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Schedule C .2
April 23, 1999
The key to keeping more of your paycheck is by filing an amended W-4, increasing your number of estimated exemptions (adding $3000 -$6000 in adjustments) for the current year. The amount you put on line 4 depends on how much mileage and rent went toward your business. For example, if you logged 30,000 miles last year and paid $6000 in rent, and estimate that 20% of each was for your small business, then 30,000 (.20)($.325) + $6000 (.20) = $3150 on line 4. Depending on your tax bracket, these two deductions alone are worth about $500- $750. This will put more money in your pocket immediately, and allow you to receive more money each pay period. Your justification is simple and legal: The IRS does not need to withhold as much of your pay because your Caveat: The IRS rules governing Schedule C state that you must have "the intent to make a profit," which is fairly easy to comply with. Theoretically, the IRS wants your small business to make a profit in at least three of the first five years, (which means that in year three you need to show a profit if years one and two were losses). Even this rule can be overcome if you have a business plan that meets professional standards for your industry, and there is some reason to believe you can 'grow the business' into profit-land someday through contacts, hard work, networking, etc. If you can't save at least $500 - $1000 on your taxes next year, then you aren't trying very hard. An audit cost the IRS at least $2000, so they lose money by investigating people who have turned their hobbies into legitimate small businesses. The IRS is a business, and hassling small entrepreneurs for piddling amounts of money is neither economically or politically sound. You are going to spend money on rent, use of your car, health insurance, and entertainment next year. You're just not getting credit for the money you're spending. Fundamentally, it's YOUR money. YOU earned it, now the question is whether you want to keep it or not.
Schedule C .1
April 22, 1999
I've had a number of requests to describe in greater detail how to use IRS Form 1040 Schedule C, "Profit or Loss From Business", to lower your current and ongoing tax burden. My premise is simple: Everyone is in Business, whether they realize it or not. All of us have skills that we offer to our friends and families during 'off hours' from our regular Jobs. We just don't tend to think of these skills as being part of a business. Every time you help a friend repair and upgrade their computer you are performing a service for them, usually in exchange for something later. "I'll take you out for dinner if you help me move," is, at its core, a business proposition. While your gut response might be "I'm just helping my friends out!" the concept to remember is that many of the personal expenses that you've already expended out of pocket can be viewed as deductible business expenses on Schedule C. A portion of your mileage ($.325 for every business mile) every year should be deducted for your small business. Health Insurance (up to 45%) is deductible, as is a percentage of your rent if you set aside an area of your apartment/home with a desk, computer, filing cabinet, etc. The best advice on the Net comes from the IRS Publications, though a few other sites can be valuable like Y! Tax Tips. If you treat your former hobby as a new small business, so will everyone else. Tax forms can be incredibly obscure, but with a little practice you can learn just a few lines on schedule C that will help lower your tax burden significantly. And eventually you may build up enough contacts and clients so that your small business can produce sufficient income to not only supplement your income, but also actually replace it. More examples on Schedule C tomorrow.
Better Resumes
April 21, 1999
If I've said it once, I've said it a hundred times - Resumes suck. They are a poor representation of who you are, what skills and talents you bring to the Job, and rarely bring out the intangible qualities that employees emanate in the workplace, changing a collection of individuals into productive work teams. Employees and Employers alike despise resumes, the latter because of their inefficacy as a tool in finding Job candidates that will 'fit in' with the company and adequately perform the Job duties at hand. However, for the immediate future, they are still one of the primary means by which Employers find and screen Job candidates. You probably have yours posted with several of the Job Boards, perhaps having gone to the trouble of posting slightly different ones that emphasize your various skills. This can be a useful test to find out which of your skills are currently in demand. There are a number of services that are willing to assist you in reworking your resume so that it attracts, rather than repels, attention from the right group of people. Ask the Headhunter is one of my favorite sites, and Nick Corcodilos has a way of cutting the BS out of career advice that is refreshing. Another site worth a visit is Peter Newfield's Career Resumes. Take a look at the Resume Makeover (possible topic for an upcoming Jenny Jones episode?) that Peter did for the Marketing Manager at Headhunter.net. While I am wary of the marketing/spin/lying that seems endemic to resume rewrites, you have to play the game by the rules of the powers that be, and selling yourself by way of eye-catching resumes is part of it. Note in particular the change in fonts and emphasis in the new and improved resume. Peter's site has links to other databases as well, with one (resume express) that will shoot your resume off to over 3500 different sites for posting. Alas, it comes with a fee that is far more than nominal, in my opinion. Your best bet is to search around and see what advice and services are free, and determine if they are worth what you paid for them. Remember, more expensive is not necessarily better. Likewise, free may be too small an investment.
Tax Tip #2: Schedule C
April 20, 1999
Now that you've filed your taxes (procrastinators excluded), how can you avoid paying so much tax in future years? One of the best methods for reducing your tax liability and earning a fat refund check from Uncle Sam is by turning personal expenses that weren't deductible into business expenses that will reduce your taxable income, and thus tax liability. There are two ways to look at salaries: One way is how much money you make, and the other is how much you keep. In order to keep more of what you make, it may be time to consider getting Uncle Sam's hand out of your back pocket. You've probably been annoyed for years that your take-home pay is substantially less than your gross pay, but didn't realize that a few simple steps can narrow the gap between these two numbers. This magic is performed on Schedule C, Profit or Loss from Business. Almost any hobby can be turned into a small business - all you need is solid record keeping and the intent to make a profit. It doesn't really matter what the hobby is, what is important is that you can show a reasonable intent to make a profit at some point down the road. Writing up a short business plan showing how your business can be built up over a number of years is usually sufficient to satisfy any potential IRS auditors. Libraries, Banks, College Business Departments, and the Small Business Administration can be a big help. Even the IRS is a good source for starter kits to get small businesses up and running. Several line item expenses on Schedule C are especially helpful here. For example, you are allowed $.325 per every mile that you travel for your small business. By using a logbook and keeping track of your mileage when you investigate leads, supplies, and information, you can rack up tons of deductible expenses that won't cost you any extra money. If you plan on a long trip, take the time to incorporate a visit that relates to your new business (and former hobby). If you log 10,000 miles that can be associated with your business for the year, you can deduct $3250 from your taxable income. This will reduce your tax liability by roughly $750 to $1000, depending on your tax rate. Another advantage to filing a Schedule C is that you can deduct a portion of your rent, utilities, computer expenses, meals, lodging, insurance, etc. Most of these expenses are normally personal out-of-pocket monies that you are already spending every year. You're just not getting credit for them. Even if you're only dedicating one-fourth of your apartment to your new business, it could be generating another $4000 in business losses that again ups your potential refund by another $750 to $1000. The object is pretty simple: turn those yearly expenses that you already have into business deductions on Schedule C. And next thing you know, you've given yourself a well-deserved raise.
Tax Tip #1: Postpone
April 19, 1999
Well, guess what season it is? Everybody's favorite, Tax Time!! Because I once worked for H&R Block for about fifteen minutes, many of my friends start calling me frantically this time of year, looking for last minute help in filling out their returns. Tax forms are at various times an obstacle course, a minefield, and generally undecipherable. Who makes up these things, anyway? I remember almost falling out of my chair when I read the 'estimated time to complete' the Estate Tax forms after my parents died. Even though their estate was well under the amount where any tax was due, the IRS expected me to spend 140 hours to complete the form!!! Do they really expect John Doe, Average American, to take three to four weeks off from work to complete forms like this? It's a wonder that anyone files taxes at all, given the difficulty involved. Which is exactly the point, I suppose. The IRS doesn't really want anyone to bother filling out those pesky tax forms. What they want is for you to just let them take a chunk out of each paycheck, no questions asked. And then have you forget about how much of your money they took. "Don't worry," I can hear an IRS rep saying, "If it's not in your paycheck then it must not have been your money to begin with." Most of my friends are so afraid of the IRS that they just let them keep whatever money they've already snatched out of their paychecks, rather than actively pursuing what is owed to them. For the true procrastinators, you can always postpone the inevitable by filing Form 4868 for an automatic four-month extension to file your 1998 taxes. Remember, this extension is granted without any need for explanation, but it is NOT an extension to PAY your taxes. If you estimate that you owe any money, you are supposed to pay any amount that is due. If you think your Federal Withholding basically covers your amount due, don't worry about this too much. The penalties & interest are based on the difference, and small differences won't cost you very much. The good news about postponing dealing with your taxes? The IRS doesn't have a very substantial budget for auditing returns sent in on August 15, four worry-free months from now.
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