Writer's Mom

Hi June,

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

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

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

Thanks in advance for your advice!
Avonelle


Dear Good-Mom Avonelle,

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

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

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

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

Best,
June

Childcare is not a business expense.

Hello June -

I started a home business 1 1/2 years ago in Forest Park, IL. I hand paint wood items for kids rooms (plaques, frames, etc...)

I was wondering if I can deduct my babysitting expenses? I spent approx. $1200 last year for a babysitter to watch my son while I worked.

I just found your website. I plan to go pick up your book this week!

Kelly
Forest Park, IL


Dear Kelly,

Babysitting cannot be deducted as a business expense.

You may be eligible for a childcare tax credit if the following two conditions apply:

-- You have a profit from your indie business or you have earned income from a job. If you are married then your spouse must also have earned income.

-- Your sitter or daycare must be legitimate. If it's a service or school you will need an employer identification number. If you pay a babysitter then you must have a social security number for your sitter and the sitter must claim the income.

If you are a budding indie then you will find my book, Self-employed Tax Solutions useful. The least expensive place to purchase it is right here.

Best,
June

EINs and Pensions

Hi June,

Thanks for your website. It gives lot of information for starters like me.

I just started working as indie software consultant. I wanted to open a solo 401k also. I read in your blog like if I want to contribute to solo 401k I need EIN number. If I apply for EIN number, I have to use that EIN number for my clients. Is that correct?

and also Do I have to open a business account with that EIN number or my personal account should be fine?

Thanks
Mani
Tallahassee, FL


Dear Mani,

EIN stands for Employer Identification Number. Here's a couple of my posts on EIN-employer identification # (2)

When you establish a 401k and certain other kinds of self-employed pensions you must get an EIN for the pension. That's because the pension is an entity -- something that is separate from you -- and it must have its own identifying number.

For some pension plans, once assets exceed $250,000 a tax return for the pension must be filed. It is Form 5500 or Form 5500-EZ. You, the indie, must then also have your own EIN because it is required on the Form 5500.

Keep in mind this does not mean that you have two EINs. Your pension has an EIN and you have an EIN.

You do not have to open a checking account with your EIN. You may use your personal account as long as you are not operating as an LLC.

I don't know what you mean by "use that EIN number for my clients."

-- June

Supplies or Inventory

Dear June:

Each year at tax time we have difficulty choosing a category for products purchased for my wife's hair salon. She is an INDIE, a cosmetologist who leases her own shop. We try to put things in the categories listed in your book, but are a little confused about colors, shampoo,foils etc. that are used on clients directly, products purchased for retail and then supplies like cookies, flowers, decorations for the shop etc.

We keep more detailed records for our own purposes to tract individual client expenses, but for tax purposes we wonder what we can lump together.

Thanks for Your help,
William for Joyce


Dear William,

You may group together the supplies that are used directly on clients as well as cookies, flowers, etc. In other words, those things that you use, or use up.

Things that you sell are part of your inventory. You need to calculate the value of what you have on January 1. Add to that what you purchase during the year. Subtract from that amount the value of what you still have left to sell on December 31. That ending amount is the cost of what you sold for the year. It is called Cost Of Goods Sold ... COGS.

Best,
June

Working and Traveling in More Than One State

June --

IT Consultant. I started work on 1099 in Oct 2008 on a 6 month contract in CA.

As a 1099 I am subject to self employment tax for Social Security and Medicare. Does CA have any additional self employment taxes to be paid?

If I travel to CA from TX on Sunday evening around 6pm and reach at 10pm, can I claim the full per diem amount for lodging and meals for that day or can I claim the per diem amount only on the days I work in CA?

Thank you
Bill
Dallas, TX


Dear Bill,

California has no self-employment tax. You may be subject to CA income tax. Read my posts here taxes -- state / nonresident state (6)

Travel meal expenses are explained in my posts here expenses -- travel (17) and here expenses -- meals and entertainment (12) and here .

-- June

EINs in Germany

June --

This is my question: During my first deployment in Iraq (2007-2008) I started selling books, DVD, and other items online in my free time as a hobby, after a couple of months I was receiving more than a few hundred dollars from Amazon, Ebay and other websites for my sales every two weeks, but the net income was very small ex: of $600 amazon deposit, only $50 would be real profit.

In order to get wholesale prices from the on line suppliers I got an EIN (Sole proprietorship, internet sales) from the IRS website and I kept selling. I really didn’t know a single thing about taxes, I didn’t keep any records or receipts of the books or dvds that I bought to resale online….. and I didn’t take it in consideration when I got the EIN from the IRS either, that the Army taxes office in Iraq couldn’t help me to file my taxes because of that EIN. So I didn’t file in 2008.

After we left Iraq I stopped selling because I don’t know what to do with this tax and EIN situation, I want to fix this and find out how to keep selling without getting in trouble.

I read in the IRS website that you can cancel the EIN number and retake at any time, do you think I should do that?

I ‘ve been trying to talk to someone that does taxes for Americans here in Germany but it’s not that easy.

I would like to hear what you would do if you were me.

Thanks a lot!!
steven


Dear Steven,

Do not get rid of your EIN. Having an EIN really doesn't make much of s difference in your situation.

Very simply: Keep on selling. Claim the income on your tax return and reduce it by your expenses. You must keep a record of expenses. On your tax return, your tax preparer will put your social security # and your EIN.

I have clients in Iraq and in Germany. I think you'll be able to find someone in Germany who can prepare your tax return for you. The preparer just needs to know the basics of filing a return for a self-employed person. Start by asking at the base then at the bank.

Best,
June

EINs and LLCs: Updated

Dear June,

Subject: "Payee" Name on Checks that are Written to Me?

I am an LLC operating as a sole proprietor in CO. The IRS does not require an EIN for my situation, so I have never used one. I have always instructed clients to write checks to my company name. Twice in the past year two clients received letters from the IRS. I haven't seen the letters, so I don't know the exact context, but the bottom-line is that my clients believed that if I wanted to continue to receive checks with my company as Payee, then I would have to provide them with an EIN.

For tax purposes, the IRS site clearly states that an EIN is not necessary for an LLC operating as a sole proprietorship.

For legal purposes, it's my understanding that you should always receive checks in your company name. So, how should a check be written?

Additional Information that May Be Relevant I like "clean" tracking, so I deposit the checks into a business account from which I also pay business expenses. When I want to pay myself, then I transfer funds from my business account to my personal account.

An EIN has seemed unnecessary, and it's never been a problem until this year. I loathe the idea of adding yet more numbers to my life. Is it feasible to continue avoiding an EIN

Thank you in advance for your guidance!

Rose

P.S. I diligently searched your book (which I bought many years ago, and often refer to and recommend to others). Trust me, I'm not just flattering you; your book is great and I wonder when you will write an update. I also searched your blog. I'm confident that either (a) my question is not already answered on your blog, or (b) I don't know the right key words to use when searching the book's index or searching your site.


Dear Rose,

This is an update to an earlier post on EINs.

The IRS now says that an LLC must have its own EIN.

If at all possible get a copy of the letters your clients received from the IRS. You said the the clients "believe" they can't pay you unless you have an EIN. Well ... what's that really mean?

You are also correct that in order to maintain the protection of the LLC checks should be made out to the LLC. Whatever name your LLC is registered as, is the name the checks should be made out to. Be sure you have that name on invoices and business cards so that clients will have a reference.

If your clients plan to send you a 1099 at year-end they will also need your address and your EIN.

Thank you. I am so pleased that you use my book as a reference. That is what it is meant for! By he way, all the basic information and how-to instruction in Self-employed Tax Solutions, although written several years ago, still applies for 2008 tax returns and so far for 2009 as well. Specific numbers may have changed but method has not. For instance, although the per mile rate for auto deduction changes every year, or even every half year, the all-important simple method I explain for keeping mileage records and the deductions for auto expense have not changed.

Best,
June