Tax Savvy Indie Saves $850 Because Of Reimbursed Expenses On Her 1099

So many of you continue to have questions about reimbursed expenses and I've written so much about them that I thought you'd like to see a really positive response from a California indie. Here 'tis:

Hi June,
I live in Oakland, CA and I worked for about three years as a freelancer for various online outlets (I'm now a regular employee). I just wanted to thank you for your very helpful posts about 1099s and reimbursable expenses!

In 2008 I was missing the 1099 from one of my clients, so I filed my return with an estimate of my income based on my pay stubs. Just now I got a notice from the IRS because the 1099 info they received had about $2k more income than I had reported. I went back to my files (thank goodness I kept very good ones!) and realized that the discrepancy was exactly accounted for by my expense reports that had been reimbursed.

At first I was mad at my client and was going to demand that they revise the 1099 to exclude the reimbursed expenses. But luckily I first read your posts explaining that the client is allowed to do that and it's MY burden to separate out how much is income versus reimbursed expenses. So I'm going to file an amended return reporting the larger amount of income from the 1099 and deducting the expenses on Schedule C. Even though some of the expenses are meals/entertainment, I'm going to include 100% of the amounts in order to properly offset the income amount from my 1099 -- as you said, the client is the one who paid the expenses, so they are the ones responsible for making sure only 50% is deducted (the instructions for Schedule C explicitly say this on page C-7!).

Since I guess the mistake is my fault, I will probably still owe some money in interest, but at least I won't have to pay the $850 the IRS was saying I owed! I know all I did just now was regurgitate the info that you already know well and have explained in past posts... but I just wanted to drop you a note, hoping that you might get some satisfaction from knowing that you helped another person understand their tax situation!

My only fear now is that filing an amended return will flag me for scrutiny and I may get audited because of other unrelated deductions I took... fingers crossed for no more letters from the IRS!

-Alana

Wasted Time = Donated Time = No Expense Deduction

Hi again June,

You were nice enough to answer my question on your blog a year or 2 ago, so I'm back with another that I hope you can help with.

I have a small consulting psychologist practice in Virginia; I help the State determine whether or not disability claimants are medically eligible for SSI benefits. The biggest occupational hazard I face is people who don't keep their appointments. I work in 2-hour blocks, and when they don't show, the state government, with whom I contract, pays me next to nothing for my trouble.

Question: can I write off the difference between the little the State pays me for those "no-shows", and what I WOULD have been paid if the patient HAD shown up, as a loss? If so, I have 25 years of amended tax returns to work on.

I realize that this may be a tax attorney question, but I thought the answer might benefit your readers.

Thanks,
Mark
Fairfax Station, VA


Dear Mark,

No tax attorney needed. This is one of those really-easy-to-answer questions with a you're-not-going-to-really-like answer.

Your time is not an expense and so it is not deductible. For tax purposes wasted time is treated the same as donated time. Check out my posts on the topic right here expenses -- donated services or products .

Suggestions: Find out why they miss appointments. Do they need transportation? Have an arrangement with someone to drive them to the appointment. Maybe that could be an indie business for a friend of yours.

Do they simply forget? Hire someone looking to work from home to call each client the week before, the day or evening before, and even the morning of to remind of the appointment. What you pay the person making the calls for you is a deduction for you. If you're married and your wife can do the calling as your employee, even better. Or if you have a child old enough for the responsibility, that would work too.

Another suggestion: Have work ready to do to fill the time of the no-shows. Things like research reading, recordkeeping, learning French.

Best,
June

Be Smart By Being Legit With Your Nanny

Hi June,

Any suggestions on paying the nanny tax and cheapest/simplest way to do so?

Thanks!
Kurt

Hi Kurt,

In tax talk we affectionately or not so affectionately refer to anyone who cleans our house, takes care of our children, cleans our yard, drives us around, or takes care of our real Nana who resides in our upstairs guest room as "a nanny." And so the tax we must pay on someone who works for us in that capacity is referred to as the "nanny tax."

The most simple way although often not the cheapest is to hire someone though an agency. The reason that's not the cheapest is because they are legitimate -- mostly -- and so they can charge more than illegitimate workers.

By illegitimate workers I mean both undocumented aliens as well as good ol' Americans simply not claiming the money you pay them to cook your meals or watch your children. In this way on $15 per hour they are avoiding about $5 per hour in taxes; On $30 per hour they are cheating the government -- that's us the taxpayer -- out of about $10 per hour.

Your other simple choice is to hire someone who has her own business. She is then an independent contractor and you do not have to pay payroll tax on what you pay her.

The determination of whether a babysitter is self-employed follows the same rules as those for any other indie. More on that right here self-employed and/or employee .

So, if the worker does not come from an agency, nor is she self-employed, and you pay her $1,700 or more during 2010 then you must treat her as an employee and do the relevant paperwork.

IRS Publication 926, Household Employer's Tax Guide spells out what you must do. It's available here http://www.irs.gov/publications/p926/index.html.

I strongly urge you to be legitimate with a household employee.

It is fair to her. She will be racking up social security points and she will be covered by your homeowners insurance should something happen, such as tripping down the stairs or having the overhead light fixture crash on her while she's washing it. [Be sure to check your homeowners or apartment insurance.]

It is better for you because you will not be committing fraud and you won't lose your house when she sues you after the glass from the light fixture lands in her eye.

Best,
June

New to indie life? Where To Start -- #2

Hi June,

Analyst (Business, Systems, Data, Information, etc.) ... 2 months as an indie. I am new to the SE world, and really don't know much about it.

My headhunter said he had a job lined up for me, but it was 1099. I said, 'Sure, I'll take it', not really sure what he was talking about.

Well, now I'm beginning to understand exactly what I'm signed up for, and I must say I'm rather excited at the entire prospect of the 1099 world. It sounds like the freedom and control I've been searching for.

What I need is to get up to speed quickly and see that your book may be just what I need to do that. I'm going to order a copy today.

Thanks, Arthur
Pasadena, CA


Dear Arthur,

Just like Mark who sent a question only minutes before you: You're new to self-employment and you need info.

Take a look at my answer below New to indie life? Where To Start . You're right. Self-employment does give you freedom and control. In order to have control and the confidence to know you are doing things right you need to educate yourself in the business and tax basics of being an indie.

I wish you much success,
June

New to indie life? Where To Start

June --

Computer Consultant Only 2 months.

Few things i have going: Recently married on May 22nd I worked part of the year as a W2 and my wife has always worked w2. I recently started working as a 1099 contractor on May 3rd. Basically i receive $9200.00 every two weeks and my expenses run about $1300.00 every week. Expenses include Flight, hotel, meals, car service. I have kept and recorded all receipts.

I am not sure how much i should be withholding or pre-paying in taxes every quarter. Also how does my w2 income and my wife's w2 income play into calculating a correct tax.

Mark
Orlando, Florida


Dear Mark,

Congratulations on your marriage and your new indie venture.

You're in a new situation. You need information, too much for me to provide in one blog post. I recommend you start by reading a short column on my website, such as: I Am A Business and also Is it a deductible business expense? . Also read Estimated Taxes, a post on my blog which will help answer your questions about how much and how to pay quarterly taxes and how your W2 earnings come into play.

If you like what you read there, I encourage you to read a copy of my book, Self-employed Tax Solutions. Take a look at the Table of Contents to see the topics covered. Solutions answers many of the most common self-employed questions in the same easy-to-understand style you'll find in my columns.

And more than just answering those taxing questions, the information in Solutions will give you a firm foundation on which to build your solo venture!

I wish you much success.
-- June

Mistakes With Reimbursed Expenses

Ms. Walker: Please help me!

I am an Adult Education Practitioner. Been an indie for 11 years.

My 2008 tax returns inflated my modest earnings because my company pays me as a 1099 contractor and included all the money paid as if it were earnings, when in reality, about 58% was nothing more than reimbursed up-front expenses.

I am still paying the federal government for that tax bill and was wondering if there is anything I can do retroactively to ease the burden going forward.

Reading over what you've said to others I take it that it was my primary responsibility to take along all my actual invoices where the difference between travel, hotels, etc. from speaking fees was clearly noted but I did not. Is there any way I might do that this year in an attempt to, if nothing more, lessen the burden of what I still owe the "feds"?

Thanking you in advance,
Hopeless


Dear Hopeless,

There are a few things you said that I don't quite understand. When you say that you've read what I said to others, if you don't mean all my posts here, expenses -- reimbursed, then be sure to do so.

I don't know where you were taking your actual invoices. To an IRS audit? To the people who hired you? Are you asking if the past can be fixed or just what to do for the future?

In the posts about reimbursements that I mentioned above there is an explanation of how to list reimbursed expenses on your tax returns in the future.

This is what you can do about the past: If you have proof that the income was expense reimbursement then have a tax pro file an amended return deducting those expenses. You will get a refund for the overpaid tax. You may file an amended tax return up to three years after you originally filed the return.

It's not hopeless.
-- June

It's only words ...

june

thank you for taking the time to get back to me , how ever the vocabulary and life lessons were a bit much..i am quite clear on what the word rape means, and i am very, very clear that aanxiety, anger and depression are not going to reduce my taxes.
this is just the way i choose to speak and write, and it is certainly no bodies business but my own. i did not want a mother or a teacher, i simply wanted some tax advise and Nothing more.


Above is Sara’s response to the post below: Learn more. Reduce stress and reduce taxes.

I want to take a bit of your time to comment because when you dig down, these afterthoughts are related to taxes and to being a professional indie with an indie-business mindset.

#1. I am a teacher. That is my goal: To teach indies how to handle the business side of their taxes, recordkeeping and finances more accurately, more simply, using less time and possibly saving more tax.

#2. I have four children and am not looking for any more. That mothering takes enough of my time and love.

#3. And this is the most important: Words have meaning. In #1 above I say “possibly” save you on taxes. I can’t assure you that you will pay less. I can’t omit “possibly” just to get your attention. I can’t use “always” because that is not so.

BTW – watch out for those guys promoting self-employment and promising you’ll “pay no taxes.”

Using words like “rape” or “Nazi” to indicate something unpleasant or someone you don’t like or someone with who you disagree is not only inaccurate but does an unimaginable disservice to those who have been raped or someone whose family has suffered at the hands of the Nazis.

Words are important in taxes and in life.

Indies, you're my favorite people!
June