She first asked me what my hunch was where this family should begin to cut back. I had mentioned that without a complete picture it is difficult to advise or even guess, especially regarding more complicated areas like the medical insurance and co-pays. That said, I do believe that many families spend more than they need to on clothing, food, and other basic commodities.
Another overlooked area, often addressed by financial columnists is childcare. Childcare is simply an overwhelming expense for families. It is well worth evaluating various types of care to see if there is a less expensive way to provide the car needed. I know families who have worked out different work schedules to make this accommodation. At $400 a week shared between two families, I have to wonder if there is not another arrangement that can provide the hours needed for less.
Utilities in old homes are expensive. A poster suggested solar. Another suggested replacing appliances with more energy efficient appliances. I will warn people that often the benefit is overblown. I'm favorable to saving up cash to pay for newer appliances. I would not start with something big like windows. The payback period is long and I think it is often overblown. I would start (cash in hand) with smaller things like moving to energy efficient lightbulbs which can be had on nearly full rebates from time to time or even replacing a washing machine. Our own washing machine, replaced about 5 years ago, has paid for itself twice over I'd estimate. The other bonus is that it holds more laundry, saving us time and physical energy. When it comes to bigger systems, yes, they can pay for themselves, but I would not jump on whatever trend is out there in hopes of saving, especially when you don't have the funds to "invest." Stick to the smaller efforts and don't underestimate old fashioned things like turning the heat down a few notches and turning off lights.
And now for the real meat of the post: queen bee asks about this advice and if it is legit.
Another route we tried that didn't work for us but may work for you, from the advice of an accountant, is to ask your employers to make you a type of employee that is essentially self employed (I forget the name) it can be applied to certain professions like someone who sells life insurance. That allows for greater tax write offs. Or perhaps registering a company that operates out of your home, even if it makes the minimum allotted amount would give you other kind of tax write offs on your home expenses. Perhaps worth it to speak to an accountant.
A statutory employee is a very specific type of employee and chances are you aren't one! And if you do happen to be one (Do you pick up and deliver laundry? Do you distribute beverages, but not milk? Are you a full time life insurance sales agent working primarily for a single company?), there is a good chance that the business owner's accountant has put a good amount of time into worker classification on your behalf.
The classification of contractor vs. employee depends on three main factors: Behavioral Control, Financial Control, and Relationship Type. There are fairly severe penalties for misclassification. An employer retains the right to control how work is performed. An employee is generally paid a regular, fixed wage whereas a contractor is paid by the project and is employed on an as-needed basis (for professional services, the contractor is customarily paid hourly for the project). The relationship type between an employee and a contractor is significantly different and therein lies the rub.
I tend to have a bad feeling when an employee (and even their own personal accountant perhaps) start to agitate over how they can save some tax dollars by doing this or that to their employment status. Maybe there is an advantage to being a contractor, thinks the employee who sees his businessman neighbor pull up in a leased car for business? Hey, I want to be able to write off my car lease he thinks! And I'd love to be able to write off my IPhone and data plan. And wouldn't it be great to be able to write off those wedding gifts this wedding season?
In certain instances, an employer can convert a regular employee into a contractor. Perhaps an employer even has an incentive to convert an inquiring employee into a contractor because of the onerous legal regulations for larger employers and your inquiry will be very welcome. It might be very tempting to become a contractor because contractors are often paid more for their work (often to make up for the additional employment taxes they will incur as a contractor, but also for their own investment in equipment, etc).
That said, a contractor is far different than an employee and when you become a contractor, even if it is an "arrangement" you really are a contractor and should expect to be treated as one. Understanding your new status is key.. One of the determining factors between an employee and a contractor is the intent of the relationship and its (implied) permanency.
An employee is generally someone you employ and expect to have a continuing, ongoing relationship with and an investment in. An employer has little investment in a contractor beyond the work they are contracted to do. An employer will generally expect the contractor to know it or figure it out. Continuing education: your responsibility. Professional development: your responsibility. I've had plenty of interaction with contractors (and contracted companies) and contractors are expected to perform and produce or the relationship will come under question fairly quickly. Employees are also, of course, expected to perform, but there is a different type of investment in an employee and given the closer proximity a different type of investment. An employee that maybe isn't strong in this or that area, might be moved over to a different department. An employee with some time on their hands might be asked to try something new or experimental that could prove very successful. The contractor doesn't usually have the same proximity as an employee and isn't operating in the same day-to-day work environment.
Get hurt on the job? You aren't covered by workman's comp. Get laid off? Well, you don't really lay off contractors, you just don't take them on for new projects and no, you aren't covered by unemployment insurance. Company decides to award a bonus or open up a certain benefit program like pre-tax transportation dollars? Well, you don't get benefits. Worse yet, you are an accounts payable so get in line for payment. Did the employer not like the result of your project or find a defect in the work? You might be fighting this one out in court, unpaid. Severance pay? Maternity Leave? LOL in text-speak.
I certainly would not discourage a person who has great services to offer the world to go out there and make their way b'hatzlacha. But I would not turn in an employer-employee relationship with good potential and with the many legal protections it provides-a window seat into an industry-for a seat outside the window in exchange for some deductible mileage or a home office deduction. And, by the way, many successful business owners/contractors got where they did by being employees. Don't walk from industry too early for a tax deduction alone!
Regarding the idea of registering a company that operates out of your home for the tax deduction, is that legit? Let's take a step back. A person may take certain business expenses when running a business. What is a business? In short, something that you are engaging in with the intention of turning a profit. Merely "registering a company" that operates out of your home does not a business make. If you want to take a home office deduction, you need a home office. If you want certain write offs, you need certain current profitability. You also are walking a fine line if you are finding something to call a business that could be considered a hobby and are taking losses. So, the advice gives me pause.
Decreasing taxes does not the bottom line make. Ultimately, when a person runs around with this idea and that idea to save themselves some money, they are using their energy and their time and that investment should be profitable. So the question for a family in financial distress should not be how much can I decrease my taxes, but how can I significantly improve my current situation and my long term situation? If starting a business is a viable pathway, great. If not, don't bother upshlugging the Internal Revenue Code. Look towards other investments for your time.
Lastly, queen bee asks my opinion regarding the wealthy amother's following assertion:
the way to build wealth is through entrepreneurship rather than having a job, and she's a big believer in taking financial risks.
There is no one path to wealth except discipline. You must spend less than you earn. You must continue to spend less than you earn for many, many years on end. You must balance risk with common sense and discipline. And you must have a long term financial outlook. The amother from that thread struck me as someone with "new money." She criticized the Dave Ramsey conservatism, believing him too risk adverse. Her risk has paid off for her in the present. That doesn't eliminate the accumulated data on business failure which is a highly interesting study. Nor do we know if she could have got where she is with less risk. And, by the by, one reason why start up businesses often fail: lack of financial responsibility and awareness. So even where you take risk, you eventually need to turn the corner towards conservatism for the long term.
So that is my take, queen bee, happy you asked.