This article is from the April 2011 issue of KC Stage
Editor’s note: what follows are excerpts from Dean Vivian’s 2010-2011 tax letter that he sends out to his clients. It is only excerpts and is not intended as a full-fledged guide on how to prepare your taxes. KC Stage encourages you to seek out qualified help if you have any questions or concerns about preparing your 2011 taxes.
What’s important to know these days?
The continuing big news is the bulls-eye most freelancers have painted on their backs. The IRS has loudly announced targeting the self-employed. A recent study showed about 80% of the under-reported income comes from the self-employed, so audits have increased dramatically, and the IRS is convinced of two things:
1) If you get a 1099, or are self-employed, you’re hiding income, and 2) You don’t have proof for what you’re deducting. I’ve preached the value of keeping good records since the beginning; these increased audits have only made me a stronger advocate. As for the income, I heard something during an audit that put a chill up my spine. From the next cubicle: “If you don’t know what that deposit is, we’re going to count that as Schedule C income.” It’s true: all wealth acquisition is considered income, unless you can prove otherwise. (Aunt Petunia’s birthday check IS NOT considered taxable income ... if you can prove it.) Lesson: keep records of your deposits, too.
Important note: if you have sponsors or “angels” who give you money as an artist because they believe in a project, be sure you have a written agreement they expect nothing in return and the monies are a gift.
What records do I need to deduct entertainment expenses?
Besides date, place, and amount, you’ll need whom you were entertaining (it must be someone with “hiring capabilities”), and what specific income-producing opportunity you were discussing. “The upcoming season” is not specific enough; “Louise in Gypsy”, or “pitched upcoming art installation” is acceptable. The only general times would be opening night, closing night, a specific cast party, or the producer/director’s birthday celebration, i.e., something originating with the business and occurring just before or just after the business event. Contrary to popular belief, going to lunch with a colleague and discussing business does not qualify.
I paid a professional over $600 for lessons. Should I send her a 1099?
Yes. Same for an accompanist, scene partner, contractor, fellow band member, etc. And you should send the IRS a copy as well as a 1096, which is a summary of ALL 1099s.
I gave voice lessons and never got paid. Can I deduct the $500 I’m owed?
Only if the $500 was included in your prior income (which it probably wasn’t). Otherwise, since you didn’t receive any income from this person, no extra income will be reported, and no extra income tax will be due.
Is that fair?
Yes. Think of it this way: if you got paid $400 and stiffed on $500, you wouldn’t be able to suddenly declare a loss of $100. You got the $400, and that’s all you would claim as income.
What is a “qualified performing artist”?
A qualified performing artist is anyone who works for at least two arts organizations with W-2s totaling at least $200 from each, has $16,000 of adjusted gross income or less, and spends at least 10% of their arts income on maintaining their career. The advantage is the QPA gets both a standard deduction, and their itemized arts deductions, which can make a huge difference.
What’s new this year?
Huge change: States are finally serious about the Use Tax, which is sales tax not charged by an online purchase. A recent court ruling allows sales tax to be collected online even if the business has no ties to the state, collected in full by your home state if no sales tax is collected.
Along with that, starting at the end of 2011, electronic payers will report electronic purchases to the government - and probably you - via a new form, a 1099-K, merchant card, and third-party payments. Any prior avoidance of paying sales tax by buying over the internet will end. It will be very important to track your online purchases and the sales tax you pay or don’t pay from now on!
April’s filing deadline is April 18 instead of April 15. The deadline for filing extended taxes is October 17. Remember: if you’re not going to file, be sure to extend. And keep in mind, an extension to file is not an extension to pay; you’ll still need to pay what you estimate you’ll owe. If you expect a refund, no payment is due, but be sure!
Didn’t get a tax packet from the IRS? They don’t send them out anymore. Neither do most states or cities. They expect you (or me) to download them and print them out. Here are links for the IRS and for state tax information. Similarly, if you got unemployment, paid qualified state tuition payments, or got a tax refund from the State of Missouri, you must go to MO 1099-G to get that information, or call 1-573-526-8299. Your tax dollars at work!
Despite what you may have heard, health care will NOT be taxable next year. Your employer has the option of putting the amount paid on your behalf on your W-2, but it’s informational only (like the 401(k) info), not taxable, and, again, optional.
New rule: investment companies now must keep records on your cost basis. Staring in 2011, investment companies will track your cost basis of stocks (and other securities) you buy & sell. At times in the past, it’s been a guessing game at best, especially with investments held for years and years. Next January you’ll get a clear statement of profits and/or losses. This change is long overdue.
The estate tax was suspended for one year in 2010. No one really meant for that to happen, and it’s unconscionable our legislators didn’t fix this before the first of the year. The December 2010 tax bill made the exemption amount $5 million, and the tax above that will max out at 35%. Great news if you’re a multi-millionaire or billionaire!
Most taxpayers with earned income and adjusted gross income under $95,000 ($190,000 for a married couple) still qualify for the Making Work Pay credit, initiated in 2009 and extended into 2010. It’s a 6.2% rebate, up to $400 per person. For workers with steady paychecks, it’s already been “accounted for” via those extra few bucks each week, so it shouldn’t change the usual bottom line. As with last year, those with multiple W-2s could get hurt, as every employer will have accounted for that additional $400. Freelancers should see their burden ease a little. And 2011 will see a different bump in the paycheck, as 2% of the payroll tax has been erased for one year. That means, for filings next year, freelancers will only be paying 13.3% on their profits instead of 15.3% of profits in payroll taxes. If you get a W-2, your withholding percentage for Social Security will be 4.2% instead of 6.2%; your employer will still pay the full 6.2%.
Self-employed workers who pay for health care can now deduct expenses paid for a child 26 and younger (by 12/31/10), even if that child is not your dependant. And this can now be deducted on Schedule C, saving not only income taxes but payroll taxes as well. Speaking of payroll taxes, here’s an important fact: most workers pay more in federal payroll taxes (Social Security and Medicare) than federal income taxes over their lifetimes.
Dean Vivian has been an actor for over 30 years, and started helping fellow performers with their taxes in 1985. His specialties include performers, the self-employed, and people with home-based businesses. Should you wish to consult him on your taxes, he can be contacted at aaktor@sbcglobal.net or by calling 816-523-3476.
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