10 Tax Tips for Sales Professionals
Spring has sprung! It’s that beautiful time of year when mother nature is working tirelessly to shake off the last remnants of winter, and if you’re like me, you are working tirelessly to figure out the best ways to keep money in your pocket and out of the hands of Uncle Sam.
Tax season can be stressful, but it doesn’t have to be taxing (pun intended). So, to make your life a little easier, we have compiled a list of tax tips for people in sales and customer relationship roles. As the frontline of the business world, you work especially hard for what you earn, and we want to help you keep every penny.
First things first, if you aren’t filing an extension, 2016 taxes are due on Tuesday April 18th, since the 15th falls on a weekend and Washington D.C. observes Emancipation Day on Monday the 17th.
1. Know if you are an Employee or Independent Contractor
While everyone has a different definition of what they do for work, the IRS only has two, you are either self-employed or you are an employee. Which category you fall into comes down to the level of control you have over your working relationship with a hiring firm.
To determine if you are self-employed, you can ask yourself a few key questions such as, does the firm directly influence how and when I accomplish my work? Am I financially invested in my work with an opportunity for profit or loss? Do I receive employee benefits? And can my relationship be terminated at will?
Truthfully, the firm you work with will typically make the determination for you, however the IRS has stated that 20% of workers are improperly classified. It is important to know if there is a mismatch between how a hiring firm views your relationship and how the IRS views your relationship because independent sales reps have additional tax responsibilities employees do not.
2. Make Quarterly Estimated Payments
Independent sales reps are expected to pay taxes just like everyone else, with the difference being there is no employer to withhold federal, state, and FICA taxes each pay period. To ensure everyone is paying their fair share over time, the IRS expects self-employed individuals to make quarterly estimated tax payments on their profits.
This can be tricky to manage, and requires a periodic, usually quarterly, review of your year and where you expect to close on December 31st so you can make appropriate adjustments. If you expect to close a large deal near the end of the year make sure to factor that into your calculations.
3. Pay your Self-Employment Tax
In a typical employee employer relationship, each party pays half of the 15.3% tax on eligible wages for Social Security and Medicare. If you are an independent sales rep, you will be responsible for the entire 15.3% because you are both employee and employer. The good news is that the tax is calculated on your net earnings from your Schedule C, and the 7.65% you pay for the employer portion is tax deductible.
Above we discussed tax rules that applied only to self-employed sales reps. Below we discuss deductions that both self-employed sales reps and employee sales reps are eligible to claim on their 1040s.
If you are an employee, you will often have the below expenses reimbursed by your employer, and any reimbursed expenses cannot be deducted on your personal tax return. However, in the case where you are not completely reimbursed, the non-reimbursed portion can be claimed on Form 2106 of your 1040.
4. Properly Calculate Your Meals and Entertainment Deduction
Next to travel expenses, client meals and entertainment is probably the next largest expense line item that you as a sales rep incur. It is also one that the IRS has set strict rules and guidelines around in determining what constitutes a legitimate business expense and what does not.
For a meal to qualify as a deduction for tax purposes you must have a business discussion immediately before, during, or after the meal. For an entertainment expense to qualify, it must be an activity that reasonably allows for business discussion to take place. A good question to ask yourself is “am I having too much fun”? If the answer to that question is yes, then the IRS may disqualify the deduction on the assumption that the primary intent of the entertainment was pleasure and not business.
In the event of an audit, the burden of proof for each meal and entertainment expenses is quite high, and you should keep thorough documentation on each event you attend or host. Important information to keep track of is cost, who was in attendance, location, and what was discussed.
5. You Can’t Claim a Deduction for All Client Gifts
You may deduct no more than $25 for business gifts you give directly or indirectly to each client during the tax year.
6. Track the Costs of Software You Use
You may claim expenses related to the purchase of any software, online tools, website hosting, domain registration fees, and or apps used in performing your function as a sales rep. So, as an important tool for any sales rep, the monthly fee for Sales Navigator would be an expense that you could claim as a deduction on your return. Sales Navigator is already a very competitively priced app, and becomes even more so when factoring in that the monthly subscription is tax deductible.
7. Document your Travel Expenses
Since clients and prospects don’t come to you, travel expenses are a central part of your, and many other sales representatives’, yearly budgets. Any expense related to business travel, such as airfare, car rental, Lyft, hotel, AirBnB, and meals are tax deductible. As with meals for entertainment purposes, you may only deduct 50 percent of meals incurred as travel expenses. And remember, the purpose of any expense you claim must be business. Any personal travel expenses that occur while on a business trip may not be claimed.
8. Know Both Methods of Calculating Vehicle Deductions
For all our road warriors out there, traveling by vehicle for business represents a significant cost in terms of upkeep and wear and tear you put on that vehicle. Because these expenses are business related they are of course tax deductible, and you have two options when claiming vehicle deductions.
The first is to document all expenses related to your vehicle, such as gas, insurance, and maintenance, and then calculate depreciation and take the actual value of your vehicle expenses incurred for business as your deduction.
The second option is to track the number of miles you travel for business and take the standard rate of $0.54 for each mile. Ideally, you should track both and take the higher of the two deductions come tax time. MileIQ is an excellent tool to use for tracking miles you travel related to business.
9. Deduct the Costs of Professional Services
Any professional service costs you incur in relation to your business or trade, such as legal, tax, or financial advice, are tax deductible.
10. Properly Choose Which Home Office Calculation to Use
If you are a sales representative who maintains a home office that you use exclusively and regularly for business, then you are allowed claim the usage of your home as a business deduction on your taxes. The IRS provides two methods for calculating the deduction, and you can elect which one you use.
The first method is to determine actual expenses paid in maintaining your home and multiplying that cost by the percentage of the house used exclusively and regularly for business.
The second option is to determine the square footage of the home used exclusively and regularly for business, up to a maximum of 300 square feet, and multiply the area by $5. The exclusivity and regularity tests are important, and simple things such as allowing your kid playing in the office, your dog sleeping there at night, or having personal documents or items, such as a bed, in the room can be grounds for an IRS auditor to disqualify your deduction.
The key to being successful come tax season is to be informed and prepared. Use our tax tips above to get you started in the right direction on what kind of information you need to collect, what literature you should read on the IRS website about deductions you plan to take, and how to understand your responsibilities to the IRS based on your employment status. If you don’t have time or interest to do the research yourself, then we are confident the people over at HR Block, or your local accountant, would be more than happy to have a conversation.
The topics discussed in this blog are informational only and do not represent tax or legal advice. We are not responsible for any action taken in response to reading this blog. When deciding on eligibility for tax deductions, refer to IRS publications or discuss them with a tax professional.