Tax Tips for Booth Renters
By: Becky Moore
It’s the scariest time of year – and I’m not talking Halloween. Ghosts, ghouls and goblins aside, just the mention of April 15 can frighten even the bravest souls. If 1099s make you shudder and W-2s have you hiding under the bed, it’s time for you booth renters to face those fears head on! Good friend of BTC Judiffier Pearson has given us ten insightful tax tips to make this typically ghastly process a piece of cake. Here’s what she had to say:
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1. Add it Up - Itemize all of your business related expenses such as rent, backbar products, assistants’ salaries, smocks, capes, business cards, brochures, etc. Think about the entire package – everything you use to keep your business running. “If you use a room in your house as an office or if you use your cell phone as your business line,” says Judiffier, “then talk with your accountant about writing off a portion of your mortgage or residential rent, as well as a portion of your cell phone bill as business deductions.”
2. Deduct This! Don’t forget to deduct business-related educational expenses such as tradeshows. You can deduct the associated travel (airfare & carfares), lodging, parking, meals, registration/tickets and materials. While only 50% of the value of meals is currently deductible, everything else listed here should be 100% deductible. Every little bit helps!
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3. Not Half Bad - Be an active participant. Make sure that your accountant deducts the employer portion of your self-employed taxes (FICA) that you are required to pay as a booth renter. Judiffier notes, “If you were an employee of someone else’s company, your FICA tax bill (Social Security + Medicare) would be cut in half since the employer is required to pay the other half.” Self-employed individuals currently pay Social Security & Medicare taxes at 15.3% of their income (excluding tips). Employees currently pay 7.65% of their income (excluding tips). Because you are self-employed (paying both the employee and employer portions), 7.65% (or half) of your Social Security & Medicare tax payments are tax deductible.
4. Party like it’s 1099…Take care and cover all of your bases. Issue the salon owner a 1099 for the booth rent you paid and file the corresponding form 1096 with the IRS. “IRS Publication 3518 instructs you to issue a 1099-MISC form to non-corporate landlords,” Judiffier continues, “These would be individuals or business entities not classified as corporations for Federal tax purposes.” If you are in doubt about whether or not your landlord has corporate status, then issue the 1099 anyway. It won’t hurt and it will also substantiate your deduction for rent.
“Because there is so much abuse of underreporting income and misclassification in the salon industry, I also recommend issuing a 1099 if leasing/renting space is not the salon owner’s primary business activity,” says Judiffier. For instance, if the salon owner also works as a hairstylist, issue a 1099 because your rent was income to the owner…often unreported income. If you work in a hybrid salon where there are some employees receiving W-2s, some “commission” staff/independent contractors receiving 1099s and some renters, then issue a 1099 to the owner. If you work in a salon mall or salon suites, it is NOT necessary to issue a 1099 because leasing/renting space is that business’ primary activity and source of income.
5. Secrets, Secrets Are No Fun - Just between you and me, do you have any assistants whom you pay “under the table”? Legally you cannot write off the wages you’ve paid to them. If you do write them off without having submitted the appropriate wage reporting forms, you could be liable for your employees’ unpaid federal and state taxes, including Social Security and Medicare. Don’t take any chances, issue a 1099 or W-2 to these assistants.
6. A Balancing Act - Adopt corporate record-keeping practices now in anticipation for short-term or long-term growth and expansion. Even if you have no plans to expand from a booth rental operation, upgrade your record-keeping for the sake of business integrity and excellence. “Creating a Profit & Loss statement by saving receipts and writing transactions in your appointment book is just one dimension of your business activities,” says Judiffier. “If you use credit cards or have any type of financing agreements (i.e. software, computer, credit card terminal, distributor line of credit, etc), then you need to integrate balance sheets into your bookkeeping practice.” Your accountant may need this anyway in order to properly complete your annual tax return. The Balance Sheet provides information that a Profit & Loss statement ignores, such as how much debt your business has, the value of your assets and the amount of depreciation you can deduct. In addition to your credit report, this financial document also becomes extremely important when applying for a business loan or a salon mortgage/lease.
If you have an accounting background, you can generate these reports yourself using software like Quickbooks or Peachtree Accounting. If you are unfamiliar with accounting and bookkeeping, then hire a pro to do it for you. When used in conjunction with a P&L statement, the Balance Sheet reveals a multi-dimensional snapshot of the health and value of your business.
7. Don’t Mix Business with Pleasure - Have your eye on a hot pair of Laboutin’s but can’t afford to put it on your personal Visa? Judiffier advises NOT to commingle business and personal accounts (even if that means shopping at Payless). Bookkeeping is much simpler when cash, personal credit cards and personal checks are not in rotation for business transactions. If you strictly adhere to this rule, your accountant will love you! The only documents you’ll need to maintain your books are revenue reports, commercial bank statements and business credit card statements. When you commingle funds, you’ll need another heap of paperwork, including personal bank statements, personal credit card statements, cash receipts, petty case statements and/or reimbursement notes. What a mess!
8. The Seven Year Itch - After the grueling process of doing your taxes, you may feel like burying all reminders at the bottom of a dumpster. But beware! Judiffier advises to save all financial records for at least seven years. Receipts, credit card statements, bank statements, mileage logs, etc. should not be discarded after you file your taxes. Archive your records by tax year in a labeled file box or container so that you can quickly retrieve and reference them at a later date if necessary. Your tax returns and company financials (i.e. Profit & Loss, Balance Sheet) should be kept indefinitely in a safe, accessible place.
9. You’ll Have to Wear Shades - Plan for a bright future now. Set up and contribute to your retirement account with pre-tax dollars. Consider a Simplified Employee Pension Plan (SEP) or a Keogh Plan. In addition to securing your financial future, the contributions can help to minimize your taxable income now and decrease your tax liability later if you expect to be in a lower tax bracket when you retire. Brilliant!
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