#205: How Freelancers Can Maximize Their Tax Deductions and Make Tax Season Way Less Stressful

Welcome to the high income business writing podcast helping you propel your writing business to a whole new level and now here's your host ed gandia hey there.

Welcome to the high income business writing podcast i am your host ed gandia and this is the podcast for business writers and copywriters who want to earn more and less time doing work they love for better clients just a quick reminder that you can find detailed show notes for this episode at bwlauncher dot com episode two zero five those notes include a summary of our discussion as well as any links to resources we mentioned during the show if you're in the us tax season is upon us unfortunately and i know the topic of taxes might not be the most exciting topic for many of us but getting a handle on your taxes and your finances is one of the most important things you can do to run and grow a healthy professional freelance business i find that we tend to spend so much time and energy growing our income that we give too little focus to making sure we keep as much of that income as we possibly can now fortunately taxes don't have to be as stressful as we make it out to be it's about the planning and about getting the right kind of help this episode is for us freelancers only and don't worry if you're outside of the us i'll be back next week with more stuff for everybody but in this particular episode you're going to hear from diane gardner diane is a certified tax coach a qwilly award recipient and a best selling author who has saved her clients millions of dollars she works specifically with freelancers and entrepreneurs on how to decrease owed taxes to the lowest legal limitations and increase business cash flow diane shares a number of valuable nuggets in this conversation including what the biggest mistake freelancers make when it comes to taxes how to maximize your deductions and you'll find some great ideas there that i never heard of or thought of how to make tax planning easier and less stressful how to minimize your tax liability even as you move into higher tax brackets and much much more so don't miss this one if you're in the us there's some great great stuff inside i hope you enjoyed diane welcome to the show it's great to have you.

Here and i'm so happy to be on your program i'm looking forward to a wonderful conversation with you and it's.

Going to be great i know this is a topic that scares a lot of people but i know that by the end of our conversation listeners are going to feel like you know what that's not so bad i love the energy that you bring to this discussion and we're going to be getting into that but before we do why don't you tell us a little bit about yourself in your business so what kind of work you do what kind of clients you typically work with just give us the diane story well i'm fortunate.

That i get to work with the most amazingly wonderful clients all across the united states work with successful service business clients who are in pain over the amount of tax that they're paying they know that they want to grow their business and earn more money but when you grow your business and earn more money you're going to pay more tax and it's like i really don't want to pay more tax but i really want to get to where i'm trying to get to in business and so they're looking for somebody who will come alongside them and show them how to pay the least amount of tax they can pay legally while being able to grow their business and increase their profits all at the same time oh i.

Like the sound of that so mostly service based businesses i'm assuming some of those are creative professionals such as ourselves.

Yes yes creative professionals are fun to work with as long as they don't panic over the money subject or the.

Tax subject yes well it can be confusing and i know we're going to be addressing that this is important i find that a lot of writers just try to avoid this altogether it's kind of like maybe like my dog when she does something wrong she just looks away thinking if she can't see me everything's okay and they kind of ignore this and then at the end of the year they really have to pay the price so i'm curious if maybe we could start with the biggest mistakes that you see freelance professionals make when it comes to taxes so let's just.

Address that head on the very biggest mistake that i see them make is a lack of planning because it's an uncomfortable topic they don't understand it they don't want to understand it because they're good at what they do they just ignore it and then at tax time they get slapped and they get slapped pretty hard sometimes so that makes it even more uncomfortable so let's ignore it even more so the cycle kind of gets rolling and where if they're willing to take some time and stop and work with a professional who will help them put together a plan there is so much that can be done and we can completely change the output of tax season as evidenced by the over four million dollars that i've saved my clientele over the last few years wow.

I like what you said about putting together a plan because so i come from a family of entrepreneurs and my dad always drilled it into my head he said ed when you go into business you should have some partners and one of your trusted partners should be a really good accountant and i want you to think of them as a partner so i was still really early days and i went out searching for someone that i could partner with for the long haul and to me it was always much more than just hey can you do my taxes i wanted someone that i could formulate a plan with and that to me is a real partnership and i like the way you're approaching it so it sounds like you work with clients way beyond just the tax filing aspect of it you.

Bet you bet yes in fact the only way i'll take on a client is through putting together a plan for them because we don't take on people who just walk in off the street need their taxes done now as a result of working with the client and developing this long term relationship then we're happy to assist them with tax returns or whatever else that they need in that arena but the main goal is to build out this plan meet with them on a regular basis make sure they understand their numbers make sure they understand that if they make this change in their business this is what will happen and help them be more successful than they would be otherwise absolutely it's.

Hey you do what you do best and you do what you do best as an accountant then it goes both ways so let's talk a little bit about i'd like to get into deductions and really kind of minimizing your tax liability so maybe we can talk about some concrete steps a lot has changed over the past couple of years with the new tax law and i would love to if you could share maybe some concrete ideas that especially those that many freelancers or self employed professionals don't seem to be aware of maybe we can start there and then we can expand from that you bet you bet.

In my book the ten most expensive tax mistakes that cost you thousands we talk about some of those types of things we talk about entrepreneurs who are maybe have outgrown their business entity type maybe they started out as a sole proprietor or a single member llc and they've been successful they've grown quickly they're now making some money and they've outgrown that initial entity type and so it's costing them thousands and thousands and thousands of dollars in tax each year so maybe it's time to sit down and do an entity analysis and look through that business and come up with the entity that's going to fit for the next five or ten years so that's a big one where we see people spending money a lot of my successful service business type entrepreneurs are not even thinking about retirement planning they're so busy running their business getting the next job quoting it getting it done getting it invoiced all that type of thing that they're not thinking more long term and so we want to look at those types of things for tax deductions there's some great deductions in that world there's some wonderful deductions in things like hiring family members did you know that the irs says that your child has to be at least seven years old to be able to work for you in your business i had no idea what could we do with a child it's a great way to pay for things like summer camps and i always say basketball camps football camp horse camp dance camp whatever it might be those extras over and above if you can find a way to employ your child in your business you've just paid for that camp that you were going to pay for anyhow with after tax dollars now you've paid for it with pre tax dollars because you've paid your child a wage out of your business.

I was not aware of that that is an interesting idea especially with the work that a lot of us do where there are several components that happen beyond the writing that don't require necessarily our expertise research administrative work and so forth that.

Think about your high schooler your college student how could you help them start funding a college account by working in your business and under the new tax law the first twelve thousand ish dollars that they make is tax free because that's the standard deduction right now so that's a lot of money that they could potentially earn before they have to file a tax return absolutely what could you do how could you make that work flip it around the other direction what if you're helping to support a sibling or a parent or an aunt or an uncle or somebody that you're helping to support them because they just need that extra little bit what if you could flip it around and hire them to do something in your business and now you're paying for that support with pre tax dollars instead of after tax dollars i want to go back.

To something you touched on and forgive me this question feels like it's kind of in the weeds but it's one of the most common questions i get when it comes to this kind of thing and i have to tell people look i am not a financial professional i'm not an accountant i can't really advise you on this so wondering if you could at least maybe give us a little bit of direction even if it's not a very specific answer i get a lot of people who ask me look when should i go from sole proprietor to either an llc or an s corp or something along those lines how do you typically advise your clients in terms of that decision i.

Tend to look at their net income or their net profit when that net profit starts hitting that eighty to one hundred thousand dollars range it's time to have a very serious conversation and with somebody who's a freelance writer they don't have a lot of overhead most of them are working from home maybe they're using a co working space or something like that but they don't have the big overhead that another type of business so they'll get there faster than a business who's got employees and overhead and all that type of thing but that's where i start having that serious conversation of what is the best entity have you potentially outgrown your initial sole proprietor single member llc whatever it might be.

Is the reason for that that we're going to have some costs here that we need to offset with tax savings and those tax savings don't come into play until you have a higher income.

Level yes yes because if we were to turn somebody into change their entity into maybe an s corp or an llc taxed as an s corp then we have to put that owner shareholder on payroll and so there's the cost of processing payroll there's some possible some unemployment you're going to have to pay to the state and or federal there's some workers comp that may or may not have to be paid depending on what state you're in there's some of those kinds of costs out there there's the possibility of a separate tax return a business tax return that's going to have some costs in it and so you really we always you want to do a cost savings analysis and we want to make sure that the tax savings far outweigh those costs that you're going to pay to move up to this next level of being in business.

Yeah that's a great point those are a lot of things that a lot of people don't think about and so my advice personal advice to people is if you're new don't get hung up on this start as a sole proprietor and like diane says you can always move into a different category later and i say that because i see too many kind of newer freelancers get hung up on this and guess what they use it as a delay tactic in deep down inside it's really a fear issue you know they want to spend three or four months researching this and they still haven't gotten started and what you're saying is look start simple we can always get there later that's when.

It makes sense definitely start simple just pull the trigger and go you can deal with the rest of this down the road up to about that eighty to one hundred thousand range you really don't recoup the cost the tax savings versus the cost that it's going to take to be more of a formal.

Type entity that makes sense i want to shift gears a little bit and talk about some of the most important changes in the tax law as they apply to us and then maybe also then take a look ahead into things that are new this year in twenty twenty so can you maybe give us a high level overview of some of the most important changes that impact us from this past tax law this new.

Tax law you bet under the new tax law probably one of the biggest changes that people saw was they lost their dependents as an exemption on their tax return and that was whether you're self employed or w two employee we went the tax return used to be your total income minus your exemptions minus standard deduction or itemized deductions brought you to taxable income now it is total income minus standard deduction or taxable and standard deduction or itemized deductions equals total taxable income so we've lost a little spot in there to make that up they doubled the standard deduction amount so i noticed in my practice probably half of the people that used to itemized deductions are no longer itemizing deductions they're taking that higher standard deduction now so that made an effect on various types of my clients where the good news came in is for those with younger children if you've got children under seventeen years old the child tax credit went from one thousand to two thousand dollars per child that became huge because a tax credit versus a deduction are completely different a credit is a dollar for dollar savings so if you owe dollar one hundred in tax and you've got dollar one hundred credit you now owe zero in tax but if you owe one hundred dollars in tax and you have one hundred dollars deduction and you're at the twenty five percent tax bracket you're only going to get a twenty five dollars change in your tax outcome and so that was kind of hard for people to wrap their heads around some of those basic changes right there over and above that moving into the self employment world we used to have meals and entertainment where deductions a business but we lost the entertainment piece and i'm not sure if that really hurts your industry as much as it hurts some of the other industries but if you were to take a client out and take them maybe to a sports function and then out to a meal or something like that now only the meal piece could be deductible with the actual function would it be so i noticed that with several of my clients that used to do some of that kind of stuff some of the golfing some of the sports activities some of the just special type things that they used to do with their clients are no longer deductible now some clients have chosen to do them anyhow and they'll just take their lumps and take it as personal income but it has really changed the way businesses are thinking about doing business by losing that entertainment factor because that was a real way to.

Build relationships yeah yeah i know that it was also kind of abused it.

Was very much so which is why.

We lost it i wonder if you could speak a little bit to this twenty percent deduction that businesses got i think it's twenty percent i'm not sure exactly what the terminology is but i remember seeing a lot of questions about that and specifically the fact that there were some exceptions to that rule it sounded like if you were a service based professional like we are then you wouldn't qualify for that twenty percent tax deduction as a business so what can you tell us about that you bet.

Yes that new twenty percent deduction is what's called a qualified business income deduction now i back up and give you some backstory on that back when they were working reworking the tax law they took into account that america's corporate tax rate of maximum of thirty five percent was some of the highest rates out there compared to other countries and so they were trying to help us become more efficient or whatever in the more global type economy and so they dropped that corporate rate from thirty five percent down to twenty one percent well congress said well if we don't do something for the rest of the businesses out there every business in the world is going to turn around to become a c corporation so they could take advantage of that twenty one percent because that's quite a bit lower than a lot of people were paying if they were successful in business they were paying as high as thirty nine percent so when they did that they came up with this qualified business income deduction so for the rest of us who are not operating in a c corporation status we are in theory we're able to take our net profit of the business and multiply it times twenty percent and take a new deduction over on our personal income tax return but there are caveats to that any business that has professionals or services that is based on the skill of the shareholder owner type person so your industry my industry attorneys doctors those types of industries where we are selling our skill as opposed to a product of some sort we are not able to take full advantage of this up to certain income levels we can take advantage of it once we exceed certain income levels then it starts dropping off until we get nothing at all so there's a possibility that you get some but maybe not the whole thing or you might get it all depending on what your total income level is and they look at all income sources when they're looking at the income levels.

And can you give us an approximation of what that is i mean it sounds like it varies but i mean are we talking about a million dollars or one hundred thousand dollars it was.

I believe don't i believe it was right about the four hundred fifteen thousand level for a married couple it started dropping off last year and i have not seen the numbers for this year if they're going to hold them there if they're going to move them up a bit so somewhere in that four hundred ish thousand range then it starts dropping off and you start losing that deduction so you have to it phases.

Out it's not a big it's not an all or nothing situation yeah so.

You have to look at your spouse's income to add it to your income plus any other kinds of income that you might have on your tax return and and it will start phasing out so it helps some it didn't help.

Everybody what's the reasoning behind it for that decision it seems unfair i mean.

Maybe unbiased it does i wish they would have just made it a standard twenty percent for all businesses but they didn't and i don't really know why they didn't other than they think that those of us who use our you say use our brain for lack of a better word in our business those of us they tend to think that we're all really rich and that we shouldn't get those kind of deductions on the other side and so i think that had something to do with it was supposedly keeping it fair for your common everyday person yeah it seems like.

This is the way the world is going more and more businesses are all about their intellectual property their skills their experience their talent not about brick and mortar inventory on the shelf kind of situation so it just seems like maybe the reasoning behind it was just faulty.

Yeah right because why should we be penalized because we've chosen a profession where we are selling our brain power our intellectual property or whatever wording you want to use you're selling your brain power you're not just selling a loaf of.

Bread on the shelf absolutely well it's good to know because i know a lot of people weren't aware of that deduction but it sounds like it's something we need to take into account and look into in terms of changes or anything new coming out in twenty twenty it doesn't sound like the big change was for last tax year but anything we should be aware of that's coming.

Out there's been some more clarification on the qualified business income deduction it's just now starting to hit the accounting community i know i've got some upcoming classes on what is this new clarification that they're talking about so at the time that this interview is going to be going live we will have answers to that i don't have them today but other than that the general new tax law that we got last year is in place until twenty twenty five and so at that point who knows what will happen but for the most part we're pretty assured that the lower tax rates that we got will be there for the next few years and the double standard deduction the double child tax credit those types of things at this point in time look like they will be there through twenty twenty five so.

I was not aware of that i know a lot of people are very concerned about wait a minute is this thing here to stay or if a new president comes on board can they just change it repeal it immediately so twenty twenty five that's kind of a.

Done deal as far as i've been told through twenty twenty five this is our tax law things could change after that now it doesn't mean if we got a new president that they couldn't come back and make a change and make it retroactive so that it could somehow get into this time period through twenty twenty five because congress seems to you know do all kinds of stuff.

So yeah there's always a loophole there.

Always is a loophole and they always throw it in in the last week of the year yeah which creates havoc in my world because you're trying to plan with somebody and then here comes congress something and then they make it retroactive and they you know they do it in the new year and they make it retroactive to the last week of the last year or something and it's like there went my strategy when.

They do that yeah fun fun fun.

They give you something but you didn't know about it in time to have taken advantage of it yeah and also.

Want to clarify something for listeners when we're talking about new things that are coming out in twenty twenty that would be for twenty twenty tax year so things that you don't necessarily need to worry about right now as you're listening to this depending on when you are listening to it but that will apply to income earned in twenty twenty so just to make sure that people are aware of that there's something you mentioned a little bit earlier in our conversation about professionals who were growing their income that's my crowd i work with higher income and established writers and copywriters i help them grow their income which is great but in many cases as you mentioned that also means higher taxes so what do we need to know as we become more successful and move into higher tax brackets how should we prepare is that even a concern i mean should we even be worried about that i've never met someone who says i'm kind of holding back because i don't want to jump into a new tax bracket everyone i know just kind of just goes for it and then at the end they figure it out so any ideas or strategies that would help us plan better or think about this.

Differently you bet yes there's all kinds of strategies out there probably one of the first ones that i like to go to after looking at the entity analysis is i like to do a retirement analysis how many years do they have to retirement what do they already have in place and what can we put in place that becomes a tax deduction for the business we can put some substantial amounts of money into some sort of a retirement program for them which will give them some pretty nice tax deductions today and then in theory you know as you're taking it out down the road income should be at a lower tax bracket in theory but you know we never know that that's going to actually happen or not and depends on how much they start pulling out down the road too but in theory your income is higher today than it will be down the road when you're actually at retirement and so there's some really nice strategies in that area that we like to look at when we're meeting with our clients we also like to look at sometimes people get a little paranoid about the irs and so they're kind of afraid to take on or even think about a new strategy because they're so worried that it's going to cause a red flag with the irs and so understanding the types of things that cause a red flag and the types of things that don't so there's certain strategies that are just totally blessed in the irs code it is full of tax deductions and tax strategies but most of us don't know what we don't know and then there's other things that are totally tax evasion and we never want to go there we always want to stay on the side of irs has blessed this particular tax strategy so things like is it possible to write off your medical benefits through your business depending on the type of business entity you possibly could and that can be a huge deduction for us oh my gosh massive yeah and so we're looking for ways how can we make that work that we can get some sort of a pre tax write off in our business and in your industry they don't have a lot of employees so some of these medical strategies work really well because we could do things like a section one hundred five medical expense reimbursement plan or those kinds of things that where what you offer to the owner you have to offer to all your staff so they don't work as well in an industry where they've got a bunch of employees like maybe a plumbing company and they got twenty five or thirty employees but it works well where you don't have a bunch of employees and so if we can write off your health insurance premiums your co pays any other out of pocket costs through through your business we can move the needle on your tax return just with that particular strategy.

Now is that something that you could do if you had no employees do you have to have at least one employee in order to qualify for something.

Like that no it works actually this is one strategy that works best when you are operating as a sole proprietor or a single member llc where you file a schedule c with no employees it works best in that instance and you're married and you have a spouse we call it hiring our spouse so we hire the spouse to come work in your business and you pay that spouse with medical benefits and you're able then to write those benefits off through your business the spouse can then cover you as their spouse and their family as their dependents and so it becomes a way to write off one hundred percent of your medical benefits through your business that doesn't work well if you don't have a spouse so we go one eight hundred rent a spouse not.

Really yeah get married guys the biggest piece of advice here is just get married not for love for money for medical benefits for medical benefits and savings tax savings i like that so you're essentially talking about look what i'm hearing from you diane is just maximize your earning potential i mean don't let these things slow you down but then work with someone where you can plan ahead number one early in the year or the previous year actually then stay in touch during the year so we could figure out where we are how we're tracking and then make adjustments based on that and then of course at the end we can see where we are and also plan for the following year is that maybe kind of a better.

Approach it is and then at tax time i love to pass out the sheet to each of my clients that says you saved x amount of dollars this tax year and then i have my accumulative total from all the way down so some of my clients are up well over six digits of tax savings with us just because it keeps compounding and accumulating over the last few.

Years wow that's how you knew about the four million yes i keep a.

Spreadsheet i'm kind of a nerd that.

Way i love that it's kind of like a thermometer you know it is.

Yeah it's like four four point two.

Million that's wonderful that is wonderful so yeah i like that approach better i'd never understood the oh wait a minute where are we going to kind of scale back and i don't know anyone who operates that way so i like your idea a lot lot better people.

Who operate that way have more of a scarcity mentality they're just they're afraid to pull the trigger and go because they've been told horror stories about taxes well in reality taxes aren't horror stories they're kind of comedy because we can make them fun by letting somebody who's a tax or a profit planning superhero swoop in and help you make this big difference on your tax return yeah.

Here'S the other thing and correct me if i'm wrong the way i understand it too when you get into higher tax bracket let's just say it's three hundred thousand it's one of the cutoffs it's not that if you make three hundred one thousand dollars that suddenly your tax liability goes up through the roof it's that anything you earn over three hundred thousand dollars will be taxed at that higher bracket but everything below is a totally different story is that correct.

Correct right yeah and people don't understand that they're so afraid to earn that one more dollar and push them into a new tax bracket yeah yeah yeah.

Okay got it makes perfect sense is there anything as we start wrapping up that maybe we didn't talk about or any advice that you found has been really helpful for people like us who are self employed we don't have huge overhead but we're missing out on some opportunities that we could be taking advantage.

Of well we're all specialists in the fields that we work in in your case copywriting which i just amazed at what you guys can say in words that i can't so i hire copywriters all the time so it kind of goes back to the old adage of work your strengths and hire your weaknesses so in my case i hire copywriters in your case align yourself with somebody who's proactive who's entrepreneurial who understands your industry who's willing to sit down and have maybe quarterly meetings with you who will put together a plan and then tweak it as you go forward who's got your back who's going to make sure that you are paying the least amount of tax legally possible and as you grow will continue to bring new strategies to the table because a business at two hundred thousand is a completely different business than one at five hundred thousand because they can afford to do different things so somebody who will just track right with you and be proactive and stay the course with you i.

Think it's sage advice and talking about advice diane can you tell us a little bit about where listeners can learn more about you i know you have a series of books out there you have some wonderful resources so where can people learn more about that the best.

Place for them to go is www dot taxcoach four you dot com high incomebusiness writing we may do your own little url there look at that i'm taxcoach yeah tax coach the number four y o u dot com there we'll be happy to share our tax planning guide it's got a lot of different tax deductions and credits and compares the old law and the new law they can also reach out to me from there and request a copy of my newest book called unleash the power of tax planning and we can put some of those information in their hands i also offer a free discovery session with people to where we can have a talk after i've had a chance to look at your tax returns and just tell you are you doing good is your accountant being proactive enough with you or here's some areas that i see that you could have for improvement and if we want to work together we decide to work together and i'll create a plan for you if not we are happy to tell you that you're doing a great job and send you on down the road with a bunch.

Of free information wow diane thank you for offering those opportunities and resources to our listeners i'll make sure to include that link in the show notes so guys definitely check it out this is important and this is the right time of year to get ready of course now we're kind of getting into tax season and prepping and filing but it's never a bad time to also start the planning aspect that we talked about don't wait might as well start today so thank you diane i appreciate that and thank you very much for sharing your wisdom with my listeners oh it's.

Been my pleasure i love to help people to understand a little bit better about their taxes so it's not such a big scary monster in the middle of the room that nobody wants to.

Talk about yes yes thank you i.

Appreciate that the high income business writing podcast is a production of b two b business launcher learn more at b two b launcher dot com.