the debt becomes totally worthless and uncollectible. There may be instances when a debt
is partially worthless, but usually businesses wait until it’s clear that the debt is com-
pletely worthless before taking the deduction.
How do you know if a debt is worthless? The best way is when the client informs you
in no uncertain terms that they can’t pay you. However, if there are good signs that a debt
is worthless that you can back up with facts, it can likely be deducted. For example, the
client has filed bankruptcy and there are a miles of creditors in front of your claim. An-
other would be when you haven’t been paid after several months and you learn your
client’s phone is disconnected and they’re nowhere to be found.
Self-Employment Tax
Being self-employed means being special. To the IRS, being “special” means having to
pay your very own tax. It’s how we pay into Social Security and Medicare. Unlike our
payroll counterparts, who split these costs with their employer, we cover the full amount.
The self-employment tax in 2010 is 13.3 percent, up to $106,800 of all net self-employ-
ment income. Above that amount, only the Medicare portion is paid. The Social Security
portion is currently 10.4 percent, and Medicare is 2.9 percent.
There are times when an artist might want to contribute more than is required. For ex-
ample, when they’ve had a bad year and take a loss. They can opt to pay more in order to
maintain or build up their Social Security credits. Doing so requires they use the aptly ti-
tled Optional Method. More information can be found within the Schedule SE instruc-
tions, available on http://www.irs.gov, for the current tax year.