People often ask me about deducting job search expenses on their tax returns. Every year I hear stories on the news, “Don’t forget, your job search expenses are tax deductible!” While this is true that job search expenses can be deductible—many times, they really aren’t.
For one thing, if you’re job hunting, you can only deduct your job search expenses if you’re looking for a job in your current occupation. I do taxes; I’m in the accounting field. If I decide to chuck it all and become a belly dancer—I couldn’t deduct those job search costs since belly dancing is not related to accounting. (Tap dancing—maybe: http://www.youtube.com/watch?v=fNKRm6H-qOU)
But say you truly are looking for a new job in your field, what can you deduct? Here’s a pretty good list:
- Employment and job placement agency fees
- Cost of preparing and mailing copies of your resume
- Travel expenses to look for a new job, but only if the trip is primarily to look for a job. (If you’re a professional snow remover and you’re job hunting in Honolulu it’s really not going to fly with the IRS.)
- You can deduct your job search expenses even if you do not find a new job
After you figure out what your qualified job search expenses are, it goes as a miscellaneous itemized deduction on your Schedule A. That means that your job hunt expenses will have to be more than 2% of your adjusted gross income before they even start to count. And remember that even then, you’ll need enough other items on your Schedule A form to make it worth your while—also known as itemizing deductions.
Here’s an example: Christie is an office manager for a small law firm and makes $50,000 a year. She paid $500 to a professional resume service, and $2,000 to a placement agency to help her find a new job. Although most of the out of state companies that interviewed her paid for her travel, she did have $100 of out of pocket travel expenses. In this case, Christies total job search expenses were $2,600.
Now 2% of Christies adjusted gross income is $1,000 ($50,000 times .02 = $1,000.) So in this case, Christie would have a miscellaneous deduction of $1,600. ($2,600 expenses – $1,000 threshold = $1,600.) So if Christie had other deductions to go along with it, great, then she could benefit from claiming her job search expenses. If she didn’t have any other deductions, then she’d still be better of claiming her standard deduction.
You cannot deduct your job search expenses if you are looking for a job for the first time. This rule keeps most recent grads from claiming job search expenses.
Don’t let not being able to claim a deduction keep you from spending money that you need to spend to look for a job. If your resume needs help, hire a resume writer. If a placement agency can help you, use one. Be sure to put your best foot forward.
For some good free advice about job hunting, check out this website from BestCollegesOnline.com. Although the article is written specifically for online students, there’s so much good and basic job hunt information in there it’s worth checking out. Face it, when you don’t have a job, free is a pretty good price. Here’s a link: http://www.bestcollegesonline.com/career-skills-learn-school/
One summer job opportunity is the unpaid internship. With the job market being so tight, it might make sense for you to consider working at an unpaid internship to gain some practical work experience which would make you easier to hire in the future. But before you accept an unpaid position, there are a few things that you should think about:
- Do you need the money? Dumb question, I know, every teenager needs money. But seriously, if you need a job because you have to pay your tuition, or buy a car, or whatever, then the unpaid internship is not an option for you. You’re better off flipping burgers at McDonald’s and getting a paycheck.
- What’s in it for you? I hate to sound like a mercenary, but if you’re going to work someplace for free, there has to be an upside to it. Will you learn a new job skill? Will you meet people who can help you get a better job next summer or during the school year? Will it look good on your resume? What is it about this job that makes it worth it to you to do the work for free? If the answer is nothing, then maybe you shouldn’t waste your time there.
For example: there’s an organization I know that routinely hires unpaid interns. The positions are part-time and usually last three or four months. The interns work on interesting projects, meet all sorts of clients of the business, and their employers openly promote them, “Do you know our intern Sarah? She’s graduating in May with a degree in accounting, I was wondering if you were looking to hire anyone?” No, I couldn’t hire Sarah but I did know of a company that was hiring and I suggested it. Her employer said, “I know they’re hiring, but they have a high turnover rate. I don’t think they treat their employees very well, we want Sarah to find a good job.” If you’re taking on an unpaid internship, you want to be someplace like that, where they actually care about you.
Another organization I know had a completely different attitude about the unpaid intern. The job consisted of sitting alone in a room making telephone solicitations for 40 hours a week. That’s not an internship, that’s slave labor. Their reasoning was that the economy was so bad that they could get a teenager to do the work for free if they called it an internship. They gave up on the idea of that internship, but I can imagine other organizations using the same logic. Here’s a good rule to thumb to follow: if you are actively engaged in bringing money into an organization, then you should be compensated for that type of work. Sales people get paid for their sales, period. If the job consists of sales or soliciting funds, it should be a paid position.
Taking on an unpaid position can be even more challenging than taking that paid job. For one thing, you’re going to work every day and there’s no paycheck waiting as your incentive, you have to really want the job. Do your homework; Google the company, make sure its a place you won’t be embarrassed to say you worked for. Maybe even Google your boss, make sure he’s not some serial killer that was just released from prison. (You think I’m joking here, no. Exaggerating, yes, joking, no. Google your boss.) Ask questions about what you’re expected to do and how you’re expected to do it. Know what you’re getting into.
If you do decide to take on that unpaid internship, treat it like a paid position. Dress appropriately for the job, always be on time, and do your best work. The reason you take the unpaid internship is to be a stepping stone to a paid position. The best way to do that is to make a good impression on the people you’re working for. If you slack off, you won’t get good references, and that’s the whole point of taking the unpaid job in the first place.
I just received my IRS newsletter and they offered a tax guide about teens getting summer jobs. I was going to blog about that anyway, so I thought I’d read their guide and use a lot of their points. Here’s the link: http://www.irs.gov/pub/irs-utl/oc_-_may_-_summrjobtips_050211.pdf. If you took a look, you’ll notice that they even set it up for folks like me to copy and paste. Kinda sweet.
But here’s my problem with it, the page says that if you do odd jobs like babysitting or lawn mowing then you have to record that as self employment and pay self employment tax on it. That means that if I hire Alex from across the street to mow my lawn once a week, and I pay him $25 a week for the entire lawn season—that’s 28 weeks where I live, he’ll have earned $700 and, according to that IRS newsletter, he’ll have to pay self employment taxes on that. Normally, a student earning only $700 would pay no taxes at all, but because Alex is self employed, he’d have to pay about $90. Suddenly that lawn mowing job isn’t looking so good.
Let’s call the IRS to the rescue! You see, in IRS publication 926 (yes that sounds awfully dull but ya gotta fight fire with fire) the IRS lists jobs that are considered to be “household workers”. One of those jobs is a yard worker, like Alex. (Babysitter is another one.) What makes a household worker an employee is if the homeowner controls not only what work is done, but how it’s done. For example, I want Alex to mow my lawn on Thursdays. I want the grass shorter in the spring and longer in the summer, and I want him to leave the clippings on my lawn unless it’s really overgrown. Alex doesn’t have a lot of say in this so that makes him an employee.
Why does any of this matter? Because as a household employee, Alex doesn’t have to pay self employment taxes, that would be his employer’s job (that would be me.) But it gets better, since I’m only paying him $700 this year, his wages from me are below the threshold for having to pay social security and medicare taxes so we’ve got a “win/win” situation. As long as the employer pays a person less than $1,700 in a year, then there are no employment taxes. Alex can work and keep his whole $700.
Now here’s the best part of all—Alex is only 16. If you hire a household worker who is under age 18 at any time during 2011, you do not pay employment taxes at all. I could give Alex a raise (please don’t let him read this, okay?) I could also hire him to do some landscaping work in addition to mowing my lawn. Let’s say that I paid Alex $3,000 for work he did in my yard. If he filed a tax return as being self employed, he’d pay almost $400 in self employment taxes for 2011. As my household employee, he pays $0. (I live in Missouri, so if I paid Alex over $1000 per quarter, I would have to pay for unemployment insurance, but that would by my expense, the boss, not the employee.)
So, if you’re looking for summer work and you’re under 18, don’t overlook those old standbys of babysitting and lawn care. And if somebody tries to make you pay self employment taxes, tell them to go read Publication 926. It’s all there in writing. http://www.irs.gov/publications/p926/ar02.html#en_US_publink100086722
Schools almost out and it’s summer job time. Here are five things you should know before you go to work:
1. The federal minimum wage is $7.25 an hour, but if you’re under 20 years old and you’re a new hire, the business can legally pay you $4.25 for the first 90 days of your job. There are also exceptions to the minimum wage laws for student workers, student learners and persons with disabilities; so if you fall into one of those categories you may not receive the $7.25 per hour even if you work longer than 90 days.
2. The minimum wage for people who get tips is $2.13 per hour, (basically restaurant wait staff) if that amount plus your tips brings you up to the minimum wage. If you’re working in a restaurant keep really good track of the tips you receive. Every night you’re going to want to count out your tips and write it down. (It’s called a tip log.) You might need this as evidence at tax time that you didn’t really make as much money as your employer claims you did.
3. Wages: if your employer is going to pay you “wages”, you will need to fill out a W4 form. Here’s what one looks like: http://www.irs.gov/pub/irs-pdf/fw4.pdf Don’t bother with all the questions at the top, just go straight to the bottom part where you start filling in your name and address. Check the box that you are single. On line 5 you are going to write 0 exemptions. If this is your first job ever and you’re only going to work over the summer and you are positive that you won’t make over $5,600 for the entire year, then write the word “exempt” on line seven. That means you’re telling your boss that you don’t want any federal income tax withheld. If you want to get a refund next April, then don’t write exempt, just keep the 0 on line 5 so there will be withholding.
4. Social security and medicare. It’s kind of hard to wrap your head around the idea that you’re paying social security and medicare taxes when you’re only 16 or 17, but you are. When you get your first paycheck, even if you say that you don’t want any federal income tax withholding, you will still be paying social security and medicare taxes. Let’s say that you get a job at $7.25 an hour and you worked for 20 hours before your first paycheck. Your pay should be $145. Your check though will only be for $136.81, because your employer has to take out $6.09 for social security and $2.10 for medicare.
5. Self employment. Some employers don’t want the hassle of handling payroll taxes on their summer help. They don’t give you a W4 form to fill out for your withholding, they give you a W9, it looks like this: http://www.irs.gov/pub/irs-pdf/fw9.pdf?portlet=3 What that means is your boss isn’t going to pay your social security and medicare taxes for you—you’ll have to do it yourself. This is really important—if you are a W9 worker, then you’ll have to pay income taxes in April. It means that you are self-employed and that you own your own business. Generally, students who make less than $5600 a year pay no income tax come April, but if you are self employed, you will pay taxes if your income is over $400. Every year I have to help students who found they had to pay taxes they had no idea they owed. It’s okay to work a W9 job, but know that you’re going to have to pay taxes on it. Here’s a link for more details on that: http://robergtaxsolutions.com/2010/09/employee-or-contract-labor/
Good luck with your job hunt and have a great summer!
It’s important to have your W2s before you try to file your income tax return. If you take your taxes to a professional, it’s against the law for us to file a return without having a copy of your W2 in our files. So what do you do if you don’t have yours yet?
Well first, your employer has until January 31st to send your W2 out. By now, you really should have it. If it’s still missing, here’s what you need to do:
Call your employer. That’s the easiest solution. Give them a reasonable amount of time for it to arrive in the mail, but usually that will take care of the problem. It doesn’t matter if he doesn’t like you or you left under bad circumstances, he has to give it to you—it’s the law.
If calling your employer doesn’t help, and you have not received your W2 by February 14th, then you need to call the IRS. You’ll be calling the main line at 1 800 829-1040. They’re going to ask a lot of questions so be prepared to give them your name, address, city and state, zip code, social security number, and phone number. Then, you’re also going to give them your employer’s name, address, city and state, zip code and phone number. Plus, you’re going to need to give them your dates of employment, an estimate of the wages you earned, the federal income tax that was withheld, and when you worked for that employer during 2010. Basically, you’re going to get that information off of your final pay stub. The numbers are going to be off of the “year to date” column.
After you’ve done steps one and two, then you can file your tax return. You’re going to use a form called a 4852. It works as a substitute for your W2. All the information that you called in to the IRS, is going to go on the form 4852 again. Warning -your refund will probably be delayed until the IRS can verify the payroll information provided. (This is why it’s so important to try to get the W2 from your employer first. If you’re getting a refund you don’t want it to be delayed.)
Sometimes, people receive the missing W2 after they’ve filed the form 4852 and the information is different. If that happens to you, you need to file an amended return (form 1040X.) This doesn’t happen all the time, I just mention it so that you know in case it does happen to you.
One thing that’s important to remember is that you are supposed to report all of your income, even if you didn’t receive your W2. You can’t just take a late W2 and put it on next year’s taxes. It can get you into trouble if you try that so please don’t. Also, you might not receive your W2, but the IRS probably did. If you file a return without your missing W2, but the IRS does get the W2, then you could get a nasty little letter from them about why didn’t you report all of your income? And what’s even worse, in my opinion, is if filing the W2 would have gotten you a bigger refund. The IRS usually doesn’t bother you if they owe you; it’s usually the other way around. So be sure to have all of your paperwork before you file, you don’t want to miss a thing.
Filed under: Jobs, People, Self Employed, Tax Deductions, Uncategorized
What do you do for a living? Are you in advertising, construction, real estate? When you tell people what your job is do they seem to have a grasp of what that means? Some people’s jobs aren’t so easily defined, like Superman for example.
Actually, his name is Charlee Chartrand and he dresses as Superman for his job. This is not your every day occupation. Now I don’t know Mr. Chartrand and I don’t do his taxes, if I did, my confidentiality rules wouldn’t allow me to talk about him. I read about him in Sunday’s Post Dispatch. I did contact him and ask for his permission to use him as an example though.
The main part of Mr. Chartrand’s job is that he dresses as Superman, hangs around at Cardinals games and collects tips for posing in pictures with fans and tourists. He’s also been performing at birthday parties. If you think there’s no money in this, think again, he can earn as much as $400 in tips in a day. And that’s why he’s going to need to figure out his deductions before he files his tax return.
So what can Superman deduct? Let’s hit the obvious thing first: the costume–all of it. Cleaning, repairing, replacing, clearly this is one clothing expense that will count as a business expense. I would also include his undergarmets. You can’t dress as Superman and wear any old boxer shorts.
The hair: most of the time hair cuts and styling products, etc are not considered legitimate expenses for business, even if you are a professional actor or television personality. In Superman’s case here, I would claim his hair expenses. He has to dye his hair black to be Superman, and he uses four different products to get just the right effect–including the “S” shaped curl on his forehead. I think that goes far beyond what would be normal for Mr. Chartrand during his off duty hours.
I can’t tell from the photo if Superman is wearing make-up or not. He doesn’t look like it, but if he was, I’d allow it. (He might need to darken his eyebrows to match his hair.) A note about make-up: generally, make up is frowned upon by the IRS as a business expense. A clown wearing clown make-up would qualify for a deduction, but most women in any business would not. I once helped a dancer with her return and as we went through her expenses she claimed “a gallon of eyelash glue.” Now, I thought that was an excessive amount even for a professional dancer. “Not for eyelashes,” she said, “It’s to keep my costume on!” Evidently, during a dress rehearsal she had had a “wardrobe malfunction”. In order to keep herself looking decent, she glued her costume on to make sure she stayed covered. That clearly fit the category of “necessary” and I put it in. (Even the meanest IRS agent couldn’t argue that one.)
Let’s get back to Superman, He can probably claim either a home office deduction or rent for his work space. And, since he travels from his home office to his gigs, he can deduct his mileage as well. These are expenses that are pretty normal for many small businesses. It’s important to remember that even unusual businesses have normal types of expenses. Another normal type of expense for Superman might be advertising, if he has flyers or cards that he distributes to get new business.
Here’s another expense that I would use for Superman that might seem out of the ordinary: comic books—Mr Chartrand uses comic books to compare against his costume and maintain the authenticity of his look. I’d count it as a valid business expense.
Also, Mr. Chartrand has a goal of moving to Los Angeles. Making a permanent move to Los Angeles would count as a moving expense, as opposed to a business expense. But, if Mr. Chartrand makes a trip to Los Angeles, to test the market so to speak, he could probably write off most of that stay as a business deduction. This would give him a chance to test out the market and give himself an out to come home if he found Los Angeles wasn’t the place for him.
When claiming business deductions, the key phrase the IRS uses is “ordinary and necessary”.
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 helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
When you’ve got a one-of-a- kind type of career, it’s not always easy to figure out what ordinary means. Hopefully, Superman’s example can give you some ideas about what’s ordinary and necessary for your business.
To read more about Charlee Chartrand, aka Superman, this link will take you to the St. Louis Post-Dispatch article about him:
Check out this IRS video on the Small Business Health Care Tax Credit. If you provide health insurance to your employees, you need to know about this credit.
For more information, check out the IRS website devoted to this issue: IRS website.
With the economy being in turmoil, a lot of people are turning to contract labor jobs. That’s where the company doesn’t hire you as a regular employee, even though you work for it. You won’t receive a W2 at tax time, but you will receive a form 1099MISC and you will be expected to pay tax on that.
Contract labor is good for employers who are a little gun shy over hiring. It’s also good for employees who may need to work to put food on the table, but don’t want to commit to a job that they wouldn’t ordinarily take.
If you’re thinking about accepting a contract labor type job, here’s a few things you should know. First, when you receive a form 1099MISC, the IRS treats that as self employment income. That means, at tax time you’re going to have to file a Schedule C along with your 1040 long form. You will be required to pay your own Social Security and Medicare taxes, in addition to paying what your employer would normally have withheld.
Let’s use an example: Heather and Melanie are both high school seniors looking for summer jobs. Heather gets a job at McDonald’s making $10 an hour. Melanie gets a contract labor position also making $10 an hour. They both work 20 hours a week. Since this is the only income the girls will make all year, we’re not even going to look at regular income tax (they won’t owe any) we’re just going to look at their take home pay and self employment taxes.
Since Heather works as an employee, McDonad’s is required to withhold her Social Security and Medicare taxes (FICA). Heather makes $200 a week, but she’ll only take home $184.70 because McDonald’s will hold back $15.30 to pay her FICA. What most people don’t realize is that in addition to the money McDonald’s holds out of Heather’s paycheck, McDonald’s also pays an additional $15.30 towards Heather’s FICA. At the end of 12 weeks, Heather will have $2,216.40 that she was paid by McDonald’s. She will owe no income tax at the end of the year.
Now let’s look at Melanie. As a contract laborer, Melanie has no FICA withheld from her pay. For one week, she gets a check for $200. At the end of 12 weeks, she’ll have been paid $2,400. The difference here is that Melanie will have a tax bill of $339 that she’ll owe at tax time. After paying her taxes, Melanie will only have cleared $2,061.
[Geek alert: if you checked my math, you'd say. "but 2400 times 15.3% is $367" -and yes, you're right. The first $433.13 of self employment income isn't taxed so the actual equation is income x .9235 x .153.]
In our example here, it’s better to be hired as an employee because the company pays half of your payroll taxes. But that doesn’t mean that you should not take that contract labor job. For one thing, you may be able to write off some of your job expenses, which would reduce your self-employment taxes. Or, you might negotiate a higher hourly wage rate. An increase of 7.65% would basically cover the additional tax paid by the employer. Knowledge is power. Knowing how you’ll be taxed and how much you’ll be taxed let’s you make smart decisions.
I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes from his wages. While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault. But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly? Fortunately, there is help.
First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you. If everything is fine, why change? But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track. It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.
What you need to do is have a copy of your latest pay stub and your last tax return handy. You’ll need both to answer the questions in the calculator. Then you’re going to click on the link to the IRS withholding calculator:
Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?” But seriously, it’s the best program for figuring out where you stand for your taxes. For most situations, I like it better than some of the fancy professional tax projection programs I’ve used. Most importantly, you don’t need any special training to use it. Just answer all the questions. Sometimes you may have to guess, but do your best. You really do need to have your latest pay stub and last tax return to do this though. If you’re just estimating, it’s not going to be helpful.
The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be. And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.
So let’s say you ran the program and it does recommend that you change your withholding. What next? That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form. Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.
So about that guy who wants to sue his employer? I’ll leave that up to the courts. As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.