"Actor/Waiter/Fund-Raiser/Office Temp"
by Greg Mermel
Published in the "Money and Taxes" column in PerformInk on March 14, 2008
People who design forms often assume a simplicity that doesn’t exist by providing only a small box for “occupation.” Do you know anyone like that: a person with one occupation that can be succinctly
described? Perhaps, but not many if you hang around with
people in the performing arts. All too often, there is
a “civilian” job that pays the rent and credit cards, plus whatever you do in the arts. Also,
your work in the arts varies: you may act, but if you are
not cast you help the dramaturg or the development director
or the scene shop. I know a woman with five union cards:
Equity, SAG, AFTRA and two different IATSE locals (one
stage, one film). Does she have one occupation? Two? Three?
Five?
Usually, the number of occupations is just a simple semantic game, or an identity
issue to work out with your psychotherapist. On a credit
card or mortgage application, you probably just put down
whichever answer you thought would get you approved. But
people often panic when confronted with the small occupation
box on page two of their federal income tax return. “If I list my civilian job,” they think, “the Internal Revenue Service won’t allow my acting deductions.”
Boring Facts and Data
The only purpose of that box is to help the IRS develop statistics. The IRS
does not care how many occupations you have, so long as
you report the income and don’t try to deduct personal expenses. They do not even care which of your occupations
is the primary one, or even if you have a primary occupation.
What does matter is that you keep your deductible expenses sorted by occupation,
because that is how you have to show them on your tax return.
Often, that’s easy: if you are an actor who also owns a hot dog stand, you should have no
trouble figuring out which occupation requires makeup and
which mustard. But some inherently overlap, like your car,
or computer, or cell phone. You have to allocate these,
and usually that requires making a reasonable estimate.
Your acting career probably uses the cell phone more than
the hot dog stand, but how much? Seventy percent? Eighty?
All? The only answer I can give is to be honest with yourself
in making the estimate. Automobile use presents a particular
problem, because in many cases the use is going from one
occupation to another (e.g., from the day job to a rehearsal).
I tend to push these to the arts side of the ledger, on
the “otherwise, I would have taken the CTA” theory. Please note that the estimate here is the split between occupations;
you still have to keep records of your business automobile
mileage.
When Five Occupations Are One, and One is Two.
Typically, I use broad occupational definitions, and would treat my five-union
friend as having only one occupation. That minimizes the
need to allocate expenses, of course. But it is also the
reality of her life. You would not expect a supermarket
to separately report its activities as butcher, greengrocer,
fishmonger, etc.; why should she divide her life as a theater
person among departments?
She may have to divide her professional life for tax purposes anyway, but not
among departments. Think of it as a vertical slice instead
of a horizontal one, since this division depends on how
she is paid.
In any occupation, one can be either (a) employed by another, (b) employed by
oneself, or (c) unemployed. Unemployment has euphemisms,
but no common synonyms. All sorts of nontechnical terms
are used for the first two states, sharing only a tendency
to define by describing an attribute. Being an employee,
for example, may be termed “W-2 income” (since that is the reporting form) or “with taxes” (because taxes are withheld). Similarly, people speak of their self-employment
income as “1099 income” or “fee income” or “independent contractor” work.
Whatever word you use, the two types of income flow separately through your
income tax forms, and the nature of the income has a significant
impact on how you report your deductible expenses and the
tax benefit of them.
Law of the Jumble
The division between employee and nonemployee work is fuzzy at best, and many
payers simply make arbitrary decisions that may not be
technically correct. As the payee, that’s not your problem. Your problem is dividing the expenses between the income
streams, and conceptually that is no different than dividing
them among occupations. Some clearly relate to one type
of income or the other, while some have to be fairly allocated.
Deductions against self-employment income will often save you more in taxes
than the same deductions against employee compensation.
There are two reasons. First, a self-employed person is
treated as running a small business, and only pays taxes
on the profits (if any); losses offset other income and
reduce the tax on it. Employees’ business expense deductions, in contrast, are limited: only the amount above
two percent of your income is deductible, and it gets rolled
in with other itemized deductions (like home mortgage interest
and charitable contributions). Employees whose total itemized
deductions are less than the standard deduction get no
tax benefit. Second, the profit from self-employment is
subject not only to income tax but also to Social Security
tax -- both the part that you would pay as an employee
and the part that an employer would pay. Deductions here
reduce both income and Social Security tax; employees’ deductions do not reduce Social Security tax.
“What’s fair is fair” goes the popular phrase, but the decisions in making a fair allocation of expenses
will undoubtedly be colored by the differences in tax savings.
Just don’t get greedy.Free for the asking.
Free Offer
Every year during the income tax season, I offer free copies of my
“Checklist of Potential Deductions...” for those in the arts. Just call my
office, or send
an email to checklist@gregmermel.com.
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