Taxes Cause Fireworks Too?

Q. We recently ran a fireworks stand for a business in another state.  They have stands over about 4 different states and they hire people to manage them for them.  This was our first year running the stand.  We sold off of commission.  We were to receive 20-25% of net sales that we took in.  I just received the check from the company.  The check made out to me in the amount of just over $6,000.  It is my understanding that when tax time comes, I will be receiving a 1099 for that amount.

Here is my problem, I do not want to have to pay taxes on the full amount when I’m planning on giving about $4,500 in wages to 9 workers.  I also have about $500 in expenses.  The way it looks to me right now, is that in April, I will be paying income tax on the whole amount.  Can I write them checks as contract labor?  If so, what is the max on it?  How do I show those expenses after I get the 1099 so it doesn’t look like I received the whole $6,000?

A. Taxes, Taxes, Taxes.  Everyone seems to want to avoid paying taxes on their income for some reason.  Actually, it is your legal right to only pay the taxes you actually owe.  You should be taking advantage of all possible legal deduction opportunities that are available in the tax code.  In your case, yes, you will receive a 1099 for the amount you earned running the stand.  The arrangement described almost sounds like a franchising opportunity. I wonder whether you are actually “self-employed” as you are being classified or if you are indeed an employee.  I wrote an article about that one awhile back that you can read here.

If you are actually considered a small business, then you need to track your expenses incurred while running the stand like a regular business would.  As a self-employed individual, the income and expenses from your business will be reported to the IRS on Schedule C of the tax return.  Schedule C allows many types of deductions.  You can read instructions for that form here.  Valid expenses could be everything from vehicle mileage or depreciation, office supplies, employee and benefit expenses, licenses you were required to purchase, business meals, commissions, insurance, etc.  If you paid people to run the stand with you, those people were likely employees and should have been paid and reported properly through a payroll system.  Basically a valid expense is something that a an auditor would allow during the course of an examination.  If you take a conservative approach and have receipts and documentation for expenses, you are much more likely to keep your claimed expenses from being denied if you are audited.

Of course, the best way to make sure you are doing this correctly is to retain the services of a knowledgeable accountant.  Both the IRS and the state government will have unique tax laws relating to your situation.  Your accountant will become your trusted advisor while guiding you through the labyrinth of tax laws that exist today and helping you make better business decisions.  Good luck!

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Hurricanes, Twisters and Lightning

No questions about this one, but the weather guys are starting to talk about tropical storms forming.  When I think of hurricanes or tropical storms, I think of lots of destruction and lots of tax documentation flying away from those who need it.  While other bloggers and reporters may talk about preparing food, shelter and data backups, this blog is designed for the average person to read.  No one talks about your tax documentation.  What happens if you are audited by the IRS or a state jurisdiction?  What is the first thing they look for?  Documentation!  How do you support your deductions if the paperwork has all flown away?  My recomendation is always to digitize all your important documents.  Use a service like Mozy to perform a backup of your documents that is both encrypted and offsite.

Secondly, store the original paper documents in a secure place like a bank safe deposit box.  When paper is flying, your W-2s, 10992, 1098s and all sorts of items containing your social security number suddenly are not in your control.  This leaves you and perhaps your family open to some serious identity theft risks.  Secure those documents!!

In an event like this, it is also important to keep important insurance information in a location that can easily be accessed.  If everything is on computer and you have no electricity or phone capability, you are stuck.  Find somewhere safe where all of this can be kept and retrieved in the unfortunate event that a disaster strikes your household.

A business owner or manager has much more to keep track off than just these two things.  You have employees, equipment, and building management to be concerned with.  Make sure you have an effective plan in place to get your business up and running as quickly as possible.  Some good articles on this topic can be found here, here, and here.