Category: Tax

Posted on by Jan Roberg

Tax Tips for Performers

Are You A Hobby or a Business?

Many performers don’t think they have a real business – they’re just doing a few shows on the side, it really is more of a hobby than a business.  And if you’re just getting paid in cash by private citizens that’s fine, you can get away taxwise with being a hobby.  But, if you’re working through a company and you earn over $600 in a year, then you’re required by law to receive a form called a 1099NEC.  And if you receive a 1099NEC, the IRS pretty much treats you like a business. 

So the question becomes, at what point does your performing become a business instead of a hobby?  A lot of your decision may be based on taxes.

 

Hobby Income Taxes  

Hobby income is taxed at your regular income tax rate.  It goes on line 8 on the Schedule 1 of the 1040 tax return.  Now in the past, you might have been able to deduct some of your hobby expenses but that option is no longer available.   So, if your federal income tax rate is 22%, and you earned $5,000 on your performing, then your tax on that $5,000 will be $1,100.

 

Business Income Taxes  

Business income is taxed at your regular tax rate plus the self-employment rate.  The self-employment rate is 15.3%.  So, if you’re in the 22% tax bracket, the tax rate on your performing income would be 37.3%.  That means that the $5,000 you made income would now be taxed $1,865.  Which sounds awful at first blush.

But the advantage to being taxed as a business is that you get to write off your business expenses directly against your income.  Let’s say you had $3,000.00 in business expenses, then your tax would only be $746.

 ($5,000 income – $3,000 expenses = $2,000 net income to tax)

($2,000 taxable income x 37.3 percent tax rate = $746 in taxes)

If you have business expenses, being able to claim your performance income as a business can be a good thing.  This is especially true if you have a business loss.  You can use your self -employed business loss to offset other income – like wages you receive from another job – on your tax return.  Be sure to read about QBI further on though because there’s more to business taxes than just this.)

1099NEC   If you receive a 1099 NEC, the IRS will automatically count you as being self-employed – even if you have another job somewhere else. 

 

 

What will be different about your tax return if you’re a professional performer instead of a hobby performer?

 

You won’t need to incorporate or file a special business return.  Most people will just include their performance income on a Schedule C form which becomes part of your 1040 tax return.  It will show your business income and expenses. 

Form Schedule SE will show your self-employment tax owed.

 

Common Tax Deductions for most Small Businesses

 

Most small businesses have these deductions on their tax returns:

  • Advertising
  • Home Office expense
  • Mileage
  • Supplies, etc.

The important thing to know is that as far as the IRS is concerned, you may deduct an expense that is ordinary and necessary to your business.

A few exceptions to the ordinary and necessary:  you might need nice clothes for an audition or an interview show – but clothing that you can wear in a normal situation cannot be deducted.  It’s one of the most common questions I get which is why I put it up here.  Costumes, on the other hand, are deductible.

 

Your two best Tax Deductions

 

The two best tax deductions for a small business owner are the Mileage and Home Office (Studio) deductions.  These deductions are great because they are expenses that you already are paying for anyway.

 

Mileage

If you want to claim mileage, you must keep a mileage log.  For every business audit I have ever worked on – the IRS requested the mileage log.  The IRS wants to know how many total miles you put on the car, not just your business miles.  This is the most forgotten about issue but it’s really helpful to know.  You can get a free mileage log on our download page

Super Silly Tax Tip:  When you’re watching the Rose Parade (or football game or something that you know you do every year) write down the mileage on your odometer on January 1st and stick that number with your tax records. This way you’ll be able to figure your total mileage for the year – just subtract last year’s odometer.

 

 

Home Office

 You don’t need a desk and a computer for your home office.  It could be a storage space for your supplies, the place where you do your work, or the room you keep your product or supplies in.   It doesn’t have to be a separate room in your house, it can be a section of a larger room.  It can also be very small. 

The most important reason for claiming a home office is so that you can claim your mileage to your gigs.  The important issue is “regular and exclusive”.  Maybe you work in your kitchen – that’s fine but you can’t claim your kitchen as a home office because you cook dinner there.  You have to use a space exclusively for your business in order to deduct it.  So, if you work in your kitchen, you need another space to maybe store your supplies that you can claim as your “exclusive” working space.

 

 

Should you become an LLC?  

Generally, performers tend to be “individuals”.  An LLC is not required.  An LLC is a limited liability company.  The idea is that your liability – meaning if someone wants to sue you – is limited.  If you decide to become a Limited Liability Company anyway there are rules you must follow.

 

  1. Get a Federal EIN number.
  2. Set up a bank account for the LLC.
  3. Run all of your business income and expenses through that bank account.

If you don’t do all those steps, you’ve “pierced the veil” of the LLC and you’re just wasting your time and money.

“Piercing the veil” means that someone could still sue you personally even though you have an LLC.   If you’re not going to bother with the separate bank account and getting a separate EIN number, you’re not protected by your LLC. 

In most cases, a decent business insurance policy might be all you need.  But if you decide you want to set up an LLC, it only costs $50 in the state of Missouri.  It only takes about 10 minutes to do it online. 

If you choose to become an LLC unless you make a special election to be taxed differently, you would still claim your business income on a Schedule C like an individual.

 

 

DBA Doing Business As  

You might have a business name that you want people to use, like “Willie’s Writings”.  You can file paperwork for “doing business as” with the Secretary of State’s office.  It only costs $7.00.  That way you can receive checks under your business name instead of your own name.

 

A word about making Estimated Tax Payments

 

If your business is successful, you’re going to be making money.  And if you make money – you have to pay taxes.  If you’re going to have a tax balance due of more than $1000.00 federal, you should start making estimated tax payments.   A good rule of thumb – if you make over $6,000.00 after deducting your expenses then you should make estimated payments.

It’s easy. You can go online at IRS.gov and click on “Pay”.

 

The Qualified Business Income Deduction

QBI – What you need to know about your business income for 2021

As a small business owner, there is something called the Qualified Business Income Deduction.  QBI for short.  QBI is a 20% deduction off your business income from your taxable income.  It’s really pretty awesome.

Simply speaking – remember that example above where you have $5,000 of income, but after expenses you only had $2,000 of taxable income?  Well, with the QBI deduction, you still pay your self-employment tax on the full $2,000 – so that’s 15.3% = $306.

But then, you get to deduct 20% from the $2,000 before you pay the regular tax.  In this example you’d take 2000 – 400 = 1600, then take 1600 times 22% and you get $352.  So, really, instead of paying $746 like in the earlier example, you’ll only pay $658 – a savings of $88.  

That doesn’t seem like much, but if you had a net income of $50,000, at the 22% tax bracket you’d be saving $2,200!  The QBI can be a really important tool for you. 

But not everyone can qualify for the QBI deduction.  For an automatic QBI deduction – meaning – you don’t have to jump through any hoops to qualify, a single person would have to have income below $164,900.  A married person would need to be below $329,800.

You might be thinking – I’m just starting out as a performer, I’m not Johnny Depp.  I don’t make anywhere near those numbers.  But I’m talking about your total income.  So, if you’ve got a day job, or a spouse with a high income, your QBI deduction could be lost.  (For what it’s worth, Johnny Depp doesn’t make anywhere near $329,800 – he makes a lot more!)

But there are strategies for QBI if your income exceeds those limitations.  That’s where it makes sense to talk with your accountant about what’s best for your situation. That’s really outside the scope of this little blog post.

 

 

Posted on by Jan Roberg

Time to Get Your Mileage Log Ready

 

Claiming mileage on your taxes requires a good mileage log.

                                  If you claim mileage for your business, your mileage log is your most important tax document!

 

 

Do you claim auto expenses for your business on your taxes?  If the answer is no, you should probably skip this blog post.  If the answer is yes, this is exactly the post you want to be reading.

 

I do a lot of audit work.  Lots of audit work.  Every audit that I’ve ever worked on where the taxpayer claimed mileage the IRS asked to look at the mileage log.  Every single one!  Small business owners are more likely to get audited than wage earners and most small business owners claim mileage.  So—if you’re a small business owner, you need a mileage log.

 

So here is your new mileage log.

mileage log

 

All you have to do is fill it in with the miles and the appointments.  It’s all set up and formatted as an Excel spreadsheet.  There’s even room for other auto expenses in case you’re using your actual costs instead of mileage.

 

 

Did you know that you have to keep track of your miles even if you are claiming your actual expenses?  It’s true.  Often, people come to me with their auto receipts and I can’t do anything for them without their mileage.  Whether you claim mileage or actual expenses, you must have a mileage log.

 

In order to do your mileage log correctly, you’ll need your odometer reading from the beginning of the year and from the end of the year.  I like to take my readings on New Year’s Day during the Rose Bowl Parade.  I started 2012 out with 81 miles on my car (I got a new car at the end of 2011.)  Now I’m up to 8903.  I should reach 9700 by the end of the year.    Of those miles, about 5,000 of them are for business.

 

If I’m claiming straight mileage, I would take the 5000 miles times the 55.5 cents per mile that I’m allowed to claim for a deduction of $2,775.   (The mileage rate for 2018 is 54.5 cents per mile.)

 

If I’m claiming actual expenses, then I’d take the 5,000 business miles I drove and divide that by the  9610 actual miles I drove during the year  to get the percentage of my expenses that I could deduct.  5,000 divided by 9610 = 51.98%.  So I’d total up all my gas and maintenance expenses and figure the depreciation and multiply that all by 51.98% to get the right dollar amount.

 

So you see, you can’t claim your actual expenses without having the mileage to figure the percentage.

 

 

Feel free to use it.  Copy it.  Give it to friends.  It’s okay.   We left the year off so that you can use it for multiple years if necessary.  We’d like you to use it when you have us do your taxes, but if you use someone else’s, that’s okay.  You can always use our mileage log.  The point is that it is very important to have a mileage log for your taxes that we don’t care who uses it.  It’s free.  We’re not even asking you to sign up for anything.

 

If you’re claiming auto expenses on your tax return this year, you need to use a mileage log.  If you don’t already have one, here’s one for you.

 

mileage log

 

Posted on by Jan Roberg

Checklist of Tax Filing Documents

tax documents need for filing

It helps to have all of your tax paperwork together before you start preparing your return.

 

It’s that time of the year again when we get to file our tax returns. If you’re expecting a refund, you’re probably anxious to get all your paperwork together so that you can file. For those of you who expect to pay, you’re probably not too thrilled about it. Whether you’re hiring a professional or preparing your own return, make sure you have all of your paperwork together before you start.

 

Here’s a list of some of the more common documents associated with filing. Not every person will have every form, but this list should just help jog your memory so that you don’t forget something you need. The list:

  • W-2 wage and income statement – that’s your statement of wages, you’ll need a W-2 for each job you held. For lots of people, this is the only thing you need for filing your return. Make sure you have all of your W2s though; the most common problem is that Christmas season job part-time you had last year where you got paid in January of this year. Make sure you get all of your W2s before filing to avoid an IRS letter.
  • W-2G is for gambling income. The W2G is the second most frequently lost tax form (only the Social Security SSA-1099 beats it.) If you’ve received one of these statements, you need to include it on your tax return. If you don’t, you will get a letter from the IRS. Gambling losses, up to the amount of winnings, can be deducted on your Schedule A. The catch is, you have to report it. You can’t just leave it off if it’s deductible.
  • You need all of your 1099 forms – there are several types:
    • 1099-INT for interest – you get this from your bank. If you earned less than $10 in interest, you probably will not get one
    • 1099-DIV for dividends – you’ll get this from stocks you own. Sometimes they’ll come from a broker (like Edward Jones) and sometimes they’ll come straight from the stock issuing company (like Ameren).
    • 1099-B for sale of securities – and this is going to be different this year. The laws about reporting stock sales have changed so don’t be surprised if your report is looking a little different. Some companies (like Edward Jones) send out a combined form that has your 1099-INT, 1099-DIV and 1099-B all in one statement and it can be 12 or 20 pages long, or longer. Be sure to give all of the pages to your tax preparer – if you don’t, you’re cheating yourself out of your own money.
    • 1099-R for annuities, pensions and other retirement plan withdrawals—once again, even if your pension isn’t taxable, you need to report it on your tax return.
    • 1099-G is for government payments like a state tax refund or unemployment benefits. If you live in Missouri, the state doesn’t send you a 1099G for your refund anymore; you have to go online to get it. Here’s the website: 1099G
    • 1099 MISC is for miscellaneous income, like commissions or non-employee compensation. If you have income shown in box 7, you’ll be required to file a Schedule C for self employment income.
    • SSA-1099 is for Social Security income – a note about the SSA 1099 form: it has to be the most frequently lost form on the planet. It’s usually the first one mailed out and I think it kind of gets lost in the shuffle. If you receive Social Security benefits, or are assisting someone who does, please make sure that this form is included with the other tax documents. For some people, it’s not taxable – but you need to include the figures from this form when preparing your taxes to determine if it is taxable or not. You get the 1099SSA form at about the same time that you get the information about what your benefits will be for the next year. You need the 1099SSA to do your taxes, not the future benefits statement.
  • 1098 tells how much interest you paid on your mortgage—important for itemizing deductions
  • 1098-E shows interest paid on a student loan—so you can claim a student loan interest deduction
  • 1098-T shows the amount of tuition paid at an educational institution–you need this to claim those college tax credits
  • If you purchased a new home this year, you’ll want to have a copy of your settlement statement—there are little things that might help with your deductions
  • K-1 forms – if you are a member of a partnership, joint venture, S corporation, estate or trust. Those forms aren’t required to be completed until March 15th (partnerships not until April 15th) so you may not be able to file your personal return before then. It’s a good idea to make your tax appointment once you have all of your other forms together. The K-1 information can be added at a later date.

 

And of course, you’ll want to have all the documents to support your deductions like real estate taxes, charitable contributions or deductible business expenses.

 

It’s a good idea to have a copy of last year’s return with you also.

 

Don’t forget to bring the social security cards for you and your children to your tax appointment.

 

One last thing—have a blank check so that you can use the routing and account numbers for direct depositing your refund.

Once you have everything together, you’re ready to go!

 

Posted on by Jan Roberg

Filing and Paying Taxes in the United States

If you are working in the United States, you should expect to pay US income taxes.

                               The United States government taxes the worldwide income of its citizens and residents.

 

If you plan on working in the United States, here are some things you need to know about the US federal income tax system.

 

The United States taxes residents differently from non-residents, so the first thing you need to do is determine if you’re considered to be a resident or not. Generally, if you’re in the US temporarily because you’re a student, teacher, trainee, foreign government employee or a relative of one of those, then you’re considered to be a non-resident. These Visas are usually labelled as F, J, M, or Q. If you fall into this category, you’re considered to be a “non-resident”. You will file a tax form called 1040NR.  This post is mostly about filing a tax return as a resident, a regular 1040 form.

 

If you are in the US on a regular working Visa (such as an H1) there are two ways to be considered a resident for income tax purposes. One is to have a green card—this form shows that you are a lawful, permanent resident of the United States. The other way to be considered a resident is to meet what’s known as the substantial presence test.  The quick and dirty way to figure that out is to ask yourself if you were here for over 183 days this year.  If the answer is, “yes” then you can be considered a resident.  I’ve attached a substantial presence test questionnaire at the bottom of this post for anyone who needs a more accurate determination, especially if your time here crosses over two or more calendar years.

 

Qualifying as a US resident usually reduces your American income taxes. The biggest benefit is being able to claim the same “standard deduction” that US citizens claim. The standard deduction is a portion of your income that the government doesn’t tax. Also, as a resident, if you are married, you can file your tax return as “married filing jointly” which gives you a larger standard deduction and a lower general tax rate. For many people, being able to claim “resident” will reduce your taxes.

 

The downside of being a “resident” is that the United States government taxes the world wide income of its citizens and residents. Let’s say you move to America from France where you earned an income equal to $50,000 USD. You move to the US in June and work for 7 months, easily qualifying you to be a US resident for income tax purposes. While in the US you earn an additional $50,000 USD for a combined global income of $100,000 USD.   You do not want to pay US income taxes on the $50,000 USD that you earned in France!

 

You have two options in this situation: One, you could file a “dual status alien” return— this would make you a US resident for the 7 months that you were here and a non-resident for the 5 months that you were in France. You would not get the full benefit of the resident deductions, but it would save you from being taxed on your French income. The second option would be to file as a US resident and claim a credit for the foreign taxes paid. If you come from a country where your taxes are equal to or higher than in the US, this is a good option for you. If you come from a country with lower taxes, you might be better off claiming the dual status alien. You do not have to decide this now, you can have your tax preparer work out the numbers for you both ways and choose which option works best for you.

 

A note about hiring a tax preparer in the US.  There are many companies that have shops where you can pay someone to prepare your income tax return for you. These are for profit companies, not government agencies, and they expect you to pay them for the service. Most of them do not prepare 1040NR returns, or dual status alien returns at all. If they see that you qualify to be treated as a resident, they will want to proceed with filing your return as a resident. If you had no income in your home country, this is not a problem, and you can feel comfortable filing a US resident return. If you had income in your home country, make sure that the person you are dealing with understands “dual status alien” and “foreign tax credits”. Many tax preparers, especially the ones that set up temporary kiosks in the shopping center, have not been trained in these areas, and it’s essential to you that you hire someone knowledgeable about tax issues for foreign persons.

 

A common question is: what if I just don’t report my foreign income? How will the IRS know? The IRS has treaties with several countries and there is a great deal of information sharing. Although it seems impossible that the IRS could find out about someone’s foreign wages, when they do have that information, the fines and penalties for not reporting your income are severe. I recommend filing an honest and accurate return, then you’ll never lose sleep worrying about it.

 

A few other things you should know about income taxes in the United States.  Our tax year ends on December 31st.  Your income tax form is due by April 15th of the next year.  Most states, and even some cities also have their own income tax forms that need to be completed and usually are due at the same time as your federal tax return.  Make sure to file all of the returns you need to file, not just the federal.  And the US government also wants to know about your foreign bank accounts.  Even if you don’t have any taxable income from them, if you have over $10,000 USD equivalent in a foreign bank, you’ll be expected to report that bank account in an FBAR form.

 

And probably one of the most confusing things about US income taxes is that different circumstances generate different income tax rates.  So you and your best friend could be working at the same job and making the exact same amount of money and withholding the exact same amount of tax – and one of you could wind up owing the IRS and the other one could get a huge refund.  It happens all the time.  There are different tax rates for married people than for single people, and there are special tax credits for children and all of those things affect what your tax bill will be.

 

My best advice is that if you are new to the United States, it’s a good idea to get some professional help with filing your US tax return.  It will cost you some money to have this done, but it will give you peace of mind.

 

 

Substantial Presence Test (You can also find this on the IRS website) to determine if you can qualify to file your tax return as a US resident.

You must pass both the 31-day and 183-day tests.

31 day test: Were you present in United States 31 days during current year?

183 day test: [If you weren’t here for the full 183 days during the current year, the time you spent here in prior years counts towards your being deemed a resident.]

Current year days in United States x 1 =_____days [the days you spent here during this year count as full days]

B. First preceding year days in United States x 1/3 =_____days  [the days you spent here last year only count as 1/3 days.  So if you were here last year for one month (30 days) then it only counts as 10 days]

C. Second preceding year days in United States x 1/6 =_____days    [the farther back the time, the less it counts.  Two years ago only count as 1/6 of the days, so a month then counts for 5 days.]

D. Total Days in United States =_____days (add lines A, B, and C)

If line D equals or exceeds 183 days, you have passed the183-day test.

Exceptions: Do not count days of presence in the U.S. during which:
you are a commuter from a residence in Canada or Mexico;
you are in the U.S. less than 24 hours in transit;
you are unable to leave the U.S. due to a medical condition that developed in the U.S.;
you are an exempt individual; [basically that’s an F, J, M, or Q visa]
you are a regular member of the crew of a foreign vessel traveling between the U.S. and a foreign country or a possession of the U.S. (unless you are otherwise engaged in conducting a trade or business in the U.S.)

Posted on by Jan Roberg

Business or Hobby?

Hobby or business?

                                                               Photo of life size action figures at a gaming event in Thailand.

 

Updated December 6, 2018

Batman stopped by my office the other day.  He usually doesn’t visit me in his Bat costume, but he had just done a charity fundraiser as Batman and had promised  the ladies in my office to visit us in costume.  (I’d just like to point out that not all of my friends and clients are super heroes.  I do know plenty of normal people.)

 

I once did a post about a fellow who made a business out of appearing as Superman.  On a good day, Superman can take in some decent money.  After Batman’s successful fundraiser, he kind of wondered aloud about following in Superman’s footsteps and making occasional appearances for pay also.  While I recently made the case for Superman being a legitimate business, Batman’s income I believe would be a hobby.

 

How do you tell if something is a business or a hobby?  Sometimes it’s kind of hard to tell.  Everybody recognizes that if you open up an Ace Hardware store selling tools and duct tape you’ve got yourself a real business.  But what if you make purses and wallets out of duct tape and sell them at craft fairs?  Where does that fit in?  What if you breed your champion Cocker Spaniel and sell the puppies?  Dog breeding is a real business, but how many litters makes you a breeder?  It’s not all black and white.   Here are some guidelines to help you.

 

First, I want to point out the most important key ingredient that the IRS uses to determine if you are a real business:  a 1099MISC showing an amount under “non-employee compensation.”  There are numerous guidelines as to what constitutes a business versus a hobby and this one is never mentioned.  Yet it’s the most important factor as far as the IRS is concerned!  If you receive a 1099MISC, the IRS counts that as self-employment and they will tax you not just income tax, but an additional 15% self employment tax.  As a professional preparer, if I see one of those, even if I truly believe that your business should be classified as a hobby, I’m preparing a Schedule C showing you as a business.   That’s how the IRS is treating that income.

 

What’s the difference in how your income is classified and why is it important?  Business income is taxed at your regular income tax rate plus the self employment tax rate.  Let’s say your regular tax rate is 22%, then your business income is taxed at 37% (22% + 15% = 40%.)   The advantage of being treated as a business is that you can write off your direct business expenses against the income and you can even have a loss that will offset your other income.

 

Hobby income is taxed at your regular tax rate, there is no self employment tax so you pay less tax on hobby income.  The big disadvantage to claiming income as hobby income is that under the new tax law for 2018, you can’t deduct your Hobby expenses.  (Although to be fair, it wasn’t a very good deduction before 2018 anyway.)

 

You cannot switch your business back and forth from hobby to business depending upon whether or not you have a profit or loss.  It’s okay to grow your hobby into a business.  It’s even okay to downgrade your business into a hobby.   But flip flopping for the sake of lowering your taxes is just going to land you in trouble with the IRS.  You need to put a little thought into it before you start claiming business losses.

 

If you’re not receiving 1099 MISC forms, what other tests can you use to prove your business is real and not a hobby?  One is the three year test–if you’ve shown a profit in three out of the past five years, then you’re considered a business.  This is a good rule, but it’s not completely hard and fast.  There are court cases proving businesses to be valid even though they’ve shown losses for more than three years.  Even though its a good rule of thumb, I don’t like to see people get too hung up on it, there are other tests.

 

Is the business carried out with the intention to make a profit?  Does the taxpayer (or the taxpayer’s advisors)  have the knowledge to make the business a success?   Does the taxpayer spend enough time on the business to indicate a profit motive?  Has the taxpayer made a profit on similar activities in the past?   The answers to these questions is why I put Superman in the business category and not the hobby category.  Superman had previous paid experience as a costumed character and model, and he also had a website devoted to his business and posted blogs about how to be a superhero.  He clearly devotes a great deal of time to his business.   Batman,on the other hand, wouldn’t really pass these tests, that’s why I consider his income to be hobby income.

 

Me with my Batman friend back in 2010

One final point.  Batman takes offense at Batman being labeled as a hobby.  “Batman isn’t a hobby, it’s a calling.”  Like I said in the beginning, some of my friends are normal.