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Sex, Drugs, and Taxes – Abigail’s Magazine Road Crew Nightmare
By Stacie Clifford Kitts, CPA
This is a multipart series about a girl who was enticed into the indentured life of a door-to-door seller of magazine subscriptions. Her recount of industry practices and the resulting tax consequence is truly shocking.
This story also illustrates the importance of understanding your worker status for employment tax purposes, understanding contracts your employer asks you to sign, the need to research industry practices particularly in door to door sales, accounting and tax issues associated with cash transactions, tax consequences of self employment and Form 1099, the importance of having a Plan B and consulting with the right advisors before making life decisions, oh and gee a bunch of other scandalous stuff.
This story also makes us question why our lawmakers continue to allow this industry to persist in its abuses against America’s youth!
Part One – How The Nightmare Started
It was a warm fall day not so long ago when a young man knocked on Abigail’s door. He was selling magazines. “Can you help me out by purchasing a subscription?” he asked.
Now as it turns out, Abigail had recently graduated from high school and had just moved into her own apartment. She was also attending classes at the local college and working a part time job. But she wasn’t happy in her new life. College wasn’t what she had expected and money was tight. Abigail was aching for something to change. And change it would.
“Oh he really was a confident little charmer,” Abigail explained as she recounted her story.
He stood on her porch and flirted, saying all the right things. And before she knew it, she was handing over her phone number along with the remains of her monthly allowance. And as expected, once he had her money in hand, the conversation quickly ended. Abigail was sure she would never hear from the charming young man again.
But she was wrong.
Not long after, Abigail began to receive phone calls. For several days Abigail and the young man had long engrossing conversations. It was during these conversations that Abigail learned how concerned he was about her and how he wanted to help. He told her how he could provide her with a better life, filled with excitement and adventure. “We could have so much fun,” he told Abigail. “Why don’t you join my magazine road crew? You can make lots of money and travel all over.” It was a chance of a lifetime, you see, because not just anyone was invited. She was special. He could tell she would do well.
But there was this one small tiny little problem. She had to leave straight away before his crew left the area. There was no time to talk to her parents, no time to drop her classes, no time to deal with her apartment lease. If she was going to come, she had to do it now.
Irrational as it might sound, the choice for Abigail was clear. She would join the charming man on the road, have fun, and make tons of money. She packed a bag, locked the door to her apartment, and said goodbye to her old life……
If you are interested in hearing more about Abigail’s nightmare, stay tuned for the upcoming post: Life on The Road With Nick.
Note: This story is based on true events and is told with the permission of the taxpayer. Names and some events have been changed at the taxpayer’s request.
Who Hates America’s Small Businesses? H.R. 4213 American Jobs and Closing Tax Loopholes Act of 2010 Does.
By Stacie Clifford Kitts, CPA
Lately I’ve been reading commentary bouncing around the blogging community about S-corporations and self-employment tax. To understand the controversy, first we need to understand the tax benefits of a corporation electing S-corporation status.
The IRS describes S-corporations this way: S corporations are corporations that elect to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
Shareholders of S-corporations generally receive a W2 for their services as employees. The remaining profits of the corporation are passed-through to the shareholder (on Form K-1) to report on their individual income tax return.
Currently, S-corporation shareholders avoid self-employment taxes on the flow through income reported to them by their S-Corps.
However, congress wants to change this tax structure and make the income passed through to shareholders from some types of S-corporations subject to self-employment taxes.
I absolutely love what Joe Kristan at the Tax Update Blog has to say about the proposal:
It’s hard to do something exceptionally stupid to a tax code already brim-full of dumb, but Sander Levin, Charlie Rangel’s replacement as head of the House Ways and Means Committee, is up to the job. Exhibit A: his new proposal to apply self-employment tax to some — but only some — professional S corporations.
It would penalize the smallest personal service providers to the benefit of their larger competitors.. A sole proprietorship would pay taxes at a rate at least 2.9% higher than a competitor whose “principal asset” is the reputation of more than three employees.
The bill also will require businesses and the IRS to determine what the “principal asset” of a personal service corporation is. The bill obviously requires the valuation of intangible assets — reputation and skill — but in a way not elsewhere attempted in the tax law. How do you do this?
Let’s take an entirely hypothetical S corporation CPA firm with nine shareholders. All have been practicing in tax or audit work since they had hair. They like to think they are all highly skilled, but the skill sets differ. Some are known more as rainmakers, some view themselves more as technicians. One has an enormous Google footprint, while others are more old-school in their business development methods. Which counts more?
In his extensive coverage of this issue, Joe asks The S corporation medicare tax grab: what is to be done?
The tax blog world is aghast at the weird revenue grab from small S corporation professional practices contained in HR 4213. TaxGrrrl, Kay Bell, Robert D Flach, and Monica Lawver (UPDATE – Russ Fox, too) have all raised the alarm for this awful bill (and have kindly linked to the Tax Update while doing so).
But it will take more than being appalled to prevent the worst-designed tax rule since Sec.409A from becoming law. We need to contact our congresscritters, especially in the Senate, immediately. The Senate will take up the bill as soon as tomorrow. If you have a professional practice, call and e-mail your congresscritters early and often and let them know that your livelihood is more important to you than NASCAR and the rest of the “motorsports” industry. If you hire professionals, tell Congress that you don’t want your local professionals to be discriminated against in favor of the big guys. The message is simple: The S corporation tax increase in HR 4213 is a mess and should not be enacted.
In his latest post How not to determine your S corporation compensation Joe explains:
-The IRS already has the ability to go after professional corporations that underpay employment taxes. ….
– If you want to use an S corporation to reduce your payroll taxes, remember that hogs get slaughtered, and treating only $24,000 of $200,000 of professional firm earnings as salary is on the porcine side.
My take? It always feels sleazy when our lawmakers sneak in some stupid provision that gets overlooked by the majority because the focus is steered toward other areas. It does appear to be a poorly written provision that will be a nightmare to implement. It’s about as ridiculous as the booby tax that we debated last year in the posts:
Still Talking About Fuller Lips, Larger Breasts, Slimmer Thighs, And H.R. 3590
Stacie's Tax Stuff 