Taxes Made Simple

A reader asks: This year my business lost money to an employee embezzling funds. How do I deduct that? Can I add it to a 1099 for them?

My answer: Where you deduct the loss varies depending upon whether your business is a sole proprietorship, corporation, etc. But the embezzlement will be deducted as a Theft loss (and generally listed in the "Other Expenses" category on the tax return). IRS Publication 547 has more information. 

Want to learn more about the entity-selection decision? Take a look at my related book: Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less.

A reader asks: I have a sole proprietorship and employ my spouse and pay futa tax on him. However I was recently told that I must exempt him from futa- I thought I as the owner was exempt but it was optional for the spouse- thus him being able to benefit from unemployment should the business fail. I additionally was told that if I were a corporation he would not be exempt. Do you know if I can still pay futa on him and have him be eligible for unemployment?

My answer: The following quote is from IRS Publication 15:

"The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax."

My understanding is that, if the business were a corporation (or an LLC electing to be taxed as a corporation), each spouse would be an employee of the corporation rather than of the other spouse. As such, I believe that both spouses would be subject to FUTA.

Want to learn more about the entity-selection decision? Take a look at my related book: Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less.

A reader asks: If I contract someone in Uruguay, who does not have a SSN, to do some freelance work, do I need to deduct any taxes from their paycheck?  It might mean paying them more money on an hourly basis so they clear what I contracted them for.  Thanks!

My answer: I have to admit that I have very little experience dealing with international taxation, so I poked around a little bit on the IRS's site to see what I could find.

IRS Publication 515 (entitled "Withholding of Tax on Nonresident Aliens and Foreign Entities") states the following:

"Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld from the payment made to the foreign person."

As to the point about tax treaties between countries, you can find information about tax treaties here.

Want to learn more about small business taxes? Take a look at my related book, Surprisingly Simple: Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less.

A reader asks: For all of 2009, I will be living and working abroad, and I will earn roughly $150k. I understand that about $88k will be tax exempt. My question is regarding the rest of that money. How will it be taxed?

I have been told that i will pay taxes on the remaining $62k at $150k tax bracket. But I'm not sure how exactly I'd go about calculating that. Any information you can give me will be appreciated.

My answer: Take a look at the worksheet on page 37 of the instructions to Form 1040. Essentially, you calculate your tax on the entire amount (150k), then you subtract what the tax would have been on the excluded amount.

In your case, I believe it should work out that the amount above the exclusion will simply end up taxed at 28%.

Want to learn more about taxes? Take a look at my recent book, Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

A reader asks: My business is a sole proprietorship. When I pay myself an income from the business, how is it taxed and how do I report it? Does it count as salary? Is it a loan? Any help you can offer would be greatly appreciated!

My answer: If we're talking about Federal income taxes, it's neither salary nor a loan. In fact, it isn't anything.

As far as the IRS is concerned, for a sole proprietor, there is no distinction between the business and the person running it. As such, moving money from the business' checking account to your own checking account will have no tax effect whatsoever. It would be analogous to you moving money from one personal checking account to another personal checking account.

Quick note: They are going to tax you on the money that goes into the business (ie, the profits). As a sole proprietor, the business' net profit will show up on your own personal Form 1040 (on Line 12). This will be included in your taxable income, and you'll therefore be paying taxes on it.

But again, for sole proprietors, Federal tax law doesn't distinguish between your personal checking accounts and those of the business. As a result, moving money from one to the other will have no tax effect.

About the Author: Mike Piper is the author of Surprisingly Simple: Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less.