Happy New Year. 'Tis the season for New Year's resolutions and getting your business ready for tax season. Staying compliant with taxes is not pleasant, but it's something you have to deal with as an entrepreneur. This episode explores common misconceptions and mistakes entrepreneurs fall victim to regarding income, expenses, and tax filing.
We get into the nitty-gritty on what is considered taxable income and how to avoid getting a threatening letter from the IRS. You'll also learn commonly overlooked tax benefits. It's time to battle your fears around taxes. Get ready to become the financial superhero for your business with these powerful and essential tax tips.
Episode 71: Planning Like a CEO (Guest Racheal Cook)
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January 2022 - Tax Group Programs
IRS: Business Expenses - Business Income - 1099-NEC - Retirement Plans - The Electronic Federal Tax Payment System - Business Use of Car
For more info, see complete show notes: https://www.getthebalanceright.net/blog/episode78
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3 Essential Tax Tips Solopreneurs Need to Know
Welcome to Get the Balance Right podcast; I am your host Heather Zeitzwolfe. 'Tis the season for New Year resolutions. If you caught episode 71 with Racheal Cook, you know I was going on a CEO retreat to plan my goals for the year. Did you also set aside time to strategize for 2022? If so, what have you decided to work on this year? Did you create personal and business goals?
I'd love to hear about your New Year's Resolution. You can DM me on Instagram. Or you post your resolutions in my Get the Balance Right Facebook group, which I'd love for you to join if you haven't already. The Facebook group is a great place to be held accountable. I would love to support you with your goals and cheer you on. There's a link in the show notes.
So what are your goals for your business?
Perhaps, they overlap, like mine. For instance, I am promising to get more help in my business. If you're a long-time listener of the podcast, then you know I've been saying that for a while. But I swear, it's finally happening. I set aside time in December to document my processes to make the dream a reality. Taking tasks off my plate will allow me to relax and have more quality time with my family. It will also make time for exercise, which I desperately need to do. Full disclosure, I got out my jogging trampoline a month ago and used it once. Years ago, before Netflix, I used to jog on my trampoline several times a week, watching my X-Files DVDs, I called it Ex-er-file-zing. I thought I’d get inspired to use it again, but I haven’t. Instead, it’s causing me guilt and taking up space; it’s this large circular thing in the middle of my room, leaning against my shelves, and has become the place I toss my hoodies and yoga pants. Ironically, two things I COULD be wearing while using that contraption. I used to walk and ride my bike everywhere, but since Covid, I rarely leave the house...and within my house, I rarely leave the chair in front of my laptop. Whose got to get the balance right? Me, that's who!
I just hate exercising, but I know I gotta do it. Maybe my disdain for excise is similar to your loathing of taxes. They're both necessary evils. The consequences of ignoring them are different but both brutal. If you don't exercise, you can become unhealthy and die. Whereas if you don't pay your taxes, you'll end up in prison making license plates. Both are not optimal choices.
Staying compliant with taxes is not pleasant, but it's something you have to deal with as an entrepreneur. I'm sure the name of this episode gave you pause “Three tax tips…ughhhhh”. You were probably scrolling to see what other podcasts were in your queue. Thank you for being a brave soul and pressing play. Maybe you thought it was like a Band-Aid you had to rip off. Whatever guided you to listen, I am grateful for.
Before we get into the three tax tips, I want to address a misconception, which I hear a lot. It’s this idea that it’s better to spend all the money in the business to save on taxes. This is a safe space and I’m going to be blunt.
If your approach to avoid tax is to lower your net income to the point of obliteration, your plan is flawed. I’m sorry.
Having a positive net income means you made a profit. What you make in sales is not the same as profit. Profit is the amount you have left from sales after paying all your expenses.
For instance, you can be a selling Diva, but if your expenses exceed your income, then honey... you're broke. The goal is to earn a profit and pay yourself for all your effort. Unfortunately, many entrepreneurs fall into this trap where their sales, on the surface, appear to be phenomenal. Still, in reality, the cost to run the business exceeds the sales. This predicament is called a net loss. Sure, you'll owe less in taxes; that may sound like a win…but it's important to note that as a result, you won't have funds to pay yourself or the money to reinvest in the business.
I know all this stuff can seem stressful, overwhelming, and just plain icky, especially regarding taxes. It's easier to put on blinders and not think about it than face it straight on. But if you keep your head in the sand too long, then the IRS will hunt you down. Just like the mob, they want a piece of the action. But if you've passed the deadline, they hit you will penalties and interest, and these numbers can get rather huge. These penalties and interest are not tax-deductible either. Talk about putting salt on a wound.
I'm not here to scare you. Instead, I want you to be prepared and face the tax demon head-on. Today I'm going to share my top three tips to help you, as an entrepreneur, get prepared for this tax season. I want you to know that the tax code is complex, and these tips are not an exhaustive list. These tips should be used for informational purposes only. Yes, I am a CPA, but I do not know your unique business and tax situation. Also, depending on when you're listening to this, rules may change. Although the best practices mentioned in this podcast can be used for businesses located anywhere, all the tax forms and regulations mentioned are for US-based, for-profit companies. Be sure to get specific guidance from your CPA, tax preparer, and/or lawyer. It is up to you to do your own due diligence. Also, I would advise that you take a more proactive approach rather than a reactive one. That's why working with a bookkeeper, CPA, or profitability advisor throughout the year is so important to keep you on track. BTW – I offer all these services through my business Zeitzwolfe Accounting. To learn more, you can set up a discovery call with me; see the link in the show notes.
Alright, now that we have that out of the way.
Tip #1: Validate your total revenue. This may sound like a basic idea, but this one can get overlooked, especially by solopreneurs or newbie entrepreneurs. I'm going to cover the areas where people tend to trip up.
Many of us are using payment services such as Stripe. I use it as well. But remember they have a lot of fees. When Stripe moves the money into your bank account, that is the net amount. That means the amount they deposit into your bank account is the total after they take out their processing fees and sales tax if you're subject to this. In other words, what they deposit is not your actual revenue. If you receive a 1099-K from these institutions, be aware that the numbers on that document do not accurately indicate your sales income. Therefore, always confirm your revenue from these services by looking at your year-end statement. It will contain the fees, sales income, and taxes as separate line items.
Even if you're using bookkeeping software, you must confirm your income. Not only is the payment collected from Stripe an issue, but the software doesn't always sink with the bank perfectly. Unless you are reconciling each month to your bank statement, you can't guarantee that the funds in your books are accurate for both income and expense. As a result, you can be under or over-report your net income.
If you are a contractor but don't receive a 1099, you must report that income anyways. There seems to be some confusion on this. If you accept payment in cash, such as for services and tips, you must also report this income. Just because there is no paper trail doesn't mean you can ignore this income.
If you receive commissions or kickbacks from affiliate programs, you must include this with your income. They may have paid you with an Amazon Gift Card…well, that's taxable income. Be sure to include payment received via gift cards in your income. If you've received donations, and I'm saying that with air quotes, such as through Patreon, that money is taxable and must be included as income.
Those funds are also considered taxable income if you received money for your businesses through crowdfunding, such as Kickstarter.
Remember, the funds you receive in your business are typically taxable. There are cases when it's not, such as a loan, a special non-taxable grant, a tax credit, or some sort of non-taxable forgiveness of debt. If you've received funds that you think are not taxable, be sure to discuss them with your CPA or tax person before excluding them from income.
#2 Gather up all your deductible expenses
One of the best things about being an entrepreneur rather than an employee is deducting business expenses. Now let me be very clear, to be deductible a business expense, it must be both ordinary and necessary with the expectation of making a profit. I will assume you're running a legit business and not a hobby for this conversation. Why is this important? Starting in 2018, the IRS no longer allows you to deduct any hobby expenses; however, all the income must be reported and taxed. Ouch! Here's another reason why making a profit is essential…it demonstrates that you're serious about your business.
A mistake I often see when I take on a new client who has been doing in their own books is expensing an entire loan payment. In accounting jargon, a loan is a liability, not an expense. Only the interest on the loan can be expensed. If you have any loans in your business, I want you to be aware of this. If you're unsure how much interest you paid, you can look at your year-end statement, which will show the amount of principal paid versus interest.
With your expenses, it's important to remember what is tax-deductible as an expense and include these on your return. These may include vehicle costs using the actual expense method or the standard mileage rate method. Based on the IRS rules, you must keep your records contemporaneously. In other words, it is your responsibility to keep detailed records throughout the year if you want to take this deduction. You will need to log the number of personal miles and collect detailed information for your business travel. The process by which you do this is flexible, such as you can log it on paper, in an excel doc, or even through a phone app, which tracks your travel via GPS. Whatever you choose, pick the option that will keep you vigilant about logging your miles.
Other expenses you may be able to include as a business deduction are your home office, internet, cell phone, healthcare, and retirement funds. Discuss these expenses with your CPA to verify which ones you can deduct and what the applicable percentage of each would be. The IRS has particular rules around this, which are strict. They’re also as dry as a piece of old toast, so I’m leaving them out of this episode. To learn more, follow the link in the show notes.
If you don’t have a deductible a retirement fund,
Be sure to find a financial advisor who can help you set up an appropriate retirement fund for your business entity. They can help you choose investments based on your retirement financial goals, risk tolerance, and investments that coincide with your ethics. If you have an existing retirement fund, be sure to inform your tax preparer about the funds you've already contributed to 2021. Please find out from them how much more you're eligible to contribute towards 2021 and how that will affect your taxes for 2021. You have until April 15th, 2022, to make the contribution. However, if you have a SEP IRA and file an extension, then you have until the extended filing deadline or when you file your tax return. Keeping all this stuff straight can be a bit much, be sure to educate yourself. If you contribute too much or you're ineligible to make a contribution, you can wind up owing penalties until you correct the error. So be sure to ask your CPA and financial advisor any qualifying questions you have.
As I noted in tip #1, if you're using bookkeeping software, ensure that you include all your expenses by reconciling your bank balances each month. If you have comingled your personal and business expenses, such as using your business credit card for groceries. In that case, you'll want to make sure to exclude personal expenses from your business's expenses. If you purchased business expenses with your personal credit cards, those expenses must be included with your other business expenses. It's always best to not comingle funds because you can create a big hot mess pretty quickly. Because of this, if you have commingled expenses, you may need to get help untangling them. A bookkeeper can help you clean up your books and sort out the hot mess.
#3 Stay Compliant - Don't Mess Around
Tip number three, stay compliant. Don't mess around. Rules and laws must be followed, and taxes must be paid. Don't try to be cute; save that for your Instagram Reels. If you decide to go into business, you are expected to do things typically upheld by a government agency. It is your responsibility to keep your business compliant. Nothing will make you sit up straight and pay attention, like a threatening letter from the IRS demanding thousands of dollars in back taxes. But it's not just the IRS. Staying compliant may include various things, depending on your service or products, industry, and location.
You may have to follow guidelines at the state level or abide by local ordinances. These may include proper licensing, insurance, permits, inspections, legal documents, and audits. You may be subject to local and state taxes depending upon where your business operates and if you have employees located there. You might be subject to be personal property taxes, where you may owe tax on the assets you own. If you are conducting business in another state or house inventory there, then you must comply with that state's laws. For instance, you may have to collect sales tax in a state or register your business with the Secretary of State. Every state is different. Local communities all have different rules. Therefore, you should educate yourself on what rules, laws, and taxes you may be subject to before making money there. Some states are worse than others. For instance, running a business in CA is quite different than Florida.
Staying compliant also includes filing and sending in the payroll tax. You do not want to mess around with that. One of the benefits of using a payroll service, such as Gusto Payroll. The service will transfer the funds and file the tax documents to the correct government agencies on your behalf. If you'd like to use Gusto, you can set up an account using my affiliate link in the show notes and receive $100.
If you have contractors and pay them $600 or more within the year, you must file a 1099-NEC to the IRS and send the recipient their copy by January 31st. There are some exemptions for corporations and credit card payments, so be sure to read the rules to know what you'll need to do to be compliant. States frequently have their own rules around 1099s, so check with your state's Dept. of revenue. Many online companies offer 1099 filing services, which make the process easier.
Staying up to date on your estimated taxes is super important to avoid penalties and interest. It also helps you avoid a big tax bill when you file. Keep good records as to when you sent in estimates and how much. Estimates are calculated based on the prior year's income and should be adjusted and increased if you make more. If you tend to forget to send in your quarterly estimates, you should open up a payment account with the IRS. You need to do this in advance because they will mail you a PIN. Once you get the PIN, then you can connect your bank and pay electronically using a manual feature, or you can set it up for auto-pay, where you choose the date and the amount. You'll need to check with your state to see if they have a similar service. Otherwise, you should be able to manually send in payments electronically rather than mailing in checks.
Depending on your entity formation and how you've decided to be taxed, your business might be subject to its own tax filing. Then those earnings are reported on your individual return, such as a K-1 from a partnership or S-Corp. Otherwise, you may need to report the income and expenses on your individual 1040. Be sure to discuss this with your tax preparer. Get clarity about how your business is being filed and when it might be more advantageous to be taxed differently.
Okay, so let's just go back over these.
#1 Validate your total Revenue
#2 Gather up all your deductible expenses
#3 Stay Compliant - Don't Mess Around
After listening to this podcast, have your goals for your business changed?
Besides resolutions around marketing and sales, please consider making goals around the financial health of your business, which includes tax.
I hope this information has been eye-opening or an excellent refresher. It is not my intention to scare the BeJesus out of you. Let's face it unless you happen to be a bookkeeper, accountant, or lawyer, chances are this stuff may not be in your wheelhouse…and that's okay. But as business owners, you should at least be aware of this stuff so that you can seek the right help. Would you like help to validate your total revenue, gather all your deductible expenses, and be compliant? I currently have an interactive group program to help you do just that. Whether you're using bookkeeping software or have a pile of receipts, my program will help you. This program is designed to take the stress out of filing. Through this interactive program, you'll get your business finances organized and ready for taxes, including getting your 1099s filed electronically on time and getting a handle on your state and local requirements.
Alright, my friend, thank you for listening to this episode. I hope 2022 is a fantastic year for you, your business, and your family.
Remember to join my Get the Balance Right Facebook group, if you haven't already, so we can connect.
Happy New Year.