Tuesday, February 16, 2010
Confusion abounds: LLCs & Employee vs Self-employed
Hi June--Great website!!!
I am the sole owner of my business--it is a LLC--I do have a salary which my business pays me on a monthly basis.
My question actually has nothing to do with taxes, but rather what do I put down on a HELOC [home equity line of credit] loan application--Employee or Self-Employed(Indie)?
My friend told me--for the purposes of getting a loan--it is always better to be classified as an Employee rather than a Indie. Is this true?
Please help!
Thanks,
Ty
Hello Ty. Thanks, glad you like my site.
Your question came in about 2 months ago so you may have resolved your situation. However, the elements of your question make evident the kind of confusion typical for indies. Perhaps my response will help others.
As I hope or wish all of you would know by now -- if not read here business entity -- LLC -- an LLC is not a tax entity. It is a legal entity. You can be a sole proprietorship LLC. You can be a partnership LLC. You can be a corporation LLC [that would be really silly, tho.]
So, when you say you are an LLC there is no way for me -- or anyone else -- to know what kind of LLC you are.
Ty, you say you are " the sole owner of my business--it is a LLC." That would lead me to assume that you are an LLC structured as a sole proprietorship. In tax jargon that would be an LLC structured as a disregarded entity.
However, you then say that you "have a salary which my business pays me on a monthly basis."
A sole proprietor does not receive a salary.
A sole proprietor has either a profit or a loss from his or her business.
A sole proprietor is an independent contractor.
A sole proprietor is self-employed.
A sole proprietor is an independent professional.
A sole proprietor is an indie.
Only employees receive a salary.
And Ty, you ask "what do I put down on a HELOC loan application--Employee or Self-Employed(Indie)?" Well, you must put what you actually are. If you don't you are submitting a fraudulent document. Not good. I can't tell you what to put because I don't know what you are. And I gather from your question that you may not know either.
You need to talk with the pro who set you up as an LLC. FInd out what kind of LLC you are.
If you formed your LLC online with no professional guidance, well, you have a situation that must be resolved.
-- June
Monday, February 15, 2010
Drive: The Surprising Truth About What Motivates Us
Indies, I would like to bring to your attention "Drive" a new book by Dan Pink.
In Drive: The Surprising Truth About What Motivates Us, Pink argues that the best workplace motivation is internal, the desire to excel and improve, rather than external, based on rewards and punishments, carrots and sticks. He cites scientific experimentation, largely ignored by the big business model corporations, that provides convincing evidence of this psychological/economic truth.
Dan's work follows in the tradition of his earlier books, Free Agent Nation and A Whole New Mind, which also take a fresh approach to the changing 21st century workplace.
Much of what Dan, who has been a client for several years, says about the workplace is related to businesses like BestBuy and Google, but it also has wide application to the indie life, where fulfilling one’s potential has long been a principal motivating force (yes, of course, making a living rates up there as well).
Please take a look at Drive. I think you will find it valuable, especially in these difficult financial times when indies need to harness the power of their internal motivation.
-- June
Sunday, February 14, 2010
Good Questions About Income, Expenses & Audits
Hi June,
Just finished listening to your CD and I thought it was good but rather short. I had hoped it would have been more of a version of your book less the worksheets. I much prefer an audiobook since as an indie I spend most of my time in the car and like to use the time to learn.
You have a great reading voice and may want to consider a more extensive audiobook version.
I do have a question I hope you may be able to answer. When one receives large amounts of cash as a gift at various times of the year how can you deposit this and make sure it is seen as personal? With a large immediate and extended family this can add up to thousands of dollars and I am not comfortable asking family to write notes saying they were nice enough to give me and the kids generous gifts.
Also, when I quote a job I include all expenses and there may be many varied expenses to complete the job ranging from nails to build a set to nail polish for a model sitting in the set.
I keep a docket for the jobs but an auditor who did not understand my indie lifestyle seemed to think the invoice should have had every nail and screw on the invoice and if I bought lunch for those at the shoot I should have the client and those around sign a meal log.
There is no indication in the code that this needs to be done and in the end I won in the appeal but the blood, sweat and tears only made me resent the CRA/IRS more.
The other issue I had was with unique gifts I give clients as a thank you for the work. If a client tells me they love hockey I will send an expensive stick to them and so on. What I have learned from an audit is if you think some accountants don't understand the work of an indie it pales in comparison to a government auditor.
Last question is if an indie is audited do you suggest they go it alone or get a representative to deal with the government. I understand if you can not answer all or any of my questions but they may make for good blog posts for you.
All the best,
Cliff
Dear Cliff,
I am trying to catch up with a huge backlog of emailed questions and some of this I may have dealt with already. But, a refresher never hurts.
First of all, thank you so much for your comments on my CD -- and my reading voice. I cannot do a CD of my book -- publisher constraints and the like. I do have additional CDs in the works but time is limited and client work comes first. I do have a new petite publication -- 75+ pages -- coming out very very soon -- The Confident Indie: Five Easy Steps. More about it soon.
On to your questions ...
Family gift money coming in: Make copies of the checks. Keep a list with specifics -- from whom, why, date -- of gifts by check or cash. Get pictures of family members. Make copies. Staple the family member's photo to the copy of the check. Save the birthday cards or anything that would help you prove where the money came from. And, I'm sure you always send a thank you note -- mom brought you up right! Well, copy the thank you note, or keep the dated emailed thank you. If the money was not a gift and not income, then send an acknowledgement of receipt of the money and keep a copy. That way you don't have to request anything from the giver.
If you are asking about reimbursed expenses, there's a lot on this blog about reimbursed expenses -- expenses -- reimbursed . If you are asking about expenses in general: Save receipts, of course. Photos do wonders as proof. Take a picture of the model with the polished nails sitting on the thing that was built with nails. Make notations -- including the date -- on the photo. Keep it with your receipts. Use your creativity in your recordkeeping.
No matter how much you spend on a hockey stick you may deduct only $25 as a business expense.
In an audit it depends on the tax pro and the taxpayer as to which one, or both, should handle the audit. I've had some clients who, with my coaching, did great by themselves. Other clients I would not let near the IRS. Years ago a client went to her own audit. She told the IRS auditor that she paid more in taxes in a year than the IRS auditor earned in a year. That audit did not fly well.
-- June
Just finished listening to your CD and I thought it was good but rather short. I had hoped it would have been more of a version of your book less the worksheets. I much prefer an audiobook since as an indie I spend most of my time in the car and like to use the time to learn.
You have a great reading voice and may want to consider a more extensive audiobook version.
I do have a question I hope you may be able to answer. When one receives large amounts of cash as a gift at various times of the year how can you deposit this and make sure it is seen as personal? With a large immediate and extended family this can add up to thousands of dollars and I am not comfortable asking family to write notes saying they were nice enough to give me and the kids generous gifts.
Also, when I quote a job I include all expenses and there may be many varied expenses to complete the job ranging from nails to build a set to nail polish for a model sitting in the set.
I keep a docket for the jobs but an auditor who did not understand my indie lifestyle seemed to think the invoice should have had every nail and screw on the invoice and if I bought lunch for those at the shoot I should have the client and those around sign a meal log.
There is no indication in the code that this needs to be done and in the end I won in the appeal but the blood, sweat and tears only made me resent the CRA/IRS more.
The other issue I had was with unique gifts I give clients as a thank you for the work. If a client tells me they love hockey I will send an expensive stick to them and so on. What I have learned from an audit is if you think some accountants don't understand the work of an indie it pales in comparison to a government auditor.
Last question is if an indie is audited do you suggest they go it alone or get a representative to deal with the government. I understand if you can not answer all or any of my questions but they may make for good blog posts for you.
All the best,
Cliff
Dear Cliff,
I am trying to catch up with a huge backlog of emailed questions and some of this I may have dealt with already. But, a refresher never hurts.
First of all, thank you so much for your comments on my CD -- and my reading voice. I cannot do a CD of my book -- publisher constraints and the like. I do have additional CDs in the works but time is limited and client work comes first. I do have a new petite publication -- 75+ pages -- coming out very very soon -- The Confident Indie: Five Easy Steps. More about it soon.
On to your questions ...
Family gift money coming in: Make copies of the checks. Keep a list with specifics -- from whom, why, date -- of gifts by check or cash. Get pictures of family members. Make copies. Staple the family member's photo to the copy of the check. Save the birthday cards or anything that would help you prove where the money came from. And, I'm sure you always send a thank you note -- mom brought you up right! Well, copy the thank you note, or keep the dated emailed thank you. If the money was not a gift and not income, then send an acknowledgement of receipt of the money and keep a copy. That way you don't have to request anything from the giver.
If you are asking about reimbursed expenses, there's a lot on this blog about reimbursed expenses -- expenses -- reimbursed . If you are asking about expenses in general: Save receipts, of course. Photos do wonders as proof. Take a picture of the model with the polished nails sitting on the thing that was built with nails. Make notations -- including the date -- on the photo. Keep it with your receipts. Use your creativity in your recordkeeping.
No matter how much you spend on a hockey stick you may deduct only $25 as a business expense.
In an audit it depends on the tax pro and the taxpayer as to which one, or both, should handle the audit. I've had some clients who, with my coaching, did great by themselves. Other clients I would not let near the IRS. Years ago a client went to her own audit. She told the IRS auditor that she paid more in taxes in a year than the IRS auditor earned in a year. That audit did not fly well.
-- June
Monday, February 8, 2010
Reimbursed Meal & Entertainment Expenses
June --
I am not a tax professional but I believe there is an issue that would cost a taxpayer money on the federal return if the 1099 he/she receives includes expenses... You cannot deduct dollar-for-dollar some meal and T&E expenses on your federal return...therefore if those expenses are reimbursed at 100% and included on the 1099 you can only deduct the allowable percentage on your return...so it behooves the corporation providing the 1099 to include the expenses on it but it is to your disadvantage...correct?
Herb
Incorrect, Herb. First, so that we are all on the same page: It's not "meal and T&E." I assume you mean by "T" travel expenses. It's M&E for meals and entertainment. M&E expenses are deductible at 50% by the indie or corporation that incurred the expense. [There are exceptions which I will not go into here. You may read a lot more M&E here expenses -- meals and entertainment.]
That means that if Victor Visual takes a client out for a business dinner and he spends $200, he may deduct only $100 on as a business M&E deduction. The same would apply were Callous Corporation to take out a client for dinner.
Callous Corp engages Victor for a design project and will pay Victor $3,000. In doing that project Victor must wine and dine some folks at a cost -- to the corporation -- of $500. Victor bills the corporation $3500. $3000 for his fee as well as $500 to reimburse him for expenses. Same way he would get reimbursed were he to have had $500 in printing costs for Callous.
Callous pays Victor the $3500 and is allowed to deduct the entire fee of $3000. However, Callous may deduct only $250 for the M&E. It was Callous's expense not Victor's.
Of course, if Victor's arrangement with Callous said that his fee covered all expenses, he would not be reimbursed and he would deduct only 50% of his M&E expenses.
Many payers, Like Callous Corp, include M&E expenses on the 1099 in order to cheat the IRS. That is Callous's and the IRS's problem, not yours. As long as you have proof of your arrangement with Callous and receipts to prove the reimbursement arrangement you take 100% of the deduction.
Here are more posts on expenses -- reimbursed .
You said you are not an accountant, but I am going to give you some accounting jargon here anyway. Just in case you want to pass it on to Sammy Segar CPA who doesn't agree.
I've often explained in my seminars and writing that I take the tax code and put it into language that my talented indie readers will understand. Here's a short example, already simplified from the tax code verbiage but I think you'll get the idea. By the way, the interpretation from employee to indie that applies to indies is in red:
Where meal and/or entertainment expenses incurred in connection with the performance of services are reimbursed, the directly-related-to and associated-with tests for the deductibility of the expenses are applied to the taxpayer who actually claims the expenditure as a deduction. Similar rules apply for the Code Sec. 274(n) percentage limitation on the deduction (the 50% limit) [S Rept No. 99-313 (PL 99-514) p. 71]. Specifically, the 50% limit doesn't apply to expenses described by Code Sec. 274(e)(3) which are expenses incurred in connection with performing services under a reimbursement or other expense allowance arrangement for an employer, if the expense isn't treated as compensation, or for a person other than an employer, if the taxpayer adequately accounts to that person for those expenses [Code Sec. 274(n)(2)(A)]
Similarly, a nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement. Notice 87-23].
Once again thanks to NATP for research help.
-- June
I am not a tax professional but I believe there is an issue that would cost a taxpayer money on the federal return if the 1099 he/she receives includes expenses... You cannot deduct dollar-for-dollar some meal and T&E expenses on your federal return...therefore if those expenses are reimbursed at 100% and included on the 1099 you can only deduct the allowable percentage on your return...so it behooves the corporation providing the 1099 to include the expenses on it but it is to your disadvantage...correct?
Herb
Incorrect, Herb. First, so that we are all on the same page: It's not "meal and T&E." I assume you mean by "T" travel expenses. It's M&E for meals and entertainment. M&E expenses are deductible at 50% by the indie or corporation that incurred the expense. [There are exceptions which I will not go into here. You may read a lot more M&E here expenses -- meals and entertainment.]
That means that if Victor Visual takes a client out for a business dinner and he spends $200, he may deduct only $100 on as a business M&E deduction. The same would apply were Callous Corporation to take out a client for dinner.
Callous Corp engages Victor for a design project and will pay Victor $3,000. In doing that project Victor must wine and dine some folks at a cost -- to the corporation -- of $500. Victor bills the corporation $3500. $3000 for his fee as well as $500 to reimburse him for expenses. Same way he would get reimbursed were he to have had $500 in printing costs for Callous.
Callous pays Victor the $3500 and is allowed to deduct the entire fee of $3000. However, Callous may deduct only $250 for the M&E. It was Callous's expense not Victor's.
Of course, if Victor's arrangement with Callous said that his fee covered all expenses, he would not be reimbursed and he would deduct only 50% of his M&E expenses.
Many payers, Like Callous Corp, include M&E expenses on the 1099 in order to cheat the IRS. That is Callous's and the IRS's problem, not yours. As long as you have proof of your arrangement with Callous and receipts to prove the reimbursement arrangement you take 100% of the deduction.
Here are more posts on expenses -- reimbursed .
You said you are not an accountant, but I am going to give you some accounting jargon here anyway. Just in case you want to pass it on to Sammy Segar CPA who doesn't agree.
I've often explained in my seminars and writing that I take the tax code and put it into language that my talented indie readers will understand. Here's a short example, already simplified from the tax code verbiage but I think you'll get the idea. By the way, the interpretation from employee to indie that applies to indies is in red:
Where meal and/or entertainment expenses incurred in connection with the performance of services are reimbursed, the directly-related-to and associated-with tests for the deductibility of the expenses are applied to the taxpayer who actually claims the expenditure as a deduction. Similar rules apply for the Code Sec. 274(n) percentage limitation on the deduction (the 50% limit) [S Rept No. 99-313 (PL 99-514) p. 71]. Specifically, the 50% limit doesn't apply to expenses described by Code Sec. 274(e)(3) which are expenses incurred in connection with performing services under a reimbursement or other expense allowance arrangement for an employer, if the expense isn't treated as compensation, or for a person other than an employer, if the taxpayer adequately accounts to that person for those expenses [Code Sec. 274(n)(2)(A)]
Similarly, a nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement. Notice 87-23].
Once again thanks to NATP for research help.
-- June
Friday, February 5, 2010
How Long To Keep Records
June --
Can you please tell me how long I need to keep my recorded things for tax purposes. I'm a contractor on my own.
Thank you, your site is very helpful.
Jim
Hello Jim,
You're welcome. Glad my site is helpful.
Here's a quick reference. And for more info visit here on my website.
Can you please tell me how long I need to keep my recorded things for tax purposes. I'm a contractor on my own.
Thank you, your site is very helpful.
Jim
Hello Jim,
You're welcome. Glad my site is helpful.
Here's a quick reference. And for more info visit here on my website.
Monday, February 1, 2010
IRS Allows Cheaper & Better Travel Deductions
Hello June!
Thank you for shipping your book that fast.
I began reading it and had a question on lodging expenses. I have a computer programming contract in NYC and travel there every week from Philadelphia. On weekends I usually go back home. At the beginning I stayed at the hotel but later I found that renting an apartment was more convenient and a bit cheaper alternative. So, I rented the apartment on the month to month basis but now not sure on how (if it is possible at all) to deduct the rent expense? Should I calculate the average price per day and deduct days I go back home from the total number of days?... Any ideas?...
For my meals, I am planning to use per diem and I calculate by multiplying on days I am actually there in NYC. Per www.gsa.gov site for Manhattan, it is $64 for full days and $48 for the first and last days.
Thank you.
Dmitriy
Dear Dmitriy,
Good question. And this situation is not covered in my book Self-employed Tax Solutions.
We know the IRS regs don't always make sense but just because it's cheaper and better doesn't rule out a deduction. Assuming you are allowed the travel expense deductions, then as long as the rent is equal to or less than the hotel, you are not staying there longer than you need to for business, and you are not sub-letting it to someone when you are not there you may deduct the entire cost of rent as travel lodging.
And, yes you may use the government per diem for meals & incidentals.
-- June
Thank you for shipping your book that fast.
I began reading it and had a question on lodging expenses. I have a computer programming contract in NYC and travel there every week from Philadelphia. On weekends I usually go back home. At the beginning I stayed at the hotel but later I found that renting an apartment was more convenient and a bit cheaper alternative. So, I rented the apartment on the month to month basis but now not sure on how (if it is possible at all) to deduct the rent expense? Should I calculate the average price per day and deduct days I go back home from the total number of days?... Any ideas?...
For my meals, I am planning to use per diem and I calculate by multiplying on days I am actually there in NYC. Per www.gsa.gov site for Manhattan, it is $64 for full days and $48 for the first and last days.
Thank you.
Dmitriy
Dear Dmitriy,
Good question. And this situation is not covered in my book Self-employed Tax Solutions.
We know the IRS regs don't always make sense but just because it's cheaper and better doesn't rule out a deduction. Assuming you are allowed the travel expense deductions, then as long as the rent is equal to or less than the hotel, you are not staying there longer than you need to for business, and you are not sub-letting it to someone when you are not there you may deduct the entire cost of rent as travel lodging.
And, yes you may use the government per diem for meals & incidentals.
-- June
Tuesday, January 26, 2010
Tax Pros & Tax Prep Fees
ahoy June,
happy new year!
I did some research on possible local tax preparers with experience with indies. Here are two that I just contacted: #1 XXX, name & website here. He is estimating ~$350 total, depending on how organized I am (which i believe i am pretty organized as far as possible deductions and receipts go, thanks to your book). He wants to see a copy of our 2008 returns, though our 2008 returns have no self-employed work on them (that started this year). He was recommended by a friend whose father (runs a nature tour business, not sure if he is self-employed) uses him for his taxes.
And #2 YYY, name & website here. I am still waiting to hear back from him, but recommended by another friend.
If you have any info/comments on either one, I would appreciate it.
hope all is well.
peace, wayne
Hi Wayne,
Hint #1:
You need an appendix removed. How many appendectomies did the doctor do? Are you his first? You need to ask a similar question of your potential tax pro.
Before you talk with the second guy read these posts tax pros - tax prep fees - tax returns
Best,
June
happy new year!
I did some research on possible local tax preparers with experience with indies. Here are two that I just contacted: #1 XXX, name & website here. He is estimating ~$350 total, depending on how organized I am (which i believe i am pretty organized as far as possible deductions and receipts go, thanks to your book). He wants to see a copy of our 2008 returns, though our 2008 returns have no self-employed work on them (that started this year). He was recommended by a friend whose father (runs a nature tour business, not sure if he is self-employed) uses him for his taxes.
And #2 YYY, name & website here. I am still waiting to hear back from him, but recommended by another friend.
If you have any info/comments on either one, I would appreciate it.
hope all is well.
peace, wayne
Hi Wayne,
Hint #1:
You need an appendix removed. How many appendectomies did the doctor do? Are you his first? You need to ask a similar question of your potential tax pro.
Hint #2:
There no mention of self-employeds on his site. He does mention small business. Candy store? Widget makers?
Hint #3:
Site says check out our blog. However, the blog is not CPA's material but columns from NY Times, Wharton, etc.
Before you talk with the second guy read these posts tax pros - tax prep fees - tax returns
Best,
June
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