Law Enforcement and 1099 Income: Your Tax Survival Guide

Security extra jobs are a hot button issue for officers and their unions. Some argue that officers should not work outside their capacity as a full-time public servant, but others require the additional income to pay the bills. In Houston, Texas it is common for full time police officers to work as a contractor for bars, restaurants, and other public venues that require security to earn an extra paycheck. While the one paying you won’t take taxes out of these checks, you are required by federal law to report this income on your tax return as self-employment income. This means that you will have to pay taxes on all these earnings by April 15^th at your regular tax rate plus 15% self-employment tax. For this reason, many boys in blue end up with considerable tax debt or avoid working extra jobs altogether. While it’s true that more income will lead to more taxes, claiming the right deductions and setting aside some earnings can put you in a more favorable position financially than just working your W2.

The Tax Cuts and Jobs Act of 2017 have changed the way police officers, and every other taxpayer is able to claim deductions. In general, less people are itemizing because of the standard deduction nearly doubling. Along with a higher standard deduction, itemized deductions such as unreimbursed employee expenses were eliminated. In the past, officers would use their work-related expenses against their W-2 income, but this no longer an option. The only avenue to use regular police expenses such as dues, weapons, uniforms, and other gear is by having self-employment income in the security industry. Due to these law changes, a police officer working no security extra jobs will not be able to take any work-related deductions, but an officer working security as an independent contractor may be eligible for many of these deductions.

Deductible expenses are defined by the IRS as being “both ordinary and necessary”. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” While this definition is situational, for a police officer working extra jobs ordinary and necessary expenses include tools of the trade, union dues, tax prep fees, uniform and gear. This is not an all-inclusive list, but it should give you a better idea of the types of deductible items. Again, what is tax deductible and what can’t be deducted can only be determined through your individual situation and by applying ordinary and necessary.

It’s never a good idea to purchase items you believe to be deductible just because you want to lower your tax bill. Any tax advisor will tell you that spending $400 on a new weapon will only keep you from paying taxes on an equivalent $400 of income. This means that at a 25% tax rate you will have spent $400 of your own money to save $100. As you can see, this is not a money saving technique, but can be a useful bit of tax savings if you have a true need or desire for this purchase. It’s very important to record these purchases because a year later when it’s time to file your taxes, you may forget or misremember what you bought throughout the year. Also, if the IRS chooses your tax return for inspection, you will likely have to cough up receipts or some form of proof for the deductions you have taken. Mileage can often be difficult to prove without helpful apps such as mile IQ or other mile tracking tools. An IRS agent questioning your return will expect a detailed record of each business trip, or your best recreation of such records which will be a challenge after the fact.

Without the right knowledge of how taxes work, you may end up claiming significantly more deductions than you should. There is always a chance the IRS will approve your return, and you will never hear anything more about the mistakes made. However, if you win the audit lottery, and IRS agent will ask for proof on income and expenses claimed on your Schedule C. For example, if you claim every mile you drove your personal vehicle that you only drive half of the time for extra jobs, half of the mile deduction claimed will be disallowed. Taking baseless deductions such as health insurance, your full family wireless bill, or the full purchase price of a new car can result in serious financial problems. Not only will you have to pay back the taxes you should have owed, but you will be susceptible for penalties and interest that continues to accrue. Regardless of who you hired to report these false deductions, you will still be on the line for any tax burden the IRS proposes.

It’s so important to choose a firm that understands your industry in order to solve and avoid future tax headaches. At Molen & Associates we will take the time to sit face-to- face with you in order to go through common expenses, and make sure to answer any questions you have about taxes. We’ve created our LE Checklist to make record keeping easier for our many law enforcement clients. We understand your industry as we have specialized in law enforcement taxes since 1980. We prepare returns for more than one thousand law enforcement officers each year, and make sure they pay the least amount of tax allowable by the IRS. We will help you to understand how to get the most out of your unique tax situation and avoid costly mistakes. If you’re reading this and you’re an EJ coordinator, or your part of an EJ Facebook group, please share this article with other Law Enforcement Professionals. It could mean thousands of dollars in savings, and in your chosen industry, you know how much that can mean.

Austin Long

Tax Advisor