If you run a marathon without training for it, you’ll likely have a pretty memorable – and painful – experience to remember. The same can be said for doing your taxes. That April date is like your marathon race date, and everything you do during the year leading up to it can impact how it goes.
Whether you’re a full-time fitness professional or have another career that yields multiple W-2’s and 1099’s, figuring out how to do your own taxes is daunting; it can feel just like the start of training to run 26.2 miles straight.
Josh Lance from Lance CPA Group sat down with trainers at #TrainersConnect to explain the importance – and benefits – of breaking the tax process down little by little throughout the year to make it more manageable come tax season.
If you’re a sole proprietor, do your own taxes, have complicated a tax situation, or just hate the idea of this type of life admin work, his notes will help you too.
Explore your legal set-up options
If the words “tax return” just mean cutting a big check every year back to your local and the federal government, it may be because, Lance says, you’re taxed two ways: you’re taxed from an income perspective and self-employment perspective.
“If you’re a W-2 employee, your employer withholds FICO taxes, social security and Medicare – but as your own employer, you have to cover that not only for yourself but for what your employer covered as well. And that amounts to 15.3% in addition to any income taxes that you have.”
According to Lance, if you don’t have W-2s, it may be beneficial to look into becoming an S Corp.
“It allows you to limit the amount of self employment taxes that you’ll be hit with,” Lance said.
However, note that there are additional compliance costs associated with it, like filing an S Corp tax return. You also have to treat yourself as an employee and run your own income through a payroll process. Another watch-out, Lance says, is that if you are making a total sum much larger than what you run through your payroll system, it’s likely that you’ll be audited.
It also requires a lot more detailed information, so Lance recommends having an accountant look at this form with you at least for the first year you file with it in order to ensure it will be accepted and filed.
Set yourself up for success by thinking proactively
It isn’t the most exciting way to spend an hour each month, but as Lance said, training for the marathon will feel so much better on your body if you stick to a plan from the very beginning.
Start by setting up your own accounting system
Lance posits that you should be keeping track of everything you’re spending as any business would, and there are some tools to help you do that.
“There are a lot of great cloud accounting systems that you don’t need any special software to use.”
If you have an accounting system in place, you can run an output from there and your tax return becomes a lot easier.
“If you haven’t kept it all together, then it becomes a big process,” Lance reminded us, “and ultimately if you’re hiring someone to do your tax return, it’s a lot more expensive.”
From an administrative perspective, it helps to update your books at least monthly. You’re able to ask and answer questions like, “How am I profitable?” or “How did my income change month over month?” or even “Are there areas where I’m spending more money that I didn’t realize?”
Make sure to cross reference your bank statements with your accounting system on a monthly basis; if any transactions are missing you’ll want to reconcile those to stay on top of your books.
Look into paying taxes quarterly
If you’re not a W-2 employee, your employer isn’t pulling taxes out with each paycheck. Set some money aside with each paycheck and pay your taxes quarterly to the IRS to avoid a big bill come April.
“Those quarters aren’t your typical calendar quarters,” Lance called out. The four quarter dates are April 15, June 15, September 15 and January 15. There’s no tax form to file for this, you simply have to make a payment to the IRS. You can read more information about estimated taxes and pay here.
One way to estimate how much you’d owe quarterly, Lance says, is to divide the amount you owed the previous year by four. “By doing that, you won’t run into any penalties. And if you overpay, you’ll be repaid or you can carry it forward into the next year and apply it to your first quarterly estimate.”
Take note of what you can deduct as a sole proprietor
In general, Lance said, in order to deduct an expense it needs to be ordinary to the business and it needs to be necessary to the business.
“Ordinary means something that you’d normally come across in that line of work,” Lance said.
Personal trainers, for example, can deduct travel expenses to and from training clients, supplies you need like training equipment or a computer to run your business, even a gym membership may be deductible.
Lance did call out that the new tax law will effect some deduction categories. Beginning in 2018, you won’t be able to deduct your workout clothes, because, as he describes, “if you can wear those clothes outside of your work as normal, acceptable attire, it won’t be deductible.”
If you’re working with an accountant, Lance recommends bringing more to the table than less, as it’s better to scratch things off the list of what’s deductible versus not looking at it or tracking it at all.
Separate yourself from your business in a few key ways
Lance recommends setting up a business banking account for your business-related expenses, “so that it’s easier to bifurcate what’s actually business-related,” he says, as you’re preparing to do taxes come tax season. “And if you have an LLC or S Corp election, it’s required.”
Remember the items in your life that might count for a percentage of a business deduction if you view yourself that way, like a home office. “You can write a percentage of your rent off,” depending on a few factors like the size of your house and how often you work there.
But, Lance cautions, although it’s beneficial to consider everything is on the table as you look at categories of deductions , don’t push the envelope when things are grey between business and personal expenses. It can be a red flag to getting audited.
Questions about how to do your own taxes or want help getting ahead of the game for 2018 tax season? Income tax preparation help from USA.gov offers income tax preparation help and U.S. News and World Report has a helpful round-up of free resources to utilize.