Small Business Smarts: Tax Hacks for Self-Employed, Freelancers, and Gig Workers

Mike: [00:00:00]  

Welcome to this episode of The Hidden Money Podcast.

Kevin and I are excited to talk about the tax, actually the hidden money inside the tax for gig workers, for freelancers. Um. Generally, those kind of people are always just, they're joing it, man. They're working hard and they're not thinking about tax. And usually when they're starting up, they're not making a lot of money, so they don't wanna pay a high, um, tax strategy fee, right?

Mm-hmm. But almost invariably, every time we end up talking to one of these people as a prospect or on the street or our friends, um, man, they're paying way too much in tax. Kevin? Yeah, way too much. There's a sneaky tax that it's not sneaky. It's in your face tax, it's in  

Kevin: your face. But most people don't think about it.

That's right. Because they're like, Hey, I've been a W2 employee. All they think is my employer was withholds Federal tax on my behalf. And then I report it on my, on my tax return. Yeah. And then you don't see the other piece on your tax return, which is fica. It's Medicare Social [00:01:00] Security tax when you're an employee.

You are paying Medicare and Social Security tax. It's just you're partnering with the employer. So if you're a W2 employee, you're paying half of your Medicare and Social Security. The employer is paying half of the Social Security and Medicare. When you're self-employed, guess what?  

Mike: You're paying the whole thing and each of those pieces is 7.65%.

Employee pays 7.65%, the employer matches it. Mm-hmm. So that's 15.3%, man. Yeah, it's a lot. You make a hundred grand on top of  

Kevin: income,  

Mike: you make a hundred grand before you even assess your income taxes. You're paying over $50,000 in taxes. Yeah. It's, it's rough.  

Kevin: Just right off the top. Just right, right there. And, and then you gotta pay an income tax.

Yep. And then you, what you can't do is also tax plan against that direct fica FICA because you can get your taxable income, uh, down, um, by other means, but your Schedule C or your freelance work, if you're showing income and you [00:02:00] donate a lot to charity and try to offset some of the tax liability, you're still gonna pay that self-employment tax even though your income tax goes down, your self-employment tax.

It's actually calculated on the net income of your business. But there's ways to reduce Oh yeah. And mitigate self-employment tax. You can reduce that medi, uh, that social security and Medicare tax that you pay as a, as a, uh, independent contractor or freelancer doing your side hustles. Yeah. So there's ways,  

Mike: but before we start getting into those ways, we're giving you these tidbits for free.

We're gonna give you the hidden money for free. If you don't have enough money to go pay for a, a expensive tax strategist, um, if you don't have the money to go pay for an expensive tax strategist, consider this, use it, employ it. Don't be tipping the government. Don't overpay your taxes. Mm-hmm. And invariably, most of you probably are.

Kevin: Yeah. And a common, just from a budgeting standpoint, if you are self-employed and you are doing these side, these side hustles, save [00:03:00] for your, just save for your tax. You know, if you make a hundred dollars doing a gig, I would put 24 of those dollars into a savings account. Now everyone's different in their tax bracket, but you don't have to get so granular with it.

Mike: Yeah. I'd say start doing that once you're making over about 30 grand a year. Yeah. Um, especially if you're married, filing joint. Um. And you're not having income from anywhere else. You're not gonna pay taxes until you make well over 30 grand. Mm-hmm. So you don't have to pull 25% or 24% from the beginning.

But once you're getting over a certain amount, start pulling it out and don't find yourself come April 15th when you go to a CPA or a tax preparer and they say, Hey, um, you owe taxes, and you, you don't have 'em. Yeah. And then you're paying penalties and interest even if you get a payment plan. Mm-hmm.

You're paying penalties and interest and penalties and interest. Mean, you are tipping the government, you're paying more than you need to pay. Um, I'm not gonna go into the personal situation I'm currently in because of a dumb mistake I made and I'm tipping the government, but don't do that. Learn from my mistake.

Kevin: Yeah. And you know, from a, from just a very high level, [00:04:00] you, you don't want to just. You wanna operate your life as a business. When you start turning self-employed, everything you touch, everything you use, um, that, that helps you generate revenue or profit for your business is a tax break. So be thinking about the things in your life that you may have already purchased prior to being self-employed.

You might have already bought a computer and a printer, and you might have already bought a bunch of equipment or supplies or whatever. It's a desk. A desk, a chair. A chair, yeah. You probably already had these things. Mm-hmm. But then you turn self-employed and now you're utilizing things that you purchased in the past for income generation on this new side job.

So you can harvest those expenses that you've already paid and. Put them in your accounting records or start deducting them, contribute them to your LLC or however we structure it or do it. I, I mean it doesn't even have to be so formal. No. But start looking at your life as a business. What are you doing?

That is an expense that you can reduce your taxable income because [00:05:00] that is where the rubber hits the road is. You pay income tax and you pay self-employment tax on your net income. Yes. Not your gross. You can bring in as much money as you want on the gross level, but if you can get creative and defendable.

On your expenses, you pay tax on the net after. So what are we doing in that middle ground? Not your gross revenues, but in the expenses to get our taxable net income down on our side job?  

Mike: So the, the, the tax code says any reasonable, ordinary and necessary expense you're allowed to deduct against your business.

Um. Anything you need to spend money on to grow your business, which you probably were spending money on a lot of those things anyways before you started the business. Those are deductible expenses. Let's just highlight a few of them. You got a cell phone, you need that for your business. 20 years ago, the IRS didn't think that they made you prove it, and then they realized, Hey look, you got a cell phone.

You need, everyone needs it for business. You can deduct your cell phone expense. You need internet. You should deduct [00:06:00] it. Mm-hmm. What are some other things?  

Kevin: Um, more than likely, um, unless you're working at home, probably, um, being a freelancer, doing side hustles, unless you're doing like Uber or something like that where it's an actual car.

A lot of our freelancers are working from home. They're doing art, they are doing some sort of. Work at home. Well, now you have a home office and we could take that. Um, but let's say you are an Uber driver or, I mean, those are very popular. We, there's people out there all the time that are Ubering as a side hustle.

It's a great side hustle or Uber because you could just Uber, you could pick up your cell phone and yeah, I wanna work today or I don't, and then you can accept it and move on or not, or just take the night off. It's up to you. So it's really flexible. You're utilizing and using. A personal vehicle that you bought.

So what are we doing to track our mileage, our cost of that vehicle? Even? You can pick one of two things. A vehicle deduction is very common. If you're a 10 99 realtor, you're driving all over the place [00:07:00] showing homes. If you're driving Uber, so. You could do one of two things. You can either take the mileage on your vehicle, meaning you're tracking your mileage with an app more than likely, so you're, you're, you're taking how many business miles and trips you're taking, comparative to how much mileage you have on the car for the vehicle, for the full year.

So if you drive. 15,000 miles for Uber or as a realtor or whatever the case is. The IRS is gonna allow you to take a certain, uh, dollar amount against this mileage. Right now it's probably like up to 58, almost 60 cents per mile.  

Mike: I haven't looked at it recently. Yeah, so it's probably six.

It changes every year.  

Kevin: So 60 cents per mile, let's say on $15,000. That's a huge deduction right there. Yes. Or you can take. The actual cost of the vehicle. You can't do both. But the actual cost of the vehicle, um, the business use, percent of the vehicle you can take, uh, is depreciation and if it's over 6,000 pounds, even bonus mm-hmm.

You could take wear and [00:08:00] tear on the car, you know, your repairs on tires, oil, gas, um, just your insurance, your upkeep on the vehicle, all of that's tax deductible if you're driving for Uber. 'cause your car is gonna need new tires and all. I mean, that's a business expense now. Mm-hmm. So we need to pick which one, do some just quick math and see, hey, how many miles am I driving?

And just Google a mileage rate for that tax year, compared it to, you know, how much did my vehicle cost and can I depreciate all or some or all of my vehicle plus the actual expenses and pick the higher, the two. And then that's a good tax deduction  

Mike: right there. Quick thing to add, even if you're doing mileage, you can still deduct toll roads here in dfw.

Mm-hmm. That's a big deal. Um, it gets expensive. Don't drive around dfw, especially if you're trying to avoid, avoid traffic, parking, parking, and absolutely parking. Um, so you can take direct expenses, but you're indirect vehicle expenses. Um, you don't get to take, you gotta take the mileage. So I would say that the main point to think about on this and what Kevin's just saying, 'cause I see this over and over and I know you have.

It's kind of [00:09:00] a pain to track these expenses, much less focus, like take some of your brain capacity and focus on tracking these expenses. You're trying to make a living, you're trying to live life. But man, please, please consider being a good steward of what you have, what you've been given. Be a good steward of it because that time you spend on it.

In a lot of cases can actually save you more in tax than working the extra two or three hours that you would rather do just work. Mm-hmm. It's important. So expenses, tracking, um, doing some kind of accounting system can save you a lot of money. There's actually hidden money in doing bookkeeping for yourself, and it'll help you, it'll help you manage your business better.

You'll see where you're making the money, what's costing you the money, how to improve cash flow. Mm-hmm. Um, you should do that. Yeah. Let's get back to the F attacks. You can avoid a lot of it. You can't eliminate it, but you can greatly, greatly, greatly mitigate it. Yes, and where it adds up again, if you're only making 20, 30,000, your net income.

Your [00:10:00] FICA is gonna be uh, 3000, 4,500 bucks. When you start making 70, $80,000, your FICA is through the roof. The IRS offers and, and tax law offers an opportunity to mitigate that. Just because you're self-employed, someone else isn't giving you the W2. Mm-hmm. You don't have to pay. FICA on every dollar you make.

No. Tell us about that.  

Kevin: Yeah, you can't, like you said, you can't completely bypass Medicare and Social Security. The government's gonna require you to pay any of those systems, whether you believe in them or not. Congratulations, you're paying into Medicare and Social Security. You're gonna be required to, unless you have passive income.

But if you're actively earning income, you're paying some sort of tax there. What happens though, let's say you make a hundred thousand dollars as a freelancer or a side hustle, and assuming that you're not capped out. On your Medicare and social security, um, because you have another W2 job or something.

Let's say you're just a hundred percent freelancer and you make a hundred thousand dollars.  

Mike: Lemme time out for a second. So I can just go through the elementary basics of the [00:11:00] fica. 'cause we just said might be, might not make sense to everyone. Um. Everyone who's making money for a living in the United States has to pay Social Security and Medicare, whether your employer's helping you or whether you're self-employed and you're paying it, but you only have to pay Social Security on a certain amount of income once you get over that income.

And this year it's about 170,000. With inflation, it went up a lot over the last three years. Mm-hmm. Your first 170 grand, you're paying 15.3% if it is income subject to self-employment tax or payroll tax rate. Um. So, like Kevin said, if you have a job and you're already making 150,000 W2, but then you go get another job, or freelance job gets you a hundred thousand a year, you're not paying 15.3% on all of that.

You're paying 15.3% until you get to one 70. Then you're only paying Medicare, which is 2.9% for self-employed. So that's what Kevin was talking about there. I just wanted to throw that in.  

Kevin: Yeah, so you just, you don't wanna just blindly follow this advice. Always seek out a CPA. A qualified professional who can [00:12:00] help you analyze if this is a good strategy for you or not.

Because everyone's different. It's hard to give blanket tax advice 'cause everyone's different. Yes. So, but the thought is, let's say you're a hundred percent freelancer and you are making a hundred thousand dollars after your expenses. So you maybe grossed 200, you found a hundred thousand dollars of expenses.

So your net take home is a hundred. Now you're gonna be paying $15,000 in self-employment tax. Then you're gonna pay income tax on top of that. Well, what happens is let's create an LLC. Hopefully you're running your business through an LLC anyway for liability. That's a different thing we can hop on. But let's say you have an LLC set up and we're running that a hundred thousand dollars in net income through an LLC.

Now we can elect. To have that LLC taxed as an S corp, still an LLC, still an LLC. You're not changing the formation with the state. You're not changing your EIN, you're not changing your payroll. If you have it, it is a straight tax election that you make, and you're [00:13:00] going to basically fill out a, it's a form, uh, 25 53.

It's an S Corp election form. Fill that out, send it to the IRS. And you can say, I want my LLC to be taxed as an S corp. Now what good does that do? Well, S-corps are not subject to self-employment tax, so that a hundred thousand dollars is not subject to that $15,300 tax of self-employment because. That's just the rules of the S corp.

That's the benefit of an S corp. You only pay income tax on your net, but you can't completely bypass Medicare, social security. You gotta play the game some you have to. So that's where a reasonable compensation comes in. So you're actually gonna put yourself on payroll of your own S corp. But the cool thing is we're gonna set your salary at maybe 30,000.

So yes, you are gonna pay some Medicare and Social Security on that first 30. As a salary, but then the remaining 70 to get you to your a hundred, that, that's just gonna be [00:14:00] distributions outta the LLC to you personally. A direct bank to bank transfer. Still pay income, tax pay, income tax, but no, no employment taxes.

So your, your actual tax savings is 15 point. 3% on 70,000, that is what you're saving doing an S corp. But also there's analytics to be done because now you have, if you're gonna have a professional and you're gonna outsource this, you're not comfortable doing a 25 53. And if you're late, there's late relief.

So there's a. A ways around everything. But if you get a professional to do this, they're gonna charge you for the 25 53. There now is gonna be an S-corp tax return requirement.  

Mike: So you'll be filing two returns, not just your personal 10 40. Yep. Now you're filing a corporate tax return. Correct. So you have, that's  

Kevin: spendy two tax returns a year with a CPA.

Probably. So now you're, you're fees are going up. Maybe by paying a CPA, but the whole thought of paying a CPA is if the CPA's doing their job, they're more strategy focused, hopefully, but every dollar you spend with a CPA is hopefully saving you more in [00:15:00] tax. So yes, you may be paying a CPA three to $5,000 more a year.

But that's gonna be a lot better on that 15.3% savings on 70 K. Yeah. I mean, that's almost $20,000 of savings, right? Yep.  

Mike: So let me, it's a couple more caveats on there. Not only are you having to pay a CPA to file a tax return each and every year, or. TurboTax and having to figure out how to do it. Um, you gotta set yourself up with payroll and payroll's kind of a pain if you try to do payroll.

Yeah. Um, you're on your own. Figure out how to file your payroll tax returns, your W2 pay. You have to pay withholding now as a W2, um, and employer, which you are as the employee as well. Um. You've got additional costs. I highly recommend getting a payroll service or a bookkeeper that can do it. There are ones out there mm-hmm.

That can do it. You can go almost self-service with a company like Gusto, but you're still gonna have to do a good bit of work to figure it out. At least get it set up. Mm-hmm. Or you get a bookkeeper and they're doing it and they're talking to you about it every month or every quarter about that.

So another big caveat. The IRS does not [00:16:00] allow you to choose an S corp just to avoid se tax or mitigate to se tax.

It's not allowed. Um, and don't do it. You'll, you'll be breaking the rules and if they find you, they're gonna hit you hard. But another big problem a lot of self-employed people have is lend ability. Man, it was so hard for me and Becca to buy our first home working at our firm, um, that we were self-employed in, even though we had an LLC set up.

Um, we had a partnership return, we were filing, um, 'cause we didn't have a form W2 and lenders wanna see your W2. If they hear you're self-employed, they're like, I can't count on that. But they see a W2. You're just like everyone else that's doing conventional lending. So if you wanna pay yourself an end quote, unreasonable salary, that's an important term.

Um. That's a perfect reason to create an S corp. And then you also get to mitigate USE taxes. Mm-hmm. Tremendously. The other thing, let's get back to this reasonable salary. In Kevin's example, he said you set your salary at 30,000, you're making a hundred, you set at your [00:17:00] W2 at 30, um, and then you have 70 in distributions.

That can work, and we've had a lot of clients where it works at, but you have to pay yourself a reasonable salary. The main gist of what a reasonable salary is in the, in the tax law is. What would you have to pay someone? Anyone off the street? What is the fair market price for that salary? Mm-hmm. That's a good starting point.

But don't stop. There's not reality. That's where, that's not reality. If you're a business owner, you don't get to just pay yourself market salary. Look at you and me.  

Kevin: Yeah.  

Mike: We ain't get marketed for how many years. Yeah. Um, because cashflow wouldn't allow, no, cashflow wouldn't allow. And we're trying to grow the business.

We needed the cash not to take home. We couldn't. We needed it to reinvest in the business. We needed to be able to deal with seasonality. We had to have cashflow. 'cause if you can't make payroll, suddenly your business is out. It's pretty rough if you can't pay for inventory. You're outta business. So yeah, that's a good reason.

If you have a business that's like that, you get to figure that in what reasonable comp is, and there's been [00:18:00] times where there's real, reasonable, legitimate arguments. Someone might be making a hundred thousand revenue. But they can't afford to pay themselves more than 6,000 that year. Yeah. That's aggressive.

But if, if that's your fact, if you have a good business reason, the IRS will accept it. Yeah.  

Kevin: And even in the first year, um, there's a, there're a lot more lenient than you would think. There are reasonable compensation audits. I have not seen one in years. Six years I seen. Yeah. It's, I, but I've been on 'em before.

And a reasonable comp audit is, let's say you're an escort, making. 500,000 a year and scorps are very common if you're self-employed business, not just side hustles, but if you're full-blown self-employed and you're making good money, you should probably be in an scorp depending on your goals and what you're holding in there.

But let's say you're making 500, that 30,000 is not reasonable. And if you file. Or in some, some s-corps we get off the street or we do consults with, don't even have an officer salary.  

Mike: They haven't paid themselves in three years. They don't even know it's shockingly, they haven't been audited yet.  

Kevin: Yeah,  

Mike: they're gonna be, '

Kevin: cause there's a specific line item on the S-corp tax [00:19:00] return that says officer comp and I'm pretty sure which means you, that's you, that's your reasonable comp.

If there's nothing in there and your net income showing 500 and officer comp is zero red flag, big red flag. You're just have a siren on your head. Um, so be careful. And then if you get pulled for a reasonable audit, what could happen is they could revoke your S selection.

Mm-hmm. They revoke your S selection. Now, instead of getting escort favorable tax treatment on, on that 500, they're gonna just tax it all. Mm-hmm. All 500 subject to SE tax. Thanks for playing. I mean, don't cheat the rules. Yes. Don't cheat the rules. Be aggressive where you can, so long as it's defendable. Um, but there's even ways around that.

So we're not gonna give away all of our trade secrets. But let's say you get into an S corp and you haven't done a salary and it's getting to tax time. We haven't even talked about QBI maximization, but let's say at the end of the year, you just learned this, you had an S corp and we have zero in our officer comp and we're making good money.

There's ways to get around that red flag. There's ways that you can do it on the prep process without going [00:20:00] back in time. I don't have a time machine, but we can go back in time and create officer salary on that tax return and make it fair for you and the government to make sure y'all are playing nice.

Mike: Yeah, so you mentioned QBI, the qualified business Income Section 1 99 A deduction. It's also when it first rolled out in, in the 2017 Tax Cut and Jobs Act, um, was called the pass through deduction. And the whole point of this, and I love this, I think it's fair if you have a big multinational C corporation like Google, you're not paying the same tax, you're paying less of a percentage of taxes than a self-employed individual is.

Mm-hmm. That ain't fair. Mm-hmm. Self-employed individuals, the startups, they need to be able to compete. Corps are capped at 21%. Yeah, 21% and maybe even lower if they're domestic corps under this new tax bill, but yep. We don't know what the bill's finally gonna save. But yeah, maybe 15% if they are domestic production C corps.

And you're gonna be paying. 37% total income [00:21:00] tax plus 15.3%, um, self-employment tax. That ain't fair. So to try to make that more fair, more reasonable, they came out with a QBI deduction. What the deduction basically allows you to do. And there are limitations, and Kevin's gonna talk about it in a second. Um, there's a lot of strategy you need to be thinking about in this, but you get whatever your net income is, you get a 20% deduction on the current law.

Um, under the new tax bill so far, they're gonna increase that to 23% of whatever your net income is. It's a phantom deduction. You didn't spend any money, but you get to deduct it. It is beautiful. It's powerful. I love. Things like that. Yeah. Depreciation, phantom deductions. Oh,  

Kevin: it's just a cherry on top. You don't have to remit any more cash.

Nothing's going out the door. There's no risk assigned to it outside of maybe some, uh, gray area in what's called a specified service trader business. So that's the limitation. Mike can, it had earlier, it's called an SSTB. You could just Google QBI. [00:22:00] SSTB, it'll give you a good definition of it, but the thought behind it is professional services, accountants, lawyers, doctors, doctors, people who use more consulting based, um, for their revenue streams.

They're gonna be limited on the amount of QBI, they can take given income thresholds and other things like that. So just be careful if you're. If you're using your, kind of, your brain, your power to generate, you're not developing widgets, you're not selling a product, you're not out there earning income by, you know, mowing lawns or whatever.

You are using your, your brain to your reputation, your professional reputation, your reputation to generate income, your. Might be subject to SSDB  

Mike: and if that applies to you. Remember, this podcast is for freelancers and gig workers, if that applies to you. There's still possible ways, lots of ways to be able to enjoy the q.

Yeah. Lemme  

Kevin: give you a story on that because I had a client who came in. Looking at their prior tax returns. What hap They were a consultant on paper. Yep. [00:23:00] But the real revenue stream was, they were a life coach, but they also sold these, uh, education sources every month. So you would buy into this, uh, life coach.

Uh, strategy sessions or whatever, but she got the online classes, but she has online classes with material handout material, PDF material, uh, pamphlets or whatever. She developed a product that she actually sold part as part of your feed to working with her, so she would consult, but she was consulting over her product and the prior CPA just marked it SSTB Specif.

She was a specified service trader business, which eliminated her because of her income over any QBI deduction. So I looked into it and I was just like, no. You are selling a product, you're a consultant. Yes. But a lot of your revenue, 90% of her revenue, she was not consulting with every one of her clients.

She had a product that she had online. People would buy the product and then they could upcharge to work with her. So we, that upcharge, we classified as SSTB. 'cause [00:24:00] that's consulting. But 90% of her income was on this, on this book or on this material she developed. That's selling of a product. Mm-hmm. And so I disagree with what the CPA did.

I mean, we're talking, that was probably $150,000 deduction. I mean, that's 40 grand in tax savings. 40 50 grand in tax savings. In tax savings, yeah. Just by looking under the hood and not just taking the facts for the surface of what they are. So if you're a freelancer and you Google this Q-B-I-S-S-T-V and look at 'em like, man, I might be subject to it.

Look at your revenue streams because you might not be. And that's a lot of work of what we do is how do we partition income to make it eligible for more S uh, QBI deduction.  

Mike: Yeah. Well, let's get back to the normal gig workers, even though we we're gonna have to do another one on the, on the QBI, because we've got so many cool examples.

I'm just thinking about the physician during, in the audit that you were working with last year, um Yeah. They claimed they weren't eligible for any QBI and you gave 'em like a $300,000 QBI. Yeah. Skate by that audit too. That was awesome. And you nailed that all. Yeah. You absolutely won it. Yep. Um. We want a partner.[00:25:00]  

Yes. So  

Kevin: my wins are your wins. My losses are yours too. That  

Mike: person was making a couple million a year. Gig. Workers generally aren't making that. Hopefully you are one day, but you're not there yet. Probably. Um, if you're listening to this episode, you're making under 150 probably. Um, SSTB doesn't even matter if you're in that.

Nope. The, the income thresholds, you have to get over them before SSTB um, applies. So for you guys. And, and if you're, if you're not working with a tax preparer, a good tax preparer and strategist, you're probably missing out on your opportunity to maximize QBI deduction. That could lower your tax by significant by by 20 30%.

Mm-hmm. Um, please figure that out, um, and talk with someone or study the heck out of it. Another big issue, so QBI does have limitations, even if you're only making a hundred thousand. Mm-hmm. Um, if you're sole proprietorship, you don't have to pay wages. Mm-hmm. If you're not, what, uh, what, what's the problem?

If  

Kevin: you're not paying wages  

Mike: as a sole proprietor, [00:26:00] no. If, let's say you have a LLC or S corp and you're not paying any wages. If you're not paying any wages, you're gonna have that just yourself.  

Kevin: Yeah. You're just gonna have that red flag out there that you don't have officer comp.  

Mike: Right. But also on the ss, on the QBI deduction, you are limited to 50%.

You can take a big deduction, but you have to have at least 50%, um, of that deduction. Or in wages, let's say you make a hundred thousand dollars immediately, your QBI deduction, you think is about 20,000. 20 grand. You don't pay any wages, it'd be zero. Let's say you only pay $10,000 in wages. The maximum QBI deduction you can take is 50% of those $10,000 wages.

But wait a second. If you're paying, you're only paying yourself wages right in your S corp. The more you pay in wages, the more in self-employment tax you make, but the more you pay in wages, the bigger QBI deduction you make, how the heck do you figure that that out? Man, you gotta circle  

Kevin: reference. Yeah.

This is exactly why we ta we tax plan around this exact scenario because you're trying to balance how much wage you pay. If you're just the only employee in the business, you wanna balance how much wage you pay. You don't wanna pay [00:27:00] too much, you don't wanna pay too little, uh, too much. You're, you're tipping with Medicare social security too little.

You know, you're, you're at risk for losing your s uh, election. So you want that Goldilocks just kind of right in the middle. But we recommend some of our clients, depending on what their income level is to pay over what's reasonable, but if your QBI I deduction's 20 K, you gotta pay double your QBI deduction in wages.

So that means you need 40 grand of wages. So just think about it. Let's say you are paying self-employment tax at 15.3%.  

Mike: Yeah.  

Kevin: Depending on what your ordinary tax tables are, you could be paying tax at 37%. Yep. So sometimes it's worth paying more income tax. Or more self-employment tax to save more on the QBI deduction, which is income tax.

But there's a fine line. I mean, there's a break even point. Yeah. 'cause you cap out on, so, or on your Medicare, so this could be very detailed and high level, uh, But the point is you, you gotta work with. Someone who understands this stuff 'cause it, it's, it's real money. [00:28:00] Um, we coach a lot, you know, we have tax planning, um, with clients who maybe are starting off freelancing.

We go through what is the ordinary and necessary deductions. Yeah, we have an examples of them. Then we start getting a little bit more, um, into their situation. We kind of put our, our finger in this and just say, start stirring the pot a little bit by saying, tell us a little bit more like what you like to do.

What personally, what do you do? Like, let's say you bought a, a. A short term rental property is very common with where we do this. Let's say you live in Texas and you have a short term rental property as a side gig or something that you're starting to manage some properties, well, you might be flying out to those properties, so to go check on 'em, well, that's a, that's an ordinary necessary business expense for you to go check on these properties.

Um. But you're staying at the properties. So let's say you and your family go vacation at one of your rental properties, which is ordinary necessary. You're checking on the property, but you're also staying there. So I would say that's still tax deductible Now, you don't wanna get too crazy with it if y'all stay there two weeks.

Um. You know, and you're only working for two days, or [00:29:00] you go once a month. Yeah. Yeah. So be careful with it. But if you're  

Mike: going up there to work on the property, yeah, absolutely. If you're going up there to, to fix it up, to improve it, to clean it up. If you're doing the cleans and the turns, all that's ordinary, necessary.

Kevin: Yes. 100%. And so real estate may not be viewed as so much a side hustle, um, or freelance work, but the thought behind it is think about what you're doing to generate income. Think outside the box and just. Even raise a question to A CPA who may not be in the details as much. Just saying, can I deduct this?

We get that question a lot. Hey, I saw on TikTok I can do this, this, and that. Don't do that. Well, maybe, I don't know if you have a good relationship with your CPA. I get thrown stuff sometimes. That's crazy. But  

Mike: I've seen some tiktoks and they're like, I'm gonna do this. Help me do it, Mike. And I'm like. Dude run.

Do you wanna go to prison? Yeah. No, we're not doing it. Run. Yeah.  

Kevin: So don't do anyway, but just maybe have a meeting with any CPA that's worth their, their weight and salt. So, and just say, here's, here's what I'm doing on the side. [00:30:00] Is, how do I structure this? What's the best way to limit my liability, limit my tax, um, but maximize my deductions.

What do you got for me?  

Mike: Yeah, I wanna talk about a side hustle that we're seeing more and more of. And I'm actually really considering doing it. Actually, I've already wanted do it. I just can't get my wife talk in it. 'cause she's gonna be doing most of it. What, um, we're here in South Lake Town Center or Town Square?

I'm not sure which it is. We're in South Lake. There's a Tesla dealership just down the street. I want a cyber truck, man. I just want one, but. I, I, you can't justify the expense for one. You really can't. If we turn that into a money making business and get tax deductions out of it, um. It makes sense. It'll pay for itself.

And then I get to drive a Tesla once in a while, a cyber truck without having to rent it for 400 bucks a day, which I did once. I won't do that again. Um, Turo is a really cool side hustle business. I've seen growing and growing Turo. Is, is like Airbnb or. It, it's a way for people to rent their [00:31:00] own cars to people like Avis and Hertz did.

Um, you go buy a vehicle and you rent it out to people. You have a business. It's an ordinary, necessary business, depending on how much you use vehicle personally versus how much you use it in the business. You also have a big tax deduction. Mm-hmm. Cyber truck happens to be over 6,000 pounds, Kevin. Mm-hmm.

You can take bonus depreciation on that. You can buy a Tesla cyber truck with. One or 2% down, I think get 1% interest. 1.9 I think they were offering. Um, and pay very little for $115,000 vehicle. Mm-hmm. If I get that, let's say I'm just using it for business for first couple years, and then maybe I'll take it out by a new car.

If I'm doing this in Turo, the IRS will let me deduct the entire cost of that. Even if I only put 5,000 outta pocket my first year, a hundred, if we're at a hundred percent bonus, $115,000 deduction offsets my active income. That is a side hustle. But it offset the firm income pays for itself. The [00:32:00] IRS reduces my taxes by $37,000 when I'm put 5,000 outta my pocket.

Mm-hmm. And you're making money now. Half of our clients I've seen doing turro, they're not making money. Half are making a killing. It's a shelter  

Kevin: for taxes.  

Mike: Yeah. Don't, that's what they're, don't let your taxes tail wag your investment dog or your business dog. But half of them that are taking it seriously, that researched it, that took some classes.

All of their vehicles are cash flowing positive. They're paying off the note. They're making cash on top of it and they're getting heck of tax advantages. Mm-hmm. So problem is, is you make me work too much at the firm and doing these podcasts and stuff. I don't have time to drive the car around, um, to people and get it cleaned.

My kids could clean it. I think that's a good job for them maybe in five years, but delivering it and stuff. Yeah. Um, and, and dealing with the, the customers send you messages. Like how do you, uh, how do you move the seat in the cyber truck? Yeah. I sent that message. Yeah.  

Kevin: They're kind of complicated. That's a fair warning.

I had a friend, my friend has a cyber truck. He was, uh, parked at a, uh, he was parked at a stoplight. His camera caught this, but this guy [00:33:00] was just on his phone, just boom, hit the back of it and  

um, caught it all on camera. So it's obvious. It's an obvious claim, right. It took, I think probably four months to get it repaired, getting a a, because it bents like one piece of a frame in the back, and so they had to repair this whole thing and getting a, a cyber truck repaired.

No mechanics can't work. You have to take it to the dealership. They don't have  

Mike: a frame. The body is the frame. Yes. And  

Kevin: so repairing it is a headache. So he finally, he had a rental car for about like three months, gets it back and now the value has dropped like $35,000. 'cause now he has an accident report with a major repair on it.

Even though it wasn't a, his looking at it, it looked like just a fender bender, but because the way it was built, it just tore it up. I'm not  

Mike: letting  

Kevin: you wave me off on  

Mike: that. If I'm renting, it's up. How many lot people on Turo goes and do as a Carfax report before they rent a cyber truck? I'll get the same guess.

Yeah,  

Kevin: but for resale, like your value. Well, I'm hoping to take, if you owe personal hundred grain of debt and then the value is worth 60 K and Touro's not working, I hear you're upside [00:34:00] down. Yeah. Yeah. See, that's where I come in for, I'm not risky.  

Mike: I'm looking resale. I'm not looking for resale. I'm gonna make money off of this thing.

Um, just run. Why can't you run it  

Kevin: through the firm  

Mike: we're working about? We, we have been thinking about  

Kevin: it. Yeah, thinking about it. But there's also rules of why we haven't is because one. We're in a partnership, but we're also unequal. We're not 50 50. So if he went and bought a car and I bought a car, it's not equal because there's a, there's a percentage difference.

So you gotta think about that. If you're in business with partners,  

Mike: we need special allocations 'cause there's a partnership. We could,  

Kevin: yeah, but also you have to decide if it's ordinary and necessary and how much of a deduction you could get. 'cause Mike. If he buys a cyber truck and we run it through the firm, that's perfectly fine, honestly.

But not a hundred percent of that vehicle is gonna be for business use. Yeah. 'cause he's not using the cyber truck a hundred percent for business, so he's gonna get a less deduction running it through the firm than doing Turo where it's a hundred percent profit motive  

Mike: because you're driving it to and from work.

It's commute for you. [00:35:00] That's a commute. If you're taking it to clients and that's all you did was driving back and forth to clients, then it could be deductible. But how do I get from home to the office? I leave the cyber truck of the office and drive my Camry to the office. Yeah. Each day I, that's, that's not my idea of it.

Yeah. I hear over and over again. I just wanna put. Let's put this out here. I hear over and over again. Wait. If I get something like a cyber truck or a, an Escalade and I wrap it with my company's logo, it's an advertising expense I can get away with deducting this thing. Uh, especially if it's over 6,000 pounds, I can get bonus depreciation.

Um. You hear that over and over. I've seen three TikTok videos that have been forwarded to me. I don't watch TikTok, but those are clients saying, why can't I do this? Just wrap your car. Yeah, why can't I do this? That's not ordinary necessary. In most cases, it isn't. Some, and I'll talk about one in a second, but that is not ordinary necessary.

It's not. Reasonable and look at the tax court case history and look at audit rights on that. People lose over and over again when they've [00:36:00] done that and the people that told 'em or paid got paid to prepare their taxes and told 'em to do that, they're nowhere to be found. Yeah. But you're paying back all your taxes and big penalties and interest.

We have a client, um, good friend of mine who does, uh, they, they do marketing and design. Um, they're really cool marketing team. They. They have developed a reputation of being snazzy and people that like new high tech and cutting edge, um, and they want to get in the design of creating car wraps. Um, they're really good at it.

Mm-hmm. So they bought a cyber truck last year. They created this incredible wrap. I mean, they put do like probably over a hundred hours into creating this wrap, both of the owners a hundred hours each into it, created this wrap. And they are taking it to each and every one of their client sales meetings when they're trying to do this wrap.

Um, and say, Hey, you want a cool wrap? We can design it to your business and, and we can make it sell and it's gonna, it's gonna be good for [00:37:00] SEO results and all that. That I will make an argument is ordinary, necessary. Mm-hmm. And I think, I think if they get audited doing a little RD in there  

Kevin: too.

Absolutely, man. Yeah. That's cool. Yeah, just slapping a wrap on your card does not make it a hundred percent either. Or magnet. Yeah. Otherwise, I'd go wrap my personal house. I'm like, this is a Revel house writing off my house. I'm just gonna start writing everything off. Hey, there's my kid wrapped. Yeah. Go wear this t-shirt to school.

And now I'm, I'm everything related to my kid's now. Deductible doesn't work. It's, it's, it's substance over form. Right. The form of it is you've wrapped your car, you've wrapped your kid in your house,  

Mike: and it's your personal vehicle and you're using it for everything. You go to the grocery store and it, you're  

Kevin: going to Yeah.

School events and whatnot, so Yeah, I, I get that all the time too. So it's always substance over form, so be careful over that. But what other deductions, I know we're, we're, we're kind of running short on time, but as a freelancer or as you know, and every industry is different. The Uber driver freelancer is gonna be a lot different than the band.

You know, trying to hustle for gigs, right. Um, or writing on the [00:38:00] side, or editing or whatever. Art, every industry's different, but what's maybe one common deduction they could all share and we'll wrap her up. Meals,  

Mike: business meals, every, almost everyone I know, especially freelancers, don't have their own office.

They're out meeting people at coffee shops and for lunch to get business. Mm-hmm. They need to track that. Thyre says they need to write down and track contemporaneously what the purpose of the lunch was. Who is in attendance, and guess what? It's the tax deduction. People don't do that. There are so many and, and we don't have enough time.

It would take an hour to list every single deduction that might apply to you. It all depends on your facts and circumstances, what your business does, but what Kevin and I want to reiterate. Please understand this. If you're a freelancer, if you haven't thought about tax strategy, you are very likely overpaying your taxes.

If money's not important to you or you love the federal government and think they're doing such an efficient job, then go ahead. Keep doing what you're doing. Otherwise, track. Your expenses. [00:39:00] Find out for your business what you are doing, what your facts and circumstances are. Find out what is deductible and do the work.

I know bookkeeping is not sex or fun. I hate it. I like the tax, hate the bookkeeping, but I like the tax deduction. Do it. Track your expenses. Find out what's deductible, and don't overpay the government.  

Kevin: Yeah, if to summarize everything uh, I mean between cyber trucks and S-Corp and everything, I would say look at your life.

What in your life is a business expense that's ordinary and necessary? Get as many defendable expenses as possible. Look at the S-corp election, and then help. Have a tax strategist or preparer actually get with you and enact and hold this tax plan to account. So that's the best I could I could ever offer you.

And, um, be proactive. Be proactive in it. Think ahead. Don't let April 15th come and bite you. Um, and have that self-employment tax looming. Save [00:40:00] for your taxes as you go. And I tell my clients that all the time. I was like, if you're gonna make 300 grand to self-employed, let's put some money into the savings account and a high yield account.

Don't let it sit, idle, grow it. Then let's tax plan. And the better we tax plan, the better we do our job. The more of that account you get to keep, but let's say you do zero tax planning a life event happened or whatever, and you're just unable to tax plan. You got your taxes saved in an account that you're in control of.

You can remit your taxes or we can plan and you can keep it. Mm. Which one do you want to do, you know?  

Mike: Yeah, we always say change your facts to change your tax. Don't be a victim to the Internal Revenue Code. Leverage off of it. Make it your best friend. Well, maybe not as much as Kevin and I love the code, but you can love it too.

Um, One more thing for this episode, for the gig workers and freelancers. Something that we should have mentioned and we haven't.

Um, estimated tax, what is it? A lot of people are starting to freelance work or, or new gig job. They're used to their employers taking their [00:41:00] taxes outta their paycheck.  

Kevin: Mm-hmm.  

Mike: Well, when you're your own employer mm-hmm. You kind of gotta do that too. And I see that bite a lot of people, especially in their first year or two of business.

Um. You gotta pay estimated taxes. The, the way our country's set up and our tax system set up, it's pay as you go. It's not make all the money wait till the very end of the year and then pay the government. Um, and the way they've set that up and the way they're trying to, the way they prevent you from doing that is they charge you penalties and interest for not paying quarterly estimated tax that are sufficient to cover your tax obligation.

Um. Kevin, what's your rule of thumb for someone who's just getting started so they don't have to go do a bunch of hard calculations every month or every quarter? What's your rule of thumb?  

Kevin: I would say there's two, two ways you could do this. One, you could safe harbor yourself off your prior year tax. So if you're making under  

$450,000, somewhere in there. Um, then you can pay a hundred percent of your prior year tax. That's page two of your 10 40. It'll say total [00:42:00] tax on page two. If you pay that in estimated payments, just take that number and divide it by four. Pay that in for the four quarters, then you're gonna be safe harbored from any penalties.

Um. That may not, that doesn't  

Mike: always work well though. 'cause a lot of people who start first starting freelance, they made a lot of money in their W2, now they're Yeah. Doing the risk thing and they're making less, more, or you 90% of  

Kevin: current year. So you could pay a hundred percent of prior year, um, which is a given number so you can actually know what you're paying.

But in the event that your income fluctuated up or down and that is not accurate, then you could do 90% of your current year income. So every dollar I would. Say I take as a distribution, if I'm, if I'm taking as much money out of my LLC or my side hustle account, if I'm taking that personally to live on.

Every dollar I take personally, I'm going to save a percentage, probably 20 to 25% of it into that high yield savings account. Um, and then remit that every quarter. Yeah. Um, and stay ahead of it, um, and pay that way.  

Mike: The hard thing with that 90% rule is. You don't [00:43:00] know what your net income's gonna be for the year.

It'd be really nice to know what your net income is. Figure out your tax. Go use a tax calculator. There's apps out there that do it. Um, but you don't know what the future's gonna hold. Yeah, it's almost an unfair tax rule, but you still gotta work with it. I love when you're first starting out, Kevin's idea, you just pay 23, 20 5%.

Um. NE tax, um, or And income tax. Yeah. And an income tax. There's other ways around it too, but for the basics, until you meet with a tax strategist or go build a cool spreadsheet on Excel, um, I like Kevin's idea.  

Kevin: Yeah. Uh, I would do it that way and a little bit more. If you like to play with numbers and your, you wanna nerd out, you can always tip the government.

Now listen. Listen to me. Don't freak out. I'm freaking out man. Don't freak out. So you could tip the government, don't pay any estimated tax payments. Calculate what your penalties will be and your interest and everything, okay? I'm not freaking out. Okay? Calculate what it would be. And so this is typically for like high income earners who may [00:44:00] remit like a hundred thousand a quarter, 200,000 a quarter, whatever your income is, you're gonna pay penalties if you don't pay the government, if you don't pay as you go.

So maybe we accept that, okay, I owed the government $400,000 this quarter. My penalties probably would've been 10 to 15 grand. I don't know I'm pulling that number out. But let's say it's 10 to 15 grand of penalties you would've paid for not paying your estimated payment 'cause you're gonna pay late.

Could you have invested that $400,000 and out earned what you tip to the government? More than likely, depending on the market condition. So we have some clients that play that game saying, I'm not gonna pay the government at all. I'm not gonna estimate my taxes. I'm, I'll just pay my estimated late payment penalties.

I'll pay my interest, I'll pay everything I need to pay 'cause I'm keeping my cash for myself and I'm investing it wisely. Or I'm in a very good investment that I'm outgrowing what the government's charging me and I'm in control of my money.  

Mike: So that's, it's called arbitrage. Yeah. If you can make more. By holding on and, and assessing the penalties, then you're arbitraging it's free additional money.

Yeah. And for the people that do it right, it, it makes a big difference. [00:45:00] But  

Kevin: you have risk. Yeah. So the market could go down, you could lose on that balance. And then you're Texas really kicking yourself. So do so at your own risk. I'm just telling you this is what people do and what we can advise certain people.

Yeah.  

Mike: Well, there you have it. There is hidden money in the tax code related to freelancing, gig economy, gig jobs. Um, we just basically covered the surface of 'em. Subscribe, hit like, follow us and learn more about this as our season unfolds.

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