Need to feed the kids? Freelance AND work a job.

June,

I was reading your site. Great info!

I have a question. I've run my own business for almost four years. Due to the economic downturn, I've sent my resume out a few places. I have a job offer that I am considering with a firm...I don't really want to work for someone else, but the kids need to eat.

A few questions:

1. I intend to keep my other business going...I have a few commitments and can't shut it down completely. Will having most of my income W2 prevent me from taking normal business deductions?

2. The job offer is ok, but there are no benefits at all. I want to keep deducting my health insurance premiums through my business. They say there is some kind of group plan I can get into, but I'd have to pay 100% of the premiums...so they pay nothing. Can I still deduct health insurance premiums through my business?

Please advise,
Steven
Albuquerque, NM


Dear Steven,

Glad you like my site. Thanks for letting me know.

Yes, you may work as an employee as well as freelance as a self-employed. Amount of income from each is not a factor as long as you are trying to make money as a self-employed. You may still deduct all your indie business expenses against your self-employed income even if it results in a loss. That loss would be deducted from your W-2 income.

You may not deduct health insurance premiums as a self-employed if your employer provides a group plan, even if you pay 100% of the premiums. If you continue to have insurance on your own as a self-employed you may deduct the premium cost as an adjustment to income on your tax return.

-- June

How are your plumber and the Treasury Secretary nominee alike?

In the Daily Beast, Tina Brown tells us we are in the Age of Gigonomics and that the “gig economy is no picnic.”

The economy is changing. So much so that it affects people even in the corridors of power. And because it affects them, it’s news.

The most stunning revelation to come out of the hearings on the Timothy Geithner nomination for Treasury Secretary is that nobody who is anybody understands self-employment tax. The columnists, pundits, and reporters – they’re all in the dark. Even Rep. Barney Frank, speaking on MSNBC, when referring to the self-employment tax, added, “whatever that is.” And he’s chairman of the House Finance Committee, which deals with financial matters like taxes. And even Mr. Geithner’s three accountants – whom we expect are members of the Masters of the Universe -- didn’t quite understand it. Wow. This is news!

Well, not really. It might be news that all these high-placed people have fuzzy math when it comes to self-employment tax but freelancers know that they have always struggled with it as a component in the rules and regulations of being self-employed.

Who are freelancers? Freelancer is just another way of saying self-employed, 1099 person, sub-contractor, independent professional, indie, solo. In IRS talk they are “independent contractors.” And they have always had a more difficult time in the American economy than have employees.What’s an employee? Somebody who earns wages, a salary, or has take-home pay, who usually gets benefits like vacation pay or child care benefits or a pension contributed to by the company.

Part-time or fulltime does not determine your work status. A part-timer is not a self-employed. A self-employed can work a 60 hour week.

Artist are indies. So, too, are most psychologists and plumbers and tech consultants. The guys who work for Blackwater are indies. Most politicians upon leaving office for the talk circuit get paid as independents. Your landscaper and handyman are freelancers.

Most artists, for example, work on gigs as a matter of course. Often they work on multiple levels, dividing their time between commercial art and serious endeavor – such as musicians who play good-time Dixieland one night a week and innovative jazz on another night.

We respect artists in America – at least some of us do – but we don’t worry about the precarious state of their economic survival. It’s only when the same predicament hits the mainstream economy, as it is doing at present, that it becomes a perceived problem and a big story.

In her post, Tina conflates freelancers with part-time workers. They’re different. As corporations find it to their advantage to downsize by kicking employees out the front door and inviting them back in through the rear door as associates or consultants the long-standing muddle about self-employment and part-time work is growing more confused.

Most accountants who sit in mahogany offices – I personify the type in my book, Self-employed Tax Solutions, as Sammy Segar, CPA – are clueless about the freelance life. The tax laws are written for the corporate world, and they are trained solely in the tax structure of the corporate world. When they see an honorarium for a speech they treat it as “Other Income” rather than as “Earned Income.” And you know what? On earned income you must pay Social Security and Medicare taxes. If you’re an indie – same tax, different name. It’s called self-employment tax.

This apparently eluded the tax preparer who worked on Treasury Secretary-designate Timothy Geithner’s tax returns, and thus put his appointment to the Obama cabinet at risk. The state of the new economy means the accountants have to get out of their mahogany offices and into the present economy to see what self-employeds have been dealing with their entire indie lives.

Self-employed people get screwed not only by the accountants and the tax laws, but also by the banks, the mortgage brokers and all the other monotone gray elements of the corporate W-2 side of our economy. So maybe the grim economic forces that are creating a gig economy will at last help that unorganized and unorganizable mass of freelancers. Because so many people are scrambling into the same boat with freelancers, an opportunity has opened up for a New Deal for the Indies.

June Walker

You must be in it to make money not to reduce your tax!

June --

I am a Full time IT Professional, and part time artist. I've been painting/selling my artwork for many years.

I'm just starting to think about how I can use that to my advantage during tax time.

My question is will your book be useful for me, as I'm not self employed - I have a job, but I'm also an artist? I was wondering if I should create a company to leverage against the income I get from my full time job, or should I just file my taxes differently.

Do you have any information on the topic? I paint dance-themed art. As an artist, can the creative material gathering process be included in a deduction. For example if I go to a salsa event and take pictures so that I can use that material for a painting that I will create? Is there a limit to this? For example I'm planning to go to a dance cruise - take pictures for creative material, network with people regarding my art, and give out business cards, would this be a business expense?

Would I have to become a company first?

Thanks, Alla
Philadelphia PA


Dear Alla,

Read my post, Hobby or Business? If it's fun, be careful. and you will see that in order to have a business and deduct expenses that are greater than your income, then you must have a profit motive. You must want to make money. Tax reduction is not a profit motive.

I also recommend that you read my most recent eLetter, Ways Through the Maze. The column, "Only Suckers Pay Taxes,"answers your question.

If you make money on your painting then you have taxable income even it you treat your painting as a hobby rather than as a business. My book, Self-employed Tax Solutions, explains the difference between hobby and business and also covers the tax and financial basics about being -- or thinking about being --self-employed.

You ask about forming a "company." Do you know what you mean by company? You need to do some homework. Use the search facility on my blog and in my site . For starters search "entity," then "LLC," then "corporation." You don't need to form anything to be a painter in business. You simply have to be doing it fto make money.

Whether you may or may not deduct your creative material gathering depends on how business-like you set up your indie endeavor. Right now, were I your tax pro, I would say no. Ask again after you've read and learned about indie business and decided how business-like you want yours to be.

Good Luck!
June

Software Cannot Replace Experience

Hi June,

I am a clinical and consulting psychologist who has been a sole proprietor for over 20 years.

I've started working on my taxes and have a question.

Earlier this year I spent $1,062 to purchase the latest version of a psychological test that I use regularly in my practice. I had thought that it would be considered an "office supply" and that I could write off the entire amount as a supply expense. But in using TurboTax, it asked me about a depreciable asset. It seems that by definition (something that has a life of more than a year but will become obsolete eventually) this test is not an office supply, it's a depreciable asset. In the end, TurboTax told me that it was a "special" depreciable asset that I could take a one-time deduction for, of only $561! How do I legally handle this - asset or supply?

Thanks,
Dr. Mark
Fairfax Station, VA


Dear Dr. Mark,

You see, I've been feeling really depressed. Suicidal actually. I bought this software program Mind-Mend. Says it has taken 20+years of psychiatric experience and rolled it up into this software program. There are 10 steps to avoiding stress. One step says do 15 minutes of meditation each day. Another step has me stand on my head for 10 minutes so that my circulation increases. My gym instructor says I should not stand on my head because of an old army injury. I am confused, what should I do?

As a doctor you might tell me that stress and suicidal tendencies call for different levels of treatment as well as different levels of urgency and that I should speak with a professional. You might also say that there is no way that 20 years personal experience could be put into a software program and have the same success rate as weekly visits with a therapist when treating something as complex as suicide.

This is my round-about of saying what I have said on this blog many times before: A software program written for the simple world of employees cannot replace a tax pro experienced with indie tax situations. Search "turbo tax" on my blog or go here for more info tax pros - tax prep fees - tax returns (21) .

Software is a supplies expense in almost all circumstances.

Best,
June

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

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

Son Has A Landscaping Business

Happy New Year, Indies!

It is not my policy to answer questions that are unique to one person's situation . I have made an exception here because I think this is a cool Q&A to start off the new year. My answers are in orange.

-- June


Ms. Walker,

Your book has been very helpful to us -- equally understandable by a teen and his OLD, almost 50-yr old dad. Ohmygosh, you think 50 is old!

Our 16-yr old son has mowed lawns for neighbors since he was 10 using the unregistered name "Clean-Cut Landscaping Services" the last four years. To get him started, we trash-picked a lawn mower and had it rebuilt for him. He repaid us and has since purchased all his equipment with cash, grossing $30K last year. Impressive.

He now uses a 8'x12' shed and half our 22'x24' two-story barn garage for his ~20K worth of mowing, leaf collection, snow blowing, mulching, planting, hedge, and tree equipment. His younger brother is now working with him, pulling the 8' bike trailer with equipment that the older one had pulled with his bike before he purchased his commercial riding mowers. A family business is good.

He is home schooled and consistently scores extremely well on standardized tests. His routine is starting his school work at 0530 and finishes at ~1300, with some variation for outside coop classes. With No-Child-Left-Behind as policy in public school the past few years, it's no surprise that home-schooling has been on the rise.

Our questions follow:

1. Can we charge him rent on the shed and garage storage space for his business equipment and he deduct that as a business expense? That would help to compensate us for what is now used solely by him. Yes, if you claim the rent as income.

2. Presumably he could not use such a deduction until he is actually paying us? Correct. That is, we cannot prorate the tax, repair, utility, etc. proportion of business-use of our total living space (house, garage, and shed) described in your book until it is a valid expense to him? You are asking about a home office deduction. You can not take a home office deduction because it is not your business.

3. Can we charge him for the sizable laundry cost required for his business and he deduct that? He currently buys his work clothes and shoes. Think of it this way: Were he to pay a laundry service to clean his clothes he would deduct the expense; the laundry service would claim the amount paid as income. You would need to claim the fee for laundry service as income. Depending on your income and tax bracket it may or may not be a tax advantage to have him pay you.

4. Can he claim as transportation expense the mileage from his garage and shed storage area to those neighbors where he conducts his work? He uses his large, 5' deck riding mower to transport all his equipment. His 50-customer clientele is primarily within a 1-mile radius, but for some jobs he has to make multiple trips to transport all the equipment required for that job. Yes.

5. To avoid withholding social security taxes, to his younger brother, will his brother also need to meet the criteria for a sole proprietorship? I assume that would be the simplest arrangement for the two. It's not a question of simple. His younger brother is his employee.

6. Finally, you mention in your book the option of fully deducting the cost of purchased equipment the year in which it was purchased. Are there any particular requirements that he must meet to do that? That's a tax preparation how-to question regarding depreciation. I do not give tax preparation instruction.

Thank you.
v/r Jonathan (dad) for Abraham (older son) and Moses (younger son)
Glenside, PA
You are welcome. Sounds like you have great kids. Kudos to the parents.
June Walker