SPEAKER_00 0:00

Welcome to Terp Talk. I'm John Flanagan with Global Interpreting Services, and today I have Paul Tarnowsky with me to talk about tax time. Welcome, Paul.

SPEAKER_01 0:10

My name is Paul Tarnowski. I'm a uh general counsel for Global Interpreting Services, and I am a tax attorney for the past 18 years or so.

SPEAKER_00 0:19

So we are talking to the right guy.

SPEAKER_01 0:21

You're talking to the right guy. I do tax law, but I also do tax preparation as well for all my clients.

SPEAKER_00 0:25

So let's just get right into it. If I'm an interpreter, what can I possibly take off for my taxes? What do I need to track for my taxes? It's all a little confusing and gray.

SPEAKER_01 0:38

Sure. Well, as an interpreter, I'm gonna go ahead and assume that you're self-employed. If you're self-employed, you're going to be filing what's called a Schedule C on your tax return, which means you're basically a disregarded entity. You're an individual who's self-employed, a sole proprietor. With that in mind, you have several expenses that are probably going to be your highest ones, which are your mileage. So you want to make sure that you're keeping track of your mileage. Now, if you haven't kept track of your mileage, it's not too late to do that, but you have to go back and you have to recreate all the miles that you were actually going to different job sites and then create a log for that. I would also encourage you to wherever you got your oil change done, to go pull your odometer readings because, in the event of an audit, the IRS will ask for independent odometer readings to verify that you actually tacked on that amount of mileage throughout the year. So that's very important. That's going to be probably your number one expense that you're going to have is the mileage. Beyond that, you probably don't have a whole lot of other expenses, potentially office expenses. If you are working inside your home, you do have a home office expense that you can write off. However, be very careful with that because you don't want to write off your entire home and your entire mortgage and property taxes. You can only do it based on the percentage of what portion of your home was used for your business purposes. So if 5% of your home was used for business for your business, exclusively for your business, you can write off 5% of the expenses associated with the home, which are mortgage interest, property taxes, utilities, that sort of thing.

SPEAKER_00 2:22

So I have a question about that. Some interpreters work in their home as a video relay interpreter or a remote interpreter. So I can see clearly that that is used for business and exclusively for business. But what if I'm an interpreter who does community interpreting and I use a desk and a computer in the corner of a room? What's the rules on that?

SPEAKER_01 2:47

You would have to take the square footage of the portion that is exclusively used for your business. If it's not exclusively used, you should probably stay away from that as an expense.

SPEAKER_00 2:57

And then as an interpreter, can I write off car washes or meals? I've heard both ways from people.

SPEAKER_01 3:04

So if it is used in furtherance of your business, yes. There's no real bright line test for some of these categories. So if you're talking about meals, typically no, because you do have to eat food even when you're not working on a job site. So if you are traveling though, far away from work, there is a portion of your meals that you can deduct, but it would be a 50% apportionment of that. But I would go easy on considering every meal deductible. That's not something I would advise you do, because that is one of those categories that they'll just send you a letter. The IRS will send you a letter saying, hey, show us these expenses and how you justified writing off$3,000 worth of meals. So you might want to go easy with that kind of an expense. It can be done, but I would tread lightly on that category of meals. Another category that most self-employed individuals like to write off are such things as car washes. And car washes probably would not be deductible because if you're already taking mileage, you can either take mileage or you can take actual expenses of your vehicle. Car washes would probably fall under the category of maintenance of your vehicle, which is an actual expense. You can't choose mileage and actual expenses of your vehicle. So your oil changes and that sort of thing, that's already covered under mileage if you're taking mileage as the expense. You can't take both. The other category that a lot of folks like to get a little wild with is the work clothes and dry cleaning and all of that stuff. So you can't write off work clothes if those clothes can be used outside of your business. So, in other words, a police officer's uniform, that's the best example. Think of it in terms of a police officer's uniform. Police officer isn't gonna wear that to go out to dinner the next day. If you're thinking about a suit, you can wear that out to dinner. So that's likely not gonna be an expense. The police officer's uniform will be an expense. Nursing uniform, that's an expense. You know, your jeans and your t-shirt that you wear regularly to work will not be an expense.

SPEAKER_00 5:12

If I am reimbursed mileage from my clients or an agency that I work for, can I still deduct it or do I have to then deduct the maintenance or can I deduct nothing?

SPEAKER_01 5:23

At that point, if it's reimbursed, it's not a deduction because if you're reimbursed and then deducting, it's sort of double dipping into the same purse. So if you're getting that money back, you shouldn't be taking that as a deduction to begin with.

SPEAKER_00 5:36

So if I if I'm getting reimbursed for mileage, then I shouldn't even take maintenance of my car off on my taxes either, should I?

SPEAKER_01 5:44

Correct. Unless it's reflected on that 1099. If it's reflected on that 1099, that reimbursement amount, then you can deduct it at that point. But if it's not put on that 1099 that you're receiving, if the reimbursement amount isn't even put on there, then you shouldn't be deducting it at that point.

SPEAKER_00 6:00

So as a 1099 contractor, that means that I have to give my social security number to all my clients so that they can send me uh tax information. So my first question is if I get a taxpayer identification number, is that the same as the social security number? How how does that benefit me?

SPEAKER_01 6:20

Sure. So an EIN or a T T I N, because I always refer to them as an EIN. So when you obtain an EIN, and that's the way the IRS will refer to it on the website if you want one. So it'll say EIN. The benefit of getting an EIN for your company is that you will, number one, not have to share your social security number when filling out the W9 forms to get a 1099. The other thing that it will help you do is you'll be able to open up a business bank account. And the business bank account is vital for anybody that's self-employed, and I would recommend that to anybody who's in this field, because you can keep your expenses and your income separate from everything that's personal. One thing that the IRS always looks at is they look at commingling of funds, and then it becomes very messy. Think about it this way: if when it comes to tax time, instead of having to go through every receipt that you had and everything that you spent on, if you could just go to your business bank account and look at what the deposits were and what you spent out of those accounts for business only, it would make things a lot easier to do your tax returns.

SPEAKER_00 7:31

Oh, yeah, it would. And speaking of the 1099s that you get in the mail, let's say that I work for 20 clients during the year and only 10 of them send me 1099s. Sure. You know where this is going. Do I have to report the other 10 clients' income? How does that work?

SPEAKER_01 7:51

So absolutely, whether you receive a 1099 or not, it doesn't make a difference. You have to report all income that you received. So you can't use that as an excuse for not including some other and because global wouldn't, but some other interpreting agency may say they may just not have gotten around to it or whatever, and and they don't send anything. And you're still responsible for reporting that income.

SPEAKER_00 8:15

Even if I made less than 600 at that specific agency or client?

SPEAKER_01 8:19

It's still, it doesn't matter if you made whatever amounts you made at that agency, you have to report it. So just because it's less than$600 doesn't mean it's exempt from being reported on a tax return. You have to report it.

SPEAKER_00 8:32

Okay. Do I have to make quarterly payments?

SPEAKER_01 8:34

Good question. And so the answer is it depends. It depends if there were other jobs, what other income that you had coming in. If you're anticipating owing money, then definitely you should be making estimated tax payments. I'll put it to you this way. If you were only self-employed, then yes, you should be making estimated tax payments. If you're self-employed, also have W-2 income, have a spouse that earns W 2 income, maybe, maybe not. It's on a case-by-case basis there.

SPEAKER_00 9:06

But if I'm self-employed and that's all I do, I only get 1099s, then I should make quarterly payments.

SPEAKER_01 9:12

Correct. Unless you are operating at a loss. So which means that your business only expenses exceed your income amount. And then at that point, you're not going to have an estimated tax payment. There's no penalty off of that. But if you're required to uh make estimated tax payments, if you owe money, you should be making quarterly estimated tax payments.

SPEAKER_00 9:33

How do I know how much to pay each quarter?

SPEAKER_01 9:35

It's dependent on the previous year. So you have to look at the first year that you owe, and based on that year, it'll get split up over quarters on how much your estimates should be made.

SPEAKER_00 9:46

So if I owed$400 last year, then this year I pay$100 a quarter. Correct. Correct.

SPEAKER_01 9:53

Okay. There are some safe harbor rules that require that at times that you make a hundred ten percent payment on that estimate, but that's when you start owing a lot more money per year. So they'll ask that you pay 10% over the amount that you owed for the previous year.

SPEAKER_00 10:10

Okay.

SPEAKER_01 10:10

And if you don't make that payment, there's additional penalties if you owe. There'll be additional penalties because I didn't pay that 10%. Yep.

SPEAKER_00 10:17

Now, what if I make quarterly payments but I miss one?

SPEAKER_01 10:21

Well, I would just suggest that you get right back on track and make that payment immediately on there. Because again, it all depends whether you owe for that particular year. If you owe and you missed the payment and didn't get right on top of it, then you're gonna have a bit more of an issue. You'll be penalized and interest and all of that. It's likely not gonna be a huge penalty on it, but it'll be that amount that you'll see on that tax return wondering why do I owe this? Why does it say this amount? Why did I get a letter from the IRS telling me I owe another$120 or$200 for this? Well, you didn't make that estimated tax payment until three quarters later.

SPEAKER_00 10:56

So you can't just wait till the end of the year and pay it in the last quarter.

SPEAKER_01 11:00

No, you you you can, but the IRS expects that's why they have deadlines for each quarterly payment that has to be made. So you have to make it during that period of time. And and the interest and penalties goes off how many days late that payment is. So if you're only late by a few days, it's not gonna be a big deal. But if you're late by three quarters, it might be a big deal.

SPEAKER_00 11:20

Okay. And I can get the estimated tax payment paperwork on the IRS website.

SPEAKER_01 11:28

Your tax preparer should be giving you the estimate. So you should get a voucher, it should be a coupon. It says 1040 ES.

unknown 11:36

Okay.

SPEAKER_01 11:37

Like estimate. And that's the voucher you should be submitting. You can also do it online now, too. So you can go onto irs.gov and make those payments directly online. And I believe that starting this year, the IRS isn't going to be accepting payments by check anymore. So that's something to be aware of that these payments have to be made uh online. They say they're not going to be accepting, they probably still will be, but they're encouraging everybody to make these payments more online. And when you're gonna make these payments online, don't go to any other site other than the IRS.gov website. They have all these third-party vendors that'll charge all kinds of fees. Some of them could be scams. Go to the irs.gov website and there's a method on there to make estimated tax payments or any tax payments that need to be made. Go to the irs.gov website.

SPEAKER_00 12:28

So I should not ever get a charge for making a payment to the IRS.

SPEAKER_01 12:33

I believe that there is if you're paying by credit card. I think that there is a charge for that one. But you shouldn't be charged. The IRS doesn't charge an additional fee to be taking a direct withdrawal from your bank account.

SPEAKER_00 12:47

And also, if I want to get that taxpayer identification number or the EIN, where do I go for that?

SPEAKER_01 12:53

Again, it's the IRS.gov website. Just do a search when you get to the IRS web, or you could do a Google search, say IRS.gov, get an EIN, and so it'll come right up. But make sure, again, that this is the IRS.gov website, not some third-party vendor, because it's free. There's no charge in getting an EIN.

SPEAKER_00 13:12

Okay, so I can do it myself and there's no charge. And I protect my social security number.

SPEAKER_01 13:17

Correct.

SPEAKER_00 13:18

Sounds like a win-win to me. Yep.

SPEAKER_01 13:20

The only thing I would advise though is the website for getting an EIN, it is convoluted and it's not so simple. And I have seen many clients mess this up. If you know what you're doing and you're confident with what you're doing, by all means do it yourself. It won't cost you a penny. However, when you go through the questions, you're gonna see it'll ask for your name, it'll ask for your soche, your address, you the name of your business. It'll ask for all these questions. Very easy. And then you'll get to a section there where it asks for how do you want to be taxed? And it gives you lots of options. Some seem repetitive too. It'll say, Do you want to be a corporation? Do you want to be an LLC? A partnership? A disregarded entity, a single-member LLC, a multi-member LLC, or something else. You know? And so if you're not sure what you're doing on there, I have seen this screwed up, and I have seen folks who thought they were just getting an EIN, and now they've obligated themselves to file a subchapter C corporation tax return, which causes a massive headache. And you won't even know that you have that obligation until two years later when the IRS sends you notice asking why you're delinquent on two years of corporate tax returns, why you haven't filed anything. So you won't even realize the error until much later. So if in doubt, you should ask somebody on how to do this.

SPEAKER_00 14:51

So I've heard of some of those, but I think the two most common are LLC and S-Corp. Sure. So what is the difference between those two?

SPEAKER_01 15:04

So an LLC, contrary to what a lot of people will say, is not a tax structure. It's a corporate structure through the state. So if you're in Michigan, you set up your LLC through the state of Michigan. It's a limited liability corporation. It limits liability from any debts that the business accrues. So if you're sued, you can fall on that. It doesn't say anything about taxes. When you go to the IRS website, though, it'll say you want to be taxed as an LLC, which I think is very misleading. What that means is essentially you'll be taxed as a sole proprietor. Oddly enough, it gives you that option as a sole proprietor, though too as a separate option. It really means the same thing. You're going to get to that end result in the same way. You're going to be an LLC taxed as a sole proprietor. You can also be an LLC taxed as a subchapter S corporation. So just because you're an LLC doesn't mean you have to be taxed as an LLC. The default position, if you click on yes, I want to be taxed as an LLC, the default position of the IRS will be to tax you as a sole proprietor. Again, Schedule C on your tax return. Schedule C and subchapter C corporation are not the same thing. This is totally two totally separate things. With a subchapter S corporation, there's a lot more to it there. And you can't actually get you can't actually be taxed as a subchapter S corporation just by clicking the buttons on the IRS website. There's a second step that you have to do, which is after you get that EIN, you have to let the IRS know at that point that you want to be taxed taxed as a subchapter S corporation. So even though it says it on there, doesn't mean that that's what you actually got. So if you click the button that says, Yes, I want to be taxed as an S-corp, you click the button, you go next, they say, Great. But what they don't say is you need to file another form. They actually do say it after you get, there's a letter that you get right online. It says in the small print that, hey, don't forget to file this form. Otherwise, the default position is a C corp. So you'll be taxed as a C Corp if you don't file that form. You have, I believe it's two and a half months from the date that you get the EIN to file the election to be treated as a subchapter S corporation. It's deceptively complicated on that form, though, too, that you have to file because it makes it seem like it's just a name and just a few boxes. But there's some information that you need to put on that form for the S-Corp election, which gets screwed up all the time, even by practitioners, they screw it up all the time.

SPEAKER_00 17:52

So I mean, when do you need to be in S-Corp?

SPEAKER_01 17:55

So, what I always recommend to people, because when clients come to see me, their first question is, What is the best tax structure for me? My first question and response is, have you made any money yet? If you haven't started earning money, don't worry about the tax structure. It's very simple to just be a sole proprietor on a Schedule C on your tax return. Stay with that until you start making some money. My rule of thumb is when you start hitting that roughly around that$40,000 threshold, that's when it may start becoming worth your while to look into a subchapter S corporation. The reason being is because with a sub-S, there's a lot more legwork involved. You're going to need to file a balance sheet with a tax return. You're going to have an entirely separate tax return that has to get done. So if you're doing it yourself, that's fine, but there's software costs. And certainly if you're going to hire somebody out to do that, when a client comes in and says they're a sub-S, you go to any CPA firm, they start seeing dollar signs. Now it's going to be a lot more expensive to file your tax return. The other thing, too, the benefit of doing an S Corp, though, is unlike the sole proprietorship, you can greatly avoid or limit how much you pay in Social Security and Medicare tax. As a sole proprietor, you're paying both Social Security and Medicare twice because you're both the employee and the employer. You're getting hit on the full 12 and whatever percent of your net profit is just going towards that. So when you're a sole proprietor, you're getting hit with federal income tax plus Social Security and Medicare times two. When you are a sub-S, you're only getting hit with a federal income tax. Because the difference between your income and expenses gets reported on what's called a K1. That K1 goes on to your 1040 tax return free of Social Security and Medicare tax. Now, there's a caveat to this because the IRS says we don't want you just coming in without paying anything to Social Security and Medicare. So you have to pay yourself a reasonable wage. Well, what is a reasonable wage? It depends. How much are you making? It fluctuates every year. But if the IRS requires that you're going to be paying yourself a wage, now you have quarterly tax returns, which is different than the estimates. You have quarterly tax returns, you have to pay deposits every quarter to the IRS for the withholdings. So you have to wear two hats, the both of the employee and the employer. You've got to treat yourself as the company that has an employee in yourself. And so now you're looking at all kinds of other expenses that you have to pay out. So that's why I say it's really not worth it below$40,000. Above$40,000, you're going to have to start thinking about that. It's going to be well worth your while, and the savings could be enormous for you beyond that.

SPEAKER_00 21:00

So do you feel like it's okay to do the taxes myself on like some sort of turbo tax or some online program? Or should I go to a CPA or maybe a tax preparer who is not a CPA? Maybe I go to HR Block or one of those kinds of places.

SPEAKER_01 21:21

So when you are self-employed, unless you really know what you're doing, I don't recommend you do them yourself. Unless you're very confident in what you're doing. Maybe you learned at an early age and you just kept it going and you understand what you're doing. If you're comfortable with doing it, by all means keep doing it. If you're a little bit unsure and un and hesitant about it, what I have seen happen is individuals that are self employed and they use TurboTax, they go in there and they see expenses on there and they go nuts with the expenses. And they see that number at the top changing every time they put an expense in. Their refund amount keeps growing and growing and growing. Well, the problem is you lack the experience and knowledge to look at a tax return on its face to see whether this tax return makes any sort of sense. And if you can't look at the first and second page of the tax return alone without looking at anything else, to see if this makical sense on this tax return, I don't recommend you do it because you could expose yourself to an audit, in which case you're gonna have to repay the money that the IRS sent you, plus penalties, plus interest, and all kinds of nonsense you're gonna go through. So you're probably better off going to a tax preparer. Now, who to choose on a tax preparer? I would be careful in choosing the tax preparer if it's not somebody that's reputable. I've had many situations where I've seen somebody go to a tax preparer place that was recommended by a friend. Now all of a sudden they're getting these massive refunds. If it doesn't make sense to you, and everybody has that internal inside compass that will say, this doesn't feel quite right, but they'll say, I did it one year and I got a large refund. They'll say, must be okay, because the IRS didn't say anything. So they'll go back. Problem is the IRS typically doesn't audit for three years. So they'll audit some at some point in time, they're gonna get you, but it'll be a for a two-year period or a three-year period sometimes. And then comes the difficult part. You'll be hiring somebody like me out. It's gonna cost you three times what you actually received in refund, and you're gonna have to pay all that back. If you don't go to some place that's reputable, HR block, reputable. My firm, the tax lawman, very reputable. I can prepare a tax return that makes sense, that's reasonable, and that you agree with. That's not gonna take too many risks, unsubstantiated expenses or income and that sort of thing. So uh make sure to go to some place that's reputable, that's not uh giving you refunds that you've never seen refunds like this in your life, suddenly it shoots up. Something's wrong. Get a second opinion from somebody else if that happens. So don't file it.

SPEAKER_00 24:10

So let's go back to the EIN and the LLC, the S Corp thing. If I decide that I want to be an LLC, is there separate paperwork for the LLC? What is the order in which I get everything? Do I get my number first? Do I get the LLC?

SPEAKER_01 24:25

Typically, the order is you create the LLC first, and that goes through the Lara website for the state of Michigan. So that's not something you would do through the IRS. You go to Lara, L-A-R-A, and you go to their website, and you can do it all online, and you create your business, create your LLC. Once that's been created, you can then take that information and you can go directly to the IRS.gov website to get your EIN and you would put that name in that you just created for that company. You put it in and it'll spit out an EIN for you at the end of it. Now, do you need to incorporate? Do you need that LLC to get an EIN? And the answer is no. You, Don Flanagan, can get an EIN from the IRS as Don Flanagan. I wouldn't recommend this though, because then that creates a lot of confusion when mail comes in or what is applying to you when getting a business bank account. It doesn't look like it's a company website. And certainly, if you're going through all that trouble of getting the EIN, it costs, I think,$50 to get an LLC with the state of Michigan, and then to get the EIN, it only costs you$50 to get it, to get the LLC. So that's what I would do. I would recommend doing that.

SPEAKER_00 25:44

So whether I get a taxpayer identification number or an EIN in my name, or I get an LLC, I'm still a sole proprietor unless I elect that S-Corp, LLC, S Corp part. So I can be an LLC and then let me see if I understand you. If I have an LLC, it gives me some protections from you know all of my earnings and my savings being taken if I should happen to get sued. But I'm taxed at the same rate. So it's not like I'm, you know, incurring extra taxing because no matter what, when I do my taxes at the end of the year, I'm gonna have to have that other piece of paper that says, you know, schedule C. So I have to do that either way, so it doesn't change anything, right?

SPEAKER_01 26:34

Whether you get the EIN or not, it's not gonna change anything. So if you get an EIN and you're an LLC and let's say you make no election for an S Corp or a C Corp, the default, if you check the LLC box, will be sole proprietor 1040 schedule C. If you did nothing and received no EIN, you will still be taxed as a sole proprietor. So if you did nothing about this, the default will always be Schedule C sole proprietor. And so that's the simplest form of it. But it's also the worst as far as taxing. So that's where the trade-off is. It's the simplest, but also the most unforgiving, the sole proprietor. The S Corp would probably be the most favorable once you hit a certain point, but everything else would be the default, the sole proprietor, and it would not be the most favorable tax uh percentage for you.

SPEAKER_00 27:33

Well, thank you so much. Sure, my pleasure talking with us today. And why don't you go ahead and tell everyone a little bit about the tax lawman and if they need you, how can they get a hold of you?

SPEAKER_01 27:43

So my firm is called the Tax Lawman. We've been in business since 2015, 2016. Prior to that, it was Ternowski Tax Firm, but I figured nobody could remember Ternowski to the tax lawman. You could email me at paul at the taxlawman.com, or I can be reached at 248-398-0400 at any time. And if you have any questions or need some tax help or are looking for a new prepare, please feel free to call me or email me at any time.

SPEAKER_00 28:13

Well, thank you so much, and I can definitely attest to the fact that you're wonderful at taxes and you do a great job and you know your stuff.

SPEAKER_01 28:20

So thanks for having me on, Tom.

SPEAKER_00 28:22

Thank you so much. Don't forget to like, subscribe, and share. And thank you so much for joining us today on Tirp Talk.