine over the last two months you may have missed the International Freelancers Day Conference. It was loaded with free, yes, free, information for indies.

Here's your final chance to check it out and listen to all the presentations. Really, at no cost. My fellow freelancer Ed Gandia of The Wealthy Freelancer reminds us that:

The presentation replays for "International Freelancers Day" are available for 4 more days only! They'll be pulled down on October 31.

You can access the presentations here: http://internationalfreelancersday.com/full-replay-access . Your password is: replay2010.

And... Just in case you thought that this whole thing was a once-a-year thing know that the teaching, training and learning of "International Freelancers Day" is going to continue - all year long - right up until next year's celebration!

After listening and learning, please also pay a visit to The Wealthy Freelancer . Let me know what you learned from the book. Here's my review of it: The Wealthy Freelancer .

Cheers,
June

Be damn sure you know what you're doing and why BEFORE you incorporate.

June --

I live in Columbia SC, I'm 68 years old and may never be able to retire but thankfully my health at this juncture is not an obstacle to working as a 100% commission salesman. Would you comment on a 1099 person incorporating as a business advantage and whether there is is any advantage to doing so in Wyoming or Nevada as websites in those states strongly suggest.

If there is a reference or a site that elaborates on this would you refer it to me.

John


Hi John,

I assume you are asking because of tax consideration not liability concerns. No matter in which state you incorporate the federal tax laws and regulations and requirements are the same.

States differ on laws and regulations and requirements. For instance, there may be no state tax, lower fees, and less oversight in some states.

Before considering incorporation you must first look at whether or not you are taking advantage of all the business expense and heath insurance deductions and pension contribution plans available to a sole proprietorship.

If you are taking full advantage of being an indie -- which, if you haven't read my book, Self-employed Tax Solutions, I assume you are not -- then you need to compare the cost of incorporation, the accountant fees for preparing corporate tax returns, the hassle and abundance of a more elaborate recordkeeping of finances as well as corporation activities against the amount of state taxes saved.

And, keep in mind: As states struggle in the current economy today's tax rates may not be tomorrow's rates.

If you are going to incorporate be damn sure you know what and why you are doing it. After you've spruced up your knowledge on indie taxes then read my posts on incorporating.

And a request of you and anyone else sending a question to me: Please send me the link or the source of your info.

Best,
June

Everybody's got to eat.

Hi June,

(Things are going well using your system, keeping everything organized for my indie tax preparer at year's end. Although I did break down and open a free business checking account because I didn't want to be paying vendors from the joint, home account. Still, I figure it's the tracking and not the checking account that is going to matter.)

Here's the question for the blog:
I'm confused on where to categorize costs for luncheons that I attend for service organizations (i.e., Kiwanis) and professional organizations. I know the memberships are deductible, but how to classify the weekly meeting costs?

Also, in general, can one categorize fees for attending any networking events - where meeting people for business leads is the objective - as an advertising expense?

Thanks - Ron in Long Beach, CA


Hi Ron,

Good. Happy to hear that you are following through with my recordkeeping system. I love success stories. And you are correct: It's the tracking not which checking account that matters.

When attending a business meeting where lunch is served you cannot deduct as a business expense the cost of your lunch. Were you to pay for the lunch of a a business colleague as well as for your own then you would be allowed to deduct the cost -- but only 50%.

The reasoning from the IRS: You'd be eating lunch anyway so the cost of your lunch is not really a cost of business.

Fees for any networking event can be categorized as advertising; or as dues if you pay a yearly fee. Remember to include transportation costs to and from the event.

I see from your site that your business works with local and community policy. You might want to take a look at the piece I wrote for New Mexico Business Weekly on deducting lobbying expenses.

Best,
June

To barter is to earn & spend.

Hi June,

I've been reading your newsletters. We are having a debate on whether I, as a sole proprietor, have to declare a barter.

I understand I cannot make a donation claim, but do I have to declare a trade on my state and federal taxes? Does it make any difference if I trade time vs trading a $$ amount?

Thank you in advance,
Susan


Hi Susan,

A barter, whether in time or service, is income. Whether you're a sole proprietor, partnership, or corp doesn't matter. I am not sure what you mane by "donation claim" but let me give you a little more info on bartering.

Self-employed income is compensation you receive for a service you have performed [your time]or a product you have provided. Does the source of the income matter? No; it could be paid by your sister or the Government of Egypt. Does the form of payment matter? No; it could be cash, or check, or you could be paid in camels.

Here's an example: Syd System receives two massages from Rob Rolf in exchange for setting up the massage therapist's computer. The fee generally charged by Rob the masseur, let's say $200, is the amount Syd the IT consultant reports as income.

Likewise, Rob shows $200 in income and also $200 computer expense.

Each of these transactions results in income for a self-employed person. Don't be fooled into thinking that because the payment you receive is out of the normal course of your business or is not in good ol’ American currency that it is non-income. However unorthodox, it is still self-employed income.

Rob had income equal to an expense, however, his gross income may be subject to state tax and so he must include it on his tax return. before the deduction of expenses.

Now you know the rule. End of debate.

June

Forced to incorporate is a quirk of the company.

Hi June,

I'm a New York City Indie Sound mixer for TV, 10 years. Thanks so much for your very informative web site.

I'm so confused this is the second company that has sent me an email with this content. "Hi Sheila, Helen forwarded your invoice and w-9 form to me – however, we cannot pay you via a w-9 form. Because you are not incorporated, we need to pay you via a w-4 and withhold payroll taxes. You will be issued a w2 for 2010 tax reporting purposes. We are obligated to follow the instructions of New York State Department of Labor. Please complete the attached, including a signature and a withholding exemption amount on line 5. You may email it back to me, mail, or fax." I have not sent a reply to this request.

I am wondering if i should incorporate (which you don't suggest). Some years ago I used a DBA. I could I use the name I used then to get a tax id number and set up a bank account and ask this company to issue me a 1099 to the DBA?

If all my vendors start doing this will I lose my ability to deduct.

I welcome your comment.
Sheila


Hi Sheila,

If you are legitimately self-employed then there is no New York state department of labor law that says you must incorporate or you must be an employee. That demand is a quirk of the company.

Here's my post with good overview of the requirements for self-employment: Employee vs. Self-employed. And here's a post of someone in a similar situation: Forced to be an employee!

If the company will accept a federal ID # or a DBA [doing-business-as meaning a name other than your own] or even an LLC then by all means do one of those rather than work as an employee or even more cumbersome and expensive, forming a corporation.

Would be great if you could get me a copy of the instructions of New York State Department of Labor that Helen says they are obligated to follow.

Pleased that my site is helpful. Thanks for letting me know.

-- June

Income is what you actually receive.

Hi June,

I have been a self employed massage therapist for three years. My question is, I just ran a promotion with a local company. The company sold vouchers of my services for 50% off my regular rate and I get 50% of the sales.

How do I write this off on my taxes at the end of the year?

Jessica
Boylston, MA


Hi Jessica,

Congratulations on setting up promotion.

This is a simple situation. The discount or coupon has no impact on how your income is taxed. If you generally charge $100 for a massage and instead, with the coupon, you now receive $50, then your income is $50.

-- June

Learn how to deduct medical costs as a business expense.

Hi June,

I'm a software/controls/simulation engineer. Indie for 6 months.

Your web site has been a fantastic resource for me. Thank you. I read recently about deducting medical expenses and I contacted TASC about setting up a plan, which I expect will save me a good chunk on taxes.

I wanted to let you know your link is not working on your page http://junewalkeronline.com/index.asp?sPG=80.

Here's a link that works: https://www1.tasconline.com/buytasc/bizplan/page/whatisbizplan.

Thank you for the great web site !

Regards,
Rob
Pleasanton, CA


Hi Rob,

The guys to talk with at BizPlan are John Gill and Marino Alcorta-Narvaez.

How much you'll save depends on your total medical costs. There have also been some changes due to the new small business tax act that may have an impact on medical insurance deductions.

Thanks about the link -- been fixed -- and for your generous comments about my site.

Please let me know how BizPlan works out.

I just signed with Xynergy to develop my a new website and online marketing. Hope to have things up and running by Christmas or earlier. As a one-person info source I need to figure out how to spread the word more efficiently.

-- June

Indies: Stand up for yourselves

Hi again, June,

Well, today is a big indie day, isn't it? The President signed the Small Business Jobs Act.

But I, for one, am confused about capital expenditures vs "bonus depreciation".

I am a consulting psychologist in private practice [for 25 years], and was going to buy a new computer. I seem to remember that the IRS has had a maximum amount of business expense you can write off all at once, as opposed to having to depreciate it. I have always depreciated my computers/printers, etc. How does the new law affect us indies?

Can I now write off the whole thing in one tax year?

Thanks,
Mark
Fairfax Station, VA


Hi Mark,

I gather you are the same Mark who sent me this Q&A Software Cannot Replace Experience a while ago. And, I gather you did not take my advice -- still doing your own tax return. Right? Big mistake unless you absolutely cannot afford a pro or there is not one available to you.

You can write off the cost of your entire computer as long as the cost was $250,000 or less. You get a better deduction if ,instead, you take advantage of the bonus depreciation feature. However, the deduction must be spread out over time. Which method is better for you depends on your entire financial picture at the moment and predicted for the future. Which is why you need a pro.

Go back and read that experience post of mine. Please. I think it might save you some money.

And while you're reading I suggest this one too, What's a small business? Yes, it is an important day for small business. Could have been a lot more important had we had some more congress people willing to help the likes of you rather than the likes of those who make a lot more money than you.

I don't know yet how the new Small Business Act will impact indies. Once it's signed it then must be interpreted. Then the interpretation must be understood and agreed upon.

Indies, please pay attention to who votes for what and who advocates for which kind of tax change. That you can now deduct 100% of your health care costs and may deduct for a home office as well as have another work location are tax changes that came about because of the work and attention of your fellow indies.

You are 40 million strong. You have the power and the clout.

-- June

What's the difference between a tax bracket and a tax rate?

We are all hearing a lot of hype about tax cuts and tax hikes for the middle class, for the rich, for everybody, for nobody.

But, has any pundit or pol explained how taxes work? No. No more than anyone explains what is a small business?

So here's something with which to regale your friends at the next cocktail or tea party -- a little tax savvy.

What’s your tax bracket? It's the same thing as your marginal tax rate. As your taxable income increases so does your federal income tax rate. The rate at which you end up is called your tax bracket. Another term for tax bracket is marginal tax rate.

Tax bracket and marginal tax rate both mean the percentage at which your next dollar of income is taxed. If you’re in a 15% tax bracket, for instance, on the next $100 of taxable income you will pay $15 in income tax. If in a 28% bracket, then $28 of the next $100 taxable income will go to the Feds.

Advancing to a higher tax bracket does not mean that all your taxable income is taxed at the higher rate. It means that any income from that point on is taxed at that rate.

Gross income, age and filing status -- married, single, widow(er), etc. -- determine whether you must file a tax return.

Taxable income is what's left after all deductions have been subtracted. Taxable income determines the rate at which tax is paid

Let's look at Gary Graphic -- single, owns a house, gives a lot to charity.

Gary grossed $250,000 in his design business [Wow! that's a lot.] After deducting business expenses his net income for the design business was $195,000.

Among the deductions from the $195,000 were Gary's self-employed pension contribution, mortgage interest, real estate taxes, and charitable contributions. After all subtractions he had $100,000 taxable income.

Here's how his tax is calculated:
The first $ 8,350 …… is taxed at 10% = $ 835
the next $ 25,600 ….. is taxed at 15% = $ 3,840
the next $ 48,300 ….. is taxed at 25% = $12,075
the last $ 17,750 ...... is taxed at 28% = $ 4,970
Total Income: $100,000 Total Tax: = $21,720

Gary is in a 28% tax bracket. That is his marginal tax rate.

Gary's real tax rate -- we tax pros call it his effective tax rate -- is: just about 22%. Meaning that about 22% of Gary's taxable income went toward federal income taxes.

How did I get that: Divide 21,720 by 100,000

Keep in mind that in this example Gary started with $250,000 income. The tax talk about taxing the rich who make more than $250,000 is not about Gary or most of you unless you are one of the top 3% earners in the country.

If Danworth Design's taxable income were a half million dollars his federal income tax would be $152,684. That is a little more than 30% of his taxable income.

End of today's tax lesson.

June Walker

What's a small business?

Indies, you know that I frequently tell you that you are a business. That you must think like a business. That you must have an indie-business mindset. You also know that your business is small. Your business may be you and only you. You may call yourself a "small business" because you are.

There’s lots being said right now about tax credits, tax hikes, what’s good and what’s bad for small business.

Well, what exactly is a small business?

I think it will come as no surprise, that there is no "exactly." Let me give you some examples from our ever-present source: The IRS.

If Caitlin Caterer, who has three women working for her, or Lorenzo Landscaper, who has a couple guys help him out, were looking to take advantage of the "health care credit for small business," they’d qualify because, for this tax credit, small business is defined as any business having 25 or fewer employees.

If graphic designer Victor Visual wanted to carry-back the business loss he had this year in order to recoup some of the taxes he paid in previous years he’d be allowed to do that as long as his small business had gross income of not more than $5,000,000 per year over the last three years (yup, that’s five million dollars). Doesn’t matter how many employees Victor has as long as he didn't gross five million dollars.

If Sid System wanted to set up a medical savings account for the two techies who are his employees he’d be allowed to do that. Why? Because for the Archer medical savings plan the definition of small business is 50 employees or less.

And then there’s a whole lot of other “definitions” of small business. And this is where size really counts.

Based on the North American Industry Classification System (NAICS) the following are considered small businesses if their income is equal to or less than:
agricultural industries ---------------- $750,000.
heavy construction industries ----- $33,500,000.
trade contractors -------------------- $14,000,000.
retail and service industries -------- $7,000,000.

Or their number of employees is equal to or less than:
for most manufacturing and mining industries -- 500. employees
for all wholesale trade industries ----------------- 100. employees

(For complete list of size standards, see the Small Business Administration's Table of Small Business Size Standards.)

So indies, please be careful when people with an agenda throw around terms that have different meanings.

According to the IRS, in 2007 [most recent statistics available] 94% of businesses were S-corporations, partnerships, and sole proprietorships. I don’t want to boggle your mind but all those business entities pay taxes at the individual tax rates. Yes, that is so.

I’m a sole proprietor. I pay tax at an individual rate. If I hook up with another accountant and we form a partnership and split the profit, then we each pay tax at an individual rate. The same would be true if we formed an S-corp.

Randy Neugebauer, a Republican who represents the 19th District of Texas, as a guest blogger of Townhall.com, wrote on July 29, 2010, that "Ninety-four percent of small businesses will face higher taxes under the Democrats' plan."

Randy is using 94% to confuse us. You and I are part of the 94% of small businesses out there. So is just about everyone who visits my site. And! Most of us do not have at least $250,000 in taxable income.

I see Randy as intentionally muddying the water. Some may say it’s a lie. The Democratic plan is to keep individual tax rates as low as they currently are, except for those individuals with taxable income over $250,000.

Unless Mr. Neugebauer refers to small businesses such as retail manufactures with gross receipts of $7-million or trade contractors with a gross of $14-million he is deliberately misleading indies.

Indies send me lots of questions about the fear-instilling emails they receive that threaten tax hikes that will wipe them out. Don’t listen to that propaganda. Tell your indie colleagues not to be terrorized by this intentional misrepresentation. Get more information.

June Walker

Stage Mom -- sort of -- asks the questions for child model

Ms. Walker,

I bought your book Saturday night (Self Employed Tax Solutions - 2nd Edition) and highlighting stuff as I go, LOVE IT!!!!! I am only on page 52, soaking up every word you say!
Great to know. Thank you.

I HAVE TWO MAIN QUESTIONS:

I am in a really strange situation and can find ABSOLUTELY NO BOOKS ON THE SUBJECT MATTER! I have a daughter who is 13 and studying to be an actor/model. All the contracts we have signed say she is an "independent contractor". I understand that means she is responsible for own taxes, at the age of 13. ??? Yes.

Okay her taxes? or my taxes? Her taxes.

If she does a job for a client, the client pays the agent, the agent pays my daughter and then daughter has to pay a percentage (as stated in our contract) to her talent manager. Is there book on this stuff? Not sure what you're asking. If you're asking is there a book on this subject. yes, mine. The one you are reading. Your daughter is self-employed.

If you are asking about expenses, then the payment to the talent manager is a business expense against your daughter's self-employed income paid to her by her agent.

Holy cow! My head is spinning. This is our first year and how no idea what to expect when tax season rolls around.

And since I am paying the Talent Manager a commission, no taxes removed, is there something I need to worry about there? Your daughter, that is using her name and social security #, must send a Form 1099 to the talent manager at year-end. Here's some info 1099s W2s W4s W9s .

And are they deductible in the year occurred or year actually paid, When paid because your daughter is a cash-basis taxpayer. Read this post Cash vs Accrual Recordkeeping .
as most of the work here in South Florida is done October through March.

If for some reason she gets no work this year (2010) and I am told most of her work will probably be in January (2011), do I have expenses I can deduct? Yes. 2010 expenses are deducted in 2010 even if there is no income.

I am keeping records best I can but now after reading only half your book, I see I missed a lot of expenses - DUH! Keep on reading.

Thank you.
Annette


Annette, you had many, many more questions. Stop spinning. After you've finished reading my book, go talk with a tax pro. Ask your daughter's agent or talent manager to recommend someone.

Best,
June

Lots Of Travel Expense Info

Katie had requested my Self-employed Business Expenses list. On the request form I ask: Where do you get most of your tax advice? Katie's response was "I don't... :( "

My response: "Please don't say 'I don't ...?' Your homework: Read my site or blog 15 minutes a day!"

I advise that to any indie who doesn't get any simple and accurate tax or recordkeeping advice.

Katie sent the following:
Thank you so much for all the information you have provided me! I've been reading your site everyday for a good 15 mins... or more!

I'm still confused on travel expenses for my field of work. As a free lance stage manager, I often go to other cities for weeks at a time. (Mobile, AL for 4 weeks, Tulsa, OK for 9 weeks, etc.). They often house me, but I drive there and around the city as well as provide my own meals when out of town. There usually is not much or no kitchen available to me and I end up eating out most of my time there. Can I deduct my mileage while I am there and driving around? Also, am I allowed to take the IRS per diem? I was unclear what exactly I am able to deduct while I'm out of town.

Thanks for any help that you could provide! (I'm working on getting your book at the library and look forward to reading it!)

Katie
Shawnee, KS


Dear Katie,

Take a look at these posts expenses expenses -- travel (17) and these expenses -- travel-per diem-temporary worksite (10) . I think you'll find you answers there. If not please let me know.

-- June

Writers, beware: A royalty is different than a royalty.

June,

Thank you for your wonderful book. It has been a useful resource in the past year since I purchased it.

I am writing to you with a question I hope you can answer. Early this year, I published my first book. I am receiving royalty checks for the book this year. I am also working on another book (no advance or payment for the text--I'll just get royalties for that one too).

I have been an indie for many years first as a performer and more recently running a martial arts school, but writing is new for me.

I am quite puzzled about how to report royalty income. The IRS schedule E is for reporting income from royalties. However, there is a single sentence in the instructions that says "if you are self-employed as a writer, report your royalty income on a schedule C instead." My question is, what standard does the IRS use to determine if I am self-employed as a writer? On the one hand, it seems that anyone who is receiving royalty income from a book is, sort of by definition, self-employed as a writer. Is the difference whether or not I write off my writing expenses as business expenses? Is the difference whether I have another stream of income? This point has me quite confused, and it seems likely that it could make a difference of hundreds if not thousands of dollars in my tax liability, since schedule C income then gets reported on a schedule SE, whereas schedule E income does not. Any feedback you have on this would be most welcome. I welcome your comment.

Jonathan
Saint Paul, MN


Hello Jonathan,

Congratulations on getting published!

My "wonderful book." Oh, how I love to hear that. Thank you.

I don't usually get into tax preparation and tax forms on my blog but because so many accountants screw up on just the question you ask I want to address it here and alert writers to know at least this much about the actual preparation of their tax returns. So here goes:

How much income you make, whether you have other income, whether you write off expenses -- none of those come into play regarding the classification of royalty income. Read these two examples.

With a very little amount of money a regular Jon or Jane could invest in an oil well. Many do through their investment brokers. Many who do don't even know that they've invested in an oil well. At year end they get a Form K-1 from the oil company that says, hey Jon, you made $700 in royalty income. That royalty income goes on federal Schedule E. John didn't do anything to get that $700 other than invest some money.

With a whole lot of blood, sweat and tears Jon writes a book. It is published. Jon's publisher receives the money from the sales of the book. Then the publisher pays Jon his portion of that sale income. At year-end Jon receives a Form 1099 saying that Jon made $700 from the sales of his book. That income goes on federal Schedule C. Because Jon worked his butt off for two years writing the book that royalty is self-employed income and Jon will pay self-employment tax on whatever is left of that income after business expenses are deducted.

Royalty income from a publisher is the same kind of income as a fee for writing a magazine piece or a column for a blog.

The same applies to musicians who get a royalty on their compositions.

It's all self-employed income. Be sure your tax pro treats it as such.

Best,
June

Easy Recordkeeping

Hi June,

I live in Philadelphia, PA. I'm a calligrapher and journalist and I've been an indie for 5 years (and I'm originally from Santa Fe!)

I wanted to ask about the worksheets you provide on your website. What format are these in? Excel? PDFs?

Are they meant to replace an accounting method or are they intended to use at the end of the year for tax time?

I'm having a hard time finding simple accounting software and was wondering if you have any suggestions for Excel spreadsheets (other than me making my own). I was going to go in any copy the system you suggest in the book but I just wanted to make sure these sheets don't already exist for purchase.

QuickBooks is just way too complicated for my needs...

Many thanks,
Mara


Hi Mara,

Just returned from vacation in Jemez Springs. Being an ex Santa Fean I assume it's an area you know And, BTW, my daughter lives in Philly.

I am not sure what you refer to when you say worksheets that I provide on my website. On my site I offer for sale my 2010 manual recordkeeping how-to guide:The Confident Indie: Five Easy Steps. It has my worksheets in it.

Five Easy Steps shows indies the most simple way to keep records -- manually. In the 75 page publication are the worksheets which I developed over more than 20 years of working with indies.

The worksheets are PDFs; they are not in Excel. They are your means of presenting your self-employed tax information to your preparer.

Accompanying each worksheet, if necessary, is a description or instructions. Some of the worksheets follow the format of an actual IRS form but modify it in such a way as to make it more understandable and useful to you and your tax preparer.

First comes the recordkeeping; then come the worksheets.

Excel is not a recordkeeping program. It is simply a spreadsheet. Just like those old systems that had you putting things in little boxes then adding them up. Excel does the addition for you. It does nothing more regarding recordkeeping.

I agree with you, QuickBooks is too complex. It's for professional bookkeepers and accountants. It's a double entry system not for the layman. If you want to keep records manually, I strongly recommend you buy Five Easy Steps and follow my Most Simple System method. If your want to keep your records on computer I highly recommend Quicken -- just ignore all the latest bells and whistles. As one of my Learning Tools I did have a pub on adapting Quicken for indies. [Quicken is really is for W-2 people and small businesses.] However, it's out of date re the Quicken version I reference and I haven't yet revised it.

Hope that helps. Please let me know.

Best,
June

You are what you speak.

Dear Indies,

I think you all know that I don't applaud tax pros who speak a specialized tax jargon that leaves the indie puzzled and frustrated. Or as a Russian friend used to say: "Lost in a dark forest."

Well, it's not just tax pros who are guilty of using goobledygook that is meaningless and incomprehensible to the layman. What follows is my response to an email I received from Rackspace. Rackspace is what I use to get my email smoothly moving in and out. It's my host but what else it does exactly I am not sure.

It is obvious from Rackspace's emailed announcement that it wants to tell the world about its new accomplishment. The problem is that I, and my guess most other non-IT indies, don't even know what that accomplishment is or what it means to me.

Here's what I wrote to Rackspace. The original email from Rackspace is below my response. Please let me know if you'd like to see Rackspace's reply.


Hello Rackspace,
I am a layman. Well, a layman re web-tech stuff, however I am a tax expert. Am I, as a layman, supposed to understand the meaning of the announcement emailed to me from the Rackspace CEO?

Here are some examples:
-- open source cloud platform
-- cloud interoperability
-- drive a deployable totally open cloud solution through this project
-- proprietary or closed platforms that create lock-in and make migration difficult

You posit: What does this mean for our customers?

"Customer" that would be me, a Rackspace user, right? Well, I don't have a clue what the following bullet points mean.
** No fear of lock-in.
** Flexibility in deployment for a highly elastic commodity cloud.
** A bigger, more robust ecosystem for more tools, better capabilities and a stronger platform.
** Freedom to decide how you want your cloud. (Freedom. Oh, wow! I can't wait.)

I write about taxes. My job is to make complex tax regulation understandable to self-employed IT people, for example.

Did any of you guys ever write for the general public? I use different jargon when speaking with fellow tax pros than I do when talking taxes with my clients. Careful I'll throw some tax terminology at you and you won't have a clue. Then you'll understand what I'm talking about.

I am copying this to some tech people who work for me. One of whom recommended Rackspace. Pass the word that it's important to be able to speak the language of your customers.

Best regards,
June Walker

Dear June,
Today is a big day for Rackspace® Hosting. We announced a new project that we believe will change the way the cloud is developed and it's called OpenStack™ – an open source cloud platform designed to foster the emergence of technology standards and cloud interoperability. In short, we will be opening code on our cloud infrastructure for public use.

The initial components being released through this project include the code that powers our Cloud Files (available today) and Cloud Servers (expected available late 2010). This project will also incorporate technology provided by other open-source projects. We expect to be joined by leaders in the technology industry and others to drive a deployable totally open cloud solution through this project.

Why are we doing this? Historically, most cloud offerings have been built on proprietary or closed platforms that create lock-in and make migration difficult. With OpenStack, any interested party – including our peers, Solution Partners and customers – will be able to collaborate with us to author, improve and expand OpenStack technologies.
What does this mean for our customers and Solution Partners?

No fear of lock-in
Flexibility in deployment for a highly elastic commodity cloud
A bigger, more robust ecosystem for more tools, better capabilities and a stronger platform
Freedom to decide how you want your cloud

OpenStack is an innovative, open-source cloud computing solution for creating, managing and deploying scalable elastic cloud services. Through the ongoing development of this project, we will be able to drive greater industry standards and help increase the speed of cloud innovation. As the leading specialist in the hosting industry, it is simply our responsibility.

In addition, we look forward to bringing enhancements made to the OpenStack project to our own product offerings in the future.

We are excited about this new chapter in Rackspace history and even more thrilled that you are able to share it with us. If you have any questions, please contact us here.

Don't abandon sole proprietorship. There are many benefits.

June --

I am a Computer IT consultant 4 years. Just came back to being a contractor again after several years of W2. I have a TIN and a name but never did the LLC. At age 60 I am most interested in what structure will allow me to put away the most retirements money and allow me to deduct my HUGE monthly health insurance premiums.

Thanks,
Jeri
Eden Prairie, MN


Dear Jeri,

You have a "TIN." For the acronym-averse, that a Tax Identification Number. Also known as an Employer Identification Number [EIN] or Federal Identification Number. They all refer to a business's identification number, similar to a person's social security number. [There are other purposes for an EIN.] More on tax ID numbers here EIN-employer identification # .

An LLC is a Limited Liability Company. There's a lot of info on LLCs right here business entity -- LLC. Did I say a lot? Well, yes, really a lot. Read those posts. In them you will learn that an LLC is a legal way of forming your business. An LLC does not determine tax structure as does a corporation or a partnership or a sole proprietorship.

The pension laws were changed a while back so that now a sole proprietor has more of a choice on pension structure than does an employee. For instance, you may choose a Defined Benefit pension, that will allow you to contribute enormous amounts to your pension. Example: $100,000 contribution on $350,000 net self-employed income. A more modest and more flexible plan is a UNI-k. Think of it as a one-person 401-k.

Health insurance premiums are deductible as an adjustment to income whether you are a sole-proprietor, partnership, or S-corporation. Deducting them as a C-corporation is a bit different.

Think things through carefully, and get as much accurate information as you can before you abandon the advantages of self-employment for a different structure.

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

Sales tax regulations vary by state.

Hello June -

Robert from Sir Roberts Furniture Restoration,Repair and Design, Stow Ohio.

I am on your e-mail monthly list and appreciate all the information you provide.

My question, I restore antique pcs. build and repair furniture. What is the rule on charging sales tax and or reporting sales tax. Why for the question. I network with several upholsters in when they provide services they do not charge me sales tax on the work they complete. What is the rule for charging sales tax when completing work to a customer. Thanks for your time.


Dear Robert,

Happy to know my information is helpful to you. Thanks.

Every state has unique sales tax regulations. Some states have no sales tax. Others have a gross receipts tax. In New Mexico the rate changes depending on where you live.

Some charge for out-of-state purchases. Some do not.

Get the idea. No state is the same. You need to contact your state, county, city. And make sure you do. Since all the governments are hurting for money many are enforcing payment regulations with a vengeance. Be careful.

BTW -- the same applies to licensing and zoning laws.

-- June

Sometimes it takes a while to get it.

Alana from Oakland, CA in commenting on Tax Savvy Indie Saves $850 Because Of Reimbursed Expenses On Her 1099 said:
Nice! Thanks again for the helpful posts that led me to that. I dropped my amended return in the mail last week, so I think I'm all set. Hopefully my story in turn helps a few others. Sometimes you have to hit people over the head with 10 examples of the same principle before they get it. :)
thanks June!


You're welcome, Alana, and thanks for getting back to me. You'll see from my blog that my schedule has been wicked so apologies for my late response.

I think that when something comes at you from an alien field -- maybe, financial jargon to an artist or tech talk to a plumber or explanation of a painting's composition to a realtor -- it takes a while to grasp. Reimbursed expenses are a good example. Of all the questions I get it's that topic that currently heads the list of most frequently queried.

Often something must be explained several times in different ways in order to be really understood. That's the job of the teacher -- to be understood. The student must keep on asking questions until he or she understands. Doesn't matter if the teacher is the one you had in third grade, or your physician or your tax pro.

Thanks again for the update.

Best,
June

Oh, the hype ... lies ... and edited video tapes

June --

I am a writer that is still having a time finding a tax person with your indie point of view. But the good bookkeeping I have learned from you has been a plus. Can I get your updated version of biz expenses?

Also, I am hearing that massive tax increases are coming in January 2011. Can you please post what these tax increases are on your blog as you can? This would really help in my monthly bookkeeping.

Thank you, Donna
Lakewood, NM


Hello Donna,

Thanks for letting me know that my advice is a help. Expense list sent a while ago so on to your question.

So many indies write me and say that they heard such-and-such but they don't tell me where they heard such-and-such. Aunt Tillie? A CPA? The yoga teacher's husband?

And I must tell you that just about all the such-and-such is hogwash. As is what you heard.

Anecdotally, I have seen taxes go down for my clients. The refundable and non-refundable credits available have increased. The reading I must do to keep up on the new tax breaks is daunting.

And, it's not just my experience. The Center on Budget and Policy Priorities says that: "This is the second-lowest percentage in the past 50 years."

I am so pleased that you asked before acting. And, as my husband the former reporter always says: Check your sources then check them again.

Best,
June

Tax Savvy Indie Saves $850 Because Of Reimbursed Expenses On Her 1099

So many of you continue to have questions about reimbursed expenses and I've written so much about them that I thought you'd like to see a really positive response from a California indie. Here 'tis:

Hi June,
I live in Oakland, CA and I worked for about three years as a freelancer for various online outlets (I'm now a regular employee). I just wanted to thank you for your very helpful posts about 1099s and reimbursable expenses!

In 2008 I was missing the 1099 from one of my clients, so I filed my return with an estimate of my income based on my pay stubs. Just now I got a notice from the IRS because the 1099 info they received had about $2k more income than I had reported. I went back to my files (thank goodness I kept very good ones!) and realized that the discrepancy was exactly accounted for by my expense reports that had been reimbursed.

At first I was mad at my client and was going to demand that they revise the 1099 to exclude the reimbursed expenses. But luckily I first read your posts explaining that the client is allowed to do that and it's MY burden to separate out how much is income versus reimbursed expenses. So I'm going to file an amended return reporting the larger amount of income from the 1099 and deducting the expenses on Schedule C. Even though some of the expenses are meals/entertainment, I'm going to include 100% of the amounts in order to properly offset the income amount from my 1099 -- as you said, the client is the one who paid the expenses, so they are the ones responsible for making sure only 50% is deducted (the instructions for Schedule C explicitly say this on page C-7!).

Since I guess the mistake is my fault, I will probably still owe some money in interest, but at least I won't have to pay the $850 the IRS was saying I owed! I know all I did just now was regurgitate the info that you already know well and have explained in past posts... but I just wanted to drop you a note, hoping that you might get some satisfaction from knowing that you helped another person understand their tax situation!

My only fear now is that filing an amended return will flag me for scrutiny and I may get audited because of other unrelated deductions I took... fingers crossed for no more letters from the IRS!

-Alana

Wasted Time = Donated Time = No Expense Deduction

Hi again June,

You were nice enough to answer my question on your blog a year or 2 ago, so I'm back with another that I hope you can help with.

I have a small consulting psychologist practice in Virginia; I help the State determine whether or not disability claimants are medically eligible for SSI benefits. The biggest occupational hazard I face is people who don't keep their appointments. I work in 2-hour blocks, and when they don't show, the state government, with whom I contract, pays me next to nothing for my trouble.

Question: can I write off the difference between the little the State pays me for those "no-shows", and what I WOULD have been paid if the patient HAD shown up, as a loss? If so, I have 25 years of amended tax returns to work on.

I realize that this may be a tax attorney question, but I thought the answer might benefit your readers.

Thanks,
Mark
Fairfax Station, VA


Dear Mark,

No tax attorney needed. This is one of those really-easy-to-answer questions with a you're-not-going-to-really-like answer.

Your time is not an expense and so it is not deductible. For tax purposes wasted time is treated the same as donated time. Check out my posts on the topic right here expenses -- donated services or products .

Suggestions: Find out why they miss appointments. Do they need transportation? Have an arrangement with someone to drive them to the appointment. Maybe that could be an indie business for a friend of yours.

Do they simply forget? Hire someone looking to work from home to call each client the week before, the day or evening before, and even the morning of to remind of the appointment. What you pay the person making the calls for you is a deduction for you. If you're married and your wife can do the calling as your employee, even better. Or if you have a child old enough for the responsibility, that would work too.

Another suggestion: Have work ready to do to fill the time of the no-shows. Things like research reading, recordkeeping, learning French.

Best,
June

Be Smart By Being Legit With Your Nanny

Hi June,

Any suggestions on paying the nanny tax and cheapest/simplest way to do so?

Thanks!
Kurt

Hi Kurt,

In tax talk we affectionately or not so affectionately refer to anyone who cleans our house, takes care of our children, cleans our yard, drives us around, or takes care of our real Nana who resides in our upstairs guest room as "a nanny." And so the tax we must pay on someone who works for us in that capacity is referred to as the "nanny tax."

The most simple way although often not the cheapest is to hire someone though an agency. The reason that's not the cheapest is because they are legitimate -- mostly -- and so they can charge more than illegitimate workers.

By illegitimate workers I mean both undocumented aliens as well as good ol' Americans simply not claiming the money you pay them to cook your meals or watch your children. In this way on $15 per hour they are avoiding about $5 per hour in taxes; On $30 per hour they are cheating the government -- that's us the taxpayer -- out of about $10 per hour.

Your other simple choice is to hire someone who has her own business. She is then an independent contractor and you do not have to pay payroll tax on what you pay her.

The determination of whether a babysitter is self-employed follows the same rules as those for any other indie. More on that right here self-employed and/or employee .

So, if the worker does not come from an agency, nor is she self-employed, and you pay her $1,700 or more during 2010 then you must treat her as an employee and do the relevant paperwork.

IRS Publication 926, Household Employer's Tax Guide spells out what you must do. It's available here http://www.irs.gov/publications/p926/index.html.

I strongly urge you to be legitimate with a household employee.

It is fair to her. She will be racking up social security points and she will be covered by your homeowners insurance should something happen, such as tripping down the stairs or having the overhead light fixture crash on her while she's washing it. [Be sure to check your homeowners or apartment insurance.]

It is better for you because you will not be committing fraud and you won't lose your house when she sues you after the glass from the light fixture lands in her eye.

Best,
June

New to indie life? Where To Start -- #2

Hi June,

Analyst (Business, Systems, Data, Information, etc.) ... 2 months as an indie. I am new to the SE world, and really don't know much about it.

My headhunter said he had a job lined up for me, but it was 1099. I said, 'Sure, I'll take it', not really sure what he was talking about.

Well, now I'm beginning to understand exactly what I'm signed up for, and I must say I'm rather excited at the entire prospect of the 1099 world. It sounds like the freedom and control I've been searching for.

What I need is to get up to speed quickly and see that your book may be just what I need to do that. I'm going to order a copy today.

Thanks, Arthur
Pasadena, CA


Dear Arthur,

Just like Mark who sent a question only minutes before you: You're new to self-employment and you need info.

Take a look at my answer below New to indie life? Where To Start . You're right. Self-employment does give you freedom and control. In order to have control and the confidence to know you are doing things right you need to educate yourself in the business and tax basics of being an indie.

I wish you much success,
June

New to indie life? Where To Start

June --

Computer Consultant Only 2 months.

Few things i have going: Recently married on May 22nd I worked part of the year as a W2 and my wife has always worked w2. I recently started working as a 1099 contractor on May 3rd. Basically i receive $9200.00 every two weeks and my expenses run about $1300.00 every week. Expenses include Flight, hotel, meals, car service. I have kept and recorded all receipts.

I am not sure how much i should be withholding or pre-paying in taxes every quarter. Also how does my w2 income and my wife's w2 income play into calculating a correct tax.

Mark
Orlando, Florida


Dear Mark,

Congratulations on your marriage and your new indie venture.

You're in a new situation. You need information, too much for me to provide in one blog post. I recommend you start by reading a short column on my website, such as: I Am A Business and also Is it a deductible business expense? . Also read Estimated Taxes, a post on my blog which will help answer your questions about how much and how to pay quarterly taxes and how your W2 earnings come into play.

If you like what you read there, I encourage you to read a copy of my book, Self-employed Tax Solutions. Take a look at the Table of Contents to see the topics covered. Solutions answers many of the most common self-employed questions in the same easy-to-understand style you'll find in my columns.

And more than just answering those taxing questions, the information in Solutions will give you a firm foundation on which to build your solo venture!

I wish you much success.
-- June

Mistakes With Reimbursed Expenses

Ms. Walker: Please help me!

I am an Adult Education Practitioner. Been an indie for 11 years.

My 2008 tax returns inflated my modest earnings because my company pays me as a 1099 contractor and included all the money paid as if it were earnings, when in reality, about 58% was nothing more than reimbursed up-front expenses.

I am still paying the federal government for that tax bill and was wondering if there is anything I can do retroactively to ease the burden going forward.

Reading over what you've said to others I take it that it was my primary responsibility to take along all my actual invoices where the difference between travel, hotels, etc. from speaking fees was clearly noted but I did not. Is there any way I might do that this year in an attempt to, if nothing more, lessen the burden of what I still owe the "feds"?

Thanking you in advance,
Hopeless


Dear Hopeless,

There are a few things you said that I don't quite understand. When you say that you've read what I said to others, if you don't mean all my posts here, expenses -- reimbursed, then be sure to do so.

I don't know where you were taking your actual invoices. To an IRS audit? To the people who hired you? Are you asking if the past can be fixed or just what to do for the future?

In the posts about reimbursements that I mentioned above there is an explanation of how to list reimbursed expenses on your tax returns in the future.

This is what you can do about the past: If you have proof that the income was expense reimbursement then have a tax pro file an amended return deducting those expenses. You will get a refund for the overpaid tax. You may file an amended tax return up to three years after you originally filed the return.

It's not hopeless.
-- June

It's only words ...

june

thank you for taking the time to get back to me , how ever the vocabulary and life lessons were a bit much..i am quite clear on what the word rape means, and i am very, very clear that aanxiety, anger and depression are not going to reduce my taxes.
this is just the way i choose to speak and write, and it is certainly no bodies business but my own. i did not want a mother or a teacher, i simply wanted some tax advise and Nothing more.


Above is Sara’s response to the post below: Learn more. Reduce stress and reduce taxes.

I want to take a bit of your time to comment because when you dig down, these afterthoughts are related to taxes and to being a professional indie with an indie-business mindset.

#1. I am a teacher. That is my goal: To teach indies how to handle the business side of their taxes, recordkeeping and finances more accurately, more simply, using less time and possibly saving more tax.

#2. I have four children and am not looking for any more. That mothering takes enough of my time and love.

#3. And this is the most important: Words have meaning. In #1 above I say “possibly” save you on taxes. I can’t assure you that you will pay less. I can’t omit “possibly” just to get your attention. I can’t use “always” because that is not so.

BTW – watch out for those guys promoting self-employment and promising you’ll “pay no taxes.”

Using words like “rape” or “Nazi” to indicate something unpleasant or someone you don’t like or someone with who you disagree is not only inaccurate but does an unimaginable disservice to those who have been raped or someone whose family has suffered at the hands of the Nazis.

Words are important in taxes and in life.

Indies, you're my favorite people!
June

Learn more. Reduce stress and reduce taxes.

Dearest June ,hello my name is sara, i am a mixed media artist living and working in new york but selling my work all over the world and getting taxed like crazy in new york.. I'm getting taxed like 30% ..and i feel like i don't know my rights and am getting raped as a result...

i wrote basic things off like; travel , supplies, shipping and so on..but it doesn't seem to make much of a difference.. do artists have a different set of rules that apply to them, or do we just get taxed like everybody else depending on what tax bracket we fall into.

are there important loop holes that i am missing and don't know about and should know about that could save me a lot of money ..?

i would appreciate any advise or guidance that you could give me, as every time i pay my taxes i have an anxiety attack right after, and am angry and depressed..and i know that there has to be another way..:(

with kind regards
Sara

Dear Sara,

First, you are not really being raped. I wouldn't throw around that word. It has a very different meaning.

Artists must abide by the same rules as any other self-employeds. That means they get the same kinds of deductions and pay the same taxes as plumbers and psychologists and IT people and anyone else who works for him- or herself.

You said you are paying 30% on your income but you don't say whether that's 30% of your gross income or your net income.

Gross income is what you are paid for your work.
Subtract from that all business expenses.
You are left with net income.

It is on net income that you pay tax.

You pay approximately 15% self-employment tax + federal income tax + state income tax. And in New York City depending on your income there could also be New York City Unincorporated Business Tax and Commuter tax. All that can easily add up to more than 30%.

My guess is that your problem lies in not taking advantage of all business expenses. You must deduct every possible business expense in order to reduce your net income.

Start here by requesting a complimentary List of 100+ Indie Business Expenses . Also read Is it a deductible business expense?

That will be your starting point to educating yourself as an artist in business. Anxiety, anger and depression are not going to reduce your taxes. Learning about the business side of your art will.

For a complete understanding of the basics of income, expenses, taxes and recordkeeping for an artist, check out my book Self-employed Tax Solutions. If you can't spend $13 it should be at your library.

Knowledge will give you the confidence to come to grips with your indie business.

I wish you a less stressful indie life!

June

Single Mom in a Messy Situation

June --

The sole practitioner attorney I work for didn't want to put me on "payroll" and have me technically be an employee for tax and other reasons.

He helped me get incorporated as I also had a brief (craft shows) side business I wanted to start, which failed. He pays me an extra $2.75 hour towards the taxes.

It has messed me up with some things -- As a single mom and trying to get help and having to provide proof of income; Costing $300 a year to the accountant; Extra extra steps in getting mortgage financing. Even now in my attempt to modify my loan, he signs a paper saying I'll continue to provide administrative services.

Now, I am considering applying for SSI disability benefits and realize that this is going to put a huge damper on things. Especially since it goes by past pay.

I am not really an independent contractor. I'm his secretary and only an Independent on paper for his benefit and my detriment.

Any suggestions? Comments?

Chrissy
Legal Secretary/Assistant; 7 years as an indie
Dania Beach, FL


Dear Chrissy,

You say you're not an independent contractor. You probably knew that when you set up this deal with the attorney. So we can't blame this entirely on him. You must take some responsibility for your situation.

OK. Now that you've taken some responsibility, I really blame him. He's an attorney. You're a single mom in desperate need of income. It appears he took advantage of you.

As an attorney he is an officer of the court and is supposed to adhere to high standards of integrity, and he knows better than to stoop to this kind of tax evasion.

You need to dissolve the corporation immediately. How your accountant went along with your corporation since it's just you a legal secretary and a crafts person is difficult for me to understand. You might just want to call your local H&R Block office and see if you can set up an appointment with someone there who can dissolve the corp and file the final corporate returns. You might ask the attorney to cover the fees for this.

The next step takes some heavy thinking on your part. Do you want to pursue your options in dealing with this fraudulent situation in which the attorney may have placed you? If you do then contact the State of Florida Agency for Workplace Innovation . Or you may email directly to peter.dehaan@awi.state.fl.us for advice.

It may be hard for you to extract yourself from this mess, but you must. Do not go along with anything that isn’t legitimate and be sure you completely understand potential consequences before making any decisions. Bring a savvy friend with you to any meetings.

Good Luck.
June