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"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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