Multi-Level Marketing (MLM) Businesses and Taxes

Multi-Level Marketing businesses (MLMs) have exploded across the country; especially among the military spouse community. MLMs allow military spouses to run their own businesses at home and the job can move with their military spouse. I don’t have an accurate count but I’m sure there are nearly a hundred different MLMs out there. I’ve experienced the following MLMs: Pampered Chef, Amway, WUN Life, Isagenix, Pure Romance, Nerium, Origami Owl, Kyani and Scentsy.

A key thing MLM operators need to know is how to file their taxes. Although I haven’t run an MLM; I do have sufficient experience in tax preparation and here are some suggestions I’ve found doing research on this reader requested topic.

·         Create a separate checkings account to run your MLM. This will allow you to quickly differentiate between costs of running the MLM and income you’ve earned which will come in handy when dealing with deductions.

·         Before you even start your MLM find out if they give you a 1099-Misc Income Tax Form which identifies how much the company records as income you’ve made. Talking with MLM owners I found out that Pure Romance, Pampered Chef and Nerium file 1099-Misc forms with the IRS so you can claim that on your taxes as regular income. If an MLM doesn’t provide a 1099-Misc then it is incumbent on MLM operators to figure out how much income they’ve made. This is easier if you have a separate checkings account.

·         Running an MLM is similar to being self-employed and as such you can claim routine expenses as deductions if you itemize your deductions. If you have a separate checkings account it will make it easier to identify the costs. Some common deductions are phone and internet, party hosting expenses and gas/vehicle expenses for those MLMs which require frequent deliveries and travel. Itemizing deductions can help decrease the tax burden but it is important to ensure you’re legally entitled to the deductions.

·         If your tax situation requires you to itemize deductions then I recommend seeing a tax professional; either a tax preparation company or with a Certified Public Accountant (CPA). A professional can ensure you meet the qualifications for itemizing certain expenses and protect you from an audit.

·         For my non-military readers, if your MLM is your family’s sole source of income PLEASE ensure you meet the necessary requirements to comply with the Affordable Healthcare Act (aka Obamacare). The penalties can be steep and are basically equal to the cost of a “bronze” health care plan. So until the law is changed or repealed, it’s a better return on investment to just ge the healthcare. Like I said before, an MLM is similar to being self-employed so you’ll need to ensure you comply with the federal government’s requirements for health care.

If you’ve run an MLM and filed taxes before please leave me a comment or recommendations you have for other MLM owners.

2015 Thrift Savings Plan (TSP) Contribution Changes

In 2015, there will be big changes to our retirement contribution limits. For military members and our civil servants, our Thrift Savings Plan limit will be $18,000 up $500 from $17,500 in 2014. For those 50-years or older and that are eligible for TSP Catch-Up contributions, it will increase to $6,000 up $500 from $5,500 in 2014. This is great news. This $500 increase will allow us to put more money into tax-sheltered investments. If you do the Traditional TSP, you will be able to contribute an additional $500 pre-tax money to grow tax free and then be taxed when you withdrawal. If you do the ROTH TSP, you will be able to contribute an additional $500 of post-tax money to grow tax free and then will be tax free when you withdrawal. 2015 contributions will remain the same.

http://www.afpc.af.mil/news/story.asp?id=123433265

Another great change in 2015 is a larger saver’s credit amount. For our junior enlisted that meet the income qualifications they will see higher credits.

http://money.usnews.com/money/retirement/articles/2014/01/13/tips-for-claiming-the-retirement-savers-credit

BL: If the government gives you an opportunity, then you should take it. When funding your retirement, you should max out an IRA and then max out your TSP. This allows you to invest up to $23K in 2014 and $23.5K in 2015 in tax-sheltered accounts.

Full Disclosure: I’m a conspiracy theorist who believes there is a widening social gap and the government will look to the middle class to support the rich like some future dystopia movie. The investors who took advantage of government-offered programs will be better protected.

Help, I Need Money Quickly!

Are you at the tipping point of financial distress? Will one more month or year possibly break you financially? Will your financial troubles negatively impact your higher-level security clearance or special access program? If you need extra money quick and don’t have time for most long-term strategies, then the quickest way you can possibly generate extra cash is to adjust your tax withholdings.

People should take care before making this move; however, it is a move that everyone should consider regardless of their financial status. It doesn’t make any financial or economical sense to suffer all year long, paying interest on debt and then receive a large income tax refund at the end of the year. If you typically get more than $2,000 a year or more back in your income tax refund, then consider taking the following steps to get more money back monthly.

-          State Taxes – Search on the internet or contact your local military finance office to see if your state requires you to pay state taxes where you are currently stationed. I’m a California resident and anytime I’m stationed outside California I’m allowed to not pay State taxes. Of course this means that I won’t get any refund back either. If this applies to you then you can go to your local military finance office and ask for a DD Form 2058-1, State Income Tax Exemption Test Certificate. Depending on what day you go in during the month will determine when it will apply to your next paycheck (known as a “cutoff” date), but should take less than a month. I’ve seen people get as much as $20-$50 a paycheck extra by exempting themselves from State taxes.  

-          Military Pay Exemptions – Anyone can change their W-4 exemptions on Mypay (https://mypay.dfas.mil/mypay.aspx) anytime they want.  But before doing that, you should login to MyPay and do the IRS Withholding Calculator that is located in the Federal Withholding section on the Main page. Once you’ve done the calculator you can reasonably determine what your exemptions should be.  Once a year you should redo the calculator to ensure that annual raises and promotions haven’t changed your status. When adjusting your W-4, you can put as many exemptions as you want to adjust your tax withholdings each month, but just keep in mind that this will be the main vehicle that reduces your income tax refund check. If you don’t pay enough during the year, you may owe the IRS money. I’ve seen people get as much as $50-$200 a paycheck extra by CORRECTLY adjusting their withholdings.

Again, take great care when using these techniques. This tip is not just for those struggling with their finances either. Some of our junior enlisted families receive large amounts of Earned Income Credit and receive $5,000 or more tax refunds. These tax refunds are nice at the end of the year, but if you are struggling the whole year and your career or security clearance in jeopardy, then it makes sense to get more of that money in your paycheck every month. If you’re doing well with your finances and you want to maximize your savings, then this is a good way to do it also. Over time, putting your own money to working during the year, instead of at the end, will pay off big time.  Leave a comment and tell me if you've had success with this before.

Discussion About Depoloyment Entitlements

***Please read bottom recommendation***

Deployments can be a stressful time for many people and their families but they also come with financial compensations; although, nothing can compensate for the loss time from your family.  The best economic advice is to save ALL the "extra" money and/or use it to reduce or eliminate your debt; however, the best realistic advice is to save SOME of it and then use the rest to help you and/or family emotionally recover by making a large purchase or traveling and spending time with the family.  That being said, here are the entitlements one could expect to receive depending on location deployed to.

·         Combat Tax Zone Exclusion (CTZE) - All enlisted and warrant officer pay is tax exempt in many deployed locations. Officer's pay is tax exempt up to the cost of the Service E-9 (Sergeant Major of the Army, Chief Master Sergeant of the Air Force, etc.). This is not prorated and your whole month's pay is exempt even if you only spend one day in the deployed location.

·         Hostile Fire Pay/Imminent Danger Pay (HFP/IDP) – This is payable in an HFP/IDP authorized location and is $225 a month on a prorated basis—meaning a per day basis.

·         Hardship Duty Pay-Location (HDP-L) - This is payable for performing duties in a hardship duty location for more than 30 days and ranges from $50-$150 a month.

·         Basic Allowance for Sustenance (BAS) – For members currently receiving BAS, they will continue receiving BAS.  For members not currently receiving BAS, they will when they arrive at their deployed location. FY14 BAS rates are: for enlisted $357.55 and officers $246.24 a month.

·         Per Diem – Members receive $3.50 every day while deployed.

·         Family Separation Allowance (FSA) – Members who have approved dependants are authorized FSA and it is $250 a month on a prorated basis.

Again, these entitlements may not ease the burden of a deployment, but they do offer some financial compensation and may help improve lifestyles upon returning. So a typical Afghanistan deployment could easily yield over $1K extra a month shielded from taxes.

***NOTE*** - Please ensure you file your travel voucher within 5 days of returning from your deployment with your military finance office. Excess CTZE and BAS from not filing your travel voucher quickly gets collected back in a lump sum and is 99% of the reasons why your pay will be zeroed for one or more pay periods.  Your local military finance office can help mitigate these but your pay will not normalize for several months.  It is IMPERATIVE that you file your travel voucher and ensure it gets processed with your military finance office.

The Federal Budget and You

The Federal Budget is comprised of four components: 1) Tax Revenue (or Receipts) 2) Spending (or Outlays) 3) the difference between the two known as a Surplus or a Deficit and 4) The National Debt.  You are part of all four and here is how each one affects you on a daily basis.

• Taxes - The top three sources of income for the government is the Income Tax, Social Security Tax and the Corporate Income Tax.  Your attitude towards these taxes depends on your political ideologies.  But for financial planning purposes your goal should be to minimize the taxes you pay.  One of the advantages of a being a military member is that only your Base Pay is taxed; our BAS, BAH, deployment and travel entitlements are not taxed.  Another way to minimize taxes is to contribute to a Traditional or ROTH Thrift Savings Plan (TSP) and/or an Individual Retirement Account (IRA).  For the difference between the two, please read my article here: Should I Invest in Traditional or ROTH TSP?  In fact, every decision you make should be to pay the least amount of taxes throughout your lifetime to maximize your earnings.  Each year the government spends more than it gets in tax revenue, which increases our national debt, and we can assume that your income taxes will go up in the next 1-50 years so you need to do what you can to take advantage of today's tax rates. 

• Spending - The top four sources of spending in order or most amount spent is Department of Health and Human Services (includes Medicare/Medicaid), the Social Security Administration, the Department of Defense, and the Interest on our National Debt.  Again, your attitude on the importance you place on the different reasons for spending depends on your political ideologies.  But one thing in common is that both main political parties have been/are increasing the size of the government.  This increased spending compared to tax revenue generates a National Deficit (often confused with the National Debt).

• Surplus/Deficit - The difference between Spending and Revenue is what generates a Deficit or Surplus condition.  It's common knowledge that the U.S. Government has ran a Deficit almost every fiscal year (1 Oct - 30 Sep) for several Presidential terms.  At the end of the fiscal year the Deficit is added to our National Debt.

• National Debt - The National Debt has become a common discussion and worry for our current generation.  Large National Debts that become unsustainable have been one of the causes of civilization collapses since the Roman Times.  The interest on the national debt is the fourth largest expenditure for the federal government.  If our financial uncertainty becomes worse, the interest rate at which we pay for the National Debt will go up and every dollar we pay on the national debt is either one dollar that can be returned to a taxpayer or the federal government can spend elsewhere.

You are a taxpayer and are critical to these four components.  The only way to stop generating a Deficit is to cut spending or raise taxes.  Over the last two decades it seems that only increasing taxes has been approved and thus we all face higher taxes in the future if spending can't be cut.  It is important to see your role in this process and watch it carefully because it directly impacts your personal finances. (Q99VSR8GSWXG)

What's the Value of a Military Retirement?

With all the talk about the Federal Reserve eventually raising interest rates, we should discuss how it affects the value of the military retirement.  As interest rates rise, the theoretical value of a military retirement is reduced.  This is because you can get a higher rate of return on safer, long-term assets with civilian 401(k)s or saving-account equivalents.  Also, the military retirement is fixed for that year and as mortgage rates and loan rates go up, it makes the retirement worth less than the previous year.  The COLA annual increase helps decrease the impact of rising interest rates.

If an O4 with 20 years was about to retire this year (2013), he or she could expect to receive $43,702, annually, before taxes in retirement ($7,283.70/50% * 12 months).  To generate this annual income, one would have to invest in the safest, longest-term asset and the usual measure for this is the 30-year US government bond which currently yields 3.567%.  The value of the retirement at this interest rate is $1,225,175.  This is all theoretical and the only practical use would be to compare what you would have had in a 401(k) after 20 years in a civilian company.

Using the same assumptions, an E7 at 20 years would expect to receive $25,970 before taxes.  The value of the retirement would be $728,074.

If the 30-year bond interest rate goes up 1% to 4.567%, then the O4's retirement value would decrease to $956,913 and the E7's to $568,653.  Again, these values are theoretical, but it is important to know that fixed incomes, like a military retirement, is worth "less" in an environment of higher interest rates.