Episode 24: Tips for Tax Time with Kara Renninger

Michelle: Are you getting heart palpitations from tax time? Well, in this episode of Profit Points, we talk to Kara Renninger about all the things that you should be thinking about come tax time for this upcoming year. And we talk about all the questions that small business owners have and what to do about them. Take a listen. 

Intro: We are a Modern CPA. Our purpose is to provide valuable information to small business owners on our podcast Profit Points. We discuss business how to’s, give tax tips, and dig into real life experiences in the crazy world of running your own business. If you find this podcast helpful, then like subscribe and follow us on social media. 

Michelle: Thank you, Kara. 

Shawn: This is awesome. 

Kara: Yeah. This is fun to be together today so we can talk about tax time with people and. 

Shawn: Everyone’s favorite time. 

Michelle: Most people love it.

Kara: I heard something you made recently, Shawn, and it said that you said there’s two things that are certain. Tax time and death, right? 

Shawn: Yup, absolutely. Some may someday wish for death before tax day. 

Michelle: Yeah. Hence they keep procrastinating, procrastinating and putting off and maybe not even file for a few years at a time. So that’s never any good. But that’s not what we’re doing here today because I think a lot of people that are going to see this want to be more proactive, right? Instead of less proactive. And they really want to take hold of, you know, their taxes and really kind of gauge, you know, what kind of deductions they want. So, you know, I think it would be good for a lot of people to see this and might motivate them to go forward with getting prepared early. 

Kara: Yeah, I totally agree. So let me introduce us all a little bit. So anybody on your page kind of knows what we’re doing and why we’re here. So, I’m Kara Renninger with Kara Renninger Consulting and Michelle Ward and Shawn Cahill are CPAs and we’re actually mutual clients of each other. So I work with them with business strategy and they work with me on the finance side of things for myself and my business. And we’re doing some fun things in Modern CPA Online, getting ready for tax time. And we have a brand new quiz, which is How ready is your business for tax time? And so as we were preparing this, we started to think about a lot of the common questions that come up. And we had a funny moment while we were working on talking about it, where even though I have accountants who manage my finances and I don’t need to worry about tax time, I started sweating.

Michelle: You were getting a little nervous, like, am I thinking of that? I’m like, Yes, you’re thinking of that. 

Kara: I was like, Am I going to owe taxes with the video? Let me check on myself how I’m feeling. And so as we were talking about it, we thought, you know what, we need to come on and just make a space for people to ask questions, just to share information. Anyone, whether you own a business or you don’t own a business, you’re an independent contractor. You’re a startup. You’ve maybe done some side hustle work this year. You’re thinking to yourself, what is going to happen for tax time? You see the clock ticking in November. December is coming. And, you know, January started in the new year. Maybe you’re frustrated with yourself because you haven’t gotten organized over the year. You’re dreading what’s coming up. You don’t want to start 2023 the same way as you’ve managed your business finances over the past few years. And so that’s why we’re here to kind of chat and talk about it today. How do we set ourselves up for success? 

Michelle: Yeah. And we actually get clients who have said, you know, well, I just started my business. Not a whole lot of activity do I have to go through? And the answer is actually, yeah, because there’s you know, the numbers are the numbers. It doesn’t matter if they’re in the millions or if they’re in the hundreds or if they’re less than that, you know, you still have to capture the same information in business. So being able to understand what it is that needs to be kind of captured and how to organize yourself and making sure that you’re not leaving deductions on the table is like a really big deal because that directly affects the tax number. And so, yeah, it doesn’t matter if your business is just starting or if you’ve been in business a while or if you’re, you know, made hundreds of thousands of dollars already, it’s all the same. So yeah. 

Kara: That’s such a good point that you bring up, Michelle. I think we might have to pause for a second because I think the way we’re sharing the video on Facebook, I’m only seeing…,oh no, okay. It switched. I thought maybe it was only showing you it’s switching as we talk. So I want to make sure that no one was missing out on our amazing conversation here, so. 

Michelle: Oh, yeah, I don’t know how to change that so that it’s working. Everything okay? Perfect. 

Kara: As you all can tell, we’re new at this, but we’re doing it. So Michelle. What you said I think is a really good point that a lot of times when you’re starting a business, I know for myself you’re spending money. You’re not making money. You’re sometimes spending a lot of money. 

Michelle: Yes, that can absolutely happen. 

Kara: Yeah. And so I think you made a really good point, as you know, that getting those deductions now and using that is really important. So maybe we could talk about what are some things that people might have as a common start-up business expenses, as independent contractors, as start-up business, as new business owners? What are some things that maybe people forget about that you can tell us is a secret that we didn’t think of or what are some of the common ones maybe Shawn? 

Shawn: Yes. So the common expenses. To get your business set up is, you know, if you hire a lawyer to create your entity or consult with you or a CPA that you’ve consulted with even before you started some of those costs, you may be paying out personally. You don’t even have your business account set up yet. So it’s a great idea to start summarizing that stuff ahead of time. So, you know, if there’s any licenses, insurances, you know, the organization documents, all of that stuff. 

Michelle: Website creation, creation and subscriptions that you’ve had to kind of set up and have in place. 

Kara: Ah, yeah, yeah. Those are all really good ones and things that people might not think of. You know, we might think, I know when I started my business I had to set up an LLC for myself and set up special accounting, different things. And so it’s good to think about what’s everything that you’re spending on, because sometimes people see that just as a personal expense. And even, you know, for independent contractors who maybe haven’t done that yet, maybe they haven’t decided what type of entity they should be. You still may have some expenses that are coming up with setting up even just setting up your own email address that’s separate from maybe your day job is something that could be a good business expense for people. I know a big thing that comes up a lot is like working from your home. I’m working for my home office right now. A lot of people work from their home office, especially for side hustles and small businesses. Can that be a business expense for people? 

Shawn: Yeah, it can be. Yeah, it can be an expense for you, you know, as a business owner with a small business and your only place of business is your home office, you could deduct expenses. So basically you look at all the expenses for the house, mortgage interest, real estate taxes, homeowner’s insurance, repairs, utilities, all those things. You gather all that, and then you have to carve out, okay, what’s the square footage of the space that I’m using. 

Michelle: As Business. 

Shawn: As for. For your business. Yeah. And then the square footage of the whole home. And you may even have a garage or a shed that you’re using exclusively for inventory or for equipment for your business. That would also count for the Home Office deduction, as in that allocation. So you give us kind of all the totals. If you have a template that we provide, we provide our clients that you can track those expenses by month and you get those totals. And then when we do your tax return or if you do it yourself or your CPA does it, they’ll calculate what the business percentages are for those deductions. 

Kara: So as an independent contractor, a new business owner, a start up for me, let’s say maybe I didn’t have an accountant, like you said, I want to do my taxes myself or I have somebody I used. I should just keep track of all those expenses so that I can share the information or enter it into the tax software that I use myself at the end of the year. 

Michelle: Yeah, absolutely. I think what you want to do is know that that kind of deduction is available and to be tracking the costs that you’re incurring for them. A lot of DIY tax software will walk you through getting that deduction, but you may not necessarily have been educated on what it is and whether or not you are eligible for it. So being educated in knowing that you could get this deduction is probably half the battle because, you know, you’re not just relying on the software to prompt you. You’re going, yes, I know I can have this deduction. Where in this software is that going to tell me how to enter it? Right. The software will do the calculations for you. You know, you don’t necessarily have to understand all the details of the calculation because the tax software will handle a lot of that. But the idea is that you’re educated in knowing that you would be eligible for these kinds of things and knowing that you should be looking for these kinds of deductions. And that’s what’s important.

Kara: I think that’s the critical point that you made there is I was thinking of somewhere where I used to work in the past myself, a funny story of a new business, a startup business, and going with the person to get the taxes done with their accountant and a shoebox coming of just receipts that had been thrown in there for the year. And I was like, What? Like, that’s all the tracking we’re doing.

Michelle: This is crazy. 

Kara: Like, just the receipts. And I think anybody who hears this can relate to, you know, it’s that feeling of like, oh my gosh, what am I going to owe? And did I do everything I could? And trying to find all your statements and your receipts and your expenses of maybe, you know, you got an oil delivery and they hang a receipt on the door of the expense that you had and you didn’t save that in your box of receipts coming to the end of the year, knowing that you’re missing out on reducing how much tax you’re going to owe, is not a good feeling for anybody. So that’s why we’re here today as modern CPA, online sharing with everybody. What are some tips? What are some secrets that you guys know as the accountants that start up small business owners, independent contractors can do. So I thought of a follow up question.

Shawn: Yeah. So just one comment. Just being proactive in gathering and summarizing your information is key to not only, you know, get as many deductions as possible, but, you know, being organized feels wonderful. You know, you won’t feel lost and that being proactive will save you money. I mean, we find that all the time that, you know, we have clients that say, oh, I think I had such and such an expense, but I didn’t track it. So, you know, I can’t give you a number. I mean, that’s money on the table if you were just more proactive. 

Michelle: And it doesn’t have to be a lot of proactive. It can be, you know, one day a month for a half an hour or less than that, depending on your activity. That could, you know, save you so much in taxes just because you’ve taken the time to make sure that you’re capturing all of that. 

Kara: Yeah, such good points. And for myself, being a new business owner myself this year for the first year. I can relate to a lot of these feelings that people have. Like I said, even when I shouldn’t be nervous, I still think, Did I remember everything? Did I have it tracked? And one thing that happened for me in business was, which is I think what everybody wants to happen, we start a business and we want it to be successful. Right? We’re putting all this energy into it. We’re putting all this effort into whether we’re selling a product, whether we’re selling a service, we’re doing a side hustle, whatever it is, we’re putting a lot of energy into it. And if you want it to be successful, there’s a good chance you might have some success because of that work you’re doing. And that’s what happened to me. I did start having some success and had some money start coming in and I literally was like, Oh my God, I don’t even have a place to put the money. 

Michelle: Panic mode. 

Kara: And I didn’t do some of the basic stuff, like I didn’t have a separate bank account. And so those are some things to think about to maybe talk a little bit about. And I myself have a client right now who struggles with this, with mixing the business and the personal finances. And it’s really a challenge for her because she can’t make decisions for her business because she doesn’t actually know how her business is doing because everything’s in one account. So I’m sure you’ve had clients like that. Maybe you can tell us some tips about that. 

Michelle: Yeah, a lot of small business owners do that initially. It’s probably one of the bigger mistakes that they make with their business is that they run all these personal expenses through their business and they say, Well, it’s easier to pay where the money’s coming in at. And you’re kind of doing yourself a disservice in a lot of ways because then you’re having to sift through stuff. And if you are a different type of entity than just like an independent contractor, sole proprietor, if you’re an S corporation, that’s a big no no. So you can actually lose your S status, which you don’t want to have happen for commingling assets. So I don’t want to get people all worried and scared and everything. But it is better to keep the business the business and just, you know, do periodic withdrawals from your business, like you would pay kind of a paycheck in a way, not running through payroll, but in a pay a paycheck kind of way where you’re transferring money periodically as your pay and then pay all your personal expenses through your personal account. One of the big things that I know when people are just starting their business is that they will put a recurring transaction like a subscription or something like that on a personal credit card because they don’t have anything set up yet, like a business checking account or a business credit card. And so this personal subscription or this business subscription is running through a personal checking account or credit card, and they forgot that that was a business expense. It happens all the time. They, you know, they send you all their stuff. And then we say, well, what about something like this? Or What about something like that? And they’re going, Oh my gosh, I forgot. I have all these expenses that are running through my personal card that I never put in there. So that’s a big deal. You know that again, money on the table. 

Shawn: Yeah. And also, it’s similar to that. Like if you if you’re buying stuff for your business off of Amazon or some other online account where you where you buy personal expenses as well, you know, run, keep it, have a separate bank credit card or for business credit card so you can switch the payment method when you go through the checkout process so that it you could track those expenses that are for business. 

Kara: So that’s you guys bringing up such good points here. I think it’s very valuable for anybody because, you know, these are the things that you’re not thinking about when you’re starting a business. And a lot of times, you know, new business owners, people starting a side hustle, independent contractors, they don’t always have the future vision to know what may happen with their business, although they’re doing that hard work. And so setting yourself up for success from the beginning just takes that stress away. Leader I’m not sitting over here anymore because I’ve learned from Modern CPA Online because again, some of their programs, I’m not sitting over here feeling paranoid. Like when you said that, the first thing that popped in my head was, Oh my gosh, what about my Amazon? And then I was like, Wait a minute, I already know that. Yes, I’m already backed. I’m going to do a little pause here just in case anybody is listening midway here. Our anybody listens to the recording just to remind everybody that we’re here for modern CPA Online. I’m Kara with Kara Renninger Consulting. And we have Michelle Ward and Shawn Cahill here from Modern CPA Online. And we’re both our mutual clients to one another from the business side on the finance side. And we’re talking about small businesses, independent contractors, start ups and people worrying about tax time and thinking about it being November and December. And Modern CPA Online has a brand new quiz. Just got put onto their website it’s modernCPAonline.com/quiz and you can go to that and find out how ready your business is for tax time. You’re probably thinking that as you’re hearing us talking about all these tidbits of ways you could do things and things you should be thinking about. And we encourage you to go ahead and take that quiz so that you can kind of find out what you need to get ready for tax time? What do you need to have your business ready before 2023 shows up before you’re behind? 

Michelle: So if you’re having heart palpitations right now, it’s a pretty good chance you might want to check out the quiz and see, you know, just how ready you are. And, you know, maybe educate yourself again. That’s the whole point, right, is to get educated. You don’t have to have a masters in taxation in order to, you know, get the most from your taxes. But you want to be educated on what to look for, right? 

Kara: Yeah, that’s a good point. And you don’t have to have a CPA right away on your team if that’s something you can’t afford in a business. You know, when you take the quiz at modernCPAonline.com/quiz, you’ll get a results video right away that I’ll tell you where you are on the spectrum of being ready for tax time. And you’ll also get a report emailed to you that will give you all the details of what you need to do. And we are working on a little mini course, which we’re really excited about. 

Michelle: Oh, so super excited about this because it’s coming at the best time and just, you know, again, giving people the independent contractors, sole proprietors, just starting out, small business owners, some tools that are much needed and it’s all in one place. 

Kara: So yeah, yeah. Because that’s, that’s the key we’ve said right is getting yourselves organized. So I thought of a question that a lot of people might have known. A lot of people don’t just stop their day job and start their side business or start their new business. You do them simultaneously. Usually you continue the work you have and the money that’s coming in while you’re trying to build up something new. And so that I guess that made me think about people in that situation and them, you know, any tips for people in that situation? Anything that’s special information we should think about for tax time, anything that we need to do differently that we might not have thought about or talked about yet today. 

Michelle: Well, I know one thing that I get questions on in that same fashion is they say, well, my business has to file taxes, but, you know, I don’t know, how does that work with my personal tax return? And so what ends up happening in many cases, if you’re a sole proprietor or you even set up an LLC that’s a single member LLC, there is no separate tax filing for you. So the taxes are then included in your personal return. So then the next question is, well, what about my spouse? You know, does my spouse get pulled into that too? And the answer is, if you’re married filing jointly, then yes, you are filing a tax return. You, your spouse, your regular W-2 income, and now your new business, let’s say, or independent contractor income. All of that is going to be in one tax return. There is no separate return just for the business. And, you know, you’re not separating that from your personal and your spouse’s taxes. 

Kara: So what. Okay, that’s really good for everybody to know that, you know, if you’re starting out just doing independent contractor work with your own Social Security number, you don’t have an LLC set up yet. That’s even if you do have an LLC set up and you’re a single entity, it’s going to pass through to your personal taxes, is what I heard you say. And so let’s talk about what is going to pass through for people and what does that mean? Is it the total amount I make? Is it the total amount after my expenses? What am I responsible for paying taxes for? Sure. 

Michelle: Yeah, let’s go on that. 

Shawn: Yeah. So basically, you’re going to be taxed on the net profit of the business. So it’s your gross income, less your direct business expenses. And if you have a business used at home, that also means that those expenses are also on there. So it’s your net profit. So that net profit as an independent contractor or a single sole proprietorship that those taxes are going to be you’re going to be subject to regular income taxes. And we’re going to talk about federal, federal, regular income tax and self-employment taxes, because you are self-employed. 

Michelle: Self-Employed on those wages, your W-2 will be reported. But that’s separate and. 

Shawn: Yeah, yeah. So for the business income, that net income is subject to self-employment taxes, which is the employee and employer share of the fica and Medicare. You know, on your W-2, there’s lines for. Social Security and Medicare taxes. That’s your share. But your employer is paid the other share on your behalf as the employer. But being self-employed. You’re wearing both hats. So it might sound like it’s double taxation, but just know it means that’s your portion of what you have to pay. 

Kara: Alright. Let me interrupt you there, Shawn, real quick, just to clarify that, because it could be a hard topic for new people. It is very it is. So if I haven’t set up an LLC, if I haven’t done any of those things yet, I’m not an employer. I don’t hire other people. So do I have to pay that tax? Since I’m not actually a business yet, I’m just doing some side hustle work and I don’t hire anybody else myself. Yeah. 

Shawn: Yeah. If you earn income from your side hustle, you have to report it on your tax return. And it doesn’t matter if it’s $5 or if it’s $5,000, you have to report it. And those expenses related to that activity can also be deducted. Now, you know, there are some rules around hobbies and stuff like that with the IRS. 

Michelle: But we’re not going to get into that. 

Shawn: We’re not going to get into that. But, you know, we’re you know, we’re talking about a legitimate side hustle, right? We’re not, you know, talking about, you know, selling, you know, some of your used furniture in your house or something like that. We’re talking about kind of a real side hustle. Right. And, you know, you are going to have to pay tax on that. If you have a net profit, if you have a net loss in that year, you’ll be able to deduct that against your wage, income or other income that you have, you know, on your personal tax return. So you know, it’s the best of both worlds in that sense. But then, you know, the. 

Kara: Benefit of having your own business like going then that might scare people. You know, people might think, oh, now I have to pay both sides of the taxes. Can we talk about from I mean, I think what you talk about from a business perspective, the benefits of having your own business. But from a tax perspective, is there something that we could look at positively for ourselves and know that we have that happening? 

Michelle: Yeah. 

Shawn: I mean, you know, having your own business is, you know, there’s a sense of freedom to that, right? There’s a sense of control. And, you know, you’re building something generally. It’s something that you want to do, something that you like to do. So, you know, that’s an emotional, you know, benefit for having a small business, your own business. 

Michelle: Well, one of the things that pops into my mind as far as taxes go on, that when you’re an employee, you’re not able to write off things that you are. Like expenses that you’re incurring as an employee any longer. So the IRS used to allow you in the code. They allowed you to write off expenses against your W-2 income. It was not a very good deduction, but they did allow it to happen. That has since gone away. So there are no there’s no way in the federal return to write off expenses that you’re incurring to generate your W-2 wages. When you are an independent contractor, you are able to write those expenses off directly off of the gross revenue. So you know, you’re driving that net income number lower and lower by having. No, I’m not saying spend money so you get deductions, but if you have these deductions, they’re able to be written off. And so you want to get that number down and be able to take those deductions because of the fact that you are now required to pay both pieces of the Medicare and Social Security taxes and you also have income taxes to consider as well. So one of the benefits is the additional deductions. Yeah. What you get as an employee. 

Kara: How do the deductions benefit small business owners or independent contractors? What does that mean? You said before that we had to pay taxes on any money that we earn in our business on the net amount, so less so. How did the deductions play into that? What does that mean? 

Michelle: So when you are talking about your side hustle and you’re being subject to income taxes, there’s a lot of regular standard deduction people are used to hearing. Itemized are standard deductions that come off of the income tax side. But when you’re talking about self-employment taxes and just so everyone is aware, self-employment taxes, both pieces together, are about 15%, 15.2%. Okay. And so that is a huge tax in my mind. That’s a big tax. And so that 15% is on the net income of the business. If you have no deductions, you’re going to pay that on the gross income that you received from that side. HUSTLE Right. Rather than if you start taking deductions that are 15% every dollar you’re spending, you’re saving 15% right off the top. Because of that, we’re not even talking about income taxes. And you may even find that you are in a position where you don’t even owe income taxes but still owe 15% on the net income of your side hustle. And so you really want to drive those deductions because that is going to have the biggest impact on your tax dollar number. 

Kara: Right. Okay. I think what we talked about today is so helpful. We’re going to have to do this again. So way sharing information, because one thing that I love about modern CPA online is the ability of Michelle and Sean just to tell us real information. You know, it’s not all technical, it’s not all confusing. It’s something that’s. 

Michelle: It’s a little confusing. 

Shawn: Maybe a little confusing. 

Kara: Yet you guys explain it is really great. And I think for people who really want a side hustle, independent contractors, a start up maybe you’re like me and you have a business that is generating revenue it just feels easier to understand and I know that modern CPA Online has a course on how to set up your business finances the right way. I have taken the course and like I said, it has been a game changer for me. I feel so much more confident. I feel so much more comfortable. And sometimes I sweat and panic when you say things. And then I remember that I’ve done it the right way. And the information I learned in the course has really helped me as my business has grown this year. It’s really helped me to be able to make decisions for my business. So when things have come up and I have been unsure, like, how should I hire somebody or shouldn’t I, can I afford to spend on that training I want or should I not spend on that? Do I need to take on more clients or am I okay with the workload that I have? Those are all things that come up when you have a new business and so the confidence I got from organizing my expenses and income and knowing what’s actually happening has been life changing for me. So anybody who wants to get information about the course, can go to modernCPAonline.com and we encourage you to start with the quiz which is modernCPAonline.com/quiz. Take it now, take it when you hear this, don’t wait until next year. Don’t put it off. Stop waiting and worrying about owing taxes. Get yourself set up the right way and we’ll be back with you next week to share some more information and answer some questions. 

Michelle: And so send us your questions. We would love to hear from you. Hopefully you can hop on with us and we can answer your questions live. That would be fantastic because it’s so much more entertaining to hear real life stories like Kara’s real story is just so important. And, you know, people’s real questions, we can help. So, yeah, we look forward to seeing everybody back here next week. 

Kara: I’m glad you said that. Thank you guys so much for letting me be here and do it with you. Was really fun for me, too. And, well, we’re signing off now. All right. Bye, everybody. 

Michelle: For more information on getting ready for tax time, visit modernCPAOnline.com/quiz to take the free 60 second quiz to find out if your business is ready for tax time. We also encourage you to subscribe to our channel so you don’t miss any future videos and leave a like and a comment below if you have any further questions.