Showing posts with label payroll -- spouse as employee. Show all posts
Showing posts with label payroll -- spouse as employee. Show all posts
Thursday, July 16, 2009
Home work area must be used exclusively for your business in order to be deductible.
Hello June,
Thanks for your business expense list.
My husband has a catering business run from home. Our house is his office, manufacturing place and also storage for the business. I remodeled the house to expand the kitchen and total cost is more than $ 200,000. How can I deduct the cost of the remodel?
Thanks.
yamin
Dear Yamin,
You cannot deduct any part of your home that is used for both business and living. The exception is any area used for storage/inventory. That area may be used for both and still be deductible.
Any capital improvements made to a home office or workshop are depreciated over 39 years. That means if you spend $39,000 renovating your home office you get to deduct $1,000 per year.
However, even though you cannot deduct the kitchen because it is used for both business and personal does not exclude your deducting equipment that is used either exclusively for your catering business or for both business and personal. For instance, a $4,000 refrigerator if used 80% for business is a $3,200 business equipment deduction.
If you work with your husband, and he is a sole proprietor then the most tax advantageous business structure is for you to be his employee. You might want to read these posts payroll -- spouse as employee .
Best,
June
Sunday, January 18, 2009
Spouse On A Business Trip
June --
I am a Medical Physicist. I started part-time independent consulting in 2004 while still employed full-time. Consulting has increased and as to Jan 2008, I will be full-time independent (sole-proprietor). I just found your website--what a great resource, Thank You.
In Sept 2008, I attended a professional conference in Boston. My wife joined me on the last day and we spent the next several days in New Hampshire. I have employed her to handle finances and admin since 2006. Naturally we discussed some of the business aspects of the conference while we were in NH but that was not the purpose of the trip for her. Are any of her expenses deductible?
Is there a best mechanism to substantiate deductibility for spouse/employees for business conferences?
Thanks, Joe
Dallas, TX
Dear Joe,
I assume from your email that your wife is your employee. If she is then you may deduct all the costs of your employee's travel expenses in the exact same manner as you may deduct yours as the employer. So, if Boston were the business portion of your trip and New Hampshire were the fun, or personal, portion, then you cannot deduct the New Hampshire costs nor could you deduct the cost of your employee's New Hampshire travel.
When you take an employee on a business trip you must be able to show the necessity of having that person with you. Whether it's to transcribe notes, schedule appointments, wine and dine associates, there must be a clear business reason for attendance. This is especially so if the employee is your spouse.
If your wife-employee handles only your recordkeeping and secretarial chores then you must find a reason for her to accompany you. For instance, is she a good researcher? Can she investigate primary source documents for you at the university's library for non-circulating material while you attend the conference?
Best,
June
Saturday, January 10, 2009
Hobby or Business? If it's fun, be careful.
Well, here I am making another exception and taking on a unique situation. But since 2009 is to be the year of change, why not? And, I do think that there is enough in Guren's situation that many of you will get something from my answers. My response is in orange.
-- June
Hello June,
My wife and I are avid travelers and, although we have settled down and each work full-time as employees at different companies, we plan to start a travel blog with the goal of making enough money to fund even more traveling.
We will file a dba and work as a partnership. A partnership is the least tax advantageous structure for a husband and wife business. For some basics on that, read these posts payroll -- spouse as employee .
1 - it seems too good to be true that we could deduct the cost of our travel and other expenses against our blogging profit and, if there are losses (and I'm sure there will be in the first few years), deduct those losses from our regular employee incomes. If the losses are great enough, it would be like the IRS paying us to travel. Or am I dreaming? Your dream may become a nightmare unless you show a true profit motive. Your goal cannot simply be to save enough in taxes to pay for your travel. That very much has the ring of a home-made tax shelter to me and I'm sure would make the same sound to the IRS.
Your profession -- travel blogger -- falls into the same genre as skiing and photography and other activities that people do for fun and so the proof that you are in it to make a profit must be stronger than for other professions such as massage therapy or IT consultant.
The IRS lists nine guidelines that will help determine whether you’re goal is to make a profit. No single item on the list settles or resolves the issue, and the list includes questions such as:
Do you carry on your work in a businesslike manner? Do you keep accurate records of income and expenses? Have you had success in carrying on similar or dissimilar activities? Have you taken a similar activity and converted it from an unprofitable to a profitable enterprise? Have you had general success in running other kinds of businesses? Did you write a business plan on how your blogging is going to make money over the next 5 or 10 years?
2 - As long as we have losses, are we forbidden from contributing to a SEP retirement plan? For a SEP, and any other pension for self-employeds, the contribution is determined by net income. That means what you are left with after deducting business expenses. A loss means no pension contribution for the sole proprietor. If your spouse is your employee, then a loss does not have that same relationship to the spouse's pension contribution.
3 - any idea of what a indie-friendly CPA should charge for an initial consultation? Between $150 and $350 per hour. Depends on the geographic location and expertise of the tax pro.
I hope you're able to help!
Thanks in advance!
Guren
St Louis, MO
A related comment: There are so many books and sites that tout self-employment as a way to pay no tax. This is a concern of mine. I'll say more about it in this month's eLetter Ways Through the Maze. If you are not already on the mailing list and would like to subscribe, you may do so here.
--June
Tuesday, July 15, 2008
Husband-Wife Business: No cheating!
I have been sent many questions about husband and wife working together in a business. A good place to start for info on such joint ventures is my post The Many Advantages of Hiring Your Spouse then follow up with the posts in the category husband-wife business .
Below are some recent questions on the subject.
Dan, from Colorado, has paid the maximum social security limit through his salaried position. Dan’s wife has a home-based business that nets about $50,000 per year. Dan’s CPA , who reminds me of Sammy Segar, the clueless accountant in my book, Self-employed Tax Solutions , has suggested that Dan and his wife file a joint Schedule C: Profit and Loss from Business. This way they could split the profit 50/50.
As you know, you must pay self-employed (SE) tax on your profit. For Dan’s wife that would be about $7,500 [15% of $50,000]. If half that income were Dan’s and had he already met the SE tax maximum that would save them about $3,700. Good idea were it legit.
Dan said: “In the evenings and weekends I work with her on her business.” That doesn’t sound like 50% of the work to me. Maybe 5%. I think the beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.
Sammy Segar came up with another idea for Dan. And I must tell you that this is another one of those let’s-not-treat-indies-like-real-business-people approaches that really make my indie blood boil. Dan reports: “Another comment he made is we might want to go the partnership route and file a partnership return for the business ... he mentioned this because of some statistic he read that says the IRS is greatly increasing their audits of returns filed with a schedule C, something like 1 in 7 are now getting audited.”
OK, let’s see, Sammy is telling Dan to lie about how much work he puts into his wife’s business and put that lie in writing into an expensive partnership return that will benefit the CPA’s bank account and give no honest tax advantage to Dan and his wife.
And a 1 in 7 audit rate! Oh, come on. And even if it were correct, which it is not, honest-to-goodness indies should never fear an audit.
By the way, Dan purchased my book, hoping that the pros and cons of a husband-wife business would be covered. Sorry to say, that topic is not addressed in the basics of Self-employed Tax Solutions. Maybe in the next book!
Mary, a personal trainer / Pilates instructor from San Rafael, CA, has been self-employed since October 2007. In June 2008, her husband reactivated his contractor's license for drywall construction.
Here is Mary’s question as sent to me:
“We are now both self-employed, operating our businesses from our home. We both have a designated room/office for our businesses. I was told that it is ‘better’ from a tax standpoint for one of us to be an employee and one to be self- employed."
Mary then asked something about Social Security tax that I don't quite understand and she also asks if there are any "other other advantages/disadvantages” to the husband-wife business.
Apparently it's not just indies who are confused about SE tax. Sammy Segar, CPA has it all messed up too. SE tax is a combo of Social Security and Medicare tax. In 2008 you pay Social Security tax on income up to $102,000. There is no limit on Medicare tax. You pay Medicare tax on whatever earned income you make.
If you have a job that pays $102,000 you will have met your Social Security tax maximum. If you then make another $100,000 as an indie you are not required to pay any Social Security tax on that income. You will still pay Medicare tax.
So in a husband-wife business SE tax is saved only if the employee-spouse has earned enough income elsewhere to reach the maximum Social Security limit (as in Dan’s situation above). To form a husband-wife business to avoid paying Social Security tax is a fraudulent practice.
I am legitimately creative but I have a hard time figuring out how to make one business of a drywall contractor and a Pilates instructor -- if indeed that’s what Mary is asking.
I didn't print Mary's entire question because it was unclear, which brings me to something I have stressed in all my writing and speaking: Think before you ask – whether speaking or in writing. Make your question as clear as possible. If you don’t, you will not get a clear answer.
-- June
Below are some recent questions on the subject.
Dan, from Colorado, has paid the maximum social security limit through his salaried position. Dan’s wife has a home-based business that nets about $50,000 per year. Dan’s CPA , who reminds me of Sammy Segar, the clueless accountant in my book, Self-employed Tax Solutions , has suggested that Dan and his wife file a joint Schedule C: Profit and Loss from Business. This way they could split the profit 50/50.
As you know, you must pay self-employed (SE) tax on your profit. For Dan’s wife that would be about $7,500 [15% of $50,000]. If half that income were Dan’s and had he already met the SE tax maximum that would save them about $3,700. Good idea were it legit.
Dan said: “In the evenings and weekends I work with her on her business.” That doesn’t sound like 50% of the work to me. Maybe 5%. I think the beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.
Sammy Segar came up with another idea for Dan. And I must tell you that this is another one of those let’s-not-treat-indies-like-real-business-people approaches that really make my indie blood boil. Dan reports: “Another comment he made is we might want to go the partnership route and file a partnership return for the business ... he mentioned this because of some statistic he read that says the IRS is greatly increasing their audits of returns filed with a schedule C, something like 1 in 7 are now getting audited.”
OK, let’s see, Sammy is telling Dan to lie about how much work he puts into his wife’s business and put that lie in writing into an expensive partnership return that will benefit the CPA’s bank account and give no honest tax advantage to Dan and his wife.
And a 1 in 7 audit rate! Oh, come on. And even if it were correct, which it is not, honest-to-goodness indies should never fear an audit.
By the way, Dan purchased my book, hoping that the pros and cons of a husband-wife business would be covered. Sorry to say, that topic is not addressed in the basics of Self-employed Tax Solutions. Maybe in the next book!
Mary, a personal trainer / Pilates instructor from San Rafael, CA, has been self-employed since October 2007. In June 2008, her husband reactivated his contractor's license for drywall construction.
Here is Mary’s question as sent to me:
“We are now both self-employed, operating our businesses from our home. We both have a designated room/office for our businesses. I was told that it is ‘better’ from a tax standpoint for one of us to be an employee and one to be self- employed."
Mary then asked something about Social Security tax that I don't quite understand and she also asks if there are any "other other advantages/disadvantages” to the husband-wife business.
Apparently it's not just indies who are confused about SE tax. Sammy Segar, CPA has it all messed up too. SE tax is a combo of Social Security and Medicare tax. In 2008 you pay Social Security tax on income up to $102,000. There is no limit on Medicare tax. You pay Medicare tax on whatever earned income you make.
If you have a job that pays $102,000 you will have met your Social Security tax maximum. If you then make another $100,000 as an indie you are not required to pay any Social Security tax on that income. You will still pay Medicare tax.
So in a husband-wife business SE tax is saved only if the employee-spouse has earned enough income elsewhere to reach the maximum Social Security limit (as in Dan’s situation above). To form a husband-wife business to avoid paying Social Security tax is a fraudulent practice.
I am legitimately creative but I have a hard time figuring out how to make one business of a drywall contractor and a Pilates instructor -- if indeed that’s what Mary is asking.
I didn't print Mary's entire question because it was unclear, which brings me to something I have stressed in all my writing and speaking: Think before you ask – whether speaking or in writing. Make your question as clear as possible. If you don’t, you will not get a clear answer.
-- June
Friday, June 20, 2008
Partnership & Home Office
June,
My wife and I started an independent consultant business last year in Fairfax, VA. We file partnership returns and have a home office. In doing our taxes, we were told that home office expenses are supposed to be captured in Schedule E and attached to Form 1040.
However, another advisor also said that we can reimburse home office expenses throughout the tax year through our income distributions and then capture them as other deductions on Form 1065 (the partnership return). This would be easier since we wouldn't have to fill out Schedule E so that is what we did.
Did we do the right thing?
Thanks, Matt
Wrong thing, Matt. A basic, really basic, piece of info on tax prep: If there is income from a partnership you must include that income on a Federal Schedule E. This is another example of why I think indies should not prepare their own tax returns.
Since a partnership is the least tax advantageous entity for a husband and wife business you might want to read some posts here payroll -- spouse as employee or here husband-wife business to learn more.
Partnerships have very specific rules on deductions. If you want to deduct the costs of a home office, although not required, I would suggest writing into the partnership agreement that home office use is expected. Deductions for a home office may be taken on Schedule E only. This will reduce a partner's self-employment income and self-employment tax liability.
You may not take home office expenses on the partnership return. And, do not rent to your partnership. That's a real kettle of worms and maggots!
Best,
June
My wife and I started an independent consultant business last year in Fairfax, VA. We file partnership returns and have a home office. In doing our taxes, we were told that home office expenses are supposed to be captured in Schedule E and attached to Form 1040.
However, another advisor also said that we can reimburse home office expenses throughout the tax year through our income distributions and then capture them as other deductions on Form 1065 (the partnership return). This would be easier since we wouldn't have to fill out Schedule E so that is what we did.
Did we do the right thing?
Thanks, Matt
Wrong thing, Matt. A basic, really basic, piece of info on tax prep: If there is income from a partnership you must include that income on a Federal Schedule E. This is another example of why I think indies should not prepare their own tax returns.
Since a partnership is the least tax advantageous entity for a husband and wife business you might want to read some posts here payroll -- spouse as employee or here husband-wife business to learn more.
Partnerships have very specific rules on deductions. If you want to deduct the costs of a home office, although not required, I would suggest writing into the partnership agreement that home office use is expected. Deductions for a home office may be taken on Schedule E only. This will reduce a partner's self-employment income and self-employment tax liability.
You may not take home office expenses on the partnership return. And, do not rent to your partnership. That's a real kettle of worms and maggots!
Best,
June
Friday, March 21, 2008
Home Office Warrior: Hire Your Spouse
June,
I saw your guest post on Home Office Warrior and had a follow-up question.
You mention hiring your spouse and providing "generous" employment benefits, such as health insurance coverage. I'm wondering whether my spouse has to work for me as a full-time employee for that to work.
My wife does a few things for me, but it's nothing near full-time. Health insurance and copays are eating our lunch. Can I hire her and provide her "family" benefits if she only works about 10 hours a week?
Todd Smith, Attorney at Law
Austin, TX
todd@appealsplus.comSource
Dear Todd,
Your wife may work for you for as few or as many hours as you choose. Her pay must be comparable to others in your geographic or virtual area who do the same kind of work .
This is not a place to be creative. Your spouse must really work for you and you must set it up formally. You must ...
File all federal employment and state employment forms and pay your wife by check or direct deposit into her account.
Set up a health benefit plan for her -- referred to as a Plan 105 for IRS code section 105. You can get more info on Section 105 at BizPLan or contact John Gill at BizPlan 800.422.4661 ext 4345 or John@tasconline.com. I have no financial relationship with John or BizPLan. I use their services for my clients. They are good, and John explains this well. Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
There is more information on this here in my blog in the category payroll -- spouse as employee .
Best,
June
I saw your guest post on Home Office Warrior and had a follow-up question.
You mention hiring your spouse and providing "generous" employment benefits, such as health insurance coverage. I'm wondering whether my spouse has to work for me as a full-time employee for that to work.
My wife does a few things for me, but it's nothing near full-time. Health insurance and copays are eating our lunch. Can I hire her and provide her "family" benefits if she only works about 10 hours a week?
Todd Smith, Attorney at Law
Austin, TX
todd@appealsplus.comSource
Dear Todd,
Your wife may work for you for as few or as many hours as you choose. Her pay must be comparable to others in your geographic or virtual area who do the same kind of work .
This is not a place to be creative. Your spouse must really work for you and you must set it up formally. You must ...
File all federal employment and state employment forms and pay your wife by check or direct deposit into her account.
Set up a health benefit plan for her -- referred to as a Plan 105 for IRS code section 105. You can get more info on Section 105 at BizPLan or contact John Gill at BizPlan 800.422.4661 ext 4345 or John@tasconline.com. I have no financial relationship with John or BizPLan. I use their services for my clients. They are good, and John explains this well. Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
There is more information on this here in my blog in the category payroll -- spouse as employee .
Best,
June
Sunday, March 2, 2008
Another Misinformed Tax Pro about Husband & Wife Business
June --
My husband has been self employed architect since 1991.
Since its inception, we have had a small business health insurance plan NOT INDIV with me as one employee.
Each year I issue a small paycheck to myself for my bookkeeping services and pay payroll taxes on it. The cost of the premiums has always been deducted as a business expense a NOT PERSONAL DEDUCTION.
For reasons unknown to me, our accountant of 3-4 years abruptly declined to list our health insurance as a business expense this year although nothing has changed. He just said that unless my W2 equals the annual premium, then forget it. I do not wish to change the way I file my health insurance after 15 years? What gives?
Rosemary & Michael
Culpeper, VA
Rosemary --
"What gives" is that your accountant was doing it wrong for 3 or 4 years and didn't want to tell you.
Often health insurance plans will call a spousal assistant an employee. However, just because you have a group health insurance policy that treats you as an employee does not make you an employee.
You cannot deduct health insurance premiums from business income unless that health insurance is provided by the business for a legitimate employee.
Here's how it works:
Husband [or wife, doesn't matter] has a sole proprietorship. Wife is made an employee via the registration and filing of all federal and state employment forms. Wife is paid by check or direct deposit from the husband's business.
Husband sets up health plan benefits for his employee. It's called a Plan 105. This must be formally done. You can get more info on Section 105 from BizPLan at http://www.tasconline.com/products/bizplan/ or I can give you the person to contact. [I have no quid pro quo on this arrangement.] There is also a lot of information on my blog in the category payroll -- spouse as employee .
Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
If your accountant hasn't told you all this -- in greater detail than I can do here -- or does not say he will research and get back to you -- then fire him and get a new accountant!
1/2/11: A new regulation is in effect regarding the deductibility of health insurance premiums by all self-employed. This deduction is not for spousal employees only. So be sure to talk with your tax pro about this.
Best,
June
JW Revised 1/2/11
My husband has been self employed architect since 1991.
Since its inception, we have had a small business health insurance plan NOT INDIV with me as one employee.
Each year I issue a small paycheck to myself for my bookkeeping services and pay payroll taxes on it. The cost of the premiums has always been deducted as a business expense a NOT PERSONAL DEDUCTION.
For reasons unknown to me, our accountant of 3-4 years abruptly declined to list our health insurance as a business expense this year although nothing has changed. He just said that unless my W2 equals the annual premium, then forget it. I do not wish to change the way I file my health insurance after 15 years? What gives?
Rosemary & Michael
Culpeper, VA
Rosemary --
"What gives" is that your accountant was doing it wrong for 3 or 4 years and didn't want to tell you.
Often health insurance plans will call a spousal assistant an employee. However, just because you have a group health insurance policy that treats you as an employee does not make you an employee.
You cannot deduct health insurance premiums from business income unless that health insurance is provided by the business for a legitimate employee.
Here's how it works:
Husband [or wife, doesn't matter] has a sole proprietorship. Wife is made an employee via the registration and filing of all federal and state employment forms. Wife is paid by check or direct deposit from the husband's business.
Husband sets up health plan benefits for his employee. It's called a Plan 105. This must be formally done. You can get more info on Section 105 from BizPLan at http://www.tasconline.com/products/bizplan/ or I can give you the person to contact. [I have no quid pro quo on this arrangement.] There is also a lot of information on my blog in the category payroll -- spouse as employee .
Once the plan is set up all medical insurance as well as medical expenses for the entire family may be a business deduction.
If your accountant hasn't told you all this -- in greater detail than I can do here -- or does not say he will research and get back to you -- then fire him and get a new accountant!
1/2/11: A new regulation is in effect regarding the deductibility of health insurance premiums by all self-employed. This deduction is not for spousal employees only. So be sure to talk with your tax pro about this.
Best,
June
JW Revised 1/2/11
Husband & Wife IT Indies: Joint Filers
Hi June,
We have been web designers and web programmers for 2 years. I would like to know the following. I am married and we both work together out of the house. How do we file our taxes - self-employed jointly???
Thanks.
Elizabeth
Las Vegas, NV
Elizabeth __
Self-employment has nothing to do with whether you file jointly or separately. If you are married you may file your personal tax return in one of two ways: Married-filing-jointly or married-filing-separately.
If you are both self-employed in different professions then you must each file various forms for each business. These forms are part of your personal tax return.
If you are both self-employed in the same profession then you have choices as to how you treat the business portion of your return. But the business portion is still filed as part of your personal return.
Read this The Many Advantages of Hiring Your Spouse to learn about the different ways to handle a husband/wife business.
-- June
We have been web designers and web programmers for 2 years. I would like to know the following. I am married and we both work together out of the house. How do we file our taxes - self-employed jointly???
Thanks.
Elizabeth
Las Vegas, NV
Elizabeth __
Self-employment has nothing to do with whether you file jointly or separately. If you are married you may file your personal tax return in one of two ways: Married-filing-jointly or married-filing-separately.
If you are both self-employed in different professions then you must each file various forms for each business. These forms are part of your personal tax return.
If you are both self-employed in the same profession then you have choices as to how you treat the business portion of your return. But the business portion is still filed as part of your personal return.
Read this The Many Advantages of Hiring Your Spouse to learn about the different ways to handle a husband/wife business.
-- June
Saturday, March 1, 2008
Travel Expenses for Husband & Wife
June --
I have been a self-employed historian, located in Columbus, Ohio, since retirement from my teaching position at Ohio State University.
My income comes from book royalties, lecture honoraria, and contracting to teach seminars and workshops. My question is this: If my wife accompanies me on a research trip to an out-of-town library or archives, engaging in research on my behalf, can I deduct her expenses in any way other than by formally hiring her as an employee (and incurring the obligation to pay into her social security, etc.)?
Can I pay her as an independent contractor, obligated to report her own income and pay her own social security and deducting her own expenses?
Can I simply deduct her expenses as if they were my own?
Sincerely,
Michael
Wow! Michael, you are the first self-employed historian to send me a question. My husband is a historian. Here's two of his books A Battle for the Soul of New York and 1929: America Before the Crash.
On to your question: The only way to deduct travel expenses for a spouse is if the spouse is your employee.You say, "incurring the obligation to pay into her social security." Well, unless your income is greater than the year's required amount your combined social security costs will be the same whether she is an employee or not.
And if she is an employee you may deduct her travel expenses. So there may be a tax benefit and yet cost you nothing but time.
Be sure to read my posts in this category payroll -- spouse as employee to learn more about the advantages of hiring your spouse.
Best,
June
I have been a self-employed historian, located in Columbus, Ohio, since retirement from my teaching position at Ohio State University.
My income comes from book royalties, lecture honoraria, and contracting to teach seminars and workshops. My question is this: If my wife accompanies me on a research trip to an out-of-town library or archives, engaging in research on my behalf, can I deduct her expenses in any way other than by formally hiring her as an employee (and incurring the obligation to pay into her social security, etc.)?
Can I pay her as an independent contractor, obligated to report her own income and pay her own social security and deducting her own expenses?
Can I simply deduct her expenses as if they were my own?
Sincerely,
Michael
Wow! Michael, you are the first self-employed historian to send me a question. My husband is a historian. Here's two of his books A Battle for the Soul of New York and 1929: America Before the Crash.
On to your question: The only way to deduct travel expenses for a spouse is if the spouse is your employee.You say, "incurring the obligation to pay into her social security." Well, unless your income is greater than the year's required amount your combined social security costs will be the same whether she is an employee or not.
And if she is an employee you may deduct her travel expenses. So there may be a tax benefit and yet cost you nothing but time.
Be sure to read my posts in this category payroll -- spouse as employee to learn more about the advantages of hiring your spouse.
Best,
June
Monday, February 25, 2008
Husband & Wife Writers: One Business
Hello June,
I love your site, and it is truly the first REAL HELP I've discovered that a simpleton like me can understand.
Our details: I'm a full time writer from Austin, Texas and I maintain my own office . My wife works full time for a regular company, but she's also started contract work for the first time this year. She is in Education, and I am in Entertainment, but we both perform the same function of consulting and writing in our respective areas.
We both received 1099s this year for our separate lines of work.
Our problem: Up until now, I've considered myself a sole proprietorship, and deductions were relatively easy to understand. But now with my wife making contract money, we want to take deductions for her as well.
Can I "roll" her into my business as a husband/wife proprietorship, or is she her own side business?
My tax software lumped us together (our two 1099s anyway) but I'm not sure this action is what should be done. Do we need separate Schedule C's? Or can we actually be a husband/wife business under the same name?
For next year's problem: I'm writing screenplays and likely won't make an income in 2008. That is fine, because my wife landed a large contract and I'll help her with it. But now -- with my own office and different line of work -- then what do we do? If I become her employee, then don't I cancel out my own deductions for a different line of work? (I'll still attend seminars, classes, study, and so forth with related expenses).
I hope you can help!
Thanks. Jad
Dear Jad,
Get rid of the tax software.
OK, now I can answer your questions. Actually, your question about how a husband and wife business may file has already been answered in my post
The Many Advantages of Hiring Your Spouse . But let's deal with your current and future work situations.
For 2007, if you consider the work that you and your wife did as one business then you may file as one sole proprietorship, using one Schedule C, Profit or Loss from Business. You would split the income and the SE tax based on each one's share of income. If you think of the work as two businesses you must treat them like two separate businesses and separate all income and expenses. File two Schedules C. A real drag since, based on your description of the work you both do, I assume you share a lot of the expenses.
One thing you said doesn't make sense, "But now -- with my own office and different line of work." What different line of work? From an aesthetic perspective there is a difference between translating Homer and writing a press release for a new brand of toothpaste but from a tax perspective, writing is writing is writing. Not to mention that you'd probably get more money for the press release than the translation.
For 2008, set up as one business. The description of the work you both do certainly sounds like one business. If it's your wife's business, then you should be her employee. Or it can be your business and she can be your employee.
Be sure to read all my posts about a husband/wife business here's the category payroll -- spouse as employee .
See you off-Broadway.
June
Check out my book Self-employed Tax Solutions. It will simplify your tax and financial life, and save you money!
I love your site, and it is truly the first REAL HELP I've discovered that a simpleton like me can understand.
Our details: I'm a full time writer from Austin, Texas and I maintain my own office . My wife works full time for a regular company, but she's also started contract work for the first time this year. She is in Education, and I am in Entertainment, but we both perform the same function of consulting and writing in our respective areas.
We both received 1099s this year for our separate lines of work.
Our problem: Up until now, I've considered myself a sole proprietorship, and deductions were relatively easy to understand. But now with my wife making contract money, we want to take deductions for her as well.
Can I "roll" her into my business as a husband/wife proprietorship, or is she her own side business?
My tax software lumped us together (our two 1099s anyway) but I'm not sure this action is what should be done. Do we need separate Schedule C's? Or can we actually be a husband/wife business under the same name?
For next year's problem: I'm writing screenplays and likely won't make an income in 2008. That is fine, because my wife landed a large contract and I'll help her with it. But now -- with my own office and different line of work -- then what do we do? If I become her employee, then don't I cancel out my own deductions for a different line of work? (I'll still attend seminars, classes, study, and so forth with related expenses).
I hope you can help!
Thanks. Jad
Dear Jad,
Get rid of the tax software.
OK, now I can answer your questions. Actually, your question about how a husband and wife business may file has already been answered in my post
The Many Advantages of Hiring Your Spouse . But let's deal with your current and future work situations.
For 2007, if you consider the work that you and your wife did as one business then you may file as one sole proprietorship, using one Schedule C, Profit or Loss from Business. You would split the income and the SE tax based on each one's share of income. If you think of the work as two businesses you must treat them like two separate businesses and separate all income and expenses. File two Schedules C. A real drag since, based on your description of the work you both do, I assume you share a lot of the expenses.
One thing you said doesn't make sense, "But now -- with my own office and different line of work." What different line of work? From an aesthetic perspective there is a difference between translating Homer and writing a press release for a new brand of toothpaste but from a tax perspective, writing is writing is writing. Not to mention that you'd probably get more money for the press release than the translation.
For 2008, set up as one business. The description of the work you both do certainly sounds like one business. If it's your wife's business, then you should be her employee. Or it can be your business and she can be your employee.
Be sure to read all my posts about a husband/wife business here's the category payroll -- spouse as employee .
See you off-Broadway.
June
Check out my book Self-employed Tax Solutions. It will simplify your tax and financial life, and save you money!
Monday, February 4, 2008
Deducting Health Insurance Premiums
Hi June,
Love the site but I didn't find what I was looking for. my husband has recently started his own cabinet business. We are still in the making and will probably set up as a sole proprietor with wife as employee.
I am currently employed full time and have medical insurance coverage. I have included him on my plan since he left his job to become self employed.
Am I correct that we cannot use the insurance payment deducted out of my pay as a company expense/deduction? My insurance is covered by my employer but I have to pay for his on a monthly basis,
I have read so many different scenarios but am still confused.
I appreciate your help in advance.
Susan from Goldsboro, NC
Hello Susan,
I'm pleased you like my site. Thanks for letting me know.
I assume then that you have already read all the posts on health insurance. If not check out the category insurance -- health/medical on the left. You will see that you may deduct health insurance premiums only if you are your husband's employee and an employee medical benefit plan has been set up for you.
Best,
June
Love the site but I didn't find what I was looking for. my husband has recently started his own cabinet business. We are still in the making and will probably set up as a sole proprietor with wife as employee.
I am currently employed full time and have medical insurance coverage. I have included him on my plan since he left his job to become self employed.
Am I correct that we cannot use the insurance payment deducted out of my pay as a company expense/deduction? My insurance is covered by my employer but I have to pay for his on a monthly basis,
I have read so many different scenarios but am still confused.
I appreciate your help in advance.
Susan from Goldsboro, NC
Hello Susan,
I'm pleased you like my site. Thanks for letting me know.
I assume then that you have already read all the posts on health insurance. If not check out the category insurance -- health/medical on the left. You will see that you may deduct health insurance premiums only if you are your husband's employee and an employee medical benefit plan has been set up for you.
Best,
June
Have a question? Do a little legwork.
Hello Indies,
I have found that for all the unique qualities indies possess many do share the general public's tendency of research avoidance. Indies need to be especially attuned to doing research because they don't have big daddy in the personnel office to whom they may address their concerns.
My blog is a good place to start sharpening your research skills. Before you "send June your question" check out the categories on the left and the "search" facility in the upper left corner. There's a good chance your question has already been answered. And, if not, you'll be able ask a question that utilizes a basic understanding of your concern.
I do read every question I get from this blog and from my website. I answer or comment on just about all of them either directly via email or here in a post. So many of you have questions on similar situations -- but with a twist here or there -- that I am going to try something a little different. I am going to composite or group similar questions and provide an answer. Or I'll show you questions I just received that have already been answered here on the blog.
Let's see if it works. Here's an IT consultant who asks about a husband-wife business and about forming an LLC. Both questions are already fully answered on the blog.
Hi June,
I was googling on the net and found your website. Its cool!. I am an IT consultant planning on establishing an LLC. I am not sure whether starting it up as a single member LLC (myself) or multi member LLC (both me and my husband as members) will help us taxwise? My husband is an full time employee, but he would be taking care of the business (IT consulting firm) completely (75%). Would it be beneficial if my husband is the owner and I work as an employee for him? Please let me know what options would best for us. Also this is the first time, i am planning on establishing a business, so any help is appreciated.
Thank you in advance - Chris from Chicago.
If Chris takes a look at the category list on the left side she will see husband-wife business has 12 posts and business entity -- LLC has 11 posts. That's where the answers lie!
And, as far as "any help is appreciated." Indies, read, read, read. There is so much useful tax-saving and time-saving information at your fingertips!
I have found that for all the unique qualities indies possess many do share the general public's tendency of research avoidance. Indies need to be especially attuned to doing research because they don't have big daddy in the personnel office to whom they may address their concerns.
My blog is a good place to start sharpening your research skills. Before you "send June your question" check out the categories on the left and the "search" facility in the upper left corner. There's a good chance your question has already been answered. And, if not, you'll be able ask a question that utilizes a basic understanding of your concern.
I do read every question I get from this blog and from my website. I answer or comment on just about all of them either directly via email or here in a post. So many of you have questions on similar situations -- but with a twist here or there -- that I am going to try something a little different. I am going to composite or group similar questions and provide an answer. Or I'll show you questions I just received that have already been answered here on the blog.
Let's see if it works. Here's an IT consultant who asks about a husband-wife business and about forming an LLC. Both questions are already fully answered on the blog.
Hi June,
I was googling on the net and found your website. Its cool!. I am an IT consultant planning on establishing an LLC. I am not sure whether starting it up as a single member LLC (myself) or multi member LLC (both me and my husband as members) will help us taxwise? My husband is an full time employee, but he would be taking care of the business (IT consulting firm) completely (75%). Would it be beneficial if my husband is the owner and I work as an employee for him? Please let me know what options would best for us. Also this is the first time, i am planning on establishing a business, so any help is appreciated.
Thank you in advance - Chris from Chicago.
If Chris takes a look at the category list on the left side she will see husband-wife business has 12 posts and business entity -- LLC has 11 posts. That's where the answers lie!
And, as far as "any help is appreciated." Indies, read, read, read. There is so much useful tax-saving and time-saving information at your fingertips!
Saturday, February 2, 2008
Husband and Wife on Ebay
June--
I am from Binghamton, NY and I work full time a database analyst for a major corporation in NY, and my wife is a housewife and full time student and she doesn't work.
In Jan. 2006, I started selling crystal and china on ebay, and I got a EIN so I could buy these products from the manufacturer direct. I do all the work with the ebay business like placing all the ads, taking all the photos, ordering the products, answering all the questions from customers, keeping track of all the money and accounting, paying the state sales taxes quarterly, etc. The only work my wife does is spends about a hour a night helping me pack the products for shipment.
In 2006, I netted an additional $33,000 from the ebay sales, and I filed a joint return with a Schedule C with me as the sole proprietor, and Schedule SE to pay any self employment taxes for the additional earned income.
I did not include my wife as a partner or employee.
My question is, with the new Small Business and Work Opportunity Tax Act of 2007, can I still continue to file as a sole proprietor and not include my wife as a partner or employee without any problems from the IRS?
-- Charles
Dear Charles,
No, there's is nothing in the Small Business and Work Opportunity Tax Act of 2007 that says you must partner or employ your spouse. So many indies are confused about this new tax act that a couple weeks ago I wrote a column explaining some of its ins and outs. Here's the post The Many Advantages of Hiring Your Spouse . I suggest you read it.
In that post and in several other posts on hiring your spouse you will find that there are many advantages to putting your wife on your payroll, even if she works for you only 5 to 10 hours per week.
BTW -- great work on Ebay!
-- June
I am from Binghamton, NY and I work full time a database analyst for a major corporation in NY, and my wife is a housewife and full time student and she doesn't work.
In Jan. 2006, I started selling crystal and china on ebay, and I got a EIN so I could buy these products from the manufacturer direct. I do all the work with the ebay business like placing all the ads, taking all the photos, ordering the products, answering all the questions from customers, keeping track of all the money and accounting, paying the state sales taxes quarterly, etc. The only work my wife does is spends about a hour a night helping me pack the products for shipment.
In 2006, I netted an additional $33,000 from the ebay sales, and I filed a joint return with a Schedule C with me as the sole proprietor, and Schedule SE to pay any self employment taxes for the additional earned income.
I did not include my wife as a partner or employee.
My question is, with the new Small Business and Work Opportunity Tax Act of 2007, can I still continue to file as a sole proprietor and not include my wife as a partner or employee without any problems from the IRS?
-- Charles
Dear Charles,
No, there's is nothing in the Small Business and Work Opportunity Tax Act of 2007 that says you must partner or employ your spouse. So many indies are confused about this new tax act that a couple weeks ago I wrote a column explaining some of its ins and outs. Here's the post The Many Advantages of Hiring Your Spouse . I suggest you read it.
In that post and in several other posts on hiring your spouse you will find that there are many advantages to putting your wife on your payroll, even if she works for you only 5 to 10 hours per week.
BTW -- great work on Ebay!
-- June
Monday, January 21, 2008
Wife Helps Plumber Husband
June --
We have had a plumbing business for 3 years.
My husband does the plumbing and I do all the scheduling of jobs, and bookkeeping. We have no employees. We each take a salary, this year our tax preparer wants me to do a W2 for myself and my husband, I'm not sure about this. Wouldn't this put us in the category of a employee?
Diane in Payson, AZ
Oh My Goodness!!! Diane. If you are giving me the straight scoop -- meaning you are accurately telling me what your tax preparer said, then there is a whole lot wrong here.
Since you did not say that you are incorporated I assume your plumbing business is your husband's sole proprietorship. He cannot be his own employee in a sole proprietorship and so he does not get a salary and would not get a W2.
If someone is an employee then certain registration must be done at the start of the employee relationship. And various payroll forms must be filed with the feds and often the state as well during the year. You don't decide at the end of the year, oh well, guess I'll do a W2.
You need to talk with a tax professional who knows what she's doing. Perhaps your local Small Business Development office can help you.
Best,
June
We have had a plumbing business for 3 years.
My husband does the plumbing and I do all the scheduling of jobs, and bookkeeping. We have no employees. We each take a salary, this year our tax preparer wants me to do a W2 for myself and my husband, I'm not sure about this. Wouldn't this put us in the category of a employee?
Diane in Payson, AZ
Oh My Goodness!!! Diane. If you are giving me the straight scoop -- meaning you are accurately telling me what your tax preparer said, then there is a whole lot wrong here.
Since you did not say that you are incorporated I assume your plumbing business is your husband's sole proprietorship. He cannot be his own employee in a sole proprietorship and so he does not get a salary and would not get a W2.
If someone is an employee then certain registration must be done at the start of the employee relationship. And various payroll forms must be filed with the feds and often the state as well during the year. You don't decide at the end of the year, oh well, guess I'll do a W2.
You need to talk with a tax professional who knows what she's doing. Perhaps your local Small Business Development office can help you.
Best,
June
Saturday, January 12, 2008
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.
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.
Saturday, December 1, 2007
10 Tax-saving Tips for Writers
Attention writers.
All you freelancers, whether your income skyrockets in the 100s of thousands of dollars or you’re closer to $500 per year, Uncle Sam treats you all the same.
That’s right, amount of income earned by a writer carries no weight with the IRS. You all must follow the same rules. The most horrendous audit I've ever handled was that of an established poet who earned less than $5,000 that year.
I've put together 10 time-and-tax-saving tips on how to simplify complex IRS rules to fit your writing style. All stem from questions you have asked me or areas where I know you need help. A while back I presented a similar set of tips to designers -- Designers Dozen: Tax Saving Tips for the Graphic Artist .
1. Use two offices. Forget the old husband’s tale that home office or studio is an audit red flag. The IRS has lightened up on this. Even if you work out of two or three places, if used exclusively for your work they are all legitimate deductions. Yes, both your home office and the spare room at your country place where you do your three-hour morning blogging routine every weekend are deductible business expenses.
2. Work at home to increase your business transportation deduction. If you do most of your research and writing at a local Internet café or college library or rented office you may still deduct costs for the area of your home used exclusively and regularly for your business, no matter how small the area. And by having two work places you’ll increase your deduction for auto use or public transportation costs.
Here’s why: The IRS does not allow a deduction for commuting from home to work and back. But it does allow a deduction for getting from one workplace to another. If you work in your home office and then drive to your other workplace – the library -- you are now driving “from one workplace to another.” You've increased your business miles and the amount of your auto deduction, or made your subway trip a business expense.
3. Careful, no office sharing allowed. Keep in mind the all-important IRS exclusive use rule: that your office must be yours and yours only. If you’re the writer for Clyde Client and your spouse handles the graphic design side of Clyde’s website and both you and your spouse use the same office – sorry, no home office deduction.
The way around that: make one spouse the employee of the other. By the way – there are a whole lot more benefits to hiring your spouse.
4. Hire your spouse. Even if your honey only helps you out with printer jams or errand running or fact checking, pay him for it. Putting him on your payroll opens up a vast array of deductions. You can provide generous employee benefits and deduct the costs of those benefits from your writing income. What kind of benefits? Well, for one thing, you can give him a medical plan that covers his family – that’s you and the kids. That would make your doctor bill a deductible business expense.
5. The more broadly defined your business the more deductions you can take. Being a sports writer limits your deductions. Same with calling yourself a technical writer. Yet we know if the money were there you’d write about pretty much anything.
Maybe you can position yourself as a generalist writer; in any case, describe your field of writing as broadly as you comfortably can. Do you sell ads on your blog? Do you sell a copywriting course on your website? Do you write for blogs and edit press releases for local businesses, all while working on your book? Perhaps your true business profession is a writing and marketing consultant rather than a writer.
Whatever your profession, claim all the income --- every dime. Consider as a possible business expense everything you do that makes you better at making money.
6. Why do you watch TV, rent DVDs, see a movie? If it’s just for fun, no tax deduction. However, if seeing films is vital to your own screenwriting or your novel in progress then claim a portion of the costs as a tax deduction. Or, has the literary void on network TV forced you to get cable? Well then, part of your monthly cable cost is a business deduction. And remember, the business use portion of the cost of your TV and DVD player is also a business expense.
7. Are you allowed to deduct a gift basket of fruit to Grandma? Of course you are -- if Gram has some connection to your business. Did she show you how to hook up your scanner? Make curtains for your office?
You’re an indie business and even though you may have a personal relationship with someone, that does not rule out also having a business relationship. This is particularly pertinent in gift-giving. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business gift deduction. But what about the friends with whom you have a business connection? If dinner at a friend’s house was planned so that she could help you with your query letter or book proposal, then the chocolate you arrived with is a business gift.
8. Deduct your laundry and dry-cleaning. Spill ink or red wine on your white silk blouse while attending an awards event? Dry cleaning and laundry while on a business trip are deductible expenses. You may also deduct the costs of the first dry cleaning bill after you return home. But don’t get too creative and save all your winter’s dirty clothes for cleaning the day after you return from a 3-day writers’ workshop.
9. Just starting out? Twenty-five query letters out and still no magazine said yes. That’s a bummer, but even if you haven’t yet made your first dollar as a writer you may still deduct your expenses. As long as your goal is to make money, you’re in business – whether you actually make any money or not.
10. Discuss these ideas with your tax pro before incorporating them into your business. That’s the most important tip of all. If your tax pro isn't aware of them … time to get a new pro!
All you freelancers, whether your income skyrockets in the 100s of thousands of dollars or you’re closer to $500 per year, Uncle Sam treats you all the same.
That’s right, amount of income earned by a writer carries no weight with the IRS. You all must follow the same rules. The most horrendous audit I've ever handled was that of an established poet who earned less than $5,000 that year.
I've put together 10 time-and-tax-saving tips on how to simplify complex IRS rules to fit your writing style. All stem from questions you have asked me or areas where I know you need help. A while back I presented a similar set of tips to designers -- Designers Dozen: Tax Saving Tips for the Graphic Artist .
1. Use two offices. Forget the old husband’s tale that home office or studio is an audit red flag. The IRS has lightened up on this. Even if you work out of two or three places, if used exclusively for your work they are all legitimate deductions. Yes, both your home office and the spare room at your country place where you do your three-hour morning blogging routine every weekend are deductible business expenses.
2. Work at home to increase your business transportation deduction. If you do most of your research and writing at a local Internet café or college library or rented office you may still deduct costs for the area of your home used exclusively and regularly for your business, no matter how small the area. And by having two work places you’ll increase your deduction for auto use or public transportation costs.
Here’s why: The IRS does not allow a deduction for commuting from home to work and back. But it does allow a deduction for getting from one workplace to another. If you work in your home office and then drive to your other workplace – the library -- you are now driving “from one workplace to another.” You've increased your business miles and the amount of your auto deduction, or made your subway trip a business expense.
3. Careful, no office sharing allowed. Keep in mind the all-important IRS exclusive use rule: that your office must be yours and yours only. If you’re the writer for Clyde Client and your spouse handles the graphic design side of Clyde’s website and both you and your spouse use the same office – sorry, no home office deduction.
The way around that: make one spouse the employee of the other. By the way – there are a whole lot more benefits to hiring your spouse.
4. Hire your spouse. Even if your honey only helps you out with printer jams or errand running or fact checking, pay him for it. Putting him on your payroll opens up a vast array of deductions. You can provide generous employee benefits and deduct the costs of those benefits from your writing income. What kind of benefits? Well, for one thing, you can give him a medical plan that covers his family – that’s you and the kids. That would make your doctor bill a deductible business expense.
5. The more broadly defined your business the more deductions you can take. Being a sports writer limits your deductions. Same with calling yourself a technical writer. Yet we know if the money were there you’d write about pretty much anything.
Maybe you can position yourself as a generalist writer; in any case, describe your field of writing as broadly as you comfortably can. Do you sell ads on your blog? Do you sell a copywriting course on your website? Do you write for blogs and edit press releases for local businesses, all while working on your book? Perhaps your true business profession is a writing and marketing consultant rather than a writer.
Whatever your profession, claim all the income --- every dime. Consider as a possible business expense everything you do that makes you better at making money.
6. Why do you watch TV, rent DVDs, see a movie? If it’s just for fun, no tax deduction. However, if seeing films is vital to your own screenwriting or your novel in progress then claim a portion of the costs as a tax deduction. Or, has the literary void on network TV forced you to get cable? Well then, part of your monthly cable cost is a business deduction. And remember, the business use portion of the cost of your TV and DVD player is also a business expense.
7. Are you allowed to deduct a gift basket of fruit to Grandma? Of course you are -- if Gram has some connection to your business. Did she show you how to hook up your scanner? Make curtains for your office?
You’re an indie business and even though you may have a personal relationship with someone, that does not rule out also having a business relationship. This is particularly pertinent in gift-giving. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business gift deduction. But what about the friends with whom you have a business connection? If dinner at a friend’s house was planned so that she could help you with your query letter or book proposal, then the chocolate you arrived with is a business gift.
8. Deduct your laundry and dry-cleaning. Spill ink or red wine on your white silk blouse while attending an awards event? Dry cleaning and laundry while on a business trip are deductible expenses. You may also deduct the costs of the first dry cleaning bill after you return home. But don’t get too creative and save all your winter’s dirty clothes for cleaning the day after you return from a 3-day writers’ workshop.
9. Just starting out? Twenty-five query letters out and still no magazine said yes. That’s a bummer, but even if you haven’t yet made your first dollar as a writer you may still deduct your expenses. As long as your goal is to make money, you’re in business – whether you actually make any money or not.
10. Discuss these ideas with your tax pro before incorporating them into your business. That’s the most important tip of all. If your tax pro isn't aware of them … time to get a new pro!
Sunday, November 25, 2007
Husband-Wife Business? Don't set it up as a partnership.
June,
I am preparing to take the plunge into SE and your book Self-employed Tax Solutions book has been an excellent resource.
Due to the work I do and subsequent contractual liability concerns, it was in my best interest to form an LLC, which I did as a single member.
My spouse will work in this venture in a part-time/full time business management capacity while I provide billable consulting services.
Are we better off with my spouse as a member, thus a partnership LLC, or as an employee in a single member (sole proprietor) LLC? I want the maximum liability protection, and equal "ownership" but do not want to give Uncle Sugar anymore than I absolutely have to. Since we file jointly, I'm thinking the tax advantage lies with the sole proprietor option but need your advice.
Thank you in advance.
Dean from Fort Collins, CO
Hello Dean,
Very smart move -- getting information before you make a decision!
An LLC treated as a "disregarded entity" is a sole proprietorship.
The most tax advantageous business structure for a husband-wife business is that which has one spouse as the sole proprietor and the other spouse as an employee of the sole proprietorship.
The least tax advantageous is a husband-wife partnership.
For an understanding of the advantages read my posts in the category payroll -- spouse as employee.
Glad my book is a good reference for you. Please tell your indie friends and colleagues!
Best,
June
I am preparing to take the plunge into SE and your book Self-employed Tax Solutions book has been an excellent resource.
Due to the work I do and subsequent contractual liability concerns, it was in my best interest to form an LLC, which I did as a single member.
My spouse will work in this venture in a part-time/full time business management capacity while I provide billable consulting services.
Are we better off with my spouse as a member, thus a partnership LLC, or as an employee in a single member (sole proprietor) LLC? I want the maximum liability protection, and equal "ownership" but do not want to give Uncle Sugar anymore than I absolutely have to. Since we file jointly, I'm thinking the tax advantage lies with the sole proprietor option but need your advice.
Thank you in advance.
Dean from Fort Collins, CO
Hello Dean,
Very smart move -- getting information before you make a decision!
An LLC treated as a "disregarded entity" is a sole proprietorship.
The most tax advantageous business structure for a husband-wife business is that which has one spouse as the sole proprietor and the other spouse as an employee of the sole proprietorship.
The least tax advantageous is a husband-wife partnership.
For an understanding of the advantages read my posts in the category payroll -- spouse as employee.
Glad my book is a good reference for you. Please tell your indie friends and colleagues!
Best,
June
Tuesday, November 6, 2007
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
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
Thursday, October 4, 2007
Save Taxes: Pay your spouse for his help
Dear June,
Thank you, thank you for speaking in a voice that I can understand. I'm beginning to feel a little less like Alice going down the rabbit hole :-)
About me - I teach classes to homeschoolers. (I realize that sounds like an oxymoron, but in today's world "home education" is more like "parent directed education" and doesn't have to take place in the home exclusively.
So far, from reading your site, it doesn't sound like I need to incorporate. I'm not worried about legal liability and I don't have business debt that I need to protect personal assets from. Your book is on its way and I look forward to learning about taking advantage of more deductions. I plan on paying my children and my husband.
So far so good! Here's my question: Is there any other reason to incorporate given the fact that as a sole proprietor my income is being taxed at my husband's rate? I guess I'm confused because if I pay him then he still has to declare the income, correct? So aren't we back where we started? Am I missing a piece of the puzzle here?
Thank you again!
Renee from Houston, TX
Hello Renee,
You are very welcome. I am so pleased my writing is useful to you.
The hiring of a spouse is a big puzzle to explain in a short post that's why you are missing a few pieces here and there. But let me give you a few more pieces to the puzzle.
If you hire your spouse, yes the income is simply moved from your side of the return to his. No tax break there. The advantages come with your spouse as an employee in this way:
** You may now deduct travel costs for him when he is on a business trip with you. If he were not your employee, even though he conducted business for you while traveling, you could not deduct his travel costs.
** You could provide him and his family [that includes you and your son] with medical coverage and thereby deduct as your business expense all health insurance and other medical costs.
** Were you to set up and contribute to his pension that would also be a business deduction for you.
How's that for starters?
Best,
June
Thank you, thank you for speaking in a voice that I can understand. I'm beginning to feel a little less like Alice going down the rabbit hole :-)
About me - I teach classes to homeschoolers. (I realize that sounds like an oxymoron, but in today's world "home education" is more like "parent directed education" and doesn't have to take place in the home exclusively.
So far, from reading your site, it doesn't sound like I need to incorporate. I'm not worried about legal liability and I don't have business debt that I need to protect personal assets from. Your book is on its way and I look forward to learning about taking advantage of more deductions. I plan on paying my children and my husband.
So far so good! Here's my question: Is there any other reason to incorporate given the fact that as a sole proprietor my income is being taxed at my husband's rate? I guess I'm confused because if I pay him then he still has to declare the income, correct? So aren't we back where we started? Am I missing a piece of the puzzle here?
Thank you again!
Renee from Houston, TX
Hello Renee,
You are very welcome. I am so pleased my writing is useful to you.
The hiring of a spouse is a big puzzle to explain in a short post that's why you are missing a few pieces here and there. But let me give you a few more pieces to the puzzle.
If you hire your spouse, yes the income is simply moved from your side of the return to his. No tax break there. The advantages come with your spouse as an employee in this way:
** You may now deduct travel costs for him when he is on a business trip with you. If he were not your employee, even though he conducted business for you while traveling, you could not deduct his travel costs.
** You could provide him and his family [that includes you and your son] with medical coverage and thereby deduct as your business expense all health insurance and other medical costs.
** Were you to set up and contribute to his pension that would also be a business deduction for you.
How's that for starters?
Best,
June
Monday, July 30, 2007
How do I deduct the costs of building a home office?
Hi June,
I just found your site and am enjoying it, and learning a lot.
Question: My husband and I are partners in our home-based business.
When we bought our home 2 years ago, my husband set up his office in the attached garage. We finally saved enough to officially convert the garage to office space. We're spending a lot on county permits, fees, plans, materials, etc. To make it even more complicated, the county is requiring us to build additional covered parking on our property in order to turn the garage space into residential (office).
What portions of the costs associated with remodeling this office and meeting the county's requirements are legitimate deductions?
Will they be direct expenses, or a percentage of the home maintenance?
I've looked everywhere and can't seem to find an answer to this. I have a tax person--but they are not a self-employed expert! I appreciate any advice you can offer.
Thank you. Jolene
Hello Jolene,
All expenses -- materials and permits, etc. -- related to building or remodeling a business structure are part of the cost basis of the building. They are all business costs. However, they are not "direct" expenses as you call them. For instance, repairing a window in your office for $100 is a $100 expense that you can deduct immediately.
Building or remodeling is considered a capital improvement cost. For a business building the cost must be written off over 40 years. It's called depreciation. So, if you spent $40,000 on your new building you would get to deduct $1,000 per year for 40 years.
You say that you and your husband are partners. Be sure to talk with your tax pro. A husband and wife partnership is the least tax advantageous setup for you guys. You might want to take a look at these:
Husband-Wife Business and Insurance
Husband & Wife Business
Designers Dozen: Tax Saving Tips for the Graphic Artist tip #4.
Best,
June
I just found your site and am enjoying it, and learning a lot.
Question: My husband and I are partners in our home-based business.
When we bought our home 2 years ago, my husband set up his office in the attached garage. We finally saved enough to officially convert the garage to office space. We're spending a lot on county permits, fees, plans, materials, etc. To make it even more complicated, the county is requiring us to build additional covered parking on our property in order to turn the garage space into residential (office).
What portions of the costs associated with remodeling this office and meeting the county's requirements are legitimate deductions?
Will they be direct expenses, or a percentage of the home maintenance?
I've looked everywhere and can't seem to find an answer to this. I have a tax person--but they are not a self-employed expert! I appreciate any advice you can offer.
Thank you. Jolene
Hello Jolene,
All expenses -- materials and permits, etc. -- related to building or remodeling a business structure are part of the cost basis of the building. They are all business costs. However, they are not "direct" expenses as you call them. For instance, repairing a window in your office for $100 is a $100 expense that you can deduct immediately.
Building or remodeling is considered a capital improvement cost. For a business building the cost must be written off over 40 years. It's called depreciation. So, if you spent $40,000 on your new building you would get to deduct $1,000 per year for 40 years.
You say that you and your husband are partners. Be sure to talk with your tax pro. A husband and wife partnership is the least tax advantageous setup for you guys. You might want to take a look at these:
Husband-Wife Business and Insurance
Husband & Wife Business
Designers Dozen: Tax Saving Tips for the Graphic Artist tip #4.
Best,
June
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