Incorporation is not a tax strategy.

June --

I live in Charlotte, N.C., and have been a freelance writer for five years, although I have only done it exclusively for the last two. (Before that I also worked part-time at a newspaper.)

Anyway, I've gotten a lot of work from higher-paying publications last year, and two of them gave me mid-year per-word raises because they liked what I was doing. The result has been that my income is greater than I expected. wondering if maybe at this point incorporation makes sense as a tax strategy.

I earn $70,000 annually working 25 hours a week. (I have three kids under age 7 so I don't work full-time now but I expect to work more and see my income increase as my kids get older.)

The Department of Labor says it expects "reporters and correspondents" to make $16 to $20 an hour or $43,000 a year. What do you think?

Thanks.
Michelle
Charlotte, NC


Hi Michelle,

First, let me congratulate you on successfully freelancing as a writer. It's not easy. I think the DOL knows little if anything about reporters and correspondents or the publishing industry as a whole. Newspapers are falling by the wayside. Reporter clients of mine are being let go and they are heading onto the freelancer highway. A really good piece about this is in the December Harper's, "Bright Frenetic Mills" by Thomas Frank.

Do not incorporate. Incorporation for independent professionals should not be part of "tax strategy." So cross it off the list ASAP.

What you need to do to reduce your tax is similar to what you'd need to do if your are putting together a feature story. As my husband, a reporter for decades would say, you can't get too many facts and you can't check them too often. So here's where to start:
1. Learn what is deductible
2. You have three kids and that means a really busy life, so make your recordkeeping as simple as possible.
3. If you make more money than you need to live on, look at the many different kinds of pensions available to indies.
4. Find an indie savvy tax pro.

The most difficult is #4.

#1 and #2 are fully explained in my book. It's available at most libraries or you can buy it here Self-employed Tax Solutions.

#3 Maybe by the time you're ready to contribute to a pension I'll have an indie pension overview available.

I wish you continued success.

-- 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

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

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

Friend Says To Incorporate

Producer ... many years as an indie ... long time producing, recently gone indie ... from Brooklyn, NY.

Thanks for your response June on Don't incorporate just because the big boys tell you to.

I think that given the necessity of a separate business account and the possible negative impact on unemployment benefits...I'm going to insist they pay me as a 1099 contractor.

Going forward, I feel comfortable remaining as that, although my friend is telling me that there are so many more income tax benefits to being incorporated...I am finding it all very confusing.

Do you recommend that I buy your book to help me sort it out? Or pay someone to consult with me?

Thanks again June,
Kelly


Dear Kelly,

If I were to say to you: Do XYZ: It will make your life more complicated; Take up more time; Cost you money ... what would you say to me? I hope you'd ask me why you should do XYZ.

Your friend said to incorporate, because there are so many more tax benefits. Ask her to name one. Name two. Name three.

The main tax benefit to incorporation is for those making a lot of money. I'll use the following scenario as an example: Let's say most producers' net income is $100,000 per year. You, on the other hand, because of your years in the business and reputation make twice that because you are paid twice as much as other producers are paid. Your fee is doubled because of your reputation not the amount of time or effort you put into your work. Then half your net income could be taxed in a better way were you a corporation. If that scenario fits you, talk to a tax pro about incorporation.

There is no need to be confused. What you need is information. Start by reading these posts business entity -- incorporation .

I do strongly recommend that you read my book Self-employed Tax Solutions . As well as the basics on self-employment it thoroughly explains business deductions. Here's a Table of Contents.

Best,
June

PS Let me know what your friend says and where she got her info.

Incorporation is not simple.

June --

I am writing you from Texas. I'm helping my partner start a products business.

This is his second business, the first business is three years old. We are trying to determine whether we should incorporate to protect his assets, mainly in case we get sued (not for amounts owed, as we will pay these, but for injury). The product is not really dangerous at all, but people can come up with some strange things. Is the extra trouble of incorporation worth it?

Since I will be doing this one myself, I'd like it to be simple, but I also don't want to be at fault if someone does sue us and we lose the house.

Thanks! Jennie


To Jennie and all the indies who check out my blog, I assume you know that I can't answer all the questions sent to me. I pick and choose as time allows. I chose this one from Jennie because it is typical of so many questions about incorporating that are sent to me.

In deconstructing Jennie's question I hope to help you structure your questions in a way that will more beneficial to your indie venture.

If I were concerned whether the water pipes to the back bathroom were in good condition you'd say I had a plumbing question and that I should ask a professional (certainly not my writer husband) about the situation. You'd tell me to ask a plumber not an electrician .

Jennie has a liability situation. She did ask a pro (better than asking the new acquaintance from the spa who happens to be incorporated). But, Jennie has questions about liability. Liability is not a tax issue. Liability protection is an insurance and/or a legal issue. She needs to speak to her business insurance agent or a product liability attorney. Discuss her situation. For instance, what's the product? Is it massage oil that could give someone a rash? A power saw that could cut off an arm? A software program that could wipe out a computer?

And Jennie says: "I will be doing this one myself, I'd like it to be simple." Good golly, Jennie. There is nothing simple about being incorporated. Even though the online ads offer to form your corporation in less than 10 minutes that's just the beginning. Fulfilling all the requirements of a corporation are complicated. A corporation’s liability protection often depends on whether those requirements are met to the letter. Indies who consider incorporating should be crystal clear on why they are incorporating and whether the needs they have will be filled by incorporation. Indies should also be thoroughly informed of the hoops they have to jump through to maintain that corporate “veil” of protection.

For more info check out your local Small Business Development Agency, http://www.sbda.com/ , often located at the community college, as well as your business insurance agent and an attorney.

-- June

Indies are not Corporations

The header on my blog says, “June Walker, Tax and Financial Advisor to the self-employed.” On my website, blog, and in my books I say:

“Whether you call yourself a
1099 Worker
Sole Proprietor
Freelancer
Subcontractor
Free Agent
or
Self-employed
you are an independent professional.
The IRS classifies you as an independent contractor.
I call you an indie.”

Well, I know all you indies are smart enough to know that I am talking to you, advising you, teaching you. I am not addressing my advice to corporations. Pretty straightforward, one might think.

Many of you also know that my 30-years’ experience has shown me that most attorneys blatantly advise indies to incorporate for no good reason. And that incorporation often makes an indie’s life unnecessarily complicated and costs money in corporation set-up fees and tax preparation fees.

Also pretty straightforward, one might think.

In my post, You Do Not Need A Business Checking Account I advise indies, both as clients and as readers, that it isn’t necessary to have a separate business checking account – that it’s simpler, easier, and because of the nature of an indie venture, it works better just using a personal checking account for both personal and business needs.

I have examined some of the reaction to that post in There’s no shortage of bad advice out there.

Much of the reaction, especially from lawyers, has been hot-air-ballooned into warnings about how the only safe business structure for indies is incorporation. We can talk more about that at a later date.

For now I want to address something else. As you, my indie readers know, I pressure you to present your questions carefully. Whether you’re a massage therapist, sculptor, IT consultant, psychologist, carpenter, writer, cruise ship entertainer, furniture refinisher, or astrologer when asking a question you will get an accurate, appropriate answer only if you provide the right information. Sometimes I’m pretty harsh about that. That’s because words mean something and accuracy is important. If careless with words not only will you likely get a wrong answer but carelessness with words makes for sloppy thinking.

That said, I can’t let Attila Attorney respond to my posts by being inaccurate in his quotes of what I said.

In his post here, Attila Attorney, Esq. wrote, and this is a direct, accurate quote:

“I recently wrote in a post titled Tax Advice, Legal Advice & Piercing the Corporate Veil that it would be legal malpractice for an attorney to advise his corporate and business clients to commingle their personal and business funds.

“I wrote the post in response to June Walker who had written a blog post titled You Do Not Need a Business Checking Account in which she proceeded to give that very advice to her clients and readers.”

The problem with Attila’s premise: My readers are indies, not corporations. None of my clients is a corporation unless I am in the process of dissolving the corporation for him or her. I never mentioned corporations in that post. And, with 30 years of accounting experience [He’d know that because my blog header says “since 1979”] I’d be pretty silly were I to say that corporations don’t need to keep completely separate business and personal records. That’s one of the reasons I advise my wedding photographer clients not to incorporate. Just ask Billy Bridesnapper. He’ll tell you.

Attila continued: “Ms. Walker responded with a post titled There’s No Shortage of Bad Advice Out There. In it, she reiterated her advice to commingle, corrected my grammar and called me ‘Atilla the lawyer.’”

No, Mr. Attorney, I did not advise "to commingle funds.” I said a business checking account was not needed for indies. Big difference.

This is similar to the faulty logic of many accountants and attorneys who tell indies you must have a profit in 3 out of 5 years in order to be a business. No way. The IRS says that if you have a profit in 3 out of 5 years you are a business. Think of it this way: If it’s your birthday you will get a gift does not mean that if you receive a gift it must be your birthday.

And one more thing about Attila. In his attempt at quoting me he said I called him “Atilla the lawyer.” The gods invented quotation marks to mean that the words in between them are exactly what the person said. What I said exactly is: “Attila Attorney.”

In my book Lily Legal wants to know if, because she writes her briefs at the dining room table, she can deduct the dining room as a home office. [She can not because she also has dinner parties there.] Maybe in my next book Lax Lawyer will be asking if his reading glasses are a business deduction because he keeps misreading quotes. [He can deduct them if he uses them only for business and has another pair for reading the funnies.]

Accuracy is important. Not just for indies, but equally for accountants and attorneys.

I have received many emails from indies and tax professionals. All the indies say how much easier it is to keep accurate records using one checking account. Most of the tax pros say it's wrong. One pro said I was engaging in "chick think." Wow! More about that some other time.

Please do read The Tax Lawyer’s Blog and the comments. You need to know the kind of advice that is out there so that you can make the right choices in choosing a tax or legal professional.

June Walker

More Questions about LLCs & Corporations

I get so many inquiries about LLCs and corporations that I again feel the need to give some general instruction on question asking and doing a little research on your own.

Were you to search "LLC" on my blog search facility in the upper left corner of your screen you'd get about 20 posts on LLCs. Read them all.

Perhaps the most complete for a general understanding is LLC? Incorporate? It states, as do many other posts: An LLC is not a tax entity. It is a legal entity. And so an LLC may save you from some legal difficulties but an LLC in and of itself will not save you anything on taxes.

So the question, "If I'm an LLC will I pay less tax?" is sort of like asking, "If I have the roof repaired will I still need a new sofa?"

An LLC provides protection against lawsuits. A corporation also provides protection against lawsuits. Insurance protects you if you are sued. So, from what do you need protection? Decide that first. Then choose the appropriate protection.

You wouldn't get auto insurance if you didn't own a car.

If you renege on a contract or miss a deadline are your clients likely to sue you for your house and its contents? If your lawnblower breaks your client's pink flamingo will she sue you for all your landscaping equipment?

Both an LLC and a corporation provide protection against lawsuits. Do you need the expense and hassle of both? Does the coverage overlap? If you are looking for protection against lawsuits then talk with a lawyer to help you decide what's best for your business.

And the question, "Should I incorporate to save on taxes?" always seems to arrive without any other pertinent info. Nothing about whether income is $1,000 a year or 2.5 million a year. Whether there are employees or not. Whether the income is profit or all for services performed.

So: Should I incorporate to save taxes? Probably not. But maybe.

June Walker

Child Care Expense

Hi June,

I ordered your book yesterday and can't wait till it arrives.

Question: My spouse and I deduct for child and dependent care expenses for our joint return. The care providers were out of the home, primarily day care or day camp facilities. I have also used someone to care for my children after school in our home, while I am working in my home office until my spouse gets home to take over the care. Is this expense deductible for my business. I wouldn't double count it of course for both my business and the child and dependent care expense IRS form 2441.

Thanks,
Dan
Atlanta, GA


Hello Dan,

Doesn't matter where child care takes place -- in or out of the home. It is deductible on your tax return if both spouses have income and if it is legitimately paid. In other words paying the babysitter "off-the-books" does not get you a deduction.

Child care is not a business deduction.

Were you a corporation there are some provisions for deducting child care. However, child care alone is not a reason to incorporate.

Best,
June

SE Tax: There's No PLace To Hide

June,

I have a question that I think is probably quite common. Is it wise to incorporate for the purpose of saving the 15% self-employment tax?

I have been operating as a self-employed person for a couple of years now and have read your book which says that most people don't need to incorporate, but I am confused now because many folks in my professional circle are saying they save money by incorporating because of this. I live in California.

What do you think?
Alexis


Hello Alexis,

There is a misconception about self-employment [SE] tax and incorporation. Actually there's a lot of cheating regarding SE tax and incorporation and the IRS is making headway to deal with it.

I know from previous correspondence with you that you are a web designer. So I will use you as an example with some oversimplified numbers and situaions.

If you work at your computer designing away for 40 hours a week at $50 per hour. You have gross income of $2000 a week. If you have $1000 a week expense you have a net income of $1000 a week. Let's say $50,000 per year. On that $50,000 you must pay SE tax whether you are an indie or an employee of your own corporation.

If you owned a domain name -- let's say gogreen.com -- that you bought for $100. That is an asset of your business. If a conservation organization bought it from you for $1000 you would have a $900 gain. You would not have to pay SE tax on that gain.

So you see the difference.

When people incorporate often they pretend that the income is not earned as it is with you sitting in front of your computer but that it is similar to the gain on the sale of the domain name. And that is how they avoid paying SE tax. In IRS circles it's called fraud.

Of course there is income that an indie may earn because of her reputation or her "name" that would not be subject to self-employment tax. In that case incorporation might be worthwhile.

Let's say web designers typically charge $50 per hour. But, you, Alexis Web Design, are known throughout the region and everyone wants Alexis as designer. So you raise your fee to $500 per hour. Then some of your income, were you incorporated, would not be subject to SE tax.

As I said, that is an oversimplified explanation but I hope it will give you a basic understanding.

-- June

Unemployment Benefits for the Self-employed

Hi,

I am graphic designer/cartographer in San Francisco, CA and have been self employed on and off for over 12 years, including the last 3 years (prior to that, was employed by my dad's marketing llc). I am currently just a sole proprietor, paid by 1099s, haven't even done a DBA since I am just using my own name.

I did search the site and read many of your posts, which are extremely informative and helpful--thanks! I didn't see a specific answer to this question, although there was some info in the posts about LLCs.

I am getting increasingly nervous about unemployment, as people are dropping all around me (aunt, uncle, cousin, best friend). I currently do most of my work with one company and they are starting to cut back. I do know that I should be getting at least $20,000 next year, based on work I have started but not billed for yet. So my question--Can I structure my business so that I can pay into, and therefore be eligible for, unemployment insurance?

Would the simplest way be to set up an LLC, and pay myself through payroll? Is there any other way?

thanks
jennie


Dear Jennie,

I just spoke with the IRS to confirm what I am about to tell you. It was surprisingly easy to get through to them. I suppose there's not a lot of people thinking about taxes on the day before Christmas.

Unemployment benefits are a combination of federal and state regulation. Were you to be an employee of your own S-corporation or C-corporation you would pay into the federal unemployment system. You would need to check with California to see if there were any state restrictions on receiving unemployment benefits as the only employee of your own corporation.

You might want to consider the cost and hassle of incorporation as well as corporate recordkeeping, and that as employer you will pay into the system versus the small amount of unemployment benefit you would receive after only a year of income of about $20,000.

Happy Holidays!
June

Where are you getting your info?!

June --

Software Developer in my 3rd year.

I am currently a solo proprietor and would like to incorporate to avoid some of the self employment taxes.

If I do this in 2008 can ALL my income for 2008 fall under the incorporation or just the income that was earned after the incorporation?

Paul
Westminster, CO


Paul --

What do you mean by "avoid some of the self-employment tax?" Where did you ever get the idea that you would not have to pay self-employment [SE] tax if you incorporate? You haven't been getting tax advice from Aunt Tillie. Have you?

SE tax is made up of Social Security Tax and Medicare tax. You pay it on earned income whether you are self-employed or an employee -- even an employee of your own corporation.

Some people think that if they form an S-corporation and they make, let's say $40,000 as an IT consultant, that they claim only $10,000 of that as earned income and the rest as corporation profit. In that way they pay Social Security tax and Medicare tax on only the $10,000. That's cheating. And in legal circles it's called fraud.

Income earned before incorporating is not income to the corporation.

Best,
June

Husband & Wife Working Together: Incorporate or Not?

Dear June,

I am a freelance designer. My husband works for an advertising company. Once in a while he helps me out with my work. My friend's accountant told her that I'd save a lot of money if I incorporated. Should I incorporate and put my husband on my payroll? I'm confused because I don't really know how a corporation works.

Thanks.
Janice from Ohio


Hello Janice,

Do not incorporate unless your personal tax pro analyzes your unique situation and gives you specific, understandable reasons why it would be better for you.

Here's a snapshot of how a corporation may handle income:
In a corporation, the tax benefit of retained earnings -- that's corporate profit that is not distributed but kept in the corp for future business spending -- comes into play only when you make a lot more money than you need to live on. By doing this, you leave some of the earnings of the corp in the corp and do not have them available for living expenses.

In your corporation you would earn money as a designer. These would be your wages. Your husband would earn wages. The corporation would have a profit on which the corporation -- that's you -- would pay tax. The corporation profit -- in the form of dividends is distributed to you.

On yours and your husband's tax return you include your wages, his wages and the dividends. You pay tax on that income. Note that on the dividends, the corp -- you -- have already paid tax once. Now you will pay tax on those same dividends again.

You must pay whatever fees your state requires for setting up a corp. You must pay an accountant to help set up a corp and every year to prepare a corporate return for the feds and also for the state. There are various required papers, such as corporate minutes, that you'll need to keep.

All this is a hassle and expensive and so you don't want to do it unless you must.


When you have a sole proprietorship and you hire your spouse as your employee this is what happens or may happen:
-- Your wages to him simply move the income from one part of the return to another. No tax change. -- If he must accompany you on a business trip, his expenses are business deductions. Not so if he were not an employee.
-- You may provide him with a health plan that covers his family [that includes you]. All family medical expenses then become deduction against your business income.
-- You may give your spousal employee dental coverage, life insurance, disability coverage, a pension -- all are deductions against your business income.

And, if he works out really well, you may give him a raise.

Keep in mind: A sole proprietorship may be an LLC. Read about it here Sole Proprietor as an LLC

Best,
June

Sole Proprietor as an LLC

June --

I am a signage broker: I design, subcontract construction and installation of business advertising and identification signs.

Without operating my business as a corporation, or llc, my insurance agent has informed me he has no insurance product that will protect my personnel assets in the event of a company liability claim. Since you advise against forming a corporation, how then should a sole proprietor provide for this financial risk?

Jerry


Hello Jerry,

An LLC, limited liability company, is not a corporation. You may form an LLC as a disregarded entity. That means that you can be an LLC sole proprietorship. In this way you get ease of formation and recordkeeping along with asset protection. If you need even greater protection than afforded by an LLC and liability insurance then a corporation may be the way to go. But, before you do that, discuss it with a business attorney in your state -- not your insurance agent -- and make sure that you understand all the alternatives.

Be sure to read my post LLC? Incorporate?

I also recommend a book by Anthony Mancuso -- LLC or Corporation? How to choose the right form for your business. It's simply written and gives you a lot of basic information.

Best,
June

Clueless Professional Accountant (CPA) Says You Can’t Deduct a Gift to Your Mother

In an earlier post, It's tax time so ... beware of bad advice from the real-life Sammy Segar CPA, I warned about bad advice from tax professionals, using a comparison to Segar, the fictional CPA in my book. Another real-life Segar type turned up as if on cue when BusinessWeek published an interview with me.

A New York CPA sent an email to the magazine, which, cut to its high concept, protested that I didn’t know what I was talking about. The magazine, to check whether it had disseminated wrong information to millions of readers, forwarded the email to me.

But Mr. NY CPA was wrong on all counts.

Too many to go over all of them here, but let’s look at one – a point I made because my interviewer was not a magazine staffer but a freelancer.

Suppose she had to hire a babysitter to be free to do the interview with me, I said, and suppose the babysitter called at the last minute to say that she couldn’t make it. My interviewer could ask her mother to watch the baby, and if she presented her mother with a little gift in gratitude, the cost of that gift (up to $25) is a legitimate business expense deduction.

Oh, no, wrote Mr. NY CPA. That’s not allowed. You can’t deduct a gift to your mother.

But, the IRS says: if you give a gift in the course of your trade or business, you can deduct all or part of the cost of the gift. The IRS doesn’t say, unless the gift is to your mother.

In the same interview I advised that incorporation is expensive, complicates the life of a self-employed, and is usually unnecessary.

Mr. NY CPA disagreed with that. Of course you should incorporate, he wrote, so that you can deduct the premiums you pay on your $50,000 life insurance policy. And so that you can deduct the $5,000 you are paying to your babysitter.

Well, few indies have a $50,000 life insurance policy. And for those who do, the tax savings from deducting life insurance premiums do not outweigh the costs and hassles of incorporating.

And, to benefit from the babysitting deduction, the indie must have a kid, and pay a babysitter $5,000 -- on the books!

The tax code is not written for indies. It’s written for the corporate world and the employees who inhabit that world. To correctly interpret those laws so that they fit the situations of independent professionals is a lot of work. Sammy Segar doesn’t want to work that hard. He’d rather stay in the dark ages and not move into the 21st Century where the US holds 33 million self-employed and growing.

Once again, I remind you: Until the Sammy Segars get it together, stay on your toes. Check out the advice you get.

If you’re unsure read SELF-EMPLOYED TAX SOLUTIONS or email your question to me.

LLC? Incorporate?

This post will be updated and appear on my new blog. Please visit at http://junewalkeronline.com/category/blog/.

Cheers,
June