Recordkeeping-Quicken-QuickBooks

June- I'm at wits end finally trying to get my books in order. Wondering if you are able to help or if you have recommendations for someone out here in Los Angeles. Found your site after google search. I'm writing this after spending the day, yet again, trying to figure out how to set up my QB accounts and after buying YNAB to try and get myself on a budget. AAAAhhhhh!!!! I'm no closer than I was 6 hours ago and need pro help on this. I'm a Freelance Multimedia Producer ... 5 years

Thanks
Mike
Sherman Oaks, CA


Hi Mike,

I understand. I really do. First, forget about QuickBooks. It's way too complicated for a newbee. If you want to keep records on computer use Quicken. Buy the easiest, cheapest version. Go here for my free list of Quicken Categories For Indies .

I really should have listed that as second. Because first comes: What do you want your recordkeeping to do for you? If it's simply to give you income and expenses at year-end in preparation for your tax return, you can do that manually or on computer. If you want to go the easy, simple, manual route, take a look at The Confident Indie: Five Easy Steps . It explains a manual system and has worksheets for your 2010 tax return. Most of my indie clients prep for their tax returns using this method. It really works.

If you want monthly or quarterly reports of income and expenses, or you are really comfortable with #s and computer data software rather than prose and audio software then use Quicken.

Also, if you are going backward and redoing 2010, then I suggest manual. If you are starting to do 2011, then either/or.

Hope that helps.
-- 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

Writer's Mom

Hi June,

My question is about a new business venture of my son's. This spring he will graduate from college here in the Twin Cities with a degree in creative writing. He hopes to one day become a novelist or comic book author who can support himself via this trade. In the meantime he has discovered an interesting business. He creates funny video reviews of bad comic books written by others.

These reviews are posted on sites that include advertising with the video, and then he is paid by the advertising revenue that is generated. He isn't making enough money to live on (yet) but it is possible he will be making enough to support himself sometime in 2009.

My question is this: he spends approximately $40/month on comic books. He has been doing this for years due to his interest in the medium. But it seems to me that at least a part of that expense is now a legitimate business expense. I'm trying to figure out what is reasonable. He has to buy a comic book and read it before he can determine that it is a good book for review (not all of them are). So should he only include the comic books that he makes into reviews? Or perhaps he should avoid claiming any of it as an expense as the IRS will probably think it is too odd to be a business?

Thanks in advance for your advice!
Avonelle


Dear Good-Mom Avonelle,

As accountant and mother of four my first advice is that from now on your son should be asking the tax and business questions himself. That's an important part of his education as an indie.

I would direct him to read certain of my posts on business expenses there's about 80 of them on this blog. After a little research he would come up with the statement: Of course, I must read all kinds of comics to determine which are right for review and which are not. So, of course every comic I buy is a business deduction.

I would also have him look at his library. There may be a very large business expense deduction sitting on his book shelves. He should read this post Converting from Personal Use to Business Use .

Many of my clients and many in my family are writers. It is not an easy money-making endeavor. Your son should start now to learn about every deduction available.

Best,
June

Jeans as a "uniform." You are kidding!

Hi June,

First, I just want to say your blog is so helpful. Your advice is top notch.

I have a quick question, as a colleague of mine does this, and he has a personal accountant who says this okay to do. We both are freelancers who edit promos for television in New York City, and we basically wear whatever we please to our studio.

According to him (or his accountant), he writes off his outfits that he wears to the office as a business deduction - a uniform if you will. His "uniform" normally consists of jeans, sneakers, and a t- shirt.

So my question is, is this legit?

Can someone write this off considering this is clothing that is worn outside of our respective place of work, nor is it advertising his business?

Thanks,
Evan E.

No way!! Here's a lot of reasons why expenses -- workclothes-uniforms-costumes-hair/make-up .

-- June

Donated Services ... but I see a hidden problem

Hi June,

I stumbled upon your FAQ while searching whether services donated can be deducted. You explained it nicely.

Question: Is it legal if I donated $1000 cash to a 503c and then got paid for my services by the 503c?

I realize that I'd still be out a good percentage because I'm paying taxes on that income, but given the cause I'd be willing to put up with that. I'm a videographer/photographer who is often dealing with no budget situations (and one who does not depend on this income but would like to see some compensation)

Martin
Golden, Colorado


Hi Martin,

Before answering your question I want to bring to your attention something that may be a serious problem for you. You said that you are "one who does not depend on this income but would like to see some compensation." If you read my posts on hobby vs business you know that you must be in it to make money. If not, then you're engaged in a hobby, not a business. Were you to make a similar statement to the IRS you'd have to do some fancy footwork to prove that you are an independent professional engaged in a business.

I have never had difficulty with someone donating money to a nonprofit that also pays him for services or products. I've frequently seen indies working for an organization and then so impressed with the organization's intent that they donate money, services, products. Be sure to read the posts here expenses -- donated services or products .

There is more info on this topic in my book Self-employed Tax Solutions .

-- June

The Many Advantages of Hiring Your Spouse

Oh man. The rumors are flying. The “Small Business and Work Opportunity Tax Act of 2007” has stirred up a lot of indies. Confusion reigns about how this legislation impacts a husband-and-wife working relationship. Is opportunity really knocking?

There are several posts on my blog about how best to set up a business when husband and wife have a joint venture or when one spouse helps the other. I’m now going to explain those husband-wife arrangements in detail that goes beyond previous posts. It’s somewhat complicated though, so don’t listen to White Stripes and read this at the same time.

Here are some excerpts of questions I've received.
From Cliffside Park, NJ:
I have a question regarding hiring a spouse. You advise doing it...however, don't you have to pay for their FICA and Medicare? Also, how is it beneficial to one to do this? How do you get health care insurance for them and also get it for yourself?

A graphic designer from La Center, WA:
I have been self-employed for 33 years, and most of that time my wife has helped me (proof reading, accounting, taxes, etc.) while she was also teaching. Now she has left teaching and I want to take advantage of the new husband and wife partnership clause in the 2007 tax laws. But I am not sure how to do that or if it is better than taking her on as my employee. She is only 56 and wants to continue earning social security credits.

Website designer from Rio Rancho, NM:
I found a discussion online that states that if you live in a community property state and you're in a 50/50 husband/wife partnership SE taxes won't apply to one spouse if they have another job? Am I getting this right? I live in New Mexico which I read is a community property state and I was thinking about going into a partnership with my husband. I wanted to establish my web design business as an LLC and I would be doing 100% of the work. My husband has his own separate career which he loves and has great health care so employing him instead is not really a consideration. If we established a 50/50 partnership would only my half of the income be taxed instead of his too since we live in a community property state? Or would it be best to go solo?


Let’s look at a few scenarios based on situations of my own clients.
1. Husband and wife work jointly and equally, although each has unique skills, in a business that specializes in the IT implementation of a specific software for hospitals.

2. Husband is a technical producer for television and writes about and consults on electronics for live performances, schools, and the environment. Wife is a researcher, editor, writer in the same field.

3. Wife is a sculptor and husband builds her display cases, does all her recordkeeping and manages her show schedule.

Think of the first scenario as a 50/50 work split;
The second as the husband’s share is 70% and the wife’s is at 30%;
The last as the wife at 80% and the husband at 20%.

In each of those work relationships the structure that is the most tax-advantageous, the least complex, and costs the least in accounting fees is: One spouse has a sole proprietorship business with the other spouse as employee.


Tax situation
I’m going to use scenario #3 -- the 80/20 split -- to explain the tax advantages. If the sculptor has a net self-employed income of $50,000 and from that she pays her husband wages of $10,000 for his services, then they are simply moving the $10,000 income from one place on the tax return to another. There is no savings of income tax. And there is no savings in SE tax. (Remember, SE tax is Medicare and social security tax, also known as FICA.) The husband’s wages from his wife’s business count toward his social security credits.


Tax advantages
*** If the husband has already paid the maximum social security (that was $97,500 in 2007) through his regular job he will not have to pay social security tax on the wages paid to him by his wife.

*** The wife may provide him and his family with medical, and dental coverage. If he already has coverage through his job she may provide him with supplemental coverage. Or if coverage from his job does not include his spouse and/or children, she can fill that gap with additional coverage. These are business deductions for the wife and not taxable to the husband.
The insurance may be in the name of either spouse. It does not have to be purchased by the business or in a business name. You may keep the medical insurance you already have.

*** The wife may provide the husband with life insurance. Premiums are deductible from her business .

*** She may give her husband-employee a pension. The tax savings from this could be substantial depending on the type of pension and whether her husband has pension coverage at another job, also whether they have extra money to contribute.
Hubby may contribute his entire salary toward his pension. In this example, that would mean that the $10,000 she paid him is not taxable income. And wife-employer may contribute an additional very large employer’s share toward her husband’s pension. That, too, is a deductible business expense.

*** Were he not her employee and he accompanied her on a business trip, as helper, they could not deduct his travel expenses. As her employee, the husband’s expenses are her business deductions.

*** An employer-employee relationship simplifies the deduction of many business expenses, especially auto and home office.


Complexity and Accounting Fees
Tax preparation for a sole proprietorship is part of your individual tax return.

Recordkeeping for a sole proprietorship is easier than for any other business structure. Remember, a sole proprietorship may be an LLC. Read about it here Sole Proprietor as an LLC


Now, what about that Tax ACT ?
If a husband and wife jointly own a business and the business is not incorporated they do not have to file a partnership return. They may file as a sole proprietorship, using a Schedule C as part of their personal tax return. They split the income and the SE tax based on each one's share of income.

Prior to January 1, 2007 only those who lived in a community property state could file as solos. A husband-wife business in other states had to file as a partnership.

So if a couple were to have a 50/50 business with a net income of $50,000 then each would pay tax on $25,000. There is no income tax savings. If either spouse were over the maximum for social security tax then that spouse would not pay SE tax on his or her self-employed income.

To answer the questioner from Rio Rancho: The Tax Act states that in order to split the income each spouse must materially participate. “Materially participate” means that each spouse must do some of the work. If the wife has no connection to the business but has met the social security maximum via another job don’t get crafty by saying that this business is 95% the wife’s and only 5% the husband’s. The beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.

OK. Now you may listen to White Stripes.

Work-at-home expenses allowed without a home-office

Hi June,

I am a self-employed film and video freelance editor and work out of my home as well as work on-site and go back and forth between the two sometimes. I can not deduct for a home office though because I share a one bedroom place with my fiancee.

My question is, even though I can not claim a home office, can I still claim expenses incurred from working out of the home, i.e. my editing system, my laptop, my editing software, my supplies, my entertainment expenses, etc? I certainly hope so. Please let me know.

Thank you for your time.
Sarah


Hello Sarah,

The short answer: Yes, you may deduct every one of the expenses that you questioned.

So many indies get mixed up on the relationship of office-in-the-home to other expenses such as office supplies and equipment. Even the experts get it wrong. Here's an example of how wrong they can get it --
It's tax time so ... beware of bad advice from the real-life Sammy Segar, CPA

Simply put there is no relationship between home office deduction and the deductibility of office equipment or supplies or any other business expenses. As I explained in the above noted post: " ... the deduction of office equipment and furniture has nothing to do with a home-office deduction. If you use a computer only for business it qualifies as a business deduction, even if it sits on your kitchen counter. If you have a printer perched on your home-office desk it does not qualify as 100% business use if your kid borrows it to print his homework. An ergonomic desk chair used only when you’re working at your business computer qualifies for a business furniture equipment deduction even though it, too, sits in your kitchen.

Where business equipment is located or used in the home is not relevant to a deduction. Nor is its use related to the size or even existence of a home office.

The same applies to all business expenses. In my book, Self-employed Tax Solutions, I use the following example: "Telephone expense is not directly related to office-in-the-home expense. You may deduct for a phone used in your residence even if you do not have an office or studio in your home. If you do claim an office-in-the-home deduction don’t think that somehow office size and phone use need to match. They don’t. Your home office may take up 10% of your residence but you may use 88% of your phone for business. No correlation, no problem."

-- June

PS: Take a look at Shared Rent: You may still deduct for home office . You may have a home-office deduction.

Foreign Earned Income

Hello Annie,

Sorry for the tardy response, there have been sooooo many questions.

I've embedded responses below. Seems a bit easier this way.

It's good that you're reading my book. I'm sure you'll learn much from it.

Best,
June

Hello June,
I'm 25, have filed my own taxes two times in my life, and in January 2007 I quit my job as a production editor to become a freelance production editor for the company I had just quit. I work about 20 hours a week and make about $30/hour. By the time April 15 rolls around, I will have received paychecks totaling about $2000. I'm reading your book right now and trying to figure out the estimated quarterly taxes I'll be paying, but I have other questions about my situation.

I've applied to grad school in Australia and will be moving there in July. On a student visa I can work 20 hours a week in Australia, but my company will also let me continue freelancing.

Do I have to pay taxes to the IRS on the work I complete while in Australia? ... yes

If you are out of the States long enough there is an exclusion for income tax on foreign earned income up to $82,400 . However, although you are living abroad, it appears as if your income is "virtually" earned in the USA. If so you'd get no deduction on your indie income. .

If I stay in Australia for 5 years but keep freelancing for American companies, do I owe tax? ... yes, but how much depends on where it's earned.

If I buy a $1000 laptop before April 15, can I deduct any of it on my first quarterly estimated tax payment? Estimated taxes don't work that way. Read this Estimated Taxes here on my blog.

And finally, I don't have a tax professional, but should I get one even though I'll only be in the US for three more months? Yes, you should get advice because you have foreign earned income. Be sure to consult with a tax pro who understands foreign income and USA reciprocal tax treaties with foreign governments as well as self-employed income!

Good Luck in Australia.
June

Clothing and Make-up as a Business Expense

June,

I have a weekly live television segment that I have to buy clothing for as well as stay groomed ( waxing, hair, etc..) and buy special makeup for. Are these items tax deductible? I would not be buying all the clothing I've had to purchase this last year if it wasn't for the show.

Thanks...Great blog! Ellen


Hello Ellen,

Wish I had a more preferable answer. Street clothes -- pretty much meaning you could wear them through town and not attract weird looks -- are not deductible. On make-up and hair I look at what is typically spent for non-professionals and then take a deduction for the additional costs. For instance, typically women get their hair cut and colored every six weeks, so more often that that would be a business expense. The same with makeup. If you're doing full camera make-up each day or you're buying theatre/professional make-up you're going to spend a lot more than someone who makes up everyday for the office.

Other tax pros may treat this deduction in a different way. In cases where there is no yes/no answer, I choose a position that I would be able to argue comfortably.

Another way to look at why your clothes are not deductible: Think of the mother of a couple kids; She wears jeans and T-shirts all the time; Kids now are in school and she gets a job; she needs a whole new wardrobe. Not deductible.

Cheers,
June

Simple Recordkeeping: No Business Checking Account Required

Hi June,

I was poking around on the web for information and I found your book and your site. I just ordered your book, but I have an immediate question. I'm a self-employed sole proprietor. My business is video production and editing. I am about to invest in a computer and editing software so that I can edit at home. My husband is eligible for a discount on the computer and the software - I am not. If he buys the computer and the software, and then I in turn write him a check and buy it from him - will I be able to claim the computer and the software as my business expense?

Thanks in advance for your advice.
Stefani, Elizabeth City, North Carolina

P.S. You happen to live in my favorite place - Santa Fe. I lived in NM for a few years as a child and have never gotten it out of my system. I still have fond memories of my last trip there a few years ago and my visit to Ten Thousand Waves.



Hello Stephani,

Your husband can buy the computer, or spend money on any other business expenses for you and they will be deductible as your business expenses. You do not need to reimburse him. You don't even need separate checking accounts. You will see why when you read my book.

It's all a lot more simple than most folks think. And a lot more simple than most accountants will lead you to believe.

And, on your P.S. I feel the same way about Santa Fe. We came. We saw, We loved it. We're here forever. And here's a little weird thing, well, sort of. I married my first husband in front of a justice of the peace in Elizabeth City, North Carolina. He was an actor. Civil rights was a hot topic. Ah, yes, I remember it well.

Cheers,
June