Why Being 1099 over W2 is Better for Coaches

Today's all about you guys and how we can help you just not really not pay taxes. Do either of you enjoy paying taxes?

No.

I don't think anybody does. Kind of give you— I mean, we really, we really don't like the IRS. Anything that we can do to help you guys keep more dollars in your pocket, that's what we want to do. But anything that really— anything we can do to help you save dollars, that's what we want to do. So there's going to be a couple of key things that I want to make sure to— well, we're going to touch on a number of things. I guess to start is just like, you know, the squat. The squat is really, in my mind, a real base fundamental for almost all CrossFit movements, right? We're talking wall balls, we're talking snatches or cleans. You got to have good squat mechanics. If you don't have that, everything else kind of falls apart. Accounting is going to be like your squats. Accounting is going to be your base. Now, when I say accounting, that's going to be tracking of income and expenses. Okay? Because you guys are paid 1099, in the eyes of the IRS, you are a business. Just being 1099, whether you actually have a business or you're just being paid personally, You're still considered 1099, or you're still considered a business in the eyes of the IRS. So when I'm talking tracking income and expenses, it's going to be your quote unquote business income and expenses that we're going to really want to watch out for. Okay, from there, if you have good accounting, good taxes can come out of that. Good financial analysis, financial analysis to say, you know, am I, am I doing the things that I should be doing? Should I spend more money here? Should I spend more money, you know? It'll allow you to answer those questions. Um, so I guess that's going to kind of be the base today. In particular, we're going to talk about tax-specific things and how you can get— how you can save dollars in taxes. So I've got a little bit of a, um, of a, I guess, kind of like a handout that we have here that I'm going to share. And we'll kind of start working our way through this. If you guys have questions at any time, just Pipe up, or if the chat box is open, you can throw it in the chat box if you don't want to interrupt, and then we can get to it later. Either way, just let's make sure you're gonna get your questions answered. Okay, so can you see this screen, How to Kick Your Taxes' Ass, there?

Yes.

Okay. All right, so one of the first things that we always— that we always want to discuss with people is should they have a business entity? Business entities are going to make sense once your income is to the point that it— that the tax savings associated with it are going to be more than the cost to run that business. So we're going to start first with this side of the diagram. This is how you guys are currently being taxed, and I've run these numbers basically on $50,000, so we can adjust those if we want, but As a self-employed individual, as a business owner, you get to pay 15.3% self-employment tax. And that's on top of whatever your federal tax bracket is, which is probably going to be somewhere between 15% and 35%, and then state tax, 0% to 10%. So on your net income— now net income is income after expenses— you guys are going to pay 30% to 60% tax. I don't know how you feel about that number. Again, I hate that number. So I really don't want to do that. So ultimately, where, where does it make sense, or at what point does it make sense to set up a business? For us, it's, it's when your net income is more than $5,000 on an ongoing basis. At that point, it's going to be more beneficial for you to have a business set up. And, and pay for or deal with the other filings associated with that business file. Okay, does this side of this diagram make sense?

Yeah.

Questions?

Not off the top of my head right now, no.

Okay, so let's talk really quickly about businesses and how businesses work or how to get the right business. Oftentimes people talk about LLCs when you're setting up a business. LLCs in the IRS's eyes actually don't exist. So here's what I mean. They exist legally, so you can go to an attorney and say, I want to set up an LLC. When the IRS sees that LLC, they want to tax it as either a sole proprietor, which is this form and fashion that we just talked about, or as a partnership, or as an S corporation, or as a C corporation, depending upon what a elections you make and how you set up the business. So we like LLCs, but we just want to make sure that it's going to be taxed correctly. An LLC with only one person that doesn't make any other elections with the IRS taxes as a sole proprietor. So what's the benefit at that point? Well, the benefit is, A, it gives you a little bit of liability protection, and the other part is It sets you up so that at any time you can move into one of the other tax types and get the tax benefits associated with it. So when I'm talking about one of the other tax types, that's for the most part going to be either a partnership or an S corp. And in your guys' scenarios, it's going to be S corps. They're going to be the most beneficial for you. So that is this side of the diagram. When you have a business, and in this case an S corporation, money comes out of that business 2 ways. One to you as the officer. This is the person who runs the day-to-day operations of the business. And the other way to use the owner. So the officer, you can see here it says it's still subject to self-employment tax. So this 15.3%, we're still paying that on whatever amount we have to pay out as the officer. The owner is not subject to self-employment tax. So typically, um, you can see right here this diagram is based on $50,000. So just by making the switch here, we would have a $5,000 tax savings. The simple way is 10% of your net income. That's what you're going to save by making this change and doing nothing else different. Just by making that change, you'd save 10%. So $10,000, we're talking $1,000 in tax savings. Okay, the reason why I say it's gonna— we want to make sure that it's gonna be worthwhile is it costs money to file a business tax return. It costs money to do— to be an officer because you're gonna be paying payroll. Now those things, you can do those yourself, you can hire somebody to do them, you can— I mean, there's a lot of different ways, but there is more involved with that. And so we just want to make sure that the more is worth it. Okay, questions?

No.

Okay, all right, so that is— that would be then kind of this section about payroll is all about making sure the officer portion is correct. Okay, and we can get into— if, if, um, if at any time we want to jump into one of your personal situations, or we can even set up a phone call outside of this to go through your individual situations. We can talk about if it makes sense for you at this time to move to the business or not.

Okay.

But regardless of what kind of business you have set up, whether you're running as a sole proprietor or as an S corporation, you still can make— you can still get a lot of the same tax deductions. So I just want to take a minute and go over our philosophy On tax deductions and kind of give you some, some baselines of what things you should be looking at deducting. So Mitch is going to go over that. So go ahead, Mitch.

Shoot.

Okay, can you guys hear me okay?

Yeah. Okay, great.

So our philosophy for business expenses is if you're spending a dollar, you know, is it related to your business at all? Does it help your business bring in more money? With that being said, there's gonna be 2 things that you can never deduct. That's gonna be your personal groceries and your personal rent or mortgage. A big one for you guys is going to be like supplements, you know, protein, pre-workout, post-workout, that kind of thing. Also your cell phones. You can't really be in business for yourself without people being able to get a hold of you at all times, so you can take your entire cell phone bill for the year as an expense. Also your internet, you're most likely doing things, you know, at home as well using the internet. And then also another big one is Automobile expense. Now with that, there are 2 different options. So you can take the actual expenses, so that's like tires, oil changes, you know, maintenance things, or you can do the mileage deduction. And so each year the IRS is going to give you Like a certain amount per mile driven that you can take as that business expense. And yeah, so you want to start tracking your mileage from now on because you can, you can take whichever one is more beneficial to you, the actual expenses or your mileage. And then also your CrossFit trainer certifications. I know those can be Pretty expensive. They're what, like about $1,000 or so?

It was $1,000 for my last cert.

Yeah, yes. Yikes.

Yes, you can definitely take those. And then another big one is, uh, for you guys is workout gear and clothes. I know the, the official Reebok CrossFit stuff is pretty pricey, um, so that'd be a huge one that you guys need to track as well.

I want to interject real quick with a question. So from when you talk about automobile mileage, number one, is there kind of a base number that you see off the top of your head? Like, is 14,000 miles kind of the crossover where it makes more sense to charge your actual mileage versus—

Maintenance.

Versus the give me? And then on top of that, what kind of mileage can they count? So is it every, every day they drive into the gym? in because that's their place of business, but it's, you know, they get to count those commuter miles from what I understand from our last conversation, correct?

Sure, good question. So let's first start with the second part of that. So what miles are deductible? Anytime you're driving for business, okay? You guys at this point base out of your home, out of wherever you're living. So anywhere you're driving for CrossFit or training or anything to do with Health and nutrition, because that's really broadly the industry you're in, that's gonna be deductible miles. Okay? Questions on that from you?

So anytime they're driving somewhere to talk to someone about what they do in our business or anytime they're driving around and advertising, doing things like that, and then— yeah, that makes sense to me. You guys got it?

Yep.

Cool.

Okay, so for the most part, To and from the gym, yes. To and from getting supplements, yes. If you're going out to lunch with other gym or other coaches that you guys know, yeah, guess what? You guys are within the same industry. I'm sure you're talking about working out, so that's gonna be deductible. So really, again, think, is this related to my, my business, or is this related to me health— doing health and nutrition consulting, or Working out or physical fitness? And if the answer is yes, you're going to want to make sure to capture those. Now back to the other question, when does it make sense to take the miles versus the actual? It's going to depend on every situation. 98% of the time, mileage— the, the tracking your miles and giving the IRS prescribed rate Gives you a better tax deduction. So as an example, Brandon, what kind of car do you drive?

Hyundai Elantra.

There you go. What kind of mileage do you— gas mileage do you get in that?

Over 30 miles a gallon, probably easily.

Okay, and how much is a gallon of gas out there right now?

$2.25.

$2.30, $2.25, around there. I do get gas a little bit cheaper at Kroger though. Does that matter?

No, it doesn't matter. Okay, so let's, let's use this car as an example. So your fuel costs you 7.5 cents per mile. That's running on 30 miles per gallon. Your oil changes, if you're good and you get them done every 3,000 miles and it costs you $100, that's 3 cents per mile. Your insurance is probably only costing you somewhere between 1 and 3 cents per mile. So between those 3 things, which are going to be your biggest annual costs— I mean, yeah, if you have to do tires one year or major repair, okay, that would factor in. But for the most part, those are your costs: fuel, oil changes, insurance. And at that point, you're at maybe 13 cents a mile. The IRS is going to give you, at least for 2017, it's 53.5 cents per mile. So you get an extra $0.40 per mile by taking the mileage rate than doing the actual expenses. Okay. And give you an example. I drive, you know, I drive somewhere between 12,000 and 15,000 miles a year. My actual cost for my car, and I'm getting about 21 miles to the gallon in mine, my actual costs run about $3,200 a year. The IRS mileage rate each year is going to be closer to $7,000 to $8,000 for me a year. So I basically get an extra $4,000 tax deduction by doing the mileage.

Got it.

Okay. I have a quick question. This is Star, Dustin. Um, so for like something like, say, clothes and gear, is there a number that you hit on expenses, just like you would for dependent care expenses, that you can't Deduct anymore after you hit or paid out that much or spent that much?

Good question. So not as a business owner. Now, that being said, if you're making $30,000 in a year and you're spending $18,000 on clothing and equipment— or clothing and gear, excuse me— that's probably going to be something we're going to have a discussion about because that number is so high. Compared to your earnings, it just, it maybe doesn't make sense.

Do you have a suggestion on what that percentage should be? Is that part of the Profit First thing that we do?

It's not part of the Profit First thing. That's gonna be a little bit different, but that's more of a gut feel and just kinda experience.

Okay.

I typically, you know, if I've got a $10 million company and spending $200,000 on On, you know, shirts and sweatshirts and gear for their employees. Yeah, that's probably not a big deal.

Okay.

But a $20,000 company spending $10,000. Yeah, that, you know, it just, it doesn't make a lot of sense. So that's going to be more of just kind of an experience. And, and that's one of the things that I look at when I'm doing tax— taxes for clients is, okay. What does this number feel out of whack compared to the rest of the industry? And if it does, then we're going to talk about it and we're maybe going to reallocate some of those things. If it doesn't, well, we're fine and I'm just going to take it.

Okay.

I have 2 more quick, hopefully quick questions. Sorry. So personal groceries, I know that he said that's never something they're going to be able to expense out. Is there a percentage on the top of that, just like we do 50% of meals and entertainment? Is there something that they can claim that because they're having to eat a diet that's over and above what personal groceries would normally be required as, that they can claim a portion of that?

So here's what I would say on that. So it's going to be specialty foods and things. Again, just like, just like what you're saying, Corey, that it's, it's going to be what you're required to do. Because let's face it, if I go into a gym and the trainer's 400 pounds and And he's just really overweight, I don't have a lot of confidence in what he's probably telling me. I'm probably not gonna be around very long. And so that's why for you guys it is deductible. You have to, you have to really look a certain way and be a certain way and live a certain way in order to, to have the athletes have that confidence in you. So I would say things like your milk and your bread and eggs I would not write those off. If you're going out and buying a specialty food, I would potentially look at writing that off. Here's what the IRS— here's what the IRS would say if an audit occurred. They would say, okay, provide us with your groceries, grocery receipts, and then they'd want to know if you're buying— Let's say you're buying almond milk because it's— because it's healthier than Regular milk. Okay, they're gonna say, what's the cost of a gallon of regular milk? Maybe that's $3. And what's the cost of the gallon of almond milk? Well, that's $4 or $5. And they're gonna let you write off the difference between what a normal gallon would cost and what your gallon costs. Does that make sense? So that's where I say, rather than going through that hassle, I would just— the general things that you're gonna be having anyways that a normal person would normally have, Don't write those off. If you have a specialty item, write that off.

Perfect.

Makes sense?

Yeah. And then my other question, and you guys may get into this, they're currently renting a property. So does a rental property— and do they as 1099 contractors have the ability to do the 14-day write-off of rent to their themselves of their space?

Good question. And that's where I'm going. That's where I was planning on going next. So that's gonna be a deduction we like called corporate rent, which is gonna be awesome. So question for you guys first before we go there: do you have any questions about what you should be deducting just generally?

No, like the grocery thing, like I specifically have a specific aisle, it's an organic aisle that we get everything down, like Would that be what you guys are talking about exactly? Like, that's not like my eggs and stuff, it's just strictly organic foods. Like, would that be—

So, so yeah, the, the portion that is on that organic aisle, I would take.

Okay.

The other items, maybe, probably not. And, you know, if it comes down to it that you're at $5,000 for the year for the, for the specialty foods and you only made $15,000, yeah, we might say let's, let's be a little less aggressive with those. But that's something that we would look at. Okay.

Okay.

Okay. Casey, questions? No, that's good.

Okay.

Um, so this next tax deduction, it's a tax strategy. We call it corporate rent. It works, it works when you are in the, um, when you're in a tax setup that is some form of other taxable business. Not just as a sole proprietor. And so this is the way that the strategy works. The IRS says if you have a residence, your personal living space, you can rent that up to 15 or up to 14 days during the year, and you'd never pay tax on the income you generated from renting it. If you rent 15 to 365, you do have to claim that as income. So right now you guys are renting your house, you're renting it all the time. So the, the owner, your landlord, has to pay Tax on the money he collects from you as rent. Okay, so you, just by renting that, in the IRS's eyes, that is considered your property now. So you now have the ability to rent or sublease your space to anybody else that you want. You could rent it to your neighbors to have a Super Bowl party. You could rent it to, you know, for their kid's birthday party. You rent it for whatever you want. I don't like people being in my house, so I don't want to rent it as much as I can. So the way that the strategy works is that corporations all across the country, they're going to hold meetings, shareholder meetings, board of director meetings, whatever you want to call them, in order to improve their business. Now they're usually going to rent convention centers or hotels or other places to hold these meetings. Well, you guys, if you have a business and we're taxing it separately, you can do the same thing. You can go rent a meeting space, you can go rent a hotel to have a meeting. Well, rather than doing that and paying the hotel, we would have your company rent your personal living space from you. It would still take the deduction for a rent expense. But as long as you guys aren't renting out your space more than 14 days, it's not taxable to you as an individual. Does that make sense?

I, I don't— I mean, like, what do you mean by renting it out though, exactly? Like, having— I know he's like— I'm kind of confused with that.

This is, this is a great example. Corey and Star should be renting their house. CrossFit Little Creek should be renting their house from them to have this meeting right now.

Would that work with clients or anything like that, or is that— that's like, is that— does that make sense? Does it have to be like work comp people that nobody's checking on?

No, no, it can be— it can be like, for instance, my meeting every month is me, myself, and I. Okay, okay. I have a meeting, I review my financials, I look at what business inflows and outflows are, I look at where growth needs to occur, I You know, what new investments do I need to make in my business? How do I change my marketing? How do I— that's my monthly meeting.

Okay.

What you do is you take notes. Who was there? What was discussed about business? And what was the purpose? Current market rate is going to be $1,250 per day. So if you do that up to 14 times, let's Let's even say you just did it once a month, so 12 times a year. That's a $15,000 tax deduction that— so that's money that came out of your business account to you individually that is not taxable. So, if back to kind of the example on the diagram we're using, if you guys are making $50,000 net income, the tax savings with that single tax strategy alone is probably somewhere around $3,500. In tax savings. So that's where if I'm making $10,000 net income as a sole proprietor with no business, I can make a switch to a business, pay myself a bunch of rents, and now my business income is zero, which means I pay nothing in tax even though I just really took that money individually.

Mm-hmm.

Make sense, Casey?

Yeah.

Are you sure? I'm just processing it.

Yeah.

Okay, if it doesn't make sense, it's okay. I feel like, I feel like this is kind of like a drink from a fire hose, but if, you know, it may come that you have more questions, and if you do have more questions, definitely, I mean, let us know. So, so really, I mean, between Cell phone, internet, miles, certs, workout gear, you're gonna be able to drive your income pretty far down. Then the next question is, is it worthwhile to set up the business? And, and without knowing your individual scenarios exactly, I can't answer that question. But if you guys want to set up a time where we can go over that individually, like, hey, Hey Brandon, if you're making X dollars, how much in deductions are you gonna have? And we can, we can, we can run a quick estimate to see if it's gonna make sense. Again, for me, that makes sense range is somewhere between $5,000 and $10,000 after you take your expenses.