Gig Workers and Taxes

Tax Day is fast approaching

If 2021 was your first year in the gig economy then tax time will be full of surprises for you.
Most likely not very pleasant surprises either
Higher than expected tax liabilities
Even some penalties

Not much fun dealing with all of that.

What to do now?
Get some strong coffee (or your favorite give-me-energy drink)
And start on your paperwork.

Process your paperwork (get help, if necessary).
And file your taxes.

Tax time it’s a stressful time for many.

Now it’s the best time to start thinking, and planning, for next year
Think about how to make it easier on yourself when next tax filing comes around

Here are three things to get you started on the right track:

  1. Income
    Keep track of your income.
    Make sure to keep good records.
    The companies you work with will issue you 1099-NEC and other 1099s
    Do remember:
    The companies will also send copies of these forms to IRS
  2. Expenses
    Keep track of work-related expenses: car maintenance and repairs, work supplies, etc.
    These expenses will help lower your tax bill
  3. Taxes
    Put aside ~20% of your income. Save that money for taxes.
    (If necessary, and to avoid penalties, you may want to make estimated payments.)

That’s it!
Develop a system when you se aside time (weekly or monthly ) and do these.
And I promise you:
Consistently doing these 3 things will make tax time much less stressful.

Wishing you success in all you do

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I’m not good with money

“I’m not good with money!”

“I’m not good with numbers!”

When I do business training seminars that’s what I hear.
At every seminar at least 2-3 people will say this.
Many others keep quiet but think the same way.

The truth is that you CAN be good with numbers.
And you CAN get control of your finances.

It isn’t as difficult as you think.

Start with these 3 simple steps.

1. You are “HERE”
Take a “snap shot” of your financial situation:
Income and expenses
What money you have coming in and what money is going out.

This shows your financial position at the present time.

Use it as a map.
This will help to get you from where you are to where you want to be.

2. Set goals
Once you know where you are financially then you can start setting your goals.
If you don’t have an emergency fund then take steps to start saving for one.

If your goal is to pay off your credit cards then start by making higher monthly payments.
(Same goes for the car loan and other consumer debt.)

Just as important: don’t add more debt to what you already have.

3. Start NOW
You have your goals in front of you.
Now take action.

Set a monthly budget that will help meet your goals
Don’t get discouraged if/when things occasionally don’t work as planned.
When that happens just make adjustments.
And get back on track.

Your reward?
Financial stability.
And living life on your own terms.

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IRS — the good guy

When you hear “IRS” – what is the first thing that comes to mind?
For many just a brief mention of the word is enough to get them think (and growl) about taxes.
Either thinking of filing; or how much they owe.

IRS the good guy
IRS the “good guy” doesn’t usually comes to minds.
But it should.

This year, mid August, IRS Criminal Investigation (along with the FBI and Homeland Security) were successful in breaking up three terrorist financed campaigns.
(Cyber-enabled campaigns.)

U.S authorities seized:

  • Cryptocurrency accounts (over 300).
  • Millions of dollars.
  • Plus websites and Facebook pages.

All related to the terrorism activities.

The criminals employed sophisticated cyber-tools.
And donations were coming in from around the world.

ISIS was in charge of one of these terrorist campaigns: selling protective equipment for COVID-19 was part of their arsenal.
They were selling N95 respirator masks (not FDA approved).
Targeted for use by hospitals, nursing homes, and fire departments.

“While these individuals believe they operate anonymously in the digital space, we have the skill and resolve to find, fix and prosecute these actors under the full extent of the law.”

– says United States Attorney Michael R. Sherwin.

This seizure – the largest seizure of cryptocurrency (terrorism related) – is a victory for the good guys.
And IRS CI played a significant part in this operation.
IRS — the good guy.

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Tax Talk: 1040 changes, new deductions, and more

2020 Form 1040: Schedules 1, 2, and 3

Currently used for 1040 and 1040-SR, the Schedules will also be used for 1040-NR.

(1040-SR tax return for Seniors

1040-NR tax return for Nonresident Alien)

Another notable change for 2020:

$300 ‘above-the-line’ charitable deduction.

(That means you can deduct the $300 even if you don’t itemize deductions.)

 

IRS Enforcement Activities – IRS employees are instructed to “approach with caution”

Given the hardship many taxpayers are going through (including and not limited to personal and business monetary loss) IRS employees are instructed to use an approaching method that is both sensitive and sensible.

 

IRS Criminal Investigation, DOJ, FBI and Department of Homeland Security

A coordinated inter-agency operation resulted in dismantling terrorist cryptocurrency fund-raising campaigns.

And millions of dollars seized.

 

Tax Court Files:

Loss form sale of property (used in trade/business) not deductible

The Tax Court ruled that taxpayer could no deduct a loss from their sale of real property.

Why?

Because they failed to establish their basis in the property.

(Not keeping good records can be costly.)

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Family Business — Qualified Joint Venture

Husband and wife start a small family business.
And they want to keep things simple.
(Since neither is fond of formalities.
Or too much paperwork.)

At the same time, they do want to make sure they
1. Use the right business organization type for them, and
2. They employ the right tax strategy.

After some research they both decide Qualified Joint Venture meets most of their requirements.

What is a Qualified Joint Venture (QJV)?
As its name imply, QJV is a joint venture where both spouses materially participate in the business.
And elect not to be treated as a partnership.

For federal income tax reporting they are treated as sole proprietors.
The business’ income, deductions, and credits are allocated to each spouse.
(On separate Schedule C.)
According to each one’s interest/participation in business.

IRS requirements for QJV
For the husband and wife business owners (aka the averse-to-paperwork team) the QJV seems to fit the bill for what they want.
But are they eligible for it?

IRS’ requirements for a business to operate as QJV

  1. Not incorporated: if your business is incorporated then you no longer fit the QJV requirements
  2. Partnerships: with the exception of general partnership no other type of partnerships qualify for the QJV.
  3. LLCs: if you reside in a community property state, an LLC does qualify for QJV (just like a general partnerships).
  4. Husband and wife must be the only owners of the business AND materially participate in the business’s operations.
  5. They must file a joint income tax return.

Our friends, the husband and wife business owners, have decided on QJV.
Now they need to move on to the next decision on their agenda:
Who’s the boss?

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Lobbyists, Loopholes, and the Paycheck Protection Program

Want money? No problem. How many millions?
And don’t worry about paying it back.
Enjoy.

What’s that all about?

Paycheck Protection Program (PPP)
The PPP was supposed to help struggling small-business to keep afloat during this economic crisis.
But it turned into “free money,” grab-as-much-as-you-can for publicly traded companies.
(Results of intense lobbying efforts prior to passing the CARES Act.)

Some of these companies are worth hundreds of millions.
These businesses pay seven-figure salary to their top executives.

The only thing ‘small’ about these businesses is their sense of decency.

How much money we are talking about?
The CARES Act allocated $349 billion for PPP.

Funds were completely gone within 2 weeks.

Yes, you read that right: 2 weeks.

True, some of these companies returned the money.
How magnanimous of them, right?
(No. They got caught; and exposed in social-media.
Returning the money was part of their damage-control PR.)

How did this happen?
Well, they didn’t do it alone, for sure.
They’ve had help.

Some say “they took advantage of the loopholes.”
Others say the loopholes were built-in the program.

I do know one thing for sure:

You and I helped as well.
How?
We elect the politicians.
We vote; then we go about our daily life.
And trust that they are doing what they got voted in for.

Meanwhile, big business and other special interests know better how the system works.
They hire lobbyists.
And sent them to Washington.

Then Congress starts giving out ‘party favors’ to the highest bidder.
(Read that: the ones with the best lobbyists.)

And they keep doing it.

Why?

Because we don’t hold them accountable for their actions

What’s been done about this?
No problem, we’ve taken action.
We’ve allocated another $310 billion to the Paycheck Protection Program.

This brings the total up to $659 billion.

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Home visits — once upon the time… and now

Imagine soft music playing in the background.
And a soothing voice saying:

“Once upon the time, we used to get home visits
From the milk-man; the doctor.
Home visits — those were the days.”

Nostalgia for the days gone by

But be nostalgic no more.
Good news: in 2020 home visits are back in vogue
This time from IRS
(Did the soft music abruptly stopped?)

Home-visits from IRS agents


Do you know someone who has an outstanding tax liability?
And has this someone repeatedly ignored IRS’ payment-request letters?
Then you may want to warn them of impending IRS agent home visit.

Yes.
IRS is now going to send their agents on home-visits.
Furthermore, the visit will almost always be unannounced.
(Never underestimate the element of surprise!)

How will you know he (or she) is from the IRS?
Ask for ID’s, obviously.

Your rights as taxpayer:
The IRS officer needs to show you two (2) forms of identification.
That include serial number and photo.
You have the right to request to see both.

Now go make sure you have a fresh pot of coffee on.
You gotta show some hospitality when your friendly IRS agent drops by for visit, right?

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Trade wars

Large tech companies (with global operations) are increasingly on the radar of taxing authorities.
Canada is proposing a 3% digital services tax.
(On companies with more than C$1 billion worldwide revenues.)
The tax is set to take effect in April, 2020.

Tax regulators in Italy, Turkey, Hungary and other countries have either proposed or already approved a digital tax.

France is leading the way.
Its 3% digital services tax applies to companies with over $800 million worldwide revenue.

What do Americans think about this tax?
They say the tax unfairly targets U.S. companies (Facebook, Google, and Amazon).

“The French digital services tax is unreasonable, protectionist and discriminatory,” said top Republicans and Democrats.
(Republicans and Democrats agreeing on something — amazing, isn’t it?!)

The tax has prompted the U.S. Trade Representative’s office to launch an investigation.
The investigation (Section 301)  has found the French tax to be “inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies.”

The French stand their ground:
“We will not give up on taxation” of digital firms.

Americans threaten to retaliate with 100% tariffs on $2.4 billion imported products from France.
Including French cheese and wine.

And that is really bad news!
What’s gonna happen to all Gruyere cheese lovers?!

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Retirement question — open letter to client

Dear M and J,

Regarding your retirement question
here is some information to help you make a decision.

Taking a lump-sum distribution can be detrimental.
Mainly because “emergencies” always seem to pop up (for all of us).
And before you know it, you’ve spent all the money you had.
Leaving you with nothing for retirement.

Additionally, because these are pre-tax money (meaning this income has never been taxed)
you would have to pay tax when you take the lump-sum distribution.
And that would put you in a higher income tax bracket.

Here are some choices that would not trigger any high taxes for you.
And would keep your money safely tucked away for retirement.

  1. IRA account.

Open either a traditional IRA or a SEP IRA and have the pension rolled over into that account.
You can then continue to make pre-tax contributions every year.
(When you have available funds, of course).

 

  1. Solo 401(k) Plan

This plan is designed for self-employed/individual business owner.
It’s available to the spouse as well.
And you can save higher amounts to this type of plan. (Again, when funds are available.)

 

  1. Monthly payments

You can keep the money where they are and take monthly payments.
As long as the monthly payment provide a good ROI (return on your investment).
If not then either option 1 or 2 would be a better choice.

Fidelity, Vanguard, and others offer IRA’s and Solo 401 (k)
You can decide to stay with Fidelity (where your pension is now) or check out the other guys.

Make sure you find out about fees (if any) to maintain any of these retirement plans.
Even more importantly, make sure their retirement plans allow the rollover (of your pension).
Hope this information makes it easier for you to make a decision.

Wishing you the best,
Mariana

 *     *     *     *     *

Hope this letter helps those of you who are in a similar situation.

Wishing you success in all you do.

 

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Tax Court: Horseless horse business

For decades Denise M participated in activities connected with horses.
A trained dressage rider, she and her horse took part in competitions.
And other related activities.

Then things changed.
After 2008 Denise didn’t own any horses
She was supporting herself with income from her IT business — working 5 to 6 hours daily.
Denise also spent considerable time on a litigation process with her homeowner association (HOA).
(She sued her HOA disputing construction defects and other nuisances.)

In 2010 Denise and IRS found themselves in a disagreement.

Why?

$70,000 settlement
In 2010 Denise received a $70,000 settlement from the HOA.

She didn’t think she had to include all of the $70,000 settlement in her income.
Denise claimed some of that sum was for pain and suffering.
(Therefore not includible in income.)

The Tax Court looked at the $70,000 settlement documentation.
And found no mention of “pain and suffering.”

Horseless horse business
She also claimed losses from her horse business.
The IRS didn’t agree with that either.
Especially given the fact of how she spent the majority of her time
(IT business and litigation process).

The Tax Court looked at other factors as well:
Business plan, timeline, ROI, etc.
After analyzing all the facts, The Tax Court didn’t agree with Denise.

And that’s the story of the horseless horse business.
(Horsefeathers?)

*    *    *

The moral of this story?
When filing your income tax don’t let your imagination run wild.
The numbers you put down need to be based in reality.

When you start a business ask yourself:
Do I intend to make a profit?
Or it’s just a hobby?

How you answer will make a world of difference at tax time.

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