Kristen
Hey y’all welcome back to another episode of the savvy teacher seller. I am stoked for our chat today because we are diving into a topic that is a little scary, but let’s face it a big deal for us as entrepreneurs and that is taxes. I have gotten a bunch of requests from you all asking to hear specifically from my very own tax strategist.
Kristen
So today, your wishes my command, we’ve got Barbara Schreihans, my personal tax superhero joining us today. Barbara is the founder and CEO of Your Tax Coach. She also created the Write off your life course, and she is the voice behind the life changing money podcast. She and her team help business owners like us save a boatload in taxes, while also growing our profits.
Kristen
Barbara is gonna shed some light on when it might be a good idea for us to consider changing our business structure for better tax benefits, deductions that are probably off your radar, and how we can start prepping now for next year’s tax season. And don’t worry whether you are just pocketing a little extra coffee cash each month, or you’re running a full time TPT business, Barbara’s got advice for everyone. So kick back, grab a cup of coffee, and let’s dive in to the world of taxes.
Kristen
Hey TPT sellers ready to seek growth in your business. You’re in the right place. Welcome to the savvy teacher seller. I’m Kristen Doyle. And I’m here to give you no fluff tools and strategies that will really make an impact on your sale. Let’s get started y’all.
Kristen
Hi, Barbara, thank you so much for being here.
Barbara
Thanks for having me.
Kristen
I am so excited to dive into some tax things. One of the big requests that my listeners had was not just to learn about taxes, but to hear from my tax strategist. So I’m super excited that we were able to connect and get you on here to talk income tax stuff.
Barbara
Yeah, let’s do it.
Kristen
All right, let’s start with one of their biggest questions, which is around the different business structures and how those affect taxes. So can you maybe kind of explain the differences between sole proprietorship, LLC and S Corp?
Barbara
Yeah, one of the first things that we look at when we get a new client is how they’re structured. And so really how you’re structured determines how you’re taxed. And if you’re the wrong entity type, you could be paying way more in taxes than you need to be. So I always tell people, if you’re a sole proprietor or just a single member LLC, so you’re the only owner, you’re actually paying the most amount of money in taxes.
Barbara
So if you are a sole prop, or that single member LLC, you can actually look on last year’s tax return if you have it. And there’s a line on there called other taxes. And it’s probably a very high number. And you’re like, What does other taxes even mean? And that is your self employment tax number. And so you’re paying about 15.3% on top of your normal federal tax, right. So if you’re already in like the 22%, or even 32% tax bracket, you then have to pay another 15.3% just for being a business owner.
Barbara
And so we kind of use the gauge of if you’re making about $40,000 in profit a year, so not your revenue, but your revenue after expenses. If it’s 40k or more, we typically will recommend what’s called an S corporation or for short S Corp. And that will get you out of most of that self employment tax. So it could save you anywhere from 20 to $40,000 in taxes.
Kristen
I know I waited a long time to transition because we do have franchise and excise taxes in Tennessee and things. So that costs me a little more with being an S corp. So I waited a little bit longer to transition. But man those savings are worth it when it was the right time.
Barbara
Of course. Yeah.
Kristen
And so one question a lot of people have is around what kind of tax benefits they get from being an LLC. Can you kind of explain that?
Barbara
Yeah, definitely. So I always tell people like whether you’re a sole prop or LLC or S corp, really all the deductions are pretty much the same. It’s really a matter of if you’re a W2 earner versus business owner, and so we’ll just use the term business owner in general. And you get so many more deductions being a business owner than you do just in like a corporate job or you know, just getting a W2 because when you just get a paycheck every two weeks or every month. And those taxes are already taken out for you, you kind of like have no choice, right? You fill out that form and a mystery amount of taxes come out of your paycheck every time and you’re like, man, that seems like a lot, but I don’t really know.
Kristen
Or we just don’t even notice, because we’re so used to only seeing the pay stub amount that came out.
Barbara
Exactly. Yeah, so it’s kind of like prepaid for you, right. But as a business owner, you don’t have to pay taxes, one right away. But two, you don’t have to pay taxes on everything coming in, you only pay taxes on your net profit. So if you have expenses with your business, like marketing expenses, or going out to eat for business meals, or maybe you travel to a really cool location, because there’s a conference there, or you’re networking with another business owner, or you’re meeting a client or prospective client, you can take those travel and meals and marketing and home office deductions and maybe even vehicle deductions, on your business tax return that in the end is going to save you in taxes, because you’re only going to pay tax on that profit amount.
Barbara
So just like an example, maybe you bring in $100,000 in your business, but your expenses are $70,000, you’re really only gonna pay tax on the 30,000 rather than if you were a W2, you would have paid taxes on that full 100k.
Kristen
Yeah. And so then one of the best ways for us to reduce how much we have to pay in taxes is to keep really good records of all of those business expenses and make sure where you’re we are deducting most.
Barbara
Yeah.
Kristen
And I know most of us have kind of a list of things that we know are our deductions we can take, but what are some of the ones that maybe we aren’t always thinking about?
Barbara
A big one that I still see missed, even though like I feel like everyone now works from home. But it’s the home office deduction. A lot of times when like prospective clients are on calls with us, we look at their tax return. And it’s very obvious they work from home, but their old accountant or maybe they use an online tax software, it only took the what’s called simplified deduction for home office, and that’s maxed out at $1,500, which, you know, great, you got a $1,500 deduction for home office, but there’s like a way better way to calculate it. And a lot of our clients get like 5000 to $10,000 in deductions for home office.
Barbara
So I would double check that first on your tax return from last year and just look and see what was your actual home office deduction. And then with that, you get to take a portion of your mortgage interest, your property taxes, if you have a cleaner come to your house, or a landscaper or security system, all of your utilities. So there’s so many deductions that you get to take with the home office deduction.
Barbara
And a lot of times people are still missing their vehicle deductions too. I’ll use real estate agents, for example, a lot of times they use mileage as their deduction, because they are driving around a lot, right? They’re showing people’s houses and all of that. But if they would have taken the actual cost of their car, like maybe they bought a $50,000 car, they could have taken $50,000 of deductions rather than you know, whatever the mileage rate is for that year. And so I would really double check and make sure you’re maximizing your vehicle deductions, because then you could take the cost of the car, you could take gas and repairs, or if you want to upgrade something in your vehicle. So there’s so many I mean, it’s really like knowing how to tie an expense to your business.
Kristen
Yeah, that’s definitely a big part of it. And as TPT sellers, we probably don’t have a whole lot of auto expense. I know my husband for sure does because he is driving for work specifically. But definitely keeping track at least of mileage when we are making those business runs to the store and to the airport for a conference and all of those things. I’ve been surprised at how many business miles I actually drive as a TPT seller who works from home.
Barbara
Yeah, there’s a lot more than we kind of realized, like, maybe you run to target to pick up, you know, more post its, or you run to the Apple store because you need a new computer or Costco because you need some supplies or like you mentioned going to the airport for a business trip or a conference or a retreat or something like that. And so they can add up a lot faster than you think.
Kristen
They really can, and as you’re talking I’m thinking to write down miles for that trip to the Apple Store. Because I had a computer issue and I had to take it all the way in Nashville. So it was a lot of miles. So I have a couple of questions from people about some expense deductions. One of them is can you deduct meals when you’re working from home?
Barbara
So usually not, unless someone else is there with you. So like, maybe you have a contractor with you or an employee with you, then you can take the expense because you’re you’re having a business meeting or something like that. There is an IRS rule that says, if it’s for the benefit of the company, for you to work longer, you can take the expense. So like, I use the example with accounting firms. A lot of times when you work in an office during tax season, they’ll bring in dinner for you because they just want you to work longer during tax season, right. But as the owner of the company, you usually don’t get that benefit, kind of owners get excluded from a lot of things. So I would say like instead of eating at home, maybe go out to eat somewhere and make sure it’s with someone that you can chat business with.
Kristen
Yeah. So if I DoorDash myself lunch? Probably not. It would it be nice, right. One other question. And I think I know the answer to this one, too. But we’ll double check with you. We’re all taking photos of our resources and things and taking photos for social media. What about like hair and nails? Are those things deductible because we’re taking photos and using them for business?
Barbara
Yeah, so photoshoot expenses are a legitimate business expense. And so there’s a lot of things people don’t like realize off the bat that they could take. The obvious ones would be like, if you’re paying a photographer right to take the photos, or maybe you’re buying the camera yourself to take the photos, those are business expenses. But also, if you have props in those photos, so you know, maybe you don’t want to just take a photo of a piece of paper, you want to have like other exciting things in there. So maybe you have a laptop in the background, or a cute mug, or a plant or flowers or something like that the props for the photos also count. And if you’re in the photo, then of course, your hair makeup, maybe you get a spray tan or your nails, then those kinds of expenses would count as well.
Kristen
So if it’s for photoshoot, then yes. What about just the ones we take randomly at home? Do they fall under the same rules? Or is that maybe not?
Barbara
Well, I guess if you’re still taking photos, that’s a photo shoot, if you’re gonna use those photos in your business. Yeah.
Kristen
Good to know, good to know. What about retirement accounts? How can we use retirement accounts to kind of reduce how much we’re paying in tax?
Barbara
I love this question, because we just came out with our retirement course. And my favorite by far retirement account for business owners is called a solo 401 k. Now, this only applies to business owners that don’t have full time employees, besides their kids or their spouse, they kind of all count as you, essentially. But with a solo 401 K, you get to actually deduct up to $66,000 per year as a business deduction in your business, and you’re contributing 66,000 to your own retirement accounts. So it’s really cool. And I like them a lot more than SEPs.
Barbara
A lot of times, business owners will set up a SEP because their financial advisor, just like, recommends it. But it’s because SEPs are a lot easier for financial advisors to set up, solo 401 K’s take a lot more time and paperwork, but it’s not on you as the business owner, it’s on the financial advisor. And so kind of feel like they can be lazy and only setup a SEP.
Barbara
And even though the contribution limits are the same, like they’re both 66,000 for the year, but you can get to that 66k number a lot faster with a solo 401 K, you can also take loans from your solo 401 K if you ever need it without a penalty. And a lot of times there’s creditor protection against your solo 401 K, but neither of those things are available with a SEP.
Kristen
So yeah, and that’s important in case we put a lot into that 401k and then realize we maybe need some of it.
Barbara
Yeah, totally. And you know, we never think we’ll need it now. But who knows what happens, right? Like something tragic could happen or you never know. So I just like those perks. A lot better with a solo 401k.
Kristen
I think across my 10 years of owning a business, I have had all of the retirement accounts working on getting everything kind of into one at this point. What about mistakes that TPT sellers or just entrepreneurs in general? What are some mistakes that we make for filing our taxes?
Barbara
First would probably be not keeping receipts. So I know it can be a huge pain in the butt to store every receipt. But once you get in the habit of it, like anytime you swipe your card, anytime you buy something online, just put it in a folder in your email inbox or scan the receipt right there in person, and keep your receipts because if you’re ever audited, that’s what they’re going to ask for. And then document everything.
Barbara
So, you know, maybe you went out to brunch with your girlfriends, but the intent for you going is to actually talk to them about your business. So you can write that off as a business expense. But you didn’t put it in your calendar. And three years later, the IRS asks you why that was a business expense, you might not remember what you talked about. So add it into your calendar, like what was discussed? Who was there? It’s kind of like the who, what, where, when, why I always say. So always have that documented.
Barbara
And then probably the biggest mistake, like if you’re doing your own taxes, like you’re missing out on deductions, you’re probably not taking enough because you don’t have someone advising you like, Oh, if you did it this way, this could be a business deduction. Or if you just did this on this trip, that could be a business deduction. And so you’re probably not taking enough deductions. Because either you don’t know how to take them, or you forgot a receipt, or you’re not keeping good track. I never see someone like overtaking expenses, I usually see that they’re, that they’re missing some. And so just keeping good track of everything.
Kristen
Yeah, absolutely. I know. Man, it’s hard sometimes to remember to stop and write the things down or take the picture of the receipt or whatever. But I have definitely pulled out receipts from I don’t know, maybe a bag I took when I was traveling. And it’s only been a couple of months. And that receipt is already so faded. And it’s just hard to even read anymore. I’ve tried to get in the habit, if I’m ever anywhere that asks you if you want print or email, if it’s business, I tried to get them to email it, because then I know I can find it again.
Barbara
Yes, me too. That’s another good tip is like, I don’t know if you’re like me. But when I have to enter my email address, I’m kind of like, oh, man, like the person behind was waiting for me. But I still do it anyways, because it is worth having it in my email inbox than losing the receipt or having that magic ink disappear.
Kristen
Yes. And it just disappear so fast. Well, let’s talk a little bit about planning ahead. It is May right now, this episode will come out in early June. We’re past the tax deadline at this point. But what can we be doing to plan ahead for next year’s tax season to work on minimizing our tax liability and making sure we have everything in order?
Barbara
Great question. So first, I would try to project what you think your income will be for the years so that way we have a good understanding of like, what is your net profit going to be because there are different strategies and different ways of going about things depending on your income levels. And it will also impact whether you should you know, change your entity structure like we talked about earlier, you know, maybe you are going to hit that $40,000 profit mark or that 100k profit mark. And so planning now to change your business structure will be great because you have a longer runway to update any information with the state.
Barbara
Sometimes you have to update bank accounts or just get new bank accounts or even a new EIN number, which can take a little bit of time. And then if you are switching to an S corp, you have to start paying yourself a reasonable salary. And so you need some time to be able to set up payroll, and all of that. So starting now with figuring out the best entity structure for yourself, going back now in May or June and starting from January in terms of like, oh, let me gather as many receipts as I can. If you haven’t been keeping track, you know, maybe now you can at least drag and drop your emailed receipts you might not have all the paper ones but at least gather all your electronic ones. And then just getting in a good habit for the rest of the year for tracking those.
Barbara
And then like June, July, August are probably the number one times to open up retirement accounts. A lot of business owners are opening them in the q2, q3 range, because now we know which accounts we want to open how much you can probably contribute based on your profits and it’ll just give you enough time to open those accounts because they’re not just like an overnight thing, especially if you’re opening a solo 401k. Those take about eight weeks to set up. And so you need to start doing it kind of in the summertime.
Kristen
Yeah, and of course the earlier you start putting money into those accounts the earlier they start growing. I know I have been very guilty of waiting until the deadline and going, Oh, we didn’t put money in the account this year. And that is no not the best plan, because then it doesn’t get to grow all year.
Barbara
So yeah, exactly. And then, depending on what strategies you’re using in your business, like a lot of our clients pay their kids in their business, because you can pay your kids tax free. So maybe your kids are like testing out your new products, or your new PDFs or something like that. So they’re kind of like your test dummies, your researchers, you want to have time to set them up on payroll to pay them the adequate amount. And setting up kiddo bank accounts can take a little bit longer than normal bank accounts. So you know, there’s like so many fun little strategies and deductions you can be doing, but you have to start it in the summer, definitely before 12/31. Because kind of once that 12/31 clock ticks at midnight, you know, there’s a lot of strategies we could no longer do for you.
Kristen
It’s a new year, then, yeah, I just this past week, taught my oldest how to use Canva. He’s my new product cover and thumbnail creator, amazingly good at it actually, as long as I give him a good template to work from he is spot on. And he is loving, being creative, which is super fun, too. It really is fun to see your kids take a little ownership and I don’t know, get interested in your business too.
Barbara
And I bet he’ll get better at it, then you will let kids just learn so fast. And they can keep up on all the new updates and changes. And so that’s really cool.
Kristen
I was amazed at how fast he picked up on things. It took me way longer to figure out than him. So I had another question from someone and I know there are a lot of people in her situation. She is newer to business. And she’s kind of at a loss. And so her question is, if you are brand new to thinking about business and income taxes, where do you start?
Barbara
Well, first, I’ll say it’s okay to be at a taxable loss, especially in your first couple years of business, it’s actually kind of like expected, right? You’re starting a business, it takes capital to open one and you know, you’re gonna need supplies and all of that, and the IRS kind of gives you a few years of being at a loss without too much question. If you are at a loss, you know, for year over year over year, there could be some questions that the IRS will ask you, but as long as you can show you’re trying to show a profit, you’ll be fine and you won’t run into the hobby loss rules is what they’re called.
Barbara
But just in terms of like new business owners, again, like start out with the right entity, you want to make sure you’re always doing business in an LLC, so that you’re protected, keep track of all your stuff. And I would say like, invest in yourself first before like investing in anyone else. Just learn as much as you can, listen to as many podcasts as you can, read as many books as you can. And when you are ready, like hire the experts, because you’re not expected to know everything in business, like, everyone always comments, our Instagram is so amazing, and our social media and blah, blah, and I’m like, That’s not me, I’m not a creative person like that. I outsource that so that my headspace can really be in like taxes and how to save people money, and so outsource what you can when you can so you can stay in your zone of genius.
Kristen
Yeah, and I would say definitely working with a tax professional. One of the best investments really, that you can make in terms of return on investment. From the very first time I hired someone, instead of using I don’t know what I was even using TurboTax or whatever, to do my own taxes from the very first time I hired someone I knew like this is saving me way more than I’m paying them. Why wasn’t I doing this before? Definitely, I think one of the first investments that we should be making in our business is hiring someone to take care of the taxes for us.
Barbara
Yeah, I mean taxes can be the number one expense in your business, right? So figuring out a way to pay the least amount legally as you can, is so important. And I always say like, your accountant should never cost you money, because they should be saving you more than what you’re paying them so that it’s really not an expense at all. You’re making money off of them.
Kristen
Yeah, absolutely. And I know I definitely have experienced that. And it also is just such a weight off knowing that I don’t have to try to keep up with a bunch of tax laws and what’s changing and all of that because I have someone in my corner who’s gonna take care of that and make sure I’m doing things the right way when it comes April 15.
Barbara
Exactly.
Kristen
Well, thank you so, so much for being here on the show. This was so nice to chat with you and you definitely have my head even rolling around thinking about things I may or may not have remembered in my deductions or things I could be doing better. I’m so glad that you’ve been here and just really appreciate everything you’ve done for our family. In terms of helping us with our taxes over the last couple of years, it has been like you said, a good tax professional is saving you way more than you’re paying them, and is well worth it in the long run.
Kristen
Can you tell everyone where they can find you if they want to learn more about what you have to offer and how you can help with tax?
Barbara
Yeah, we’d love hanging out on Instagram. So @yourtaxcoach on Instagram or our website is yourtaxcoach.com.
Kristen
What a great conversation. I think it’s safe to say we are all walking away from this episode with a better understanding of taxes and how to legally pay less of them. A big, big thank you to Barbara Schreihans for sharing your knowledge with us today. As your action step for this episode. Take some time now to gather your receipts from the first half of this year and make a plan for how you can quickly record and save receipts in the future so that you have everything ready for tax season next year. This simple step can save us a lot of stress when tax season rolls around again.
Kristen
Finally, I do want to encourage you all to follow Barbara and the your tax coach team on Instagram. Their handle is @yourtaxcoach and they are constantly sharing helpful tips and updates and advice for business owners about taxes. If today’s episode was any indication there Instagram is a goldmine of valuable text strategy info. Thank you so much for joining us today. I’ll talk to you soon.
Kristen
I hope you enjoyed today’s episode. If you did, please share it with another teacher seller who would also find it helpful. For more resources on Growing Your TPT business. Head to Kristen doyle.co/TPT. Talk to you soon.
