Tax

Life on Contract: Hacking your Taxes

You’re a contractor and people are paying you to work in your pajamas. It’s a life of luxury, but when tax time comes, you are in a world of hurt and you wonder why you even do it. Taxes are tricky, but there are some tools you can use to make it less painful on your pocketbook. With planning and diligence, you can significantly increase the amount of money that stays in your bank account.

We are not certified tax lawyers or accountants, so take what follows with a heap of salt, consult appropriate people before you do anything big, and don’t blame us if you get in trouble for anything you do. Also, this advice applies to the United States. If you know some tricks for your country, we’d love to hear them in the comments.

Incorporating

Contractors can do all their work as a person. The company to whom you contract will get your SSN, then submit a 1099 form to the IRS that says “We paid this person $N in this year.” This is easy, there’s very little paperwork, and lots of people do it. However, there are a lot of good reasons why you would be better off incorporating as an LLC and having all your work done through your own business. The biggest reasons are liability and debt. Essentially, if someone sues the LLC, the worst that can happen is you lose the business. Also, if the business runs up debt and then goes bankrupt, the owner doesn’t lose their personal assets. There are lots of caveats to this; if you have to personally cosign a bank loan, for example. Banks aren’t just going to give an LLC a pile of cash without a way to guarantee that they get repaid.

There is a term called “piercing the corporate veil,” which means that in some cases the courts can determine that the LLC is just a shell and you can be sued personally or have your assets seized. This is why it’s important to set up a separate bank account, business cards, a web site, and every other measure possible to show that the business really is a business.

The bottom line is that if you are doing work for someone, then you want to set up a corporation to protect yourself. Setting one up is easy. It’s done through your state’s office, which is usually the Secretary of State, and involves an online form and up to a couple hundred dollars to file (plus a yearly fee to renew). It can be done in an hour or less. Note that in California LLCs have to pay a yearly fee of $800, so if you’re a casual contractor, this is a steep fee. In other states it’s much less. Next you would go to the IRS web site and file for an EIN. This is an online form that takes approximately 3 minutes, and results in an email with your EIN, the number used to identify your business to the IRS.

Next, go to the bank and open up a business checking account. You’ll need the information about the LLC. Finally, buy your domain name, get business cards, and get in the habit of using your business email for all business.

Expenses

Expenses are an extremely powerful tool in saving money on taxes. In the course of doing business, you take your income, subtract your expenses, and that’s your profit, which is taxed. If you can increase your expenses, then you have less profit that can be taxed. This includes rent for an office, communications (internet and cell phone), office supplies and equipment, travel for work, and a lot of other things that are important in your daily life as a contractor.

As I mentioned before, you should consider incorporating. If you are not incorporated you can still make deductions by filing your 1099 income, and unreported income on a Schedule C. Being incorporated covers more income than just 1099 and unreported work.

Individuals who are not incorporated and do not file a Schedule C may…

Owe Money to the IRS? You Could Score a Free One-Way Trip with JetBlue

April 18—Tax Day—is fast approaching. Not expecting a fat refund check? Here’s some consolation: Travel + Leisure reports that JetBlue is giving away 1000 free one-way flights to taxpayers who owe money to Uncle Sam.

The airline launched its Tax Return Return Flight giveaway on April 11. The giveaway runs until April 25, and you’re eligible to enter once a day. Just visit JetBlueTaxReturnFlight.com and fill out the required fields (name, email, age, and whether you owe money to the IRS on your 2016 return).

JetBlue will select 66 winners each…

The Morbid Way Colonists Protested King George’s Stamp Act

If the phrase “taxation without representation” evokes images of Washington, D.C. license plates, you might want to look a bit further back—250 years, in fact—to a law that enraged American colonists. The Stamp Act, which forced British colonies to pay taxes on paper products like playing cards and newspapers, sparked fierce debate and a series of fascinating protests.

By the time the British Parliament landed on the idea of taxing the colonies to pay for troops stationed there after the French and Indian War, the colonies were already irritated with King George’s Parliament. The war had taken nine years and drained Britain’s coffers, and the government back home was irked by the ongoing expense of maintaining their increasingly headstrong colonies. So they devised the tax John Adams would call “the enormous engine fabricated by the British Parliament for battering down the rights and liberties of America”—a law that struck at that metallic heart of the colonies, the printing press.

The act King George signed into law 250 years ago was deceptively simple. It imposed duties on pretty much everything that could be printed or written on a piece of paper, from wills to summons to playing cards and newspapers. In order to comply with the act, colonists were required to purchase special stamped paper produced in England with English money, not colonial dollars. Suddenly, the colonies’ thriving printing business was under fire—and colonists, in turn, were fired up. It was the first time the overseas government had ever tried to use its colonies to fill its coffers, and colonists—many of whom had fled to the Americas seeking religious tolerance and free expression—were irate. And…

What the “Alternative Minimum Tax” Is and Why It Matters for the Rest of Us

One standout item from Trump’s 2005 tax return, revealed last night, was something called the “Alternative Minimum Tax” (AMT). If you’re not terribly familiar with it, here’s what the AMT is all about and why it matters.

David Cay Johnston is the Daily Beast Reporter, tax analyst, and author who found Trump’s 2005 IRS 1040 in his mailbox and shared it online (and on Rachel Maddow). The Daily Beast reported:

The documents show Trump and his wife Melania paying $5.3 million in regular federal income tax—a rate of less than 4% However, the Trumps paid an additional $31 million in the “alternative minimum tax,” or AMT. Trump has previously called for the elimination of this tax.

It’s obviously not the only thing worth noting in this whole fiasco, but it brings to light the significance of the Alternative Minimum Tax, an important part of the IRS tax code.

The Alternative Minimum Tax was basically designed to keep wealthy people from taking advantage of so many loopholes that they don’t pay their fair share in taxes. As the Tax Policy Center explains, in 1968, Treasury Secretary Joseph W. Barr informed Congress that 155 taxpayers with incomes over $200,000 (which was an even more significant amount at the time)…

How “Carried Interest” May Affect Our Taxes

A lot has happened since now-president Donald Trump and candidate Hillary Clinton debated on October 9 at Washington University in St. Louis. If you’re like most taxpayers, you probably don’t remember the candidates bantering about something called “carried interest.”

During the debate, Trump was asked what steps he’d take to make sure that the wealthiest of U.S. taxpayers pay a fair share of taxes. Trump responded by saying that he’d eliminate carried interest. What Trump actually meant, though, was that he would change the way carried interest is taxed. Clinton, too, supported making this change. And so did former president Barack Obama.

You can be forgiven if you have no idea what carried interest is. That’s because it’s something that only benefits the general partners who manage private equity and hedge funds. And most of us can’t invest in these private funds because it is so expensive to do so. Investors must usually pony up at least $250,000 to make an investment in one of these funds.

Carried interest is one way that the managers of these expensive hedge funds and private equity funds make a profit. But just because carried interest only benefits a select few, doesn’t mean that it’s not important to the U.S. economy. According to the Tax Foundation, if Congress taxed carried interest as ordinary income, it could cost the country 2,200 jobs. On the positive side, the Tax Foundation said that changing how carried interest is taxed would also generate about $15 billion during the next 10 years in the form of more taxes…