Posted on June 22, 2011May 31, 2016 by Jan Roberg

Tax Tips for Artists: Why You Might Not Want to Donate Your Art

Photo by John Morgan on Flickr.com

If you’re an artist, you may have been asked to donate a piece of your artwork for a good cause. You might have also been told that it’s good PR for you, because people at the event will get a chance to see your work and bid on it. And of course you’ve been told that your donation is tax deductible.

While it’s true that your donation is deductible, it’s not nearly as deductible for you as it is for me. Come again? You heard me right—your art donation is not as deductible for you as it is for me. Let me give you an example: Let’s say you donate a painting that would normally sell for $500. If I bought that painting and donated it to a charity, I’d get to write off the full $500 on my tax return as a charitable deduction. If you donate that painting instead, you can only write off the cost of the materials that you used to create that painting—depending upon what materials you’re using, that’s maybe $50 to $100.

Additionally most artists are sole proprietors, their art income goes on a Schedule C on their regular 1040 tax return. Your charitable donation can’t be counted as a business expense, it must go on your Schedule A with your other personal itemized deductions. If you don’t already itemize your deductions on a Schedule A, that donated painting gives you no tax benefit whatsoever.

I’m not saying that you can never donate to charity, I like charities and I think they deserve donations. It’s just that when you donate your art, you’re not getting much bang for your buck. So what are your alternatives?

One thing is to pay to “advertise.” For example: I support a small, local ballet company. I used to just donate money to them, but now instead I purchase an ad in their performance program. They get the money they need and I get a business deduction for advertising. This is especially good for me. Before, being in the 25% tax bracket, my $100 donation was worth $25 off my taxes. Now, as a business expense, my $100 advertisement reduces my taxes by $40 ($25 from my regular tax plus an additional 15% for my self-employment taxes.) The advertising option gives you the best tax value on your donation because you can use it to offset your self-employment taxes.

Do be careful about the charity advertising though. I once did an ad thinking I was supporting a local organization, when really the money was going to an advertising agency. The organization got some money, but most of it went to the promotional company. I won’t make that mistake again.

Another option for you is to donate the profits from one of your art pieces. For example, let’s take that $500 painting; assume you paid $100 for your materials,that’s a $400 donation to the charity. Most likely, that’s a better donation than what the charity would gain if they auctioned one of your pieces off. If you’re in the 25% tax bracket, you still get a $100 reduction in your taxes. It won’t help with your self-employment tax, but you do get the good feeling of making a donation and your art work sells for its actual retail value instead of some discounted auction price (another disadvantage of donating your art for charity.)

There are many worthwhile causes out there that need and deserve your help. If providing a piece of your art work is how you want to help, by all means do it. Just remember, it’s not your best tax strategy.

Posted on June 18, 2011May 31, 2016 by Jan Roberg

Father’s Day Quiz

Photo by Etsy Ketsy on Flickr.com

Here’s an easy Father’s Day Quiz for Dads. 1. What’s your wife’s name? 2. What are your children’s names? I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?
You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.
It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born. These are all true stories: the ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old.
We all like to think that our family members would do the honorable thing. Think that all you want. But put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.
Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.
You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?
So here’s your Father’s Day to do list: check your life insurance policy, your retirement plans, your investment and bank accounts, and your will to make sure that you have the people you want to receive that money listed as your beneficiaries. If you don’t, then that’s the first call you need to make Monday morning.
Your family loves you, and they’ll probably show it Sunday morning by giving you a new tie or maybe breakfast in bed. Let me tell you, you’ll get no glory by walking into the kitchen and announcing that you’ve “changed the beneficiaries” in your 401(k) or rewritten your will. That’s okay, you’ll know you did the right thing and that’s good enough for you strong, silent, Dad types. Happy Father’s Day.

Posted on June 14, 2011August 10, 2017 by Jan Roberg

When Being Too Clever is Not So Smart: Register Your Business at Home

This is me, Jan Roberg from Roberg Tax Solutions. I live in Missouri, I work in Missouri, my business is registered in the state of Missouri and I pay Missouri income tax. I’d still have to pay Missouri income tax even if I registered in Nevada or some other state.

Rule Number 1: If you learn nothing else from this post, learn this: don’t believe everything you read on the internet. Even if you read it in this article, you should always get some sort of definite confirmation of what I am telling you. There’s a lot of misinformation out there and some of the stuff can get you into big trouble with the IRS.

There’s a lot of hype these days about incorporating or setting up your LLC in Delaware or Nevada because these states have favorable business climates. But, unless your business is located in Delaware of Nevada, it doesn’t make sense to file your organization documents in these states. For one thing, tax law and business law don’t always go hand in hand. Here in Missouri, as with most states, if you’re earning the money here, you’re paying the taxes here—no matter where you incorporated.

Bottom line, if you own a small business, your business organization documents should be filed in the state that you live in, your employees live in, your customers live in, your shareholders live in, and where your offices are located.

Hiding or disguising your identity is another thing that doesn’t make sense for the legitimate small business owner. When you own a small business, you want people to know who you are and what kind of business you’re in. By the way, let me introduce myself. I’m Jan Roberg, I do taxes. I also write these blog posts myself. I want you to know who I am because I want you to remember me when you need tax help. That’s my picture up in the corner.

This is supposed to be tax blog, not a marketing blog, but seriously, if you own a small business—you want your clients and customers to know who you are, what you do, and how to find you. (By the way, my office is in Creve Coeur, MO and my phone number is (314) 872-2111—just sayin’.) See what I mean? The more people know you, the more likely they are to use your products or services or refer a friend who needs you.

But let’s talk about the tax implications with hiding your identity. You might even be thinking, gosh, how would a person even do that in the first place? This is where you hire a third party in another state to file your EIN for you– this keeps your personal identification off of your federal corporate registration. It doesn’t really sound like such a bad thing, really. You might even be thinking that sounds like a good idea, but it’s not if you’re running a legitimate business!
If you try to hide your identity, the IRS sees it as a red flag for things like: underreporting, not filing returns, money laundering, financial crimes, and my personal favorite: financing terrorists. How’d you like to be delayed at the airport because you wound up on a terrorist watch list because you incorporated in another state? Okay, I’m pretty sure that you’d have to do more than just incorporate in Nevada to wind up on a terrorist watch list. But the point is, why flag your business that way?

I know I post a lot of ideas on saving money on taxes. I preach the “don’t pay more than you have to” sermon all the time. But you should never do something as a tax strategy that isn’t also good for your business too. You remember the old acronym KISS? (Keep it Simple, Stupid!) If you have a small, one owner (or husband and wife) business working in a local market, you really have no need to be filing tax documents out of state.

Posted on June 10, 2011May 31, 2016 by Jan Roberg

Why Do I Have to Pay Taxes on Cancelled Debt?

Photo by Alan Cleaver on Flickr.com

It’s that time of year again when the IRS audit letters are hitting people’s mailboxes. And one of the most popular letters is reminding folks that they forgot to include their cancelled debt on their income tax returns.
“But why should I have to pay tax on that?” That’s got to be the most common question I hear from folks. “It’s not like the credit card company gave me any money, they just cancelled my debt.”
Let me try to explain it the way the IRS looks at it: If you have a job and you make $30,000 you have to pay income tax on that $30,000 right? Because it’s income to you, you pay income tax. I think that makes sense to everyone (You probably don’t want to pay the tax, but you understand the concept).
When you take out a loan for $30,000, you don’t pay tax on it. The $30,000 is a loan and you are supposed to pay it back, so it doesn’t count as income. That makes sense too.
Now let’s say you take out a loan for $30,000 and you don’t pay it back. We’ll skip past the nasty phone calls from the creditors and go straight to the part where the debt is forgiven. The bank says, “Okay fine, we’re going to write off the debt, you don’t owe us anymore.” Well now that $30,000 isn’t a loan anymore, because you don’t have to pay it back. Once that loan is no longer considered a loan—the IRS counts it as income and you get taxed.
But what if I didn’t take out a loan, what if it was just a credit card? It still gets treated like a loan because essentially, that’s what your credit card does for you. It gives you little loans to buy shoes, or a TV, or groceries. If your credit card debt is forgiven, it gets taxed.
So if I get an IRS letter saying I owe taxes on cancelled debt, do I automatically owe the money? Not always. There are some situations where you might not have to pay the tax, or maybe get the amount reduced. The biggest exclusion is if your home is foreclosed on. If you lived in the house as your main home and you lost it to a bank foreclosure, you can have the principal part of the mortgage that was forgiven be excluded from your income (That can be a pretty hefty tax chunk right there).
Another exclusion is for debt that was discharged in a Chapter 11 bankruptcy. So if you’re in the middle of bankruptcy proceedings, you’re going to want to be sure to claim the bankruptcy exclusion.
The third common exclusion is for “insolvency.” Insolvency means that your liabilities (money you owe) just before the debt was discharged is more than your assets (things of value like cash, stocks, your house, your car, etc.)
There are other exclusions, but these are the three most common ones. If you think that you may qualify for one of these exclusions, then you’ll want to amend your tax return showing that you’ve claimed the exclusion. You’ll put that on a form 982: http://www.irs.gov/pub/irs-pdf/f982.pdf This is one of those cases where I recommend that you have a professional work on the return. There are a lot of little details that go into the exclusion of debt that just won’t fit into a short blog like this. If you’re pretty handy with tax issues, the details can be found in IRS publication 4681: http://www.irs.gov/publications/p4681/index.html

Posted on June 7, 2011January 13, 2017 by Jan Roberg

Hiring Grandma to be a Nanny

Usually you must withhold Social Security and Medicare taxes for household employees. But if you hire your parent to watch your kids, they may be exempt.

I was recently asked, “How do I go about hiring my Mom to be a nanny?” Unlike me, who would just try to pawn my kids off on my Mom whenever I got the chance, this person wanted to make it official: 1. She wanted to pay her mother for the work, and 2. She wanted to make sure all the tax stuff was handled properly. If you’re thinking about hiring your Mom (or your Dad) here’s what you should know.

First, when you hire your parent for domestic work (including child care, housekeeping, etc.) your parent is exempt from social security and medicare withholding. This makes the whole “hiring your parent” thing a lot easier. There is an exception though, and I think a lot of families might fall into this category:

If you meet both of these conditions: 1. Your parent cares for your child who is under 18 or is disabled and 2. You are either divorced or widowed and not remarried, or your spouse is permanently disabled. Note: the rules don’t say anything about if you were never married, just divorced or widowed. So, if you meet these conditions, then you do pay the payroll taxes. Otherwise, just pay your mom every week. She can report the income on her tax return and you can report that you paid her and claim the child care credit. Super easy, right?

If you do have to do the payroll withholding, it’s not that hard. For 2011, you’ll want to withhold 5.65% to cover the employee’s share of payroll taxes. You’ll wind up matching that amount when you file the Schedule H with your tax return (the household employee tax.) You have the option of paying your Mom’s share of the employee tax and not withholding it from her pay. (You just don’t withhold and you pay double the employer’s tax, still pretty easy.)

You do not pay FUTA (federal unemployment taxes) on your parent no matter what the circumstance.

You may be required to pay state unemployment insurance, you’ll have to check with your state. Here in Missouri, you’ll pay unemployment insurance if you pay your parent over $1,000 per quarter.

You will need to provide your parent with a W2 after the year is over showing the income paid, whether you withhold the payroll taxes or not.

For more information of household employees, check out IRS publication 926.

To check out the Schedule H, click on this link: Schedule H.

Addendum: shortly after I posted this blog, I read an article about nanny’s that get paid over $150,000 a year. If you pay your nanny over $106,800, then you don’t need to withhold the social security tax on any amount over that. (You still withhold the medicare.) If you do pay your nanny that amount, I’d just like to point out that not only am I really good with children, but I can also prepare my own payroll and do all the associated tax forms that go with it. (Just saying.)

Posted on June 3, 2011May 31, 2016 by Jan Roberg

Small Business Bookkeeping Tips, for People Who Hate Bookkeeping

Photo by Dystopos, Acme adding machine as shown in "Cheese Chasers" directed by Chuck Jones 1951.

I hate bookkeeping! I know, you probably found this site looking under “accountants” but I hate doing bookkeeping. I’ve found that many other small business owners do too. So if you’re like me, you want to keep your bookkeeping time spent to a minimum so you have more time to work on the part of your business that you love. Here are some of my tips to keep things simpler:

Make a separate bank account for your business and keep it apart from your personal money. Income goes into the business account, expenses go out of the business account. If you do this one step, your bank statements become a perfect record of your business.

What if I accidentally make a business purchase with my personal funds? Write yourself an expense report, just as if you were working for a major corporation- attach receipts, and write a check to yourself as an “expense reimbursement.”

What if I need to take money out of my business account to pay for personal stuff? Once again, you write yourself a check, label that as “owner’s draw”. One business owner I know writes checks for his reimbursements and uses account transfers for his draw so that it’s easier for him to keep track of what is what. The important thing to remember is that your draw is not an expense, that’s part of your profit.

Never take cash out of your business account with your atm card. Never.

What if I don’t have enough money to pay my business bills with my business account? Can I pay my business bills with my personal checking account? No. You should write a check from your personal account to your business account and pay the bills from there. Keep track of that. When your business is doing better, you can reimburse yourself.

I get a 1099 at the end of the year and I write less than five checks a month for expenses, if even that. Do I really need a separate bank account? In a case like this, probably not, you could get away with a handwritten log of your expenses. The point is to do what’s easiest for you, in this case separate accounts might be more of a headache.

I’ve got the opposite problem. I’ve got lots of little expenses from all over the place. It takes me hours to load it all into Quickbooks. Any help for me? Maybe, here’s a tip I learned from one of my clients that might work for you. This fellow had lots of expenses, but the vast majority of them fell into two categories: production and shipping. He got two credit cards, the Visa he used exclusively for his production expenses, and the Mastercard for shipping. Any other expenses he put on his debit card or wrote checks for, but they were minimal. Each month, as he paid his credit cards he entered that one expense as his production or shipping expense instead of the dozens of smaller charges that he had been entering. If you’ve got a business where you can group your expenses like that, this might be helpful for you. Make sure you save all your receipts in a file with your credit card statements to back up those entries in case you get audited.

If you’ve found a tip that helps you keep your small business bookkeeping simple, please share it here. Thanks.

Posted on May 27, 2011May 31, 2016 by Jan Roberg

Reconstructing Tax Records: Getting Your Ducks in a Row

Photo by Ducklover Bonnie on Flickr.com

A few years back I represented a client who had lost all of his tax records in a flood. He had excellent documentation of the flood, but the IRS didn’t care about that, they still wanted him to back up some items that he had deducted on his tax return from a few years back. They wanted copies of receipts for expenses that he claimed on a tax return that was destroyed in the flood. He filed the receipts with the return, everything was destroyed.

This year, with all the tornado damage across the Midwest, including my own neighborhood, it seems like reconstructing records is an important topic.

First the easy stuff: You can get a copy of your tax return transcript for free from the IRS. If you still live at the same address that was on your last tax return, you can do it online at: https://sa2.www4.irs.gov/irfof-tra/start.do

If your address has changed, you will either need to fill out form 4506T, here’s a link to that: http://www.irs.gov/pub/irs-pdf/f4506t.pdf or call the IRS at 1 800 829-1040.

Not only can you get information about your tax return, but you can also get information from your W2s, 1099s, and 1098 forms if you need it. Note: the IRS W2 information does not include your state tax withholding, this is really a problem if you’re having a state tax issue, but at least you’ll have a list of your employers and you can contact them if you need that.

So that gets you the information that the IRS already has about you in the first place, but how can you reconstruct documentation when all of your files have been destroyed? One thing in your favor, although the IRS requires actual receipts during an audit, if you’ve been the victim of a flood or tornado or some event where your documentation is lost, they will allow you to prove you expenses some other way. But don’t just walk into an audit and say, “My files were destroyed you’ll just have to take my word for it.” We’re talking about the IRS, they don’t take your word for nothing. You’ll have to show them that you put some effort to recreating your expenses and it had better look plausible. So what should we look at?

Bank Statements: this is really easy if you have a business account and you run all your business expenses through that one account. Even if you’re running your business expenses through your personal account, it still provides you with proof of payment. Most banks let you access your statements on-line for free. Some banks still charge a fee for old statements but they should at least be able to access them for up to three years back.
Credit card statements: Once again, you can often get these online for free.

Bank statements and credit card statements are your two biggest and best sources of expense documentation, not just for business expenses, but also for proving your charitable donations which is another expense item that’s often looked at.

After you’ve proven your expenses, you may need to recreate your mileage log. That can be tough, but once again, if you don’t try you’ll lose the entire deduction.

If you still have your appointment calendar, start from day one and figure out where you’ve been and Mapquest everything. (I’ve done this with folks who hadn’t really lost their data, they never had a mileage log in the first place. Technically you’re supposed maintain it on a daily basis, or at least at the end of each week.)
If you’ve lost everything though, you probably don’t have your appointment calendar to work with. You can check with your oil change company. They keep records of your mileage at each oil change. This will at least give you a baseline to work with. (Hint: if your oil changes show you put 12,000 miles on the car don’t try to claim that you drove 20,000 miles for business.)
Once, for a client that had lost her mileage log, I was able to show the IRS that she routinely went to a certain store once a week for her supplies. She had driven on some business trips to various cities and we could prove that from her credit card statements as she had made charges in Nashville, Indianapolis, and some other cities. I used those charges to vouch for her mileage there. Although I didn’t have a “perfect” log book, by pulling together that information, the IRS auditor allowed the entire mileage claim because it was reasonable for what the taxpayer was doing.
If you are in the same line of work, you can take a 90 day sample of your daily business mileage and use that as a sample of what you normally do throughout the year. The problem here being that you might not have the luxury of 90 days to pull a sample together. If you have nothing else to work with, I would at least do a sample log for as long as you can—something is better than nothing.

The most far- fetched proof I ever provided to the IRS was for a client who was adamant that an expense that the IRS had disallowed was legitimate. We couldn’t find a record of it in the bank statement, and it wasn’t something that would go on a credit card. It was a very normal and logical expense for the business but I just couldn’t prove it. (The company refused to provide my client with a new receipt because they were upset because she fired them. Oopsie.) Anyway, I pulled up the company’s web site and they advertised their prices on line. I had printed out the website price list and the agent allowed the expense. I don’t believe that would work under most situations, but once again, if you have nothing else to use it can’t hurt.

As you can see, reconstructing expenses for a tax audit is not fun. (Okay, let’s be real, audits in general aren’t fun but they’re definitely easier if you have all your ducks in a row.) Now might be a real good time to think about how you’re storing your important data. Are you backing up to the “cloud”? Maybe you copy your annual records to a jump drive and store that in your safe deposit box? Or perhaps you have a fireproof box that you keep your records in? It’s a good idea to plan ahead, just in case there is an emergency.

Posted on May 24, 2011May 31, 2016 by Jan Roberg

Summer Jobs for Teens: Part 3, the Unpaid Internship

Members of the Philadelphia Student Union, Poverty Scholars Program

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.

Posted on May 17, 2011May 31, 2016 by Jan Roberg

Summer Jobs for Teens Part 2: Babysitting and Lawn Mowing

Photo by miggslives at Flickr.com

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

Posted on May 13, 2011May 31, 2016 by Jan Roberg

Summer Jobs for Teens Part 1, Five Things You Need to Know

School's almost out!

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!