Sole proprietor ... self-employed: What's the difference?

June,

My husband is a custom painter. He works as a subcontractor and pays self employed taxes, what would make more sense taxwise, sole proprietor or continue as self employed?

Marcia, Morrisville, NC


Marcia,

A sole proprietor is a self-employed.

Self-employed is a description for anyone who works for himself. A sole proprietorship is how the business is set up. A sole proprietorship is the type of business structure.

For instance, if your husband went into business with a friend and they worked together they would both be self employed and their business structure would be a partnership.

If you work for yourself and do nothing about your business structure, you are automatically a sole proprietor. You might want to read this column on my website for more info I am a Business .

If you're a sole proprietor, you do not need to file a separate tax return for the business. It's part of your personal 1040. However, were your husband in business with his friend, the partnership would need to file its own tax return.

Best,
June

A 1099 Overview

June,

When is a 1099 necessary? How much money would I have to pay before I have to claim (tax) my subcontracted work?

Thanks.
Ryan, Graphic artist in Salt Lake City, UT


Hello Ryan,

So many people are confused about 1099s. Here's a quick summary.

At year-end employees must be sent a W-2 from their employer. A W-2 states wages earned.

At year-end, if a self-employed were paid $600 or more by an individual or a company, that individual or company should send a Form 1099-MISC to the self-employed. A 1099-MISC states self-employed income earned.

However, many times no 1099s are sent. Even if there's no 1099 the self-employed must report the income on his tax return -- no matter the amount.

Whether or not a self-employed will have a tax liability on his self-employed income depends on how much he has in expenses. And it also depends on all the other income and deductions on his tax return. Here's a couple columns from my website that give more explanation on which taxes you may have.
Taxes: Which ones and how much do I pay?
Estimated Tax:How much should I pay?

Keep in mind. there is a full explanation of income, expenses and taxes in my book, Self-employed Tax Solutions.

Best regards,
June

Clothing and Make-up as a Business Expense

June,

I have a weekly live television segment that I have to buy clothing for as well as stay groomed ( waxing, hair, etc..) and buy special makeup for. Are these items tax deductible? I would not be buying all the clothing I've had to purchase this last year if it wasn't for the show.

Thanks...Great blog! Ellen


Hello Ellen,

Wish I had a more preferable answer. Street clothes -- pretty much meaning you could wear them through town and not attract weird looks -- are not deductible. On make-up and hair I look at what is typically spent for non-professionals and then take a deduction for the additional costs. For instance, typically women get their hair cut and colored every six weeks, so more often that that would be a business expense. The same with makeup. If you're doing full camera make-up each day or you're buying theatre/professional make-up you're going to spend a lot more than someone who makes up everyday for the office.

Other tax pros may treat this deduction in a different way. In cases where there is no yes/no answer, I choose a position that I would be able to argue comfortably.

Another way to look at why your clothes are not deductible: Think of the mother of a couple kids; She wears jeans and T-shirts all the time; Kids now are in school and she gets a job; she needs a whole new wardrobe. Not deductible.

Cheers,
June

Inventory

Hi June,

I am a cartoonist who has also become a self-publisher. With the help of your book, Self-employed Tax Solutions, I've been able to make sense of most of my business taxes, but some things remain tricky.

My question: Buying a proof of my books is a necessary expense. The proofs are not always perfect, so I consider any proof not saleable. Yet, they are something that I can keep in my studio to show people, rather than toss them. Where can I deduct the price of the proofs? Do they go under COGS, supplies, or other?

Thanks in advance, John


Hi John,

You have a choice.

You can consider the cost of proofs as production costs when figuring your per book cost. For example:
All production costs for 100 books = $1000. That means cost = $10 per book.
If the proofs cost you another $100, then your total production costs for the saleable books = $1100. So your per book cost = $11.

Or you can include the proof books as part of your inventory. And when you use them for show, treat them the same as you would books that you give away for promotion. For example:
Let's say your cost was as in the above example, $1100. But you got 100 saleable books and and 10 proofs. Then, your cost per book = $10. And every time you use a proof or send out a book with your promo packet your inventory cost = $10 per book .

Inventory is difficult to explain in a short piece. I assumed that, because you used COGS, "cost of goods sold," that you understand a bit about inventory. Hope I was right!

Best,
June

Missing 1099

June,

What do I do if I have everything except one 1099 form from a client who is dragging their feet?

Claudia
Graphic Artist, Morongo Valley, CA

Dear Claudia,

You don't need the 1099 as long as you include the income on your tax return.

June

Education Expenses

June,

What blessings to find your site! I have a question regarding deducting education costs. I returned to grad school recently (financed by student loans) while continuing to make my living as an indie yoga instructor and writer of web content on yoga and health. I've been getting Tuition Statements from my school and wonder how I'm suppose to use these to reduce my taxes? My studies are in Asian Philosophies and so absolutely related to my work.

Many thanks.
Meg


Hello Meg,

You can get a tax benefit from education expenses, however, there are several different ways to get the benefit -- from credits to actual deductions. Which is the most beneficial depends on your entire tax return -- all the income, expenses, exemptions, etc. And you need to be careful so that you don't accidentally take both benefits. Only one is allowed.

To explain how that works would be instruction in tax return preparation -- much too complicated for an email or post.

Education expenses are explained in depth in my book, Self-employed Tax Solutions, however, keep in mind that I think indies should not do their own returns. Your job is to have all the info and then take it to a competent tax pro who knows tax law and can get get you the lowest tax possible.

Best,
June

Is it a deductible business expense?

Common sense – you know, that’s the commodity your mother wished you had – would tell you that business expenses are the costs you incur to run your business – the money you must spend in order to make money.

The IRS explains it this way:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is appropriate and helpful for your business. An expense does not have to be indispensable to be considered necessary.”

Okay, but what is ordinary to an astrologer? What is necessary to a computer games inventor?
The answer: anything you do that relates to your work, that stimulates or enhances your business, nurtures your professional creativity, improves your skills, wins you recognition, or increases your chances of making a sale is a business expense and therefore deductible.

When Anouk Astrologer goes to another astrologer for a reading, that isn’t a personal expense; that’s a business expense, and deductible. It’s just as legitimate a deduction as the cost of a “Learn to Motivate Employees by Role Playing” seminar attended by a salaried middle management executive.

Ivan Inventor – of computer games, that is – shouldn’t assume that buying someone else’s computer game can’t be a business expense. Even if he stayed up half the night fighting invaders from another galaxy, he was researching the competition. The purchase of the game is a business deduction.

You are self-employed – so from this moment on, whenever you reach into your pocket for money, write a check, or slip out your credit card, be aware that you may be engaging in a business transaction. Change your brain circuits to accommodate your new mind-set.

New mind-set in place? Good. Now turn on your brain – the fertile brain of an indie – and take a fresh look at these three aspects of your career.

First: Define your business as broadly as you honestly can.
The more multi-faceted and inclusive your field of endeavor the more wide-ranging your expenses and thereby the less taxes you’ll end up paying!
• A photojournalist can deduct a more extensive variety of expenses than can a wedding photographer.
• A technological consultant’s expenses will be more diverse than those of a computer repair person.
• A generalist writer – someone who might write about anything – has more assorted expenses than a sports writer.

Second: Look at your activities.
Don’t be so sure that there is a well-marked difference between work and family and play and chores, or that you know what the difference is. The business life of an employee is rather sharply defined, but the business life of a self-employed like yourself is intertwined with your personal life. If your business is broadly defined and your life is richly complicated, it can make for an intertwining that gets pretty tangled. If you’re caring for your parents while running a day care business, or are dropping off several of your children at different locations while delivering products to clients, or struggling to find time for your new independent venture while holding down a full-time job, the interplay of your business and other interests can be intricate. On the other hand, if you’re a loner, without commitments or obligations, the boundary between business life and personal life might be remarkably simple.
• A musician who is single and without children may do very little that is not considered ordinary and necessary to his business – travel, purchase entertainment system equipment and CDs, attend concerts.
• An alarm-system installer with 4 children who spends all his free time going fishing, by himself, is going to have limited business expenses.
• A visual artist attends a Broadway performance and scrutinizes the sets and costumes. She deducts the cost of the ticket as a business study expense.
• A structural engineer drives through Millionaire's Mile looking at the period architecture of the houses. Since this is research for him the drive is a business event and the mileage there and back is a business expense.
• The proprietor of a hand-made clothes for children shop deducts as a publication expense every magazine she purchases that has any clothing, kids, or fabric industry trends in it.

Third: Review your relationship to the people you spend your time with.
Your new mind-set expands the way you think about the link between what you do and the people you do it with. Anyone who has a connection with your business may be primarily a business associate even though in some cases he or she may also happen to be a college classmate, friend, parent, child, or spouse. Friendship with a business associate is not necessarily fatal to a deduction. You’ll just have to show that the predominant motive for the activity that warranted the expense was business-related.
• A dance instructor calls his friend to invite her to a movie and, also, to ask her to bring her workbook from the marketing workshop she attended so that he may borrow it for ideas for promoting his business. He deducts the business phone call.
• A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband she talks about her new business, gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense.

To sum up, in looking for the best possible advantage regarding business expenses:
•Define your business as broadly as possible.
• Remember your business expenses may be expanded or limited by the scope of your business, the money available to spend on your business and the time available due to other commitments.
• Whatever you do, and whomever you do it with, consider the possibility of a business connection.

To receive a complimentary list of self-employed business expenses, visit my website here.