Next Year Is Here by mThink, April 1, 2004 Right around now, the sun is shining, the days are getting longer, the garden is looking so great. And the dreaded tax deadline is behind you. The last thing you want to be thinking about is next year’s taxes. Sorry, but you really shouldn’t let taxes off your mind. Especially now, while you have a chance to do everything right in the year ahead instead of making the same mistakes you made last year. Oh, sure, you’re going to follow the advice of the great affiliate managers in your key programs, and you’ll have money pouring in. Sounds like success, doesn’t it? Well, my friend, quite often the consequence of success is failure when you don’t take care of your tax issues while you’re raking in the revenue. Here are some tips that you can start using now to help you minimize your taxes in the year ahead. Meals and Travel Separate these two costs as they occur in the coming year. All of your business travel is deductible. Your “meals” deduction gets cut in half on the Schedule C. Keeping track generates a bigger travel deduction than guessing. The costs of affiliate marketing cruises are considered travel, and you needn’t separate the cost of the meals. However, there are special rules for cruises. You may deduct up to $2,000 each year for attending cruise ship conventions that are directly related to your business. To do this, the ship must be registered in the United States and must visit only ports in the US or one of its possessions. At least 51 percent of your waking time must be spent at the seminar and you need to include two supporting statements with your return, plus a statement by the cruise organizer with the schedule of business activities. Bring the Kids Normally, the additional costs of having your family along on a business trip are not deductible. But as an affiliate marketer operating a home business, you’re in a special position. You certainly could have your spouse and children working with you, or for you. They may be an integral part of your marketing and networking presence on that cruise or trip. If you want to deduct their expenses, they must really be working like any other staff person would. And you must document what their duties are and what they did. Hire the Kids If you hire your family, but fail to put them on your payroll, you will raise a BIG red flag in front of the tax authorities. There’s a lot of hype about this out there. And there are several multilevel marketing companies whose entire business is devoted to convincing you to deduct your home office and the costs of hiring your children. Frankly, most of that is a scam. However, don’t let that discourage you from really hiring your children. Why should your teens go out to a burger joint and earn minimum wage, when you could use their services, train them to grow in your business, and be able to build a better relationship with them? If you’re going to hire your kids – do it right. Put them on payroll, have them use time cards, and have them document or summarize their work each day. Not only will this protect your deduction, it will help your teen learn to focus, get organized and communicate. Putting children 18 or under on your payroll, you must file payroll tax returns. But you don’t have to pay Social Security or unemployment taxes. And you’ll get the deduction for all their wages and any benefits or expense reimbursements. Your children will have to pay taxes on very little of the money. After all, they get their own $4,750 standard deduction, tax-free. If you pay your children, but don’t put them on your payroll, it will cost you. Your children will have to file tax returns with their own Schedule C. All the income you pay them will be subject to self-employment taxes – 15.3 percent. So even if they don’t have enough income to pay income taxes, those self-employment taxes get you every time. Hire Your Spouse Hiring your husband or wife lets you use an IRC Section 105 medical reimbursement plan. Putting your spouse on payroll lets you provide family medical coverage as part of the compensation. You may deduct all your medical insurance premiums, as well as family medical expenses right out of your business. Why bother with this when there’s a full deduction for self-employed health insurance on the front page of the tax return? Two reasons. First, you cut your income taxes and self-employment taxes on those medical premiums. Second, that front-page deduction is only for the premiums. The Section 105 plan also lets you deduct medical co-pays, dental expenses and all other types of out-of-pocket costs. When it comes to hiring any family members, remember, IRS is watching for that kind of thing. Don’t do it unless they really work for the business. Don’t just talk the talk. Walk the walk. Avoiding Errors Hopefully, you have already filed your tax return for the past year. But if you haven’t, pay close attention. If you have, then stow the following information away for next year, because the following three common errors can delay refunds or credits to your account. Wrong Names Be sure that all the names shown on your tax return match each person’s name as it reads on their Social Security cards. Wrong Social Security Numbers Look for switched digits or mixed-up numbers. Affiliate Income as Wages The income belongs on Schedule C – the business profit and loss schedule. Your profits will be subject to self-employment tax – 15.3 percent, which funds your Social Security account. On the Record Keeping track of all this throughout the year is much easier than you think. Even if you don’t have an accounting system, at least get an accordion file or two, labeled by category, and drop in your receipts as you get them. Simply add your receipts up at the end of the year and you’ll be all set. EVA ROSENBERG, MBA, is publisher of TaxMama.com and an enrolled agent, licensed to represent taxpayers before the IRS. She has a quarter-century experience dealing with tax issues faced by small and Internet businesses. Filed under: Revenue Tagged under: 02 - Spring 2004, affiliate marketing, Features, Lifestyle, mtadmin