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Winning moves to keep your taxes in check
Despite the inevitability of taxes, people still frantically dash to the post office every April 15th. This year, with preparation, careful record-keeping, and our basic tax guide, you can avoid the last-minute tax marathon and ease into the tax season without headache or heartache.
Our guide, filled with common questions many network marketers may ask, should not be construed as formal legal advice, but rather as an educational and informational tool. The answers, compiled from responses by a team of tax experts, including H&R Block, Money Minds, the American Institute of CPAs and the Direct Selling Association, offer general tax-filing guidelines. Tax law changes continually.
Network marketers may find hiring a tax attorney, a certified public accountant, or other advisors invaluable to their business.
Q:What is my tax status?
A: Generally, network marketers are considered direct sellers. The IRS defines a direct seller as "a person who sells consumer products to others on a person-to-person basis, such as door-to-door, at sales parties, or by appointment in someone's home." A direct seller, as the sole proprietor of his or her business, is considered to be a self-employed, independent contractor, and the only owner of this unincorporated business. (Husband-and-wife teams are considered to be a single owner; any other business unions, for tax purposes, are deemed a partnership or corporation.)
Q:What forms do I file?
A: Three kinds of federal business taxes apply to network marketers: income tax, self-employment tax (your social security and Medicare tax), and employment tax. Most of your tax information should be recorded on Form 1040 and its subsequent parts, such as: Schedule A for itemized deductions, Schedule C to record profit or loss, Schedule C-EZ for net profit from business, and Schedule SE for self-employment tax.
Employment taxes apply to network marketers who hire employees (such as a regular secretary). The people in your downline are not considered your employees--consider them independent contractors. For more information on employment taxes, see IRS Publication 15, Employer's Tax Guide, which can be ordered by calling (800) TAX-FORM.
For more information on determining if someone in your hire is considered an employee, consult IRS Revenue Ruling 87-41 for a 20-factor checklist. To obtain a copy, write to the Freedom of Information National Office Reading Room, P.O. Box 795, Ben Franklin Station, Washington, DC 20044.
Q:Do I need an Employer Identification Number?
A: Few network marketers need an EIN. Most use their social security number as their identification number. If, however, you have a Keogh plan, hire employees, or operate your business as a corporation or partnership, an EIN is required. You may apply for an EIN by using Form SS-4. An EIN, obtained through the IRS, can be assigned over the telephone.
Q:What can be considered sources of income?
A: Sources of income include any compensation you receive, including sales, commission checks, prizes, incentives or awards.
Q:What can be considered a business expense?
A: Operating costs required to run your business are considered business expenses and may be deducted. To be deductible, a business expense must be ordinary (common in your field of business) and necessary (appropriate and needed). Expenses might include, for instance, telephone use, advertising expenses, wages, interest on business loans, etc. Business expenses must remain separate from all personal expenses. "Every business expense is required somehow to be proven in one manner or the other," advises Mary Lou Pier, chair of the small business taxation committee of the American Institute of CPAs (AICPA). "The biggest mistake people make is not keeping track of their deductions."
Q:Can I deduct business use of my home?
A: You can take a deduction from the business use of your home only if the "office space" is used exclusively and regularly as the principal place of your business, meaning you do the bulk of your selling in your home office.
You may also take a deduction for business use of your home for inventory storage. To qualify for this deduction, your home must be the only fixed location of your business, and the storage space must be separately identifiable, and used regularly and exclusively as storage space for the business. Figure the deductible by taking the square footage of space used for storage and dividing it by the yearly cost of maintaining all the square footage of your home, including utilities, repairs and upkeep costs.
Q:Can I deduct business use of my car and telephone?
A: For network marketers whose business use of their automobile constitutes 50 percent or more of its total usage, two basic methods are used to establish your deductible: standard mileage rate or actual expenses. The standard rate is simpler to calculate--for every mile logged, 31 cents is deductible. With this method, however, you cannot deduct any of the actual operating costs, including depreciation of your car. To arrive at an actual expense figure, subtract the business portion of your car expenses from the total yearly expense of maintaining your vehicle.
The IRS recognizes two ways you use your auto for business: expenses for away-from-home travel, and local business transportation. While traveling away from home, you can deduct all reasonable and necessary travel costs. Local business transportation is considered as your day-to-day traveling expenses. Commuting (traveling between your home and a regular place of work) is a nondeductible personal expense. However, travel between two or more workplaces in the same day, or between your home and a temporary work location, is deductible. With automobile deductions, you must show the business miles you've logged, as well as the total miles you've driven during the year. Adequate records, like an account book or diary log, must be kept.
As for phone use, all business calls on a second phone line, or long-distance or call-waiting calls on a primary or secondary phone line, are deductible. You cannot deduct any charges (including taxes) for basic local services on the primary line in a home.
Q:Can I deduct meals and entertainment?
A: Business meals and entertainment are deductible if the expenses are ordinary and necessary to conducting business and can be proven as such. Allan Sharapan, a Shaklee representative based in Hermitage, Pennsylvania, indicates on the back of all his restaurant receipts what the particular business purchase was for, for which client it was made, and what business topics were discussed.
Q:How should I keep my receipts and arrange my files?
A: Your records must be permanent, accurate and complete. Keep your business expenses separate from your personal ones. Be sure to support all your receipts--you must provide a cancelled check to prove payment of expense items. "Always be as specific as possible with receipts," says Joseph Mariano, vice president and legal counsel of the Direct Selling Association in Washington, DC. "Keep a record of each and every expense, in as much detail as possible. Always note the who, what, when, where and why."
Q:How long should records be kept?
A: Maggie Doedtman, a tax research and training specialist from H&R Block in Kansas City, Missouri, advises keeping records for at least seven years.
Q:Where can I find free tax help?
A: There are a number of IRS tax publications available, including Publication #911, Tax Information for Direct Sellers, Publication #587, Business Use of Your Home, and Publication #910, Guide to Free Tax Services. To order free publications and forms from the IRS, call (800) 829-3676, visit the IRS Forms Distribution Center closest to your area, or stop by the IRS Web site at (http://www.irs.ustreas.gov). For general tax information, call (800) 829-1040.
Sandra Mardenfeld has written about small business since 1990 and has worked within the network-marketing industry for the past eight years.
For More Information
For five years, Money Minds (800-ASK-A-CPA/800-ASK-A-CFP) and its group of CPAs and CFPs have offered personal financial advice and answered tax and income questions. For $3.95 per minute, an expert will answer your questions (a typical call lasts from five to 12 minutes), and even do minimal research for you at no extra cost.
"Tax Tips," a monthly newsletter published by the IRS, offers first-time small-business owners information on basic tax law and bookkeeping, and offers record-keeping hints. For a free 12-month subscription, send a postcard with your name and address to: Internal Revenue Service, Attn.: "Tax Tips" Editor, M:C:DP, 1111 Constitution Ave. NW, Washington, DC 20224.
Direct Selling Association, 1666 K St. NW, #1010, Washington, DC 20006, (202) 293-5760.
Maggie Doedtman, 4400 Main St., Kansas City, MO 64111, (816) 753-6900, ext. 287.
Money Minds, 1037 E. St. Charles Rd., Lombard, IL 60148-2059, (630) 705-2800.
Pier & Associates, 188 W. Randolph, #310, Chicago, IL 60601, (312) 629-8424.
Allan Sharapan, P.O. Box 1495, Hermitage, PA 16148, (412) 981-6162.