Taxpayer asks:

Can food bloggers write off ingredients from paid campaigns where advertisers paid them to create a recipe?

Taxgirl says:

As promised, this is the answer to the second part of a previous question.

The world of paid reviews can be tricky. In this post, I’m going to focus solely on the question that’s been asked. In a follow-up post, I’ll talk about samples and promos – so stop by again if that’s your interest.

Before we go any further, here’s my bonus non-tax related advice: be sure to familiarize yourself with the FTC rules regarding disclosure (downloads as a pdf). They went into effect on December 1, 2009, and expand the rules relating to endorsements and testimonials in advertising. In addition to radio, television and print, the rules specifically apply to bloggers. And, quite frankly, telling readers when you’ve been paid to promote something is just good manners.

That out of the way, let’s talk tax.

First, any time that an advertiser, company or any third party pays you or gives you things as compensation for services, it’s income. I don’t care if it’s cash, something of value that you get to keep or just something you use for a little while (like the use of a time share), if it’s in exchange for your services, it’s income. You’ll see that in the Tax Code at section 61, Gross income defined, which specifically states:

§ 61. Gross income defined

(a) General definition: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items; …

So, it’s clear that compensation for services is income – and that means that you need to report the income that you’ve been paid from the advertiser/company on your tax return.

You can certainly offset that income with your expenses. To the extent that you incurred legitimate business expenses in order to produce something (including a recipe) for a third party, you can deduct those expenses so long as they meet the criteria as outlined in the prior post. This, of course, assumes that you are paying for expenses out of your own pocket.

If you are reimbursed for the products you buy to create the recipe, you may not claim those costs as business expenses. Got it? That’s the easy part. You still need to keep excellent records because the reimbursement is not considered income to you and you don’t want to report it as such. In an ideal world, you’d get two checks: one for your services and one for reimbursements. If, however, you get one big check, make sure you note on your records which part of the check should be considered compensation. Report the compensation as income but the reimbursement is tax neutral, meaning there’s no need to report it. You don’t report it as income and you don’t claim the deduction.

Now let me confuse you a little bit more. If the company issues you a form 1099-MISC for the entire amount (which is not appropriate but happens all of the time), then you may not want to take the advice that I just gave you. Here’s why: the IRS matches forms 1099-MISC to your tax return. And if what you put on your return doesn’t match that 1099-MISC, you’ll likely raise a flag. So if the company issues you one fat check and one 1099-MISC, I’d report it all and expense it away to reflect the reimbursement. I don’t like it – but it’s what I’d do.

So, to recap: income to you for services if you are compensated in any way. Deductions for expenses paid out of pocket. No deduction, no income for reimbursements (with the exception of the flukey situation noted above).

What if the advertiser flat out gives you a Kitchen Aid – or a jar of Nutella – to try out? That’s something different altogether. In order to keep this in manageable bites (pardon the pun), I’m tackling that issue separately. Check back often.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl
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This time of year, most of the focus in the media tends to be on negativity – taxes gone bad, driving folks out of business and others to distraction. That’s why it was heartening to see this story on CNN about a taxpayer who caught a break with the new tax laws.

As previously blogged, the Worker, Homeownership and Business Assistance Act of 2009 expanded the net operating loss (NOL) provisions of the American Recovery and Reinvestment Act (ARRA). The bill, which was tacked onto the homebuyer’s credit extension/expansion in November, would allow businesses which suffered losses in 2008 or 2009 to retroactively apply those losses to any five years prior to 2008. The expansion applies to all companies except those that took money as part of TARP. A similar rule, known as a “net-operating loss carryback” or “NOL carryback”, had been in place before but only allowed losses to be carried back for two years.

The key is that you have to have some kind of profit to attach to the losses. To the extent that you were not profitable over the past five years, there’s no benefit to amending your returns to take advantage of the NOLs. But if you were paying Uncle Sam over the past five years – and then suffered a loss in 2008 or 2009 – you can recover some of the tax you paid previously.

The CNN story singles out Bill Hewitt, who recently collected a $150,000 refund check from the IRS thanks to the new tax rules. Hewitt’s business (in the real estate industry) had been profitable until this year. He was forced to scale down from 50 employees to 30; he was unable to get additional financing for his business through banks (you know, the ones that are supposed to be lending to small businesses with our money as part of TARP). All of this, despite the fact that he had once been profitable.

But the NOL gave Hewitt some relief. He now has cash to continue to manage his business until, hopefully, things get better. And that’s exactly the point of the provision: to help previously profitable companies regain their footing.

The NOL isn’t restricted to real estate companies. It’s available to all companies, including partnerships, sole proprietorships and s corporations, which have previously reported profits and paid tax on those amounts. If those taxpayers experience a loss in 2008 or 2009, they may be able to recover some of those losses.

If you think that this might apply to you and your company, don’t try to work it out yourself. Consult with your tax professional – the potential savings are worth it. And the tax advice is deductible to you anyway.

And I know what the rest of you are thinking: what does this cost taxpayers? About $10 billion over the next ten years. If that seems like a lot, consider this fact: the expansion of the homeowner’s credit, which was part of the same bill, costs taxpayers the same amount – in just a mere ten months. Similar Posts:

• Businesses Get Tax Break

Taxpayer asks:

Can food bloggers write off ALL or part of their ingredients from the recipes they post on their food blog? And/or, can they write off ingredients from paid campaigns where advertisers paid them to create a recipe?

Taxgirl says:

I’m actually going to answer this question by saying that I’m not going to answer the second part… yet. That’s a different question – and I’m going to address that in my upcoming “paid reviews” post.

The first question is a bit easier and can be extended to all areas of business, including other areas of blogging.

For an expense related to your business to be deductible, it needs to be both “ordinary” and “necessary”. No matter what the industry, that is the standard that the IRS will use. So, any time that you question whether something is deductible, as a first step, ask yourself is this “ordinary” and “necessary”?

An ordinary expense is one that is common and accepted in your industry. It’s the one time that you care about what your competitors are doing. No matter what your mother says, it does matter whether everyone else is doing it, too.

A necessary expense is one that is helpful and appropriate for your trade or business. You don’t have to prove that you couldn’t be in business without the expense – more or less, it needs to make good business sense.

Again, for an expense to be deductible, it needs to be both.

Deductible expenses also need to be distinguished from the cost of goods sold; capital expenses; and personal expenses. The cost of goods sold generally includes items like inventory for resale or the cost of raw materials to make goods for sale. Capital expenses encompasses money used for start up costs or improving your business (and must be amortized rather than deducted). Personal expenses are exactly what they sound like: expenses for personal or family use; expenses used for personal and for business purposes must be divided appropriately for purposes of expenses.

So, with all of this info, take a peek at your expenses and start thinking:

1, Is it “ordinary” and “necessary”? If no, not deductible. If yes, then move on:

2, Is it related to the cost of goods sold? If yes, then it’s more properly deducted in the cost of goods sold. If no, or if you haven’t included it in the cost of goods sold, then move on:

3, Is it related to capital? If yes, then you may need to amortize. If no, then move on:

4, Is the expense for an item for your personal or family use? If no, then IT’S DEDUCTIBLE! If yes, then you have a second part of the question: Can the personal use be separated from business use? If so, then you can deduct the part attributable to business use as a business expense. If no, then no part of it is deductible.

Some examples:

Home office costs. Yes, deductible, since you can separate your living space from your business space. If you cannot clearly distinguish the two, there’s no deduction. This is why the IRS will require pictures of your space – and maybe even a home visit – on audit. More on home office costs in an upcoming post…

Automobile costs. Yes, deductible for the business portion to the extent that you keep good records showing how you used your car.

Clothing/uniform costs. Deductible only if the only purpose of the clothing/uniform is clearly for business purposes (think branded uniforms). It’s not deductible if you could wear the clothes outside of your workplace – even if you personally wouldn’t. A great example here is a suit. I hate suits: you will never, ever see me in a suit outside of court or client appointments. But it is not deductible because it is not unlikely that a suit would be worn outside of the workplace. But a chicken hat from a fast food restaurant? Not likely to be worn outside of the workplace. More on clothing deductions in an upcoming post… But you get the picture.

And here’s where I think your question falls: yes, it’s ordinary and necessary to buy ingredients for the purpose of making food to review. No, it’s not related to the cost of goods sold. No, it’s not related to capital. But is it for personal use? This is what you’re going to have to sort out in order to figure your deduction.

Food that you eat at home is generally not deductible as a business expense. You have to have food to live, which makes it a personal expense. But to the extent that the food that you’re making and trying is for business use, it would be deductible, so long as you can distinguish the personal and business pieces. This means that it will depend on the individual facts and circumstances involved. Here are some examples:

• Your blog is a baking blog and you make a full course meal, soup to nuts. Is it deductible? Perhaps the cost of the sourdough bread is … but not the rest of the meal.
• Your blog is a baking blog and you make three loaves of sourdough bread. Is is deductible? Probably the cost of one loaf – that’s the part you needed for your review, right? But not three. The other two are likely to be eaten for personal use and are not deductible.
• Your blog is a general food blog and you make a lasagne for your entire family. Is it deductible? Maybe. If your blog is a “family food blog”, then perhaps the family-sized portion is deductible. If your blog focuses solely on a niche, like healthy eating or cooking with noodles, then only the portion attributable to you, for the purposes of testing, is deductible.

So, separate, separate, separate.

The same general rules apply to restaurant reviews. To the extent that you order dishes solely for review, then it should be deductible (but only to you, not to your companions) but add-ons like wine and bread may not be.

A couple more caveats: It’s important to remember the hobby loss rules. If you’re blogging as a business, you may have deductions in a year that exceed your blogging-related income; you don’t want to make this a habit or IRS will believe that your blog is a hobby, not a business. If you’re blogging for a hobby, then your deductions may not exceed your blogging-related income.

Also keep in mind that this area is very dependent on fact and circumstances. You need to consider your own situation carefully and not attempt to make something fit that doesn’t. Don’t be greedy: think through your potential deductions carefully and honestly. Remember: pigs get fat, hogs get slaughtered.

You’ll need to retain excellent records with annotations about the expenses. Don’t expect the IRS to allow you to write off your grocery list. Keep your personal expenses distinct from your business expenses. Shop separately for your blog, where possible, and try to buy specifically for your business purpose: don’t buy a dozen eggs, use one and try to write off the other eleven. Keep a good database of which items you used for which recipe (and, if you’re freelancing, for which publication or blog). If you can, it’s best to write directly on the receipt what it was for and how you used it: “lemon curd for holiday meal piece, Gourmet magazine, 12-24-09.”

I’ll be honest and say that I haven’t seen a lot of case law in this area. Blogging and internet-related activities are relatively new to the tax scene, so I’m not sure how the IRS is going to treat some of these specific areas. But the law is the law and the rules about “ordinary” and “necessary”, as well as distinctions between personal and business use, haven’t changed. Don’t get caught up in the “internet-edness” of it all: just follow the rules. That said, if your situation is particularly tricky, you should definitely consult with a tax pro (it’s deductible!) before making any significant tax-related decisions.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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Taxpayer asks:

Thanks taxgirl for helping me out on this one! I have a couple of different ad and affiliate accounts for my blog. When I earn money, they bank it until I hit a certain dollar amount and then they make a deposit into my PayPal account. A few of them accumulated earnings in late 2009 but did not hit my PayPal account until 2010. Do I report those earnings when I earned them or when they were deposited?

Taxgirl says:

That’s a great question!

Most individual taxpayers are cash-based taxpayers. This means, generally, that you report income when received and expenses when paid. “Received” can be a tricky concept in today’s internet world since it’s not a simple matter of cutting a paycheck. Clearly, if someone gives you a check and you have the check in hand, it’s received. But if the same check is put in your in bin at work and you choose not to cash it, it’s still income to you. The general rule is that it’s income when it’s made available to you – and that extends to third party payers or internet payments.

I know exactly the situation you’re describing. I have the same arrangement through a syndication service. I get paid when my “royalties” hit a certain amount; my Kindle subscriptions work the same way. That money isn’t income until you can actually take it. If you “earn” $20 but have no right to receive it until you reach $25, then the income has not been made available to you. It’s not actually available to you until it’s deposited to your PayPal account.

There is a caveat: if the fact that the income wasn’t available was due to something you did (i.e. you made a deal that you didn’t want to be paid until you made $100), then it’s actually available when you could have taken it – even if you didn’t. You can’t simply defer income because it’s convenient for you or because you don’t want to pay tax on it.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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Taxpayer asks:

Hi taxgirl, I have a strange question. I write a food blog. I create and cook all of my own recipes and post them online. Two years ago, I found out that someone was stealing my recipes and some of my photos and using them on another site. I ended up hiring a lawyer to stop them. I won but it was expensive. I thought I could take it as a deduction but my lawyer said that I cannot because I am not incorporated. Help!

Taxgirl says:

I get a lot of variations on this question regarding legal services. The confusion stems from the fact that legal services are generally not deductible to individual taxpayers. The rule is that legal fees which are personal in nature are never deductible. You can’t deduct the cost to sue your neighbor over the tree that hangs into your yard or the cost to get your new shed through zoning. However, you can deduct the cost of legal services related to producing or collecting taxable income or getting tax advice (you may want to remember this one for the future). These expenses are deductible on Schedule A as miscellaneous itemized deductions.

However, if you are a business taxpayer, you can deduct any legal expenses that can be considered business expenses. In order to be deductible, the legal expenses must be “ordinary and necessary” and directly related to operating your business.

You do not need to be incorporated to take this deduction, you merely need to report the expenses on your Schedule C. Legal expenses would be reported on Line 17 on the Schedule C.

The costs of protecting your content are clearly deductible as a legitimate business expense on either Schedule (A or C). Other legal services related to your business would likewise be deductible.

Congrats on the win – it sucks when someone is filching your content. And deduct away!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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Taxpayer asks:

I read your post about Mary Kay and I am still confused about hobbies. I own a bunch of blogs. I make money on some of them and I lose money on some of them. Does this make me a hobby?

Taxgirl says:

You’re right to be a little confused because this is not an easy area of the law to understand. There are no hard and fast rules, just a set of factors that the IRS considers. Let me see if I can make it a little more clear.

First of all, the Mary Kay post that you’re referring to is here. In that post, I included a list of factors that the IRS considers when determining whether you’re operating a business or pursuing a hobby. The factors are:

1. Whether you run your business as a business.
2. How much time and effort you expend in the activity.
3. Your level of expertise.
4. Your track record.
5. Your financial picture.
6. Whether you continue to change your business practices in order to make money.
7. The nature of your losses.
8. Whether you expect the value of your business to grow.
9. How much fun you’re having.

The list boils down to two main factors: your motive and your money. The IRS assumes that you’re in business to make money. This doesn’t mean you have to get rich and it doesn’t mean that you have to make money every single year. But the IRS will look at patterns and will assume that a business (as opposed to a hobby) will eventually make a profit.

In your case, you are both making money and losing money on your blogging. That falls along the lines of “you win some, you lose some.” And in one or two years, if you lose more than you make, that’s probably okay. But if you’re losing more than you’re making over a period of years, you’re going to raise some eyebrows.

Let’s think about this: what would a reasonable business person do if he or she owned a number of enterprises and a few of them were losing money? Switch gears, of course. You’d try a couple of different things… Check out #6 above – that’s one of the factors that the IRS looks at.

And if switching gears doesn’t work out, what next? You’d likely shut that venture down. If I have four successful stores and the fifth is failing, no matter what I try, I’d probably shut the fifth one down. It doesn’t make good economic sense to keep it going at all costs – unless the decision to keep it going is not actually a business decision.

As it relates to blogging, if you’re writing for three or four sites and a couple are doing well and one or two are constantly losing money, the logical business decision would be to focus on those that are making money. This is because the IRS is assuming that if you’re in the business of blogging, you’re blogging to make money, as a means of improving your livelihood (see #5 above).

If, on the other hand, you’re writing the money-losers because you just simply like writing them (see #9 above) – without a care as to whether they ever turn a dime – then you’re probably a hobby blogger. That’s not a bad thing. There’s nothing that says that every person who picks up a keyboard has to be a professional blogger. It’s okay to do it just because you like doing it.

From a tax standpoint, there’s no real downside to being a hobbyist so long as your expenses are low. The income is reportable equally in both situations (though not at the same place). The main difference from a tax standpoint between being engaged in a business versus pursuing a hobby relates to expenses: where to report and how much to report.

Where to report: Expenses related to a business would be fully deductible on a Schedule C. However, expenses related to a hobby would be reported as miscellaneous deductions on a Schedule A. Hobby expenses would also be subject to the 2% floor – meaning that you can only deduct those expenses which are more than 2% of your AGI.

Here’s an example: Let’s say that your AGI is $20,000 and you had combined miscellaneous deductions of $1,000. They included hobby expenses from blogging of $500; tax preparation expenses of $200; and unreimbursed expenses from your other job of $300. You can deduct $600 of your expenses. This is because 2% of $20,000 (your AGI) is $400. Your expenses are $1,000. $1,000 (expenses) less $400 (2% floor) = $600. Get it?

How much to report: If you’re pursuing a hobby, you can only take deductions up to the limit of your hobby income; you cannot incur a loss. With a business, you can report a loss. Again, be careful. If you constantly report a loss, the IRS will wonder whether you’re actually a business.

I’ll write more about what you can deduct in an upcoming post… But for now, think about your time and income as it relates to your blogging activities. That should give you the answer you need as to whether you’re running a business or pursuing a hobby.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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Taxpayer asks:

Thanks for taking my question! I wanted to say that I appreciate your blog, I find it easy to read and understand. I also like how you talk about your children as though they’re a real part of your life instead of accessories. That’s very refreshing to see online.

That brings me to my question. I have been trying to have a child for two years. It has been frustrating and expensive. Last year, as therapy, I started blogging about my journey. I was encouraged to find that there were other women out there interested in my story. At the end of the year, I realized that I had actually made a little bit of money during the year from small ads. It was not much (about $400) but enough that I think I need to report it on my taxes. My question is where?

Taxgirl says:

Congrats on your success! That’s great to hear and I am glad that you have been able to turn your personal struggle into something positive.

Report your income on line 21 of your form 1040 as “other income.” It sounds like you’re doing this as a hobby and not as a business, so you would not need to file a Schedule C. If it turns into a business, you’d file a Schedule C – more on this distinction in a post later today. But for now, I feel comfortable that you’re treating this as a hobby so you’d report your income on line 21.

You didn’t mention any blog-related expenses, so I’m not sure that you have any. If you do have blog-related expenses for your blog (such as web hosting), you could report those on Schedule A as miscellaneous itemized deductions; those deductions would be subject to the 2% of AGI limitations (more on this in a later post, too). You can report expenses up to – but not more than – the amount of your hobby income. You may not claim a loss (meaning more expenses than income) for a hobby.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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If there’s one thing that both parties in Congress can agree on, it’s that any hope for economic recovery is going to hinge on getting unemployment under control. At the end of 2009, one out of every ten Americans able to work wasn’t working.

Fortunately, there’s some good news. Last month, the national unemployment rate dropped to 9.7%, the lowest since August. In addition, the manufacturing sector added jobs for the first time in three years.

It’s certainly encouraging but likely not enough to signify a recovery. That’s why Democrats and Republicans are working together to get a jobs bill passed this week. The bill will provide a tax break for companies who hire unemployed workers; the measure would exempt companies from paying the employer’s share of Social Security payroll taxes for new workers so long as those new employees had previously been unemployed at least 60 days. That’s equivalent to a 6.2% reduction in overhead costs for a small business. If it passes, it would be a substitute for Obama’s proposed $5,000 tax credit for small businesses who commit to new hires. The Senate plan is cheaper and considered less likely to be abused than Obama’s version.

While it looks likely that the Senate will pass some version of the bill, it’s not so certain in the House. Reportedly, a number of Representatives doubt the efficacy of a bill which creates jobs if there are no consumers willing to buy goods and services. I have one question for them: what do you suggest instead? It’s awfully easy to sit back and try nothing. After all, our good friends in Congress are employed – to the tune of $174,000 per year. Speaker of the House Nancy Pelosi (D-CA) takes home $223,500. Majority Leader Steny H. Hoyer (D-MD) and Minority Leader John Boehner (R-OH) each take home $193,400. Oh, and did I mention the benefits?

So, it’s of course it’s easy for members of the House to sit back with a “it’s not going to work” attitude without even giving it a go. They have no clue.

I’m not in Congress but I do own a business. And here’s the thing: our economy is very interdependent. I don’t buy the idea that giving the top more money will help everyone down the line any more than I buy the idea that the failure to buy goods or services at the bottom creates a standstill to the top. It’s not a straight line and it’s not a simple equation. It’s complicated. Financial incentives matter. If I could expand my business capacity with limited overhead, I would. And I think most small businesses would.

Why makes the House think they know better? And what do they have to lose by saying yes? It won’t cost them anything upfront and it would only apply if businesses actually made a new hire (which would, in turn, reduce unemployment payments). So, no hire, no cost. And it’s not a refundable credit, so nobody’s getting anything that they didn’t pay in. It’s a tax cut but for taxes associated with costs and not directly tied to profits. So it’s not a blanket tax cut – it’s a tax cut specific to businesses who create jobs. That feels like a good thing.

Last year, Idaho paid out more than $500 million in federal unemployment benefits. Georgia paid out $1.6 billion. We’re already bleeding money to pay for those who are unemployed. Why not try something new and try to kick start the economy by something other than simply throwing money at it with our eyes closed? Your thoughts?Similar Posts:

• Jobs Bill Moving Through Senate
• Congress Considers Jobs & Tax Bill (Again)
• Health Care Bill Update
• The House Has a Plan to Pay for Health Care (Yes, There’s a Catch)
• Where’s the Fire? The Rush to a Unfinished Stimulus Plan.

Taxpayer asks:

Hi Tax Girl,

Thanks for taking questions. It’s a really nice thing to do.

I have a trio that performs regularly and this year the venue sent me a W-9. I know it is just for informational purposes in preperaion for a 1099, but should they be sendind one to just me or should the other band members also receive the fom?

They pay us by check, the check is made out to myself in the full amount and I then pay the additional musicians. It looks like they may 1099 me or are setting up to 1099 me for the full amount at tax time. How do I ensure I only pay tax on my 1/3 and how do I or the venue hold the other 2 musicians accountable?

Thanks.

Taxgirl says:

Ideally, the forms W-9 and the forms 1099 would be issued to the trio, and not to you individually.

I am going to assume that the trio is not incorporated and does not have its own taxpayer ID number. I’m also going to assume that you are the member of the trio who typically signs the contracts and manages the money.

So, here’s the scoop. If the form 1099 is issued to you, the IRS is going to be looking for that income on your return. So I’d advise against merely splitting the 1099 among the members of the trio and calling it a day, which is what tends to happen. Under the circumstances as you’ve explained them, I’d include the whole amount on your return and then deduct the amounts paid out to the members of the trio, as if they were subcontractors. If you have good records, you’ll be fine with respect to reporting.

But here’s my big caveat: depending on the amount and how it’s classified (as a hobby or business), reporting the full amount will artificially inflate your gross income, even though your net income may be roughly the same. You could have unintended tax consequences, especially if you live in a state or locality that taxes gross income or if the amounts are significant.

I’ve represented a lot of groups, including musicians, theatre groups and artist collaborations. And even though I know this “one check to a member” system is something that happens all of the time, it just isn’t ideal. The record-keeping is all on the member with the check (especially since it’s your tax ID number being reported to the IRS) and things can get complicated. Technically, you should be issuing forms 1099 to your band members for their respective share of the pie and you should be keeping the records of what expenses were paid out of the check, etc. Of course, everyone else is just walking away with a check, while you stare at a spreadsheet and try to work out what’s what. It can cause hard feelings, create disputes and often results in a mess.

So, I have two suggestions for the future, depending on your plans. If this is something that’s always going to be a hobby, be very clear with the payor that you want separate checks for the members of the trio. And fill out three forms W-9. Despite the fact that the payor may initially hem and haw, in today’s Quickbooks/Quicken/Peachtree kind of world, it’s really no more work to issue one check as three. And if it’s a club or other organization issuing the check, they have an accountant who does all of that kind of stuff anyway, so it’s not a real burden: don’t let them convince you otherwise. Now, the record-keeping and reporting requirements becomes the responsibility of each individual member of the group and not just on you.

Going forward, if your trio is something that’s going to be a real business venture, meaning you hope to do it to earn a living, I’d consider incorporating or at the very least, loosely organizing as a partnership and securing a taxpayer ID number for the group. Then you pay expenses out of the group first, then split the checks. I’d highly recommend that you talk to a tax or entertainment lawyer about whether this makes sense for your group.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

• Ask the taxgirl: Tax History
• Ask the taxgirl: Hobby Expenses
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Taxpayer asks:

Do W9 forms need to be renewed each year? Or as long as I have one on file for a given contractor am I covered?

Taxgirl says:

A form W-9 is used to confirm three things: (1) a taxpayer ID number; (2) that the taxpayer is not subject to back-up withholding and (3) that the taxpayer is a US person (even though for this purpose, the definition of US person includes partnerships, corporations, trusts and estates).

Once a taxpayer ID number has been confirmed, you can pretty much count on the fact that it will never change. Even with respect to companies and partnerships, the number stays the same unless the entity changes form (for example, from sole proprietor to LLC).

Also unlikely to change (without your knowledge, anyway): the taxpayers’s status as a US person. Unless a person actually renounces his or her citizenship, or a resident alien leaves the country permanently, the status for purpose of the W-9 is not likely to change.

The most likely thing that could change is whether the person is subject to backup withholding. Again, this is not a common occurrence but it could happen.

From a practical standpoint, the payee should notify the payor if the information on the form W-9 changes – it’s not the payor’s responsibility to chase the payee for updated information. That doesn’t always happen, though, and the payor is responsible for reporting requirements related to the information on the form W-9.

Not surprisingly, the IRS doesn’t offer much guidance on this issue. From a practical standpoint, it’s not a bad idea to ask vendors to complete a new form W-9 for your records each year – many of our vendors ask us to do this every year. The form takes all of 2 minutes to complete. It’s not burdensome. It’s not expensive. It doesn’t require any expertise. It’s simply a confirmation of the three things outlined above – as well as your address.

So, from a business standpoint, it’s not a bad idea to ask all of your vendors to complete the form, just to keep it in your files. This also increases the likelihood that you won’t forget to add new vendors. From a tax standpoint, it’s generally not required unless the information changes.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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• Ask the taxgirl: I forgot to file Schedule M!