Got A Side Hustle? Don’t Miss These Tax Benefits, Deductions & Planning Tips - #028

Show Notes

Launching a side business can be exciting, challenging and at times, a little overwhelming, especially when it comes to taxes. Usually, it doesn’t take a lot of money to start a new business. To find out what hard costs, fixed costs and other tax related expenditures a solopreneur needs to know, Lori Vajda and Nola Boea sat down with Certified Public Accountant Bette Hochberger. Her approach to taxes when starting and incorporating your side business, is the subject of today’s episode.

Thanks for Listening!
Ready to start your business or grow your personal brand? Schedule a free 20 min. consultation call now. 

Sticky Brand Lab is the place for professionals who want to take their knowledge, experience or ideas on the road less traveled. 

If you enjoyed this show, make sure to subscribe to the podcast so you’ll never miss an episode. Want to get to know us more? Find out more about us and our services at Sticky Brand Lab

We love hearing from you! Leave or speak your message here

If you haven’t already, please connect with us on Facebook! 

Would you like to be a featured guest or have your question, comment or review mentioned? Ask Muse!

Business success strategies are in the works. Come have a listen!
In This Episode You’ll Learn

• What tax values to consider when it comes to incorporating a business.
• The different ways the federal government views business taxes depends on whether a business is an LLC, S-Corp, or C-Corp. 
• What the tax implications are when incorporating or not incorporating your side hustle business.
• Why the IRS actually does not recognize the LLC in any of its forms.

From payroll to paying quarterly taxes to keeping actual receipts, knowing what you don’t know about business taxes can cost you. As Nola and Lori found out, even if you don’t make any money in your first year or first few years, the IRS requires you to file taxes for your business. But, perhaps more importantly, knowing what items can save you money on your taxes is a benefit you, as a business owner, can’t afford not to know.. 

(3:57.63) The surprising value incorporating your business can have on your personal taxes. 

(7:18.88) Knowing the difference between filing your side business as an S Election versus an S Corporation, can cost or save you money on your personal taxes. 

(8:17:71) The different forms of incorporation which provide self-employment income and which ones don’t.

(8:59.88) If you just started your business and aren’t making any money, filing taxes can give you financial benefits you might not be aware of.

(15:05:21) This common mistake many entrepreneurs make in their first year of business, could cost you big money.

(18:50:99) What is the ‘pay as you go’ system the IRS uses for small side businesses and why you need to know about it.

Resources
You can subscribe to Lori and Nola's show, (we love you and want to make it easy) on Apple Podcasts, Spotify, Google Podcasts, Stitcher, or wherever you listen to podcasts.

CPA Bette Hochberger - https://bettehochberger.com/  

Bette Hochbeger YouTube - https://www.youtube.com/channel/UCNmaF-UYn3lJ9H7ShzyW6fA 

Bette Hochberger Facebook Tax Tip Tuesday - https://www.facebook.com/BetteHochberger/ 

This episode was supported by: Be-YOU-nique

Transcripts

​Nola: 0:00
Launching a side hustle can be one of the best decisions you make. It can be empowering, motivating it, give you the opportunity to take your career in the direction you choose. But running a business can also be a little overwhelming, especially when it comes to your taxes. From understanding what amount of revenue triggers self-employment rules to taking advantage of tax deductions. To savings for retirement. We had questions. Stay tuned listeners. As we optimize your side hustle, tax knowledge in today's show,

Announcer: 0:30
you're listening to the Sticky Brand Lab podcast, where time strapped professionals, like you learn how to create a business you'd love in as little as three hours a week.

Lori: 0:42
Creating your side hustle is a great way to explore entrepreneurship, showcase your subject matter expertise and generate extra income and well earning income on the side is a great financial benefit. Understanding the business side of things in particular, the tax side required an expert. For that we sought out certified public accountant Bette Hochberger. Hello and welcome aspiring side hustlers, Lori, and Nola here with the smart money episode of Sticky Brand Lab. But before we show you how to make tax planning for your side hustle, manageable, be sure to subscribe to our podcast on Apple podcasts. Google podcasts, Spotify, or wherever you listen to podcasts that way you'll never miss out on any of our weekly helpful, informative, and always opinionated podcasts.

Nola: 1:31
But before we begin a little disclaimer, in today's episode, we'll be exploring the topic of taxes for incorporating your side hustle with a CPA Bette Hochberger. The ideas and opinions shared are for informational and educational purposes only, and they don't constitute professional tax or accounting advice. So please consult with an independent financial or CPA expert for information specific to your city, your state, and your circumstances. Now let's get this financially tax fit show started. According to a bank rate study, there are more than 44 million Americans running side hustles. And according to us, census data, us business formations Rose by nearly 42% in 2020, which is great news. What many dare we say most first-time solopreneurs don't realize is that the federal government has different tax expectations depending on whether your business is an LLC. S Corp or C Corp to help us explore and understand the tax implications of incorporating a side hustle business. We sought out an expert in the field Bette Hochberger certified public accountant, chartered global management accountant owns an elite boutique CPA firm that offers accounting services, business consulting, and financial advice to forward-thinking professionals and business owners. While her firm primarily serves the Fort Lauderdale Florida area. Technology has made it easy and convenient for Bette and her talented team of accounting and financial professionals to serve clients on four continents. Bette's firm specializes in a variety of industries, including those that dominate the South Florida business economy, like real estate investment, companies with foreign investors, as well as Americans with business interests overseas. As an alumni of the Massachusetts Institute of Technology, that's MIT. Bette and her team serve the needs of venture capital funded startups in the Boston area and throughout the U S in addition to Florida's top medical, legal, and business professionals. Bette is very involved in her local community, including being a founding Scoutmaster of one of the first female boy scout troops, sword fights with a local stage combat group, and she sits on the board of various nonprofits and professional organizations. Whoa, welcome Bette.

Bette: 3:48
Hi.

Lori: 3:49
So can you help us understand how the way a business is structured impacts a person's taxable income. And by that, I mean, would you explain the value of incorporating a business in general for tax purposes?

Bette: 4:02
Sure. Absolutely. So I think the thing that is sometimes difficult to understand what tax is, depending on what structure you pick for your business, you have to either file different tax returns or the income is treated differently. So for example, if you set up an LLC and you are the only owner. Which we call members. So we call it a single member, LLC for tax purposes. It's treated exactly the same as though you were a sole proprietor. So that means it goes on your own personal business return as a schedule C and what that LLC does. It affects your taxes, not at all. It's actually a state legal construct that offers you asset protection. Which is, you know, getting into that business law area. So it makes not a difference for your taxes, but as soon as you have a partner in that, LLC, which using partner very loosely. It's not the like technical tax term, but usually people say I have a partner. So if there's two members in your LLC, well now you're not putting it on your schedule C anymore. You're now having to file a partnership tax return because the IRS actually does not recognize the LLC in any of its forms. We call it a disregarded entity. It just means the IRS ignores it. So when you then move into that partnership with a multi-member LLC, you have to file to form 10 65. It's a partnership return and partnerships are actually shockingly, simple and complicated at the same time. Hmm, because for most people, if you're like, Oh, you know, me and my friend started a business and we're just splitting everything. Okay. That's simple. But partnerships have a long history of tax law and business law for many, many, many, many years that can affect what you do and how you do it. But for most people, if you know, you've come up with something relatively simple, like we're going to split 50, 50. It's pretty straightforward. Though. The other thing is if you incorporate. Straight out incorporate with your state. You are by default a what we call a C corporation or just a corporation, your traditional think big, big companies, right? But you can be a very small company and be a C corporation. Now for those, it files its own tax return and it does not affect your personal taxes at all. Unless you take money out of it. That's what we call a dividend. Or if you put yourself on payroll, but that's not part of the business, that's, what's going to go into your personal tax return as though you just had a regular job. I hardly hardly ever see small businesses as a C corporation, unless they're trying to do something where they want to have investors. Mm, because usually investor not want to get involved in an LLC. They don't want to be your partner. Right. And they don't want to be sharing 50, 50, or whatever. They want to invest money. They want to have stock in your business. So that would be a small business that sets up a C corporation. Now. Obviously plenty of people set up corporations, right? That are small. I have a corporation, we do something called an S election. So probably people hear a lot about S corporations and really small. And what it does is it changes your business from filing its own taxes and paying its own taxes to yeah. Still files its own tax return. But now it's taking that income and plopping it into your personal tax return, but not on schedule C. It goes on schedule E schedule E page two. So it's different. It goes to this slightly different place it's treated differently and you kind of have to figure out all those moving pieces. Now here's the really fun thing. You can be an Ella, a single member, LLC. And you can make it an election to be a text as a corporation, and then you can make an S election. So sometimes you see people's like LLC company, right. And they're an S-corp because they can make all these elections. You can do a lot of things differently with the IRS than at your state level or what you initially set up. I mean, the bottom line is right. You have to know what you need to file and what is the characteristic of that income? So if you're a sole proprietor or you're a partner in a partnership. You have self-employment income, right? If you're an S corporation or a C corporation, you do not have self-employment income. So there's other taxes that come into play as well.

Lori: 8:40
Wow. I didn't even realize that. And there's benefits if you are a to paying yourself, right?

Bette: 8:46
Absolutely. Yeah.

Nola: 8:48
When somebody first starts their side hustle, they usually don't even make money at first. Is paying taxes or filing taxes. Isn't that even kind of a moot point.

Bette: 8:59
So I actually always tell people, unless you have literally no activity, like you set up the entity or the business, and you did nothing. If you're at a loss, you actually should file your taxes. Because if you're losing money in the beginning, you can either offset your other income. Those losses can offset your salary and reduce your taxes. Or if you set up like a C corporation or it was something where you're going to kind of invest, maybe you're building software, something like that, where you're investing money in, you can have losses that come into play in years that are further out. But if you don't record that anywhere, you don't get to take advantage of it later on.

Lori: 9:45
If you got equipment for your business, it depreciates over time. That's what you're referring to. Right? So the equipment depreciates, and I'm taking that over years, a certain amount of time over on my taxes.

Bette: 10:01
It could be that it could also be something as simple as, if you set up a business, say at the end of the year, like November, December. And you had to buy a computer and you had to set up a website and you had to pay your attorney, and then, then you have all this list of, you know, say you came up with $5,000 of expenses and you made not a cent, but if you're a single member, LLC, you can have a negative $5,000 on your schedule c that offsets other income. You can also make an election to take that over time. You could break it out over five years, if you wanted, it kind of depends on your individual situation, what you have now. I also work with technology startups a lot of times that are set up as C corporations and they might spend a lot, a lot of money for many years before they ever make a dime. And we call those net operating losses that we just roll forward. And one day hopefully they make money and once they start having those profits, those losses get to offset in the future.

Lori: 10:59
Well, that leads me to when you're starting a side hustle or solopreneur. What are some of the advantages and disadvantages if you incorporate in the various, like we talked about earlier, the C Corp versus an LLC, or how does the S-corp fit into that? What are those benefits that people should know about as well, drawbacks to each of them?

Bette: 11:24
Sure. So the LLC. It's very simple. That's I think the beauty of it, it's very simple and it's very flexible because you could start out as an LLC and you could decide maybe if you want to go full time with that business, you want to make the elections to ultimately turn it into an S corporation. And I've actually had clients that had kind of the reverse. They maybe had a business that they were very involved in, got involved in something else and they say, you know, bet, I don't really use it that much. I don't want to shut it down. But. It seems like a lot of work to file my own return and worry about all these things with the S-corporation. Could we revert back to an LLC and you actually can, you can revoke your S election back down to an LLC. And if you're don't want to close it, but you're going to do a little bit of activity. It's a little more simple. So the LLC is super flexible, super simple. And you know, in the very beginning, if you are just operating a little bit, it doesn't complicate your taxes all that much, which is sort of nice. It keeps down your taxes preparation bill. Uh, you don't have so many headaches of administrating the business and you can keep fairly simple financial records. I personally, I think everyone should use real accounting software, but I'm biased because I'm accountant. And that makes my life easier. If people are not coming to me with spreadsheets, but you absolutely kind of, if it's a simple business and you don't have a lot going on, there's a free software out there. You could do spreadsheets, but you know, eventually. And when you grow up a little in the business and it matures, you probably will want to turn it into an S-corporation, just because it's going to say it feels a little more real, but there's a drawback to S corporations, which is now you have to run payroll for yourself as the business owner.

Lori: 13:10
Would you do that? Every week, every month. Could you do it at the end of the year kind of thing, or

Bette: 13:17
you absolutely can. The IRS doesn't love that, but you can do that. Plus once you do payroll, one time, you have to file every quarter with the IRS and with your state. And I know Florida is really nasty if you don't file, even if you're not running payroll, if you don't file a zero tax return for your quarterly payroll, they will send you a nasty penalty bill that you got to pay. So you're paying a penalty if you don't remember to file that zero return.

Lori: 13:48
Gotcha. Gotcha.

Nola: 13:49
When we come back, Bette we would love to get your advice and feedback on common mistakes, new side, hustlers and solopreneurs make as well as some accounting tips, tricks and hacks you can use when starting your business. Are you an aspiring entrepreneur who's ready to share your vision with the world, but you're not sure exactly what that would look like? Or do you just want a safe soundboard to help you evaluate your top business ideas? Then a Be Unique session is just what you're looking for. This two-part clarity session is customized and based on your individual goals and experience .Together, we will help you determine your ideal business niche, target audience, and strategy. You'll leave the session with a realistic timeline and a set of small step, big win goals that make sense for you and your lifestyle. Sign up today for a free 20-minute consultation at stickybrandlab.com/shop.

Lori: 14:42
Welcome back to Sticky Brand Lab, where we show you how to turn your knowledge, passion, and great idea into an income stream so you can create a business and lifestyle. You're excited about. Bette, you had given us some great advice on some advantages and disadvantages for incorporating in each of the areas that we talked about, but now we'd like to look at what are some of the common mistakes that entrepreneurs make in their first year of business?

Bette: 15:10
I think a lack of records. They don't realize that they need to keep receipts. I hear all the time. Well, I put in all my credit card and I have my credit card statement. And the reality is if the IRS selects you for an audit, if you're so unlucky, they don't have to accept credit card statements. As documentation, you are required to keep receipts. That's like the number one thing. And if you're trying to write off your car or auto expenses, you need to have a mileage log.

Lori: 15:43
One of the things in particular that you said. Where you needed a receipt, because I often when charging something, you can now have an electronic receipt, but you're saying Nope. If they offer to send you a receipt, have them send you the receipt.

Bette: 16:00
Yes, definitely. Also things like meals. You're going out to business, dinner or lunch, something like that. If it gets over $75, you have to put a lot of documentation on that. Who did you meet with? Where were you? What's the date? What did you discuss? Right. What was the business purpose? I have to think about it from an IRS auditor's perspective. If they were to look at it, what would they question you about? Right. Would they believe you that you went to Publix that you took someone to lunch? I mean, maybe public subs thing here, but, but no. Oh, we went out to dinner for, you know, $300. What did you talk about and who did you take? So you have to be careful. You have to really make sure you're not trying to slide things in that aren't business expenses. And I see it all the time. Cause sometimes people think, well, if I just put it on my business card, it's a business expense. Not necessarily, right. It has to have a business purpose.

Nola: 16:55
So documentation, anything else?

Bette: 16:58
I find. And a lot of times people think that you buy QuickBooks and it's easy to use because it looks like it's easy to use. And it's not necessarily that easy to use. If you don't have accounting knowledge. So I really think it is worth it. Find a bookkeeper. And don't try to DIY that so much if you're trying to use software, because there there's a lot of things that can go sideways. If you're really willing to dive in, you can find fantastic resources. All over YouTube people show you how to do various and assorted things, but you have to a little bit be committed to learning it. It's not just, you know, I turn on a bank feed and away I go, you can make a big mess of it. And sometimes it's actually more costly to have someone fix it in the end. Then to have had them do it for you all along, believe it or not.

Lori: 17:55
So do you recommend then that as a solopreneur, that you have both an accountant and a bookkeeper.

Bette: 18:04
You can, you absolutely can. Some firms like mine, we do it. All right. We can do your bookkeeping and we can do your taxes, which is nice because then we always know what to look out for on the tech side, but we can also help you figure out kind of that management side of what is useful for you to see in your books.

Nola: 18:22
Are there any other mistakes entrepreneurs make in their first year of business?

Bette: 18:27
Well, I don't know if it's necessarily first year of business, but the first year that you are profitable and that you're going to owe taxes. A lot of times people don't realize that they need to be paying in quarterly estimated taxes. If you're not paid in enough through just your, uh, salary withholding, you're actually supposed to pay in every quarter. The IRS calls it a pay as you go system, because what they don't want to happen is, well, this first quarter of 2021 was a blowout year. I made so much money and then the rest of the year, not so great. And then 20, 22 comes along and I have to file my taxes and I'm like, well, I don't know why I owe so much. I don't have that money to pay it in at the time. The way the years of the IRS doesn't want to hear, like, I don't know where my money went, because a portion of what you earn isn't yours, it belongs to the government. Unfortunately.

Lori: 19:24
Well, when you're an employee, you're working, takes out those taxes, each paycheck. And I guess you just don't really think about it when you're self-employed or even with the side hustle, because it seems so much smaller than when your day job automatically removes it. But you're saying, wait, even if it is a side hustle, you still have to pay as you go, as you said,

Bette: 19:49
Yes. And actually a year or two ago, the IRS redid the w nine form, which is that thing you fill out when you have a new job, you know, it says, how many dependents do you have? How many exemptions, all that stuff. They revamped that whole form because so many people started side hustling and gigging and things like that. That they realized, Oh, if they've got a day job, they should increase their withholding to help cover those taxes. Because so many people didn't realize that they needed to pay in quarterly and that they were going to have a bigger tax bill than they were anticipating.

Nola: 20:24
Oh, wow.

Bette: 20:26
They're trying to make it easier for people to not fall into a trap of owing so much and needing to go on payment plans and things like that, but the forms are confusing. So it's probably still helpful to go to a tax professional and get some advice on even just how to fill out that w nine form.

Nola: 20:40
I see. Well, what are a few ways that a side gig can wreak havoc with an entrepreneur's personal taxes?

Bette: 20:49
Well, I think the big one is basically what I just said where, you know, you end up owing so much more than you anticipate.

Nola: 20:56
That's the main thing. Okay.

Lori: 20:58
If you owe money to the government that comes from your personal accounting, doesn't it, or does it stay separate that can also affect your personal taxes or no?

Bette: 21:08
Yes, absolutely. Because that side hustle is being reported ultimately on your own tax return, unless you set up a C corporation and it's completely separate. Cause even if you have an S corporation, it ultimately tax on your personal taxes at your tax bracket. Which is advantageous over C corporation tax brackets, but you still have to pay it. Right. Right. And it doesn't necessarily matter where the cash comes from. You can take the cash out of your business to pay the business taxes that are a result of having that side hustle, but you still have to pay it.

Lori: 21:46
All right. Well, you've kind of mentioned some of the novice mistakes, a solopreneur starting out makes. Can you give us some ideas for record keeping tips, techniques, any apps that you do recommend?

Bette: 22:03
Absolutely. So even though I cautioned against DIY and QuickBooks, it's actually the best accounting software out there, even for a small business. And what's super cool about QuickBooks is if you download the app to your phone, it actually can do mileage tracking for you. And it can take pictures of receipts for you. Which really simplifies a lot of that record.

Lori: 22:30
Great. Yeah. I think there are some functions within it that are still going to be beneficial to somebody starting out and there'll be beneficial to the accountant and bookkeeper because you have all of your records in one location.

Bette: 22:46
Exactly.

Nola: 22:48
For somebody who's just setting up their side hustle. Can they go to an accountant to have them set up their bookkeeping system and set up their QuickBooks as it's to make it tailored for their company and then use the, you know, go back like on an annual basis or something like that.

Bette: 23:04
Yes, absolutely. I actually have a lot of clients that do that. They come in and they say, I'm starting a new business. Can you help me set this up? And we'll get it set up, give them like a little bit of training for the pieces that they generally need to use. And send them on their way until they come back or unless they have questions along the way.

Nola: 23:23
Right.

Lori: 23:24
So Bette each state has different tax requirements, different percentages that they take out, given that your company is in Florida. Are you able to help people anywhere in the nation?

Bette: 23:38
That's a great question. I actually have clients all over the country. I won't say I've hit every single state, but I have probably filed a tax return. Yeah. And most of them that is a little bit crazy is every state is different. Right. Not every state has an income tax like Florida, for example, we don't have an income tax for people and you don't have an income tax for what we call pass through entity. Right. So a partnership or an S-corporation, they also don't have to file, but C corporations do. So sometimes it's useful to have someone that's just familiar with your state and some places have local, right. New York city, local tax. So, you know, yes, you can work with anyone anywhere. But anyone who's a CPA can represent you to the IRS and to state agencies. So you really can work with people anywhere. One thing that you do need somebody local for, if you do get audited by the IRS, and they want you to show up to a, a meeting at your local office, you want somebody local for that. But a lot of times you don't even have that with the IRS. They do what they call a mail audit. No, just want you to send documentation to them. So it doesn't matter at that point.

Nola: 24:52
So shifting gears just a little bit, we believe in inspiring quotes. And as a matter of fact, we developed a PDF of inspirational quotes for aspiring side hustlers and entrepreneurs. We thought it would be interesting to see what your personal favorite motto is and see if you could tell us in what way it reflects your experience and journey to becoming a successful CPA.

Bette: 25:16
So my motto and I say it multiple times every day is make different mistakes. Ooh. Well, don't keep screwing up the same thing. Figure out something new to screw up. Right? So if you have something that goes wrong, fix it, learn from it and move on to screw up something else that you didn't know how to do before. So by making not the same mistake over and over again, because then you don't really progress, right? You don't make a different mistake, make a mistake, fix it, learn from it. Move on.

Lori: 25:48
That is great. And it's a great motto to keep in mind as well, just for everybody. What is your guilty pleasure?

Bette: 25:58
I actually love, I love apocalypse stories.

Nola: 26:03
Oh,

Lori: 26:04
wow.

Bette: 26:05
I'll be a popular virus apocalypse in the height of like Corona. I, I kept posting on social media and like I was told there would be zombies.

Nola: 26:17
That's great.

Bette: 26:19
There's audio books of the walking dead that are like, Prequel to the main show that I've been listening to.

Nola: 26:25
Oh, wow.

Lori: 26:26
I didn't have any idea.

Bette: 26:28
Yeah, I didn't either. I found it. I like audiobooks.

Nola: 26:31
That's great. Well, thank you Bette for being our guest and helping us and our listeners. Would you tell our listeners how they can learn more about you and your CPA firm?

Bette: 26:41
Absolutely. They can go to my website, which is Bettehochberger.com. I also have. Quite a bit of internet videos on YouTube. On my Facebook business page, we do a recurring show called Tax Tip Tuesday, which comes out on Tuesdays and Finance Friday that interviews different people in different aspects of business that comes out on Fridays. And once a month, we have a business book club. Which came from the idea of, I like to read a lot of books and I would not have anyone to talk about them with. So I figured, well, if I had a bunch of people read books together, and once a month we could talk about it. That'd be 12. Different books, 12 areas of improvement over the year, and we'd all be better business people as a result. So we meet once a month.

Lori: 27:30
That's fun. Yeah,

Nola: 27:34
Listeners, you can also get the links, details and information about bed, her company, as well as the variety of services the firm offers, and you can capture her motto all by visiting our website at stickybrandlab.com/resources.

Lori: 27:50
Be sure to come back Tuesday and every Tuesday for another informative, inspiring and motivating episode. And remember action creates results. So tap into your desire to create a life, business and brand you love by taking 1% action every day. Small steps, big effects.

Nola: 28:08
Do you have questions about creating a personal brand side hustle or small business? Sign up for one of our clarity sessions for more information, contact us at stickybrandlab.com/contact.

Lori: 28:24
Be sure to subscribe to our podcast on Apple podcasts, Google

Bette: 28:32
here. We're going to be done by four

Nola: 28:36
to get through this.