episode94
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00:00:14.060 | - Side Hustle Show 94, tax saving tips for side hustlers.
00:00:19.680 | - Welcome to the Side Hustle Show,
00:00:22.320 | where aspiring part-time entrepreneurs
00:00:24.400 | learn how to turn their side hustle dreams into reality.
00:00:27.920 | Because your nine to five may make you a living,
00:00:30.280 | but your five to nine makes you alive.
00:00:33.000 | And now your host, Nick Loper.
00:00:36.560 | (upbeat music)
00:00:39.140 | - What's going on?
00:00:42.360 | Nick Loper here.
00:00:43.180 | Welcome to the Side Hustle Show.
00:00:45.160 | This is episode 94, tax saving tips for side hustlers.
00:00:50.160 | It's tax season, at least here in the US,
00:00:52.720 | and that means that you may be thinking
00:00:54.720 | about how much you owe Uncle Sam,
00:00:56.560 | or hopefully, how much you're gonna get back.
00:00:59.000 | But one thing is for certain, and that's that,
00:01:02.920 | as a side hustler, you have some distinct advantages
00:01:05.960 | come April 15th that the regular old W-2 earners do not.
00:01:10.960 | And here to help break down all of those advantages
00:01:14.720 | is Joshua Sheets from RadicalPersonalFinance.com
00:01:18.640 | and the Radical Personal Finance Podcast.
00:01:22.000 | If you're a money geek, you're gonna like this one.
00:01:24.240 | Or just if you don't like giving your hard-earned money
00:01:27.920 | away to the government, you're gonna like this one.
00:01:30.640 | Josh is a certified financial planner
00:01:32.680 | and has a whole host of other acronyms after his name.
00:01:36.440 | I'm not sure if they all mean,
00:01:37.360 | but I'll take it to signify that he's a smart dude.
00:01:40.400 | There's some really juicy stuff in this call,
00:01:42.800 | especially in the second half of this interview.
00:01:45.600 | But like the disclaimer on his site,
00:01:49.040 | RadicalPersonalFinance.com says,
00:01:51.360 | it would be dumb to take the financial advice
00:01:54.200 | of some random dude on the internet.
00:01:56.440 | So be sure to always do your own homework,
00:01:58.200 | your own due diligence, and your own research
00:02:00.360 | before putting any of this into action.
00:02:02.840 | And I'll let that serve as my disclaimer as well.
00:02:07.000 | Now, as is per the usual, all my notes and highlights,
00:02:09.140 | along with Joshua's top tips for tax savings
00:02:13.000 | are available to you in free downloadable PDF
00:02:16.600 | at sidehustlenation.com/94,
00:02:19.680 | or through the link in the episode description
00:02:22.560 | of your podcast player app.
00:02:25.040 | News and updates before we get into a real quick update
00:02:27.240 | on the public coaching project.
00:02:28.520 | Thank you, thank you, thank you so much
00:02:30.000 | for all the people who applied,
00:02:31.000 | got more than 70 applications for this thing.
00:02:34.800 | So I'm going through them as fast as I can
00:02:36.560 | and we'll sit on the progress.
00:02:38.680 | I really, honestly did not expect half that many.
00:02:41.480 | So really overwhelmed and flattered with the response.
00:02:44.480 | I just know this is gonna be a ton of fun to put together
00:02:48.760 | and see what comes out of it.
00:02:50.800 | But I do wanna make sure to be fair to everyone
00:02:53.000 | who took the time to submit.
00:02:53.960 | So it's gonna take a little bit of effort
00:02:55.280 | to go through all those.
00:02:57.000 | And with that, let's get into the show with Joshua Sheets.
00:03:00.480 | Or the first question that I get a lot of the time is,
00:03:03.280 | you know, when do I need to incorporate?
00:03:05.840 | Do I need to set up a legal entity for my side hustle?
00:03:10.180 | - So you have to start with the most difficult question
00:03:12.560 | I get, don't you?
00:03:13.580 | (laughing)
00:03:15.760 | So this one's kind of interesting
00:03:17.600 | because the answer is extremely nuanced.
00:03:20.280 | And I'm gonna give some information on it,
00:03:23.200 | then I'm gonna kind of sidestep around it.
00:03:24.880 | But this is actually one of the more difficult questions
00:03:27.120 | to answer because there is no one right answer.
00:03:31.100 | Most people do immediately start with this
00:03:33.840 | and people talking about the rich tax code
00:03:36.340 | and the poor people's tax code.
00:03:37.520 | And they say, well, the rich people get all the tax breaks.
00:03:39.960 | But that's not, at least in all the years I've studied tax,
00:03:43.000 | I can't find any of those tax breaks for the rich.
00:03:45.720 | All the tax breaks go for the poor.
00:03:47.680 | But there are two tax codes,
00:03:49.000 | and they're the business tax code
00:03:50.440 | and the personal tax code.
00:03:51.880 | The mistake that many people make
00:03:53.040 | is they immediately think that in order to take advantage
00:03:55.120 | of the business tax code,
00:03:56.560 | they have to establish some sort of corporate entity.
00:04:00.120 | They have to set up Joshua Sheets Inc.
00:04:02.600 | or Joshua Sheets LLC.
00:04:04.440 | And that is not the case.
00:04:05.800 | All you need to do is simply declare yourself
00:04:07.920 | to be in business and then pursue your business
00:04:10.520 | and you can immediately take advantage
00:04:12.160 | of the business tax code.
00:04:13.520 | So this question of should I incorporate
00:04:16.680 | is very challenging to answer
00:04:19.080 | because it's extremely fact dependent
00:04:22.180 | on one individual situation.
00:04:24.540 | Now, the way I would answer it is I would say
00:04:27.200 | probably don't worry about it,
00:04:29.000 | at least not to start with.
00:04:30.680 | Again, each structure has its own advantages
00:04:33.120 | and disadvantages.
00:04:34.160 | And if you ever read an article where somebody says,
00:04:36.440 | always do something, always file an LLC
00:04:38.960 | or always set up an S corporation,
00:04:40.920 | flip to the next article
00:04:42.080 | 'cause it's probably not to be trusted
00:04:43.560 | unless they're just simply saying,
00:04:44.800 | here's one aspect of why you should.
00:04:47.400 | Generally, in my experience,
00:04:48.880 | people are displaying their ignorance
00:04:50.600 | with articles like that,
00:04:51.600 | not recognizing all of the different variables
00:04:55.840 | that would impact the situation.
00:04:58.640 | So I'll give some of the variables.
00:05:01.140 | The first thing I would say is just simply focus first
00:05:04.720 | on simplicity of the business.
00:05:07.360 | The goal is not to incorporate so that you sound fancy.
00:05:11.360 | The goal is not side hustle nation, Inc.
00:05:13.800 | So everyone thinks you're big and impressive.
00:05:15.840 | The goal is to have a business
00:05:16.920 | that prints money for you, right?
00:05:18.520 | So once we start with a business
00:05:21.000 | that's printing money for us,
00:05:22.420 | then we can fix everything else.
00:05:23.840 | So just simply go get started in business
00:05:26.240 | and don't worry about the tax stuff.
00:05:27.840 | And then once you're making some money,
00:05:29.560 | we can fix all the entity stuff and fix all the tax stuff.
00:05:32.040 | And that's fairly normal.
00:05:33.360 | Most businesses will go through a progression
00:05:35.480 | and there's a natural progression
00:05:36.640 | where they may start off as a simple sole proprietorship.
00:05:39.700 | They may transition into some form
00:05:42.080 | of limited liability company or some form of S corporation.
00:05:46.640 | And they may transition onto a C corporation.
00:05:49.480 | But the key is be making money.
00:05:51.360 | - What I kind of, I guess what I would recommend
00:05:53.720 | to most people who ask me that is,
00:05:55.920 | I would, like you said, focus on generating revenue,
00:05:59.960 | focus on the business side of it.
00:06:02.000 | And kind of you can run everything as a sole proprietor,
00:06:05.120 | still have the benefits of being a business.
00:06:08.320 | And you're not gonna have the liability protection
00:06:10.060 | of that third party entity at first,
00:06:14.160 | but you can set that up after the fact.
00:06:16.720 | Now, my setup is a little bit more complicated.
00:06:20.320 | I have an LLC with an S corp election
00:06:25.220 | because at some point I read that you could save
00:06:27.660 | on self-employment tax by doing that.
00:06:30.040 | And it makes things a lot more complicated.
00:06:33.400 | And for some years during that stretch,
00:06:36.700 | the revenue probably doesn't or did not justify
00:06:40.400 | that extra layer, that extra complexity.
00:06:45.160 | - Now in getting started, the sole proprietorship
00:06:48.080 | is the key and that's the best place to start
00:06:50.000 | 'cause it's simple.
00:06:50.940 | And the only tax form you need is to file a Schedule C
00:06:53.840 | on your normal personal return.
00:06:55.960 | And you can basically file an unlimited number
00:06:58.600 | of Schedule Cs.
00:06:59.800 | So if you are building up a side hustle
00:07:02.180 | and you're pursuing a side hustle for six months
00:07:04.600 | in one business, and then you're pursuing another one
00:07:06.860 | for four months in another, and then a third one
00:07:08.940 | you're picking up at the end of the year with three months,
00:07:11.180 | you can file a separate Schedule C
00:07:13.020 | for each of those individual businesses.
00:07:15.420 | And that would make sense
00:07:16.380 | if they're distinct, unique businesses.
00:07:18.500 | Now, the question, I mean, people say,
00:07:20.060 | well, when should I collapse them?
00:07:21.460 | You collapse them when it makes sense.
00:07:22.780 | So if businesses are integrated
00:07:24.980 | and everything is just an offshoot of that,
00:07:27.260 | then you go ahead and set those up.
00:07:29.980 | So at this stage, for me, radical personal finance
00:07:32.420 | is simply a sole proprietorship.
00:07:33.980 | And the reason that it's a sole proprietorship
00:07:36.220 | is to date, it is not profitable.
00:07:38.740 | It is a pure loss.
00:07:39.980 | And so one of the things that's most valuable
00:07:42.100 | about a sole proprietorship is that there is essentially
00:07:45.620 | what they call in the tax business,
00:07:47.240 | I have an unlimited ability to deduct, excuse me,
00:07:49.660 | to deduct my losses as an ordinary loss.
00:07:52.840 | So all of my losses with radical personal finance
00:07:55.500 | are fully deductible against my other forms
00:07:58.380 | and sources of income.
00:07:59.800 | If I were, as an example,
00:08:01.780 | if I had established an S corporation
00:08:03.940 | and if I were choosing that to be my business entity,
00:08:07.100 | then under that scenario, my losses are only deductible,
00:08:10.660 | what's called up to my basis, up to the amount of money
00:08:13.540 | and capital that I've contributed to the company.
00:08:15.820 | And depending on the structure of a business,
00:08:17.980 | that may or may not be a problem.
00:08:19.500 | So it may be that somebody is contributing the capital
00:08:21.660 | to a business where they, you know, it's gonna be limited
00:08:25.260 | and that's the only losses they're gonna be able to take.
00:08:27.420 | Or it may be that they're anticipating
00:08:29.800 | that there'll be losses in excess
00:08:31.460 | of the capital contribution.
00:08:32.820 | And that's the case for me with radical personal finance.
00:08:35.940 | So at this stage, it's a sole proprietorship.
00:08:38.140 | Now, as the business becomes profitable,
00:08:40.140 | then at that point in time,
00:08:41.180 | I'll transition it into another form of entity,
00:08:43.900 | most likely an LLC taxed as an S corporation.
00:08:47.260 | - Okay, okay.
00:08:48.300 | So if you're going through the expense
00:08:51.140 | and the headache of setting up this corporation,
00:08:55.220 | you may actually be hurting yourself by not,
00:08:57.860 | especially in like the early years of this business,
00:09:01.740 | by not being able to write off those,
00:09:03.340 | especially if you have some capital investment,
00:09:06.340 | you're buying websites and hosting and graphic design
00:09:10.820 | and marketing and all this stuff
00:09:12.620 | that you may be needing to spend money on,
00:09:15.100 | developers, contractors and stuff like that.
00:09:17.420 | - Exactly.
00:09:18.260 | - Okay, so there's an advantage
00:09:19.940 | to staying as a sole proprietor for that.
00:09:22.020 | So do I need to file anything
00:09:24.060 | with like the Secretary of State to do that,
00:09:25.940 | with like my local city, with the federal government?
00:09:29.020 | Does any of that matter?
00:09:29.860 | Or do I just say, "Hey, I'm Nick, I'm in business, hire me."
00:09:33.540 | - Yeah, that depends on whether or not,
00:09:35.340 | that depends on the rules of your state,
00:09:36.580 | but in general, you can probably just be in business.
00:09:38.620 | Now the challenge is when people start writing you checks,
00:09:41.100 | are they writing checks to Nick
00:09:42.820 | or are they writing checks to Side Hustle Nation?
00:09:45.420 | - Okay, okay.
00:09:46.260 | - And so if you need the people
00:09:47.980 | to write checks to Side Hustle Nation,
00:09:49.660 | you'll file a simple form with your state called a DBA,
00:09:53.300 | which stands for Doing Business As,
00:09:55.300 | and all that is is it's Nick Loper DBA Side Hustle Nation,
00:09:59.820 | and then that allows you to take that down.
00:10:01.580 | You can open up a business checking account
00:10:03.140 | in your business name,
00:10:04.300 | and then people can write checks to Side Hustle Nation.
00:10:06.680 | For some businesses, they never need that.
00:10:08.460 | You know, I've run businesses for years in the past
00:10:10.460 | where people just made checks out to Joshua Sheets
00:10:13.580 | and it was no problem,
00:10:14.480 | or there was a cash transaction and that's no problem.
00:10:17.600 | But then in some businesses, it can look a little strange
00:10:19.660 | if somebody's writing a check out to Joshua Sheets
00:10:21.580 | and they'd much rather write a check out
00:10:23.220 | to Radical Personal Finance.
00:10:24.620 | - Okay, okay.
00:10:25.500 | Yeah, plus you feel, I don't know, you feel kind of cool.
00:10:27.900 | It's like you're doing business as.
00:10:30.420 | I don't know, I was back in college,
00:10:34.420 | I first set up my very first company.
00:10:36.900 | I was in a rush to incorporate
00:10:38.980 | because I thought it would be really cool
00:10:40.900 | and then I could get a tax ID
00:10:43.260 | and I could set up a bank account and all this nonsense.
00:10:45.380 | And I was like, none of this really mattered,
00:10:47.340 | but it was just maybe a little bit of an ego trip.
00:10:51.460 | - Right, and that may have its place.
00:10:53.540 | It might be that for one business,
00:10:55.380 | you need to look big and you need to look impressive.
00:10:57.820 | Certainly in many things, perception is reality
00:11:00.780 | and that you need to understand
00:11:02.580 | how people are going to perceive you in your activities.
00:11:05.020 | But for many people, it's just, it's overkill.
00:11:07.060 | And what's not talked about enough
00:11:08.800 | is people always talk about the advantages of incorporation,
00:11:11.220 | but they never talk about the disadvantages of incorporation.
00:11:13.940 | And the primary reason to establish a corporate entity
00:11:17.660 | is for liability protection.
00:11:19.620 | So you have to ask yourself,
00:11:20.580 | do I actually face significant amounts of liability
00:11:24.380 | that can be protected from at a corporate level?
00:11:27.400 | And for me sitting here on my computer,
00:11:29.940 | creating a podcast, what's my liability?
00:11:32.460 | My primary liability is if I were to give investment advice
00:11:37.020 | of some kind that were pointed out to be improper
00:11:40.660 | in some way, and if I had represented myself
00:11:42.620 | as an investment advisor,
00:11:44.140 | then I'm personally liable for that.
00:11:46.180 | But I don't have a team of delivery trucks.
00:11:48.020 | - What's your best investment advice?
00:11:48.860 | (laughing)
00:11:49.680 | - You're not gonna get me there,
00:11:50.540 | been doing this too long.
00:11:52.380 | But I don't have a team of delivery trucks out on the roads
00:11:54.760 | where one of my delivery drivers gets in an accident.
00:11:57.940 | I'm not managing a multi-unit apartment building
00:12:01.580 | where it's possible that one of my tenants
00:12:03.560 | could be injured falling down the stairwell.
00:12:05.860 | So any liability exposure that I have
00:12:08.300 | is primarily personal liability.
00:12:10.300 | And a corporate entity doesn't protect me
00:12:13.380 | against acts of personal liability.
00:12:15.520 | So there's very little need for me at this stage
00:12:19.860 | in my business to have that liability protection.
00:12:22.420 | - Yeah, so for people starting out,
00:12:23.780 | I think the gist of this conversation was,
00:12:26.420 | at least in California, save the $800 franchise fee
00:12:29.820 | and just do sole proprietor until you've got some revenue
00:12:33.260 | to justify it, and then you wanna go big
00:12:35.780 | and be official and all that stuff
00:12:37.420 | instead of hyper global megacorp right out of the gate.
00:12:41.540 | Actually, do you remember in Four Hour Workweek
00:12:43.740 | how he talks about setting up his title, right?
00:12:47.180 | Instead of being president and CEO,
00:12:49.060 | it's like VP of Marketing, Tim Ferriss.
00:12:51.580 | And so to make the company appear a little bit bigger,
00:12:54.620 | like there was other players and setting up
00:12:56.500 | these different voicemail options, like press one,
00:12:58.980 | and it all like wood forward to him anyways.
00:13:01.580 | - That's funny.
00:13:02.420 | - How about some common deductions for side hustlers?
00:13:07.180 | - There are as many deductions for side hustlers
00:13:11.100 | as there are expenses that are incurred in their business.
00:13:14.660 | And the key, I always start with deductions,
00:13:16.860 | is remember this, there's no 100% tax bracket.
00:13:20.220 | We've gotten in the United States up to as high as 94%.
00:13:23.300 | That was the highest tax bracket back in 1945,
00:13:25.900 | but we've not yet gotten to 100%.
00:13:27.980 | So you never wanna take a deduction
00:13:30.340 | just simply for the sake of taking a deduction.
00:13:32.900 | And today the rates are, there's nowhere near 94%.
00:13:36.140 | - 94%, so every dollar you earned,
00:13:38.420 | you would, after a certain point,
00:13:40.420 | every dollar you earned, you would keep six cents.
00:13:42.820 | - In 1945, every dollar you earned in excess of $200,000
00:13:47.220 | was taxed at a 94% rate.
00:13:49.580 | - Oh my gosh, and people are complaining
00:13:52.100 | about the tax rates now.
00:13:54.220 | Oh my God, well, it's come down since then.
00:13:56.260 | - Yep, it does.
00:13:57.540 | So that's the key to keep in mind.
00:14:01.180 | And there are some guiding principles,
00:14:03.060 | and I'll give you some examples
00:14:04.180 | that would be specifically helpful for side hustlers.
00:14:08.220 | But the problem with going straight to specific examples
00:14:10.900 | is if you don't have a framework
00:14:12.140 | into which you can fit those examples,
00:14:14.200 | then you're often subject to the whims
00:14:16.540 | of whatever the next article that you read is.
00:14:19.140 | A couple of pieces of the framework.
00:14:20.420 | Number one, run your business right.
00:14:22.300 | Simply pursue your business and focus on profitability.
00:14:25.200 | And then over time, you'll naturally have expenses
00:14:28.440 | that are associated with the business.
00:14:30.820 | If you're doing something
00:14:31.700 | only for the purpose of the deduction,
00:14:33.260 | you probably have a problem.
00:14:34.660 | And the only expenses that you can deduct in a business
00:14:37.860 | are the expenses that are ordinary and necessary
00:14:40.140 | to the course of your specific business.
00:14:42.380 | That's about it.
00:14:43.300 | That's basically the guiding line.
00:14:44.660 | So people ask about all kinds of stuff.
00:14:46.540 | Can I deduct this?
00:14:47.380 | Can I deduct that?
00:14:48.200 | Can I deduct the other thing?
00:14:49.180 | The answer is, well, is this an ordinary
00:14:51.020 | and necessary business expense to you and to your business?
00:14:54.380 | So I like to joke, I love to travel,
00:14:57.220 | and so I like to joke about the filming
00:15:00.140 | of the Lord of the Rings movies in New Zealand.
00:15:02.260 | Do you think that Peter Jackson's expenses
00:15:04.820 | of going to New Zealand
00:15:06.260 | and filming the Lord of the Rings movies were deductible?
00:15:09.580 | - No, for sure. - Of course they were.
00:15:10.540 | Of course they were, 'cause they're associated with him
00:15:12.100 | as a movie, creating movies.
00:15:14.760 | Now, if I decide to take my family on a family vacation,
00:15:18.140 | and we just get on an airplane and go to New Zealand,
00:15:20.780 | are my expenses deductible?
00:15:22.580 | - Well, are you gonna have a meeting there?
00:15:24.020 | Are you gonna have a client meeting?
00:15:25.200 | Are you gonna make some deals?
00:15:26.460 | - Yeah, unless there is something specific,
00:15:28.540 | and that's the reason why we're going,
00:15:30.220 | which if I'm going as a front man
00:15:32.300 | for leading out in the Lord of the Rings movies,
00:15:34.700 | then yes, it would be deductible.
00:15:36.380 | But if I'm just going on vacation,
00:15:38.300 | and it's clearly vacation, then it's not deductible.
00:15:41.020 | Now, here's how this matters.
00:15:42.060 | Let's say that I'm just going on vacation,
00:15:44.060 | but I say, you know what, I'm gonna make a movie,
00:15:46.060 | and I'm gonna toss this thing up on YouTube,
00:15:47.780 | so I film a family movie while I'm there on YouTube,
00:15:50.860 | and I put it out on YouTube.
00:15:52.260 | Are my expenses now deductible?
00:15:54.120 | No, because I don't have any history.
00:15:56.580 | I don't have any ability to prove that I'm actually,
00:15:59.540 | you know, that this is actually
00:16:00.860 | a serious business expectation.
00:16:04.140 | - Well, this could be a fine line, right?
00:16:05.360 | What if you're just starting out,
00:16:06.660 | and you have the aspirations of being a future YouTube star,
00:16:10.900 | and this is the first film of your business?
00:16:13.380 | - Exactly, okay, so this is a fine line,
00:16:15.700 | and this is where you have to look
00:16:17.160 | at each individual situation.
00:16:18.700 | So start with the perspective of,
00:16:20.700 | this needs to be an ordinary and necessary expense.
00:16:24.580 | Now, the other thing, to be able to deduct something
00:16:27.340 | in a business, there must be a profit motive
00:16:30.380 | under the business, and that's what the IRS says.
00:16:32.860 | You don't actually ever have to show a profit.
00:16:35.340 | In fact, there are courses, excuse me,
00:16:37.540 | cases in the tax court where businesses have lost money
00:16:40.400 | for 20 consecutive years, and all of those losses
00:16:42.580 | were fully deductible, but there must be a profit motive,
00:16:45.560 | and so there are a few facts that the IRS would look at
00:16:49.700 | to say, are these expenses deductible?
00:16:52.520 | The first one is the manner in which you carry
00:16:54.300 | on the activity, so are you actually pursuing this
00:16:56.440 | in a business-like way?
00:16:57.740 | Example, if I'm gonna film a video,
00:16:59.980 | and this is gonna be the first part of my YouTube stardom,
00:17:02.600 | then I'm gonna make sure that I'm probably
00:17:04.180 | gonna call ahead, I'm gonna schedule appointments
00:17:06.480 | there in New Zealand, if I'm gonna be filming,
00:17:07.940 | I'm gonna be applying for film licenses and film permits.
00:17:10.800 | I'm gonna get an authorization
00:17:12.140 | from whatever authorizations I would need to go,
00:17:14.840 | or just need to get, I would be arranging things
00:17:16.540 | in advance, coordinating equipment,
00:17:18.060 | carrying it on in a business-like manner.
00:17:20.880 | Number two is the expertise of you and your advisors.
00:17:25.000 | So if you have some history, or have invested some study
00:17:28.660 | and some knowledge into your film production capacities,
00:17:32.500 | that would be a mark in your favor,
00:17:34.100 | that whereas if I just came in off the street
00:17:36.100 | and bought an iPhone on the way to the airport
00:17:39.220 | and said, oh, I'm gonna film a movie,
00:17:40.580 | that's probably not so impressive.
00:17:43.460 | Number three would be the time and effort
00:17:45.480 | expended by you in carrying out your business activity.
00:17:49.560 | So if I go to New Zealand and I say, you know what,
00:17:51.960 | I'm planning this for weeks and weeks and months
00:17:53.960 | in advance, coordinating everything that's needed,
00:17:56.360 | and then I go and I'm doing my filming there for a week,
00:17:58.760 | doesn't matter that I had fun there while I was filming.
00:18:01.440 | Or it doesn't matter even if I was there for a month
00:18:03.520 | and I had fun while I was filming.
00:18:05.000 | The question is, what was the time and effort
00:18:07.520 | overall expended, and was this actually pursued
00:18:09.920 | in an excellent way?
00:18:11.560 | - Okay, so if I'm buying fabric and I have the intention
00:18:15.620 | of setting up an Etsy shop, there's gonna be
00:18:19.000 | some paper trail, there's gonna be some direction
00:18:21.680 | to say, oh, I'm gonna turn this into Nick's custom handbags
00:18:26.020 | or whatever and put that on Etsy,
00:18:27.640 | or I'm gonna take some photography court,
00:18:30.540 | like advanced iPhone photography, right,
00:18:32.780 | and I'm gonna turn that into some photo booth business
00:18:36.660 | or something like that.
00:18:37.740 | There's some, okay, so it sounds like there's some ways
00:18:40.260 | to make these expense.
00:18:42.180 | How about everyday stuff?
00:18:43.780 | If I'm, since most side hustlers are doing this
00:18:47.060 | from their home office, from their kitchen table,
00:18:49.500 | from their spare bedroom and stuff,
00:18:52.260 | like my internet expense, my cell phone,
00:18:56.540 | any stuff like that, is there, can I say,
00:18:59.460 | okay, a certain percentage of that every month
00:19:01.460 | could be a business expense?
00:19:03.620 | - So each of those is different, and yes,
00:19:05.960 | there are some common expenses.
00:19:07.700 | So home office, utility costs, some other ones
00:19:12.420 | are probably more common, meals and entertainment
00:19:14.620 | with prospective clients or prospective business associates,
00:19:18.340 | business travel, all of these have their pluses and minuses.
00:19:22.740 | Now they're different.
00:19:23.580 | The cell phone is actually the most liberal these days,
00:19:26.100 | where for me, I've only deducted the cost of my cell phone
00:19:30.020 | in my business and have for years.
00:19:32.200 | The IRS has made that one, and there's some specific
00:19:35.940 | private letter rulings where I would,
00:19:38.260 | I certainly, if I didn't have a business,
00:19:39.980 | I certainly wouldn't do that, but it's so hard
00:19:42.460 | for them to differentiate, and because now
00:19:44.340 | things are fully integrated, that the cell phone
00:19:46.780 | is one of those where they're a little bit less
00:19:49.020 | likely to be all persnickety on it.
00:19:53.060 | The longstanding rule for business, for telephones,
00:19:56.380 | was you needed to have a separate business line,
00:19:58.500 | and you could deduct the business line.
00:19:59.740 | You needed to keep a call log in your office.
00:20:01.980 | But the cell phones, I'm not aware of any recent
00:20:05.220 | court cases where that one is coming into focus.
00:20:07.820 | And so that can be a real benefit.
00:20:09.660 | Now, home office, things like internet,
00:20:12.420 | here you get into the home office rules,
00:20:15.700 | which is an area of real fear for many people.
00:20:18.780 | Many people don't take home office deductions
00:20:21.260 | simply because they're too scared to take it,
00:20:23.220 | and they're worried about triggering an audit with the IRS.
00:20:26.180 | And the rules on the home office are fairly straightforward.
00:20:29.380 | The office needs to be used to conduct administrative
00:20:32.720 | or management activities of your trade or business,
00:20:35.380 | and there must not be another office where you conduct
00:20:38.020 | substantial administrative activities.
00:20:40.100 | And then you must use the home office
00:20:41.840 | for business exclusively.
00:20:43.540 | So depending on your actual setup at home,
00:20:45.940 | as long as you meet those standards,
00:20:47.700 | that that's where you do administrative
00:20:49.340 | and management activities of your trade or business,
00:20:51.440 | that's where you don't have another location
00:20:53.460 | where you do substantial administrative activities
00:20:55.940 | for your business, and the space is used exclusively
00:20:59.080 | for your business, and that's the big one,
00:21:01.180 | 'cause most people don't do that.
00:21:02.140 | They say, "Oh, I've got the spare bedroom,"
00:21:04.060 | but if I were to look at a picture of the room,
00:21:06.820 | there's a computer in the corner,
00:21:08.900 | there's kids' beds and a guest bed,
00:21:11.060 | and there's a bunch of personal effects and personal books
00:21:13.620 | and all kinds of personal stuff all over the desk.
00:21:15.780 | What you should do if you're gonna deduct that,
00:21:17.760 | clear out half the room and make half the room business only
00:21:21.720 | and there should be no personal effects
00:21:23.540 | in that half of the room.
00:21:24.740 | There should only be business and snap a picture
00:21:27.020 | every six months of it and put it in your tax record files
00:21:29.820 | demonstrating that here it is.
00:21:31.360 | Here's my home office.
00:21:32.200 | - Oh, okay, okay, okay.
00:21:33.460 | - The key is proof, and this is the big one,
00:21:35.280 | is that he with the most proof according to the law
00:21:38.380 | is going to win.
00:21:39.420 | So if you're gonna do something like deduct a home office,
00:21:41.740 | yes, every January 1st and probably January 1st
00:21:44.780 | and June 1st, snap a picture of the space.
00:21:47.460 | If you're going to be using your car
00:21:49.180 | and deducting your mileage,
00:21:50.140 | you need to have a careful mileage log in the car
00:21:52.660 | and you need to have careful records,
00:21:54.380 | and this is where most people don't,
00:21:56.220 | the reason that most people don't take all the deductions
00:21:59.100 | to which they are entitled by law
00:22:01.700 | is simply because they don't have good records,
00:22:03.400 | and because they don't have good records,
00:22:04.860 | they're nervous about it,
00:22:06.140 | and because they're nervous about it,
00:22:07.360 | they're scared to go and say,
00:22:08.700 | oh, I'm gonna take these deductions.
00:22:10.020 | If you have good records and you've built yourself
00:22:12.220 | and you can build an audit proof tax records,
00:22:16.140 | then you'll save substantial money just by doing that.
00:22:19.460 | - Yeah, and I've gotta think that,
00:22:22.820 | unless you're a really, really high earner in your day job
00:22:25.680 | and you're showing some big business loss
00:22:29.880 | on your Schedule C,
00:22:30.760 | like I've gotta reason that the IRS has bigger fish to fry
00:22:34.200 | than coming after a side hustler
00:22:36.240 | who's trying to make a thousand bucks a month
00:22:40.280 | on the side or something.
00:22:41.520 | So I'm looking up at my home office,
00:22:48.120 | so the treadmill desk takes up half the office,
00:22:50.760 | takes up half the room,
00:22:51.600 | so I just need to take a picture of it every now and again.
00:22:53.660 | - Right.
00:22:54.500 | - The problem with tax savings is there is no one thing.
00:22:57.180 | People always ask me, Joshua, what's the one thing I can do?
00:22:59.400 | There is no one thing.
00:23:00.460 | There are just dozens and dozens and dozens
00:23:02.560 | of little things that you can do,
00:23:03.880 | which add up to a lot over time.
00:23:05.940 | - Okay, okay.
00:23:07.140 | Any commonly overlooked things
00:23:10.540 | that sometimes your clients are not claiming
00:23:15.540 | that they should, like we talked about the home office
00:23:17.420 | 'cause people are scared.
00:23:19.400 | Anything other similar ones like that?
00:23:21.900 | - I'll give three.
00:23:22.860 | Number one, people don't move when they should.
00:23:25.860 | And this is, in my opinion, probably the biggest one
00:23:28.380 | is that people don't look into moving.
00:23:30.480 | And they don't look into moving from one county to another
00:23:33.680 | where there are lower taxes.
00:23:34.740 | They don't look into moving from one state to another.
00:23:37.180 | One of the things that opens up
00:23:38.460 | when you get your income disconnected
00:23:40.100 | from your geographic location
00:23:41.880 | is you have the ability to earn from high-income places
00:23:45.120 | and live in low-expense places.
00:23:48.100 | And so whether this was Tim Ferriss's geo-arbitrage
00:23:51.460 | or whether it's just simply--
00:23:52.540 | - Earning dollars, paying in rupees and living on pesos.
00:23:56.380 | - Right, and this can be done within the United States
00:23:58.580 | or it can be done outside of the United States.
00:23:59.940 | I did an example on my show recently
00:24:02.020 | where I calculated just a very simple,
00:24:04.220 | kind of somewhat ordinary example of moving from,
00:24:07.940 | I think it was, I used Pennsylvania.
00:24:09.500 | And I said, let's say that there was a young,
00:24:11.780 | like a 30-year-old couple earning
00:24:14.740 | a couple hundred thousand dollars a year of income.
00:24:17.260 | And the only change they made was to move from a state
00:24:21.000 | that has a state income tax
00:24:22.780 | to a state that doesn't have an income tax.
00:24:24.460 | They moved from Pennsylvania to Texas
00:24:26.080 | or moved from Pennsylvania to Florida
00:24:27.660 | or even to a place like Tennessee
00:24:29.420 | where there is a more advantageous personal tax situation
00:24:32.860 | even though there are still some taxes, still saves.
00:24:37.860 | Well, if you save 5,000 bucks,
00:24:40.100 | that decision right there
00:24:41.540 | over the course of a 40-year career,
00:24:43.540 | that can be, depending on the investment return,
00:24:46.180 | that can be anywhere from a million to $2 million
00:24:49.300 | of assets available at middle or older age, at 65,
00:24:52.740 | if we're gonna do the traditional retirement idea.
00:24:54.980 | A simple decision like what state do you live in
00:24:57.320 | can be a difference of a million extra bucks.
00:25:00.040 | But it's very rare that somebody asks me and says,
00:25:02.920 | so Joshua, I carefully sat down and thought about my state.
00:25:05.780 | There was an anecdote recently.
00:25:07.540 | You live in California, right, Nick?
00:25:09.000 | - I call it the sandal tax, but go ahead.
00:25:11.660 | - So there was an anecdote.
00:25:12.960 | Tony Robbins recently wrote a book on money
00:25:14.840 | and it was much loved.
00:25:17.040 | But one of the anecdotes, very popularly,
00:25:18.800 | it was everywhere in every podcast.
00:25:20.400 | He did a great job with his marketing of the book.
00:25:22.320 | But one anecdote that he told in that
00:25:24.280 | was he finally, a few years ago,
00:25:25.880 | New York, excuse me, California adjusted the tax system
00:25:28.880 | and they increased taxes retroactively
00:25:31.380 | on the residents of the state.
00:25:33.080 | And finally, after years, he had enough.
00:25:35.880 | So he went on kind of this massive,
00:25:38.400 | him take massive action.
00:25:40.080 | So he went around looking for a new place to live.
00:25:42.700 | Well, he wound up in Palm Beach, Florida,
00:25:45.080 | right where I live.
00:25:45.920 | I live in West Palm Beach, Florida.
00:25:47.280 | And he wound up buying a brand new house on Palm Beach.
00:25:51.360 | And he bought, there's different scales of Palm Beach,
00:25:53.960 | but he bought it at one of the more expensive places
00:25:55.840 | where you have the ocean on one side of your property
00:25:58.680 | and you have the intercoastal waterway on the other side.
00:26:00.640 | So you have water on two sides of your house.
00:26:02.560 | And he bought this massive, brand new mansion.
00:26:05.120 | And he said he paid for the entire cost of that mansion,
00:26:08.680 | purely with the savings from his
00:26:11.100 | California state income tax for six years.
00:26:15.480 | Paid for the entire cost of a massive mansion
00:26:17.760 | with only just the savings on his state income tax.
00:26:21.640 | And the challenge is, you say, well, I'm not Tony Robbins.
00:26:24.880 | Yeah, but a million extra bucks--
00:26:26.640 | - It adds up. - For a building
00:26:27.480 | from a 5% state.
00:26:29.000 | It adds up over time.
00:26:30.360 | - Yeah, it's kind of crazy to think about.
00:26:32.600 | Like, and that's the thing.
00:26:33.720 | So we're three and a half hours away from state line
00:26:36.400 | in Lake Tahoe, Nevada.
00:26:39.400 | No state income tax, no business tax.
00:26:41.840 | It's just like they make all their money from gambling.
00:26:44.680 | So it's like, okay, they don't need it.
00:26:45.960 | It's just a completely different environment.
00:26:49.000 | And it really makes you think,
00:26:50.200 | like over, and you bring up a good point.
00:26:51.840 | It's not that much on a monthly basis,
00:26:54.320 | not that much on an annual basis.
00:26:55.720 | But compounded and invested over your lifetime,
00:26:59.680 | it's like, that can make a big difference.
00:27:02.280 | And we're just talking about locally.
00:27:03.360 | We're not even talking about, move to Vietnam,
00:27:05.420 | move to Thailand, where you can rent a place
00:27:08.200 | for 500,000 bucks.
00:27:09.560 | - Right, exactly.
00:27:10.520 | And by the way, there's a great website
00:27:12.760 | that you might enjoy and that listeners might enjoy
00:27:14.920 | called Savetaxesbymoving.com.
00:27:18.840 | And you can put in there the state that you live in,
00:27:20.800 | and then you can pick a different state,
00:27:22.160 | anything that you are interested in,
00:27:23.840 | and you can calculate, okay,
00:27:25.320 | if I just simply moved from one state to another,
00:27:27.100 | still within the US, 'cause what happens is,
00:27:28.880 | everyone says, well, I have to move to Thailand.
00:27:30.400 | Well, I don't wanna move to Thailand.
00:27:32.000 | I wanna live in the United States.
00:27:33.200 | But I might be willing to just change
00:27:34.640 | from one state to a bordering state.
00:27:36.400 | And I just ran the math here.
00:27:37.520 | 5,000 bucks a year invested over 40 years,
00:27:39.960 | say from 25 to 65 at 10% annually,
00:27:43.880 | with just level 5,000 bucks,
00:27:47.000 | comes out to be $2.4 million.
00:27:49.680 | - Yeah, I think one of these recent years,
00:27:51.640 | we paid 10 grand to the state of California,
00:27:54.720 | just for the privilege of living here.
00:27:56.440 | It's like, it hurts.
00:27:59.120 | It's crazy to think about.
00:28:00.320 | Oh my gosh, okay, so people don't move.
00:28:02.120 | That was overlook deduction number one.
00:28:04.440 | - All right, number two is,
00:28:06.480 | they don't, people don't pay attention
00:28:08.700 | to the little ways to align your activities
00:28:11.520 | in a way that are beneficial to you,
00:28:12.980 | to align your business activities
00:28:14.280 | in a way that are beneficial to you.
00:28:15.500 | Example here, let me give you an example
00:28:16.800 | of business travel.
00:28:18.280 | Many times, I just got back from a conference
00:28:20.500 | last week in Dallas.
00:28:21.520 | Now, this one for me, I needed to go there and get back.
00:28:24.040 | So I just, I flew out there,
00:28:25.240 | and it was literally gone two nights,
00:28:26.520 | and it was just there and back.
00:28:28.040 | There wasn't any fun associated with the conference for me.
00:28:30.600 | It was pure work.
00:28:31.760 | I worked if I wasn't sleeping, and that was it,
00:28:33.880 | and I got home.
00:28:34.720 | And that was what I needed to do at this point.
00:28:36.160 | But something like a conference
00:28:38.020 | can be a really great way, if you understand the law,
00:28:40.680 | can be a really great way for you to do business,
00:28:43.560 | but also have some of your expenses
00:28:45.800 | defrayed by the tax code.
00:28:47.440 | So simple things like if you,
00:28:49.800 | let's say I had a conference on Thursday and Friday,
00:28:52.400 | and I had business meetings on Monday.
00:28:54.680 | Well, under the tax code, I can stay through the weekend,
00:28:57.880 | and my weekend expenses are deductible
00:29:01.000 | as part of my business travel expenses.
00:29:03.480 | Or if there's even a holiday,
00:29:04.720 | let's say there's a holiday where there's a Friday,
00:29:06.660 | if I have pre-scheduled appointments on Thursday and Monday,
00:29:10.180 | well now if I'm staying in a town,
00:29:11.680 | those now are business expenses.
00:29:13.880 | Or one that I hope to use in the future is I like to drive.
00:29:17.460 | And under the IRS rules,
00:29:19.040 | as long as I drive 300 miles in a day
00:29:21.800 | toward my business destination,
00:29:23.560 | 'cause the IRS doesn't say how I get there.
00:29:25.000 | They don't say I have to take the cheapest, fastest,
00:29:27.720 | they do say most direct,
00:29:28.760 | but I don't have to take the cheapest,
00:29:29.760 | fastest plane ticket I can find,
00:29:31.560 | fly in on the morning and fly out the day after,
00:29:33.560 | you know, the evening after to save on money.
00:29:35.680 | I can choose to drive.
00:29:37.180 | So if I chose to drive to Texas,
00:29:39.520 | as long as I cover 300 miles in a day
00:29:41.900 | of driving on a direct route from my house
00:29:44.440 | to the business destination,
00:29:46.060 | now that's a deductible business day.
00:29:48.120 | And so all of my travel expenses associated with that day
00:29:52.120 | are now deductible.
00:29:53.340 | So little things like that.
00:29:55.000 | There's no reason why I can't arrange my affairs
00:29:57.180 | to visit some friends along the way.
00:29:59.600 | And then by understanding the number of days
00:30:01.460 | that are business versus the number of days
00:30:02.900 | that are personal,
00:30:03.820 | I can go ahead and slide in a couple of days
00:30:05.900 | of personal expenses in there.
00:30:08.720 | They won't be deductible.
00:30:09.840 | Personal expenses are simply not deductible,
00:30:12.060 | but I can defray some of the costs
00:30:14.320 | by including that in with business travel.
00:30:16.380 | So little things like that,
00:30:17.620 | understanding the actual rules and figuring out
00:30:20.460 | how do I maximize,
00:30:23.420 | for example, if you have a side hustle business,
00:30:26.480 | and let's say that you're married and you have two cars,
00:30:29.700 | you wanna make sure that you try to drive
00:30:31.080 | both of those cars for business,
00:30:32.540 | deduct business miles 'cause you'll get more of a deduction
00:30:34.940 | for driving both cars than just putting it all on one car.
00:30:37.700 | Some of the little ideas and the little math tricks
00:30:40.140 | are really helpful and add up over time.
00:30:42.460 | - Okay.
00:30:43.300 | And so if you're meeting clients locally,
00:30:45.200 | your mileage to that meeting is deductible, I assume?
00:30:48.620 | - Right.
00:30:49.460 | As long as it's not commuting.
00:30:50.420 | Commuting expenses are never deductible,
00:30:52.100 | but as long as I'm traveling from a place of business
00:30:54.200 | to a business appointment, then it's deductible.
00:30:56.820 | And for someone like you,
00:30:57.740 | your place of business is probably your home office,
00:30:59.700 | then now all of your miles to go and visit clients,
00:31:03.180 | wherever that is, or potential business connections,
00:31:06.300 | those would now be deductible business miles.
00:31:08.540 | - Right.
00:31:09.380 | And I think we should make the important point,
00:31:11.020 | not to go out of your way to rack up expenses
00:31:12.820 | 'cause it still costs you money.
00:31:14.540 | That doesn't make sense to spend money
00:31:16.020 | for the sake of spending money for the sake of a deduction,
00:31:18.980 | like you said, 100% tax bracket.
00:31:21.260 | 'Cause we would meet people in the car business
00:31:25.060 | who would come in every December and be like,
00:31:27.660 | might as well buy a truck.
00:31:28.740 | Like, okay, I mean, if you're gonna buy it anyways,
00:31:32.340 | I guess it makes sense, but we'll take the business.
00:31:35.980 | Okay, so aligning your activities
00:31:38.540 | to kind of some business or beneficial activities.
00:31:41.220 | Okay, what's number three?
00:31:42.860 | - Number three is understanding how to,
00:31:45.620 | probably understanding how to shift income
00:31:47.620 | would be an example that I would use.
00:31:49.740 | When you run your own business,
00:31:51.100 | then you have a little bit more flexibility
00:31:53.660 | with simple things like who works for you
00:31:55.460 | and when they work for you.
00:31:56.780 | So, there are some serious advantages, if you can,
00:32:00.620 | to hiring family members to work for you.
00:32:03.020 | So, you can hire your spouse and you can hire your kids.
00:32:05.580 | And essentially what you can do is by shifting income
00:32:08.820 | from you to a spouse or to kids,
00:32:11.380 | you may be able to take advantage
00:32:12.860 | of a difference in tax brackets.
00:32:14.740 | They may be earning at a lower tax bracket.
00:32:17.060 | And then you can, that'll save you a lot of money.
00:32:20.540 | And that also can be beneficial to employ your spouse
00:32:24.260 | because, or to employ family,
00:32:26.360 | because if there are business expenses
00:32:28.160 | that are associated with your employees,
00:32:30.340 | those expenses are deductible.
00:32:32.060 | Give me an example.
00:32:33.380 | If I go to a conference,
00:32:34.500 | I don't employ my wife in my business.
00:32:36.380 | And the reason I don't is simply because
00:32:38.340 | she doesn't want to work in my business.
00:32:39.860 | So, she's not open to this.
00:32:42.860 | But if she wanted to work with me in my business
00:32:45.660 | and if she was able to actually be an employee,
00:32:48.580 | and that's very important that you have careful records,
00:32:51.580 | that she's doing work.
00:32:52.500 | This is not the kind of thing where,
00:32:54.180 | oh, I'm just writing her checks
00:32:55.540 | and we'll just call this wages.
00:32:57.220 | No, she needs to be actually working.
00:32:58.960 | But for many people, they like working with their spouses.
00:33:01.380 | Well, if my spouse is employed in my business,
00:33:04.020 | that can be helpful in multiple ways,
00:33:05.780 | including the fact that now we can travel together
00:33:08.260 | to a conference, we can travel together to business events,
00:33:11.180 | and now our expenses for both of our travel
00:33:13.580 | are fully deductible.
00:33:14.700 | Because if she's not an employee in my business,
00:33:17.500 | then the only expenses that are deductible are my expenses.
00:33:22.420 | So, something as simple as that of hiring a spouse,
00:33:24.900 | that can be a big one.
00:33:25.740 | Hiring kids can be really, really valuable.
00:33:28.260 | You know, the joke is, if you want to pay
00:33:30.020 | for your kid's college with deductible expenses,
00:33:31.980 | hire them to work in your business.
00:33:33.340 | - Yeah, yeah, no, I've heard this.
00:33:34.580 | And this is a fascinating one to me.
00:33:36.180 | Like, so, I had a friend, you know,
00:33:37.780 | this was several years ago, working in real estate.
00:33:40.460 | And so, like, his kids would pass out flyers
00:33:44.180 | or they would, like, you know, model for,
00:33:48.180 | like, really random, so they would model for his,
00:33:50.340 | like, advertisement flyers or something,
00:33:52.300 | or like, oh my gosh, remember on Smart Passive Income
00:33:57.180 | where Pat had Keone read, like, say smart, smart,
00:34:01.020 | say passive, passive.
00:34:03.180 | Do you think he was paying him?
00:34:04.300 | Like, that would be, do you think he was, like,
00:34:06.980 | that was like, okay, now he's a podcast co-host.
00:34:10.820 | - So, it's an interesting question.
00:34:13.220 | One of the things that you want to be careful,
00:34:14.540 | it's great to be inspired by friends who have examples,
00:34:17.140 | but the problem is you don't actually know
00:34:18.980 | if those friends, A, know what they're talking about,
00:34:20.940 | and you don't know if what they've been doing
00:34:22.620 | has been tested by an audit.
00:34:24.400 | So, ask your friend, have you been audited
00:34:26.700 | and has this held up?
00:34:27.700 | And if so, you know, give a little bit more weight
00:34:29.700 | to what they've done.
00:34:31.300 | The key with any kind of expense is that
00:34:33.580 | you want to make sure that whatever expense
00:34:35.860 | that you're paying is a market rate.
00:34:38.540 | The IRS has no predetermined, that I'm aware of,
00:34:41.260 | there's no predetermined amount
00:34:43.260 | that you could actually pay somebody,
00:34:44.980 | or no predetermined, you know, number.
00:34:47.780 | For example, this is what's frustrating
00:34:49.020 | to so many people when they establish an S corporation
00:34:51.100 | with the goal of lowering their self-employment taxes.
00:34:54.020 | Then they say, well, how much should be wages
00:34:57.180 | and how much should be dividends?
00:34:58.660 | The only answer is the amount of wages,
00:35:01.180 | it should be wages, is the amount that should be wages
00:35:04.260 | is the amount that you would have to pay somebody
00:35:06.820 | to do that work in your area.
00:35:08.580 | And so, one of the keys of making yourself audit-proof
00:35:11.580 | is doing good research and recording it.
00:35:14.020 | So, if you were passing, if I hired my kids
00:35:16.600 | to pass out flyers and that was their goal,
00:35:18.860 | then what I would wanna do is I would wanna see
00:35:20.660 | what can I hire somebody in my local area
00:35:23.820 | to pass out flyers for?
00:35:25.420 | And I'd like to, it'd be good to have some way
00:35:27.260 | of externally verifying that.
00:35:28.900 | It's probably not $50 an hour,
00:35:30.820 | but it might be nine or it might be 10.
00:35:32.780 | So, let's say it's 10.
00:35:34.060 | Now, that can be a real benefit
00:35:35.300 | 'cause I can pay my kids $10 an hour,
00:35:36.860 | whatever the market wage is for that.
00:35:38.780 | But, if I'm paying them $50 an hour
00:35:40.940 | and the market wage is 10,
00:35:42.740 | then that is certainly gonna be disallowed.
00:35:45.220 | So, what, so the question,
00:35:47.060 | if I'm hiring my kids to model for me,
00:35:49.020 | what would I need to hire somebody,
00:35:50.540 | what would I need to pay somebody to model?
00:35:52.380 | And so, there's no reason not to pursue it.
00:35:54.280 | You call a local modeling agency
00:35:55.780 | and you get a couple of quotes and you say,
00:35:57.620 | I need some child models, here's the event,
00:35:59.700 | they're gonna be performing in this video,
00:36:01.700 | they're gonna be taking these pictures,
00:36:03.260 | what would be the fees?
00:36:04.540 | And then, if you go ahead and you track that,
00:36:06.740 | and I would put that into my records for the year
00:36:08.460 | and make sure that I had that information,
00:36:10.180 | then that would be a reasonable fee
00:36:11.940 | to pay to your kids for their modeling efforts.
00:36:14.240 | So, you can do it, you just gotta do it carefully
00:36:16.260 | and do it right and substantiate your research.
00:36:18.500 | - Yeah, I really like that one,
00:36:20.700 | then funneling that into some investment account
00:36:23.500 | for their education, that's cool.
00:36:25.180 | - Right, and there'd be multiple ways of doing it.
00:36:26.980 | So, for example, people often talk,
00:36:28.420 | and you can do this, you can set up a Roth IRA
00:36:30.380 | for your kids, that's valuable.
00:36:32.380 | The rules with establishing retirement accounts
00:36:34.540 | are all based upon earned income.
00:36:35.980 | So, let's assume I hire my son
00:36:37.620 | and he earns $3,000 working for me
00:36:40.220 | over the course of his summer vacation.
00:36:42.160 | What I can do is I can pay him $3,000
00:36:44.860 | and then I can go ahead and gift him $3,000.
00:36:47.940 | And what we do is all of his earned income,
00:36:50.420 | the $3,000, can go into a Roth IRA,
00:36:53.300 | and then he can go ahead and spend the $3,000
00:36:56.100 | that I gave him for his personal expenses.
00:36:58.500 | That's a way of me getting money into a Roth IRA
00:37:01.220 | for my 13-year-old son, if I had a 13-year-old son.
00:37:04.600 | Or if I have a 19-year-old son
00:37:06.900 | and the tuition bill is $10,000
00:37:09.220 | and I wanna deduct that $10,000,
00:37:11.420 | I can go ahead and hire him, he can work for me
00:37:13.300 | enough time to earn $10,000.
00:37:15.340 | Now I've deducted the $10,000 of wages that I'm paying him
00:37:18.820 | and I can go ahead and give him the money for school.
00:37:21.580 | Now I've deducted, in essence, the school expenses.
00:37:24.620 | - That's genius.
00:37:25.620 | - He's still gotta work, so they gotta earn it.
00:37:28.820 | So it's good on both accounts.
00:37:29.940 | It's good on taxes and it's good on character.
00:37:32.020 | - Absolutely, no, and that's really cool.
00:37:34.220 | One of the, I mean, we could geek out on this stuff
00:37:36.740 | for a long time, but one of my favorite things is,
00:37:40.580 | especially when it was full side hustle income for me,
00:37:44.340 | when I still had the day job and everything,
00:37:47.140 | one of my favorite things was to funnel
00:37:50.740 | almost all of that money into investment accounts,
00:37:53.220 | into retirement accounts,
00:37:54.300 | 'cause I didn't need it to live off of.
00:37:56.260 | It was, and with the S-Corp rules or something,
00:38:00.980 | you can invest 25% of your compensation, I think.
00:38:05.340 | And so just straight into that.
00:38:07.340 | And then what's also cool is you can, a company match.
00:38:10.220 | So I have a company match, one to one,
00:38:12.260 | up to whatever the limit is.
00:38:14.500 | And so that's gonna be a business deduction as well,
00:38:18.660 | and for the retirement account.
00:38:20.660 | - Right, I mean, in the right situation,
00:38:22.140 | and this is, what's frustrating to people
00:38:24.340 | when they hear advice like this is that it's all
00:38:26.420 | gotta be personally customized based upon
00:38:29.420 | what benefits do you have at work,
00:38:30.780 | what benefits do you not have.
00:38:32.220 | For example, if somebody's covered by an employer plan,
00:38:34.660 | a qualified plan such as a 401(k), that makes a difference.
00:38:38.580 | But in essence, you can set up, and with a side hustle,
00:38:42.040 | the rules on retirement contributions
00:38:45.340 | are all based upon earned income.
00:38:46.860 | So if you have a side hustle that's earning,
00:38:49.740 | let's say 50,000 bucks, what you probably did
00:38:51.780 | was a SEP IRA, and there you're limited to 25%
00:38:54.860 | of your income into that account.
00:38:56.940 | But if you set up something like a solo 401(k),
00:38:59.340 | and if we write the documents correctly,
00:39:01.440 | you could in essence wipe out 50,000 bucks of profit
00:39:05.800 | right into a solo 401(k) in your own business.
00:39:09.340 | And with the right entity, I could set up
00:39:12.180 | a defined benefit plan.
00:39:13.300 | If you have a C corporation, and we can do what,
00:39:15.940 | just sound fancy tax sounding words,
00:39:17.660 | but you can set up a non-qualified
00:39:19.300 | deferred compensation program.
00:39:21.100 | And there are ways that we can get 'em set up
00:39:22.860 | where we could get $200,000 a year
00:39:25.220 | of contributions into the accounts.
00:39:27.340 | It's complicated, it's not necessarily easy.
00:39:30.140 | The SEP IRA is gonna be very simple,
00:39:31.820 | a solo 401(k) is pretty simple.
00:39:33.700 | But there's no reason why you shouldn't be,
00:39:35.960 | if you wanna fund retirement accounts,
00:39:37.800 | there's no reason why you shouldn't build up
00:39:39.960 | and use some of that external income
00:39:41.620 | and use that money to fund those accounts.
00:39:44.300 | - I like it, Joshua.
00:39:45.140 | If there's, here's a question for you.
00:39:48.160 | Because a few years ago I was interviewing
00:39:51.400 | different accountants or CPAs,
00:39:53.920 | and eventually settled on one,
00:39:55.760 | but didn't end up seeing a ton of value from it.
00:39:59.240 | Like I still had to provide all the numbers,
00:40:02.160 | which I expected, but there wasn't much going on
00:40:06.180 | in terms of consultation or tax savings
00:40:10.260 | or kind of strategies, conversations along those lines.
00:40:13.160 | It was like, I'm just gonna punch these numbers
00:40:15.000 | into my form for you.
00:40:16.360 | Like, well I can do that myself,
00:40:18.080 | if that's all you're gonna do.
00:40:19.480 | And so that's what I've been doing ever since.
00:40:21.160 | So do you have any tips,
00:40:22.440 | and this could be a shameless plug as well,
00:40:24.980 | like for finding somebody who's worth it?
00:40:28.280 | And I kicked the idea around on Twitter.
00:40:30.520 | Like the performance-based accountant,
00:40:32.680 | that's all I want.
00:40:34.080 | If I, you know, take a percentage of what you save me.
00:40:36.480 | Like that's what I'm looking for,
00:40:38.040 | but I guess that's against some sort of guidelines and stuff.
00:40:40.600 | - Yeah, that's actually one of my backup plans
00:40:42.520 | that I would love to do.
00:40:43.800 | And I'm not an accountant, actually.
00:40:45.040 | In fact, I'm completely unqualified to give tax advice
00:40:48.160 | from the technical perspective of,
00:40:49.600 | I don't have a CPA license, and I'm not an enrolled agent.
00:40:52.000 | I am a certified financial planner.
00:40:53.520 | So that does give me some,
00:40:55.440 | I think I do have professional responsibility
00:40:58.680 | in that case, but like I'm not an accountant.
00:41:02.280 | And the reason I have studied this stuff
00:41:04.040 | and know a good bit about it
00:41:05.360 | is because I had the same frustration that you had.
00:41:07.440 | Is I found one good accountant that was a friend of mine
00:41:10.440 | and he helped me out tremendously,
00:41:11.840 | but then he left the area
00:41:12.880 | and I've never been able to find another good one
00:41:14.920 | who was able to do a lot of proactive planning.
00:41:18.040 | And so what I would say is that you've gotta shop
00:41:21.480 | and shop for someone that can help.
00:41:24.040 | But the key is don't shop at tax time.
00:41:26.320 | So the time to go to your accountant and ask for advice
00:41:28.840 | is not March, it's not April.
00:41:31.840 | It is probably not February,
00:41:34.040 | although February is when you should be doing planning.
00:41:36.840 | If you wanna get them while they're able to,
00:41:38.520 | they'll talk to you, it's probably January
00:41:40.320 | and yeah, very early February.
00:41:42.240 | But the key is that as we record this, it's February 17.
00:41:45.520 | This is the time to be doing planning for 2015.
00:41:49.480 | Not for 2014.
00:41:51.280 | 2014 is done.
00:41:52.720 | There are a couple of tiny tricks that can be done,
00:41:55.480 | but pretty much, which by the way, I have a show on that,
00:41:58.200 | that is last minute tax planning strategies
00:42:01.040 | that can be done.
00:42:02.000 | But even that was a December show.
00:42:04.320 | But there are only a very small number of things
00:42:06.360 | that can be done in April.
00:42:07.560 | So shop for an accountant in February or January
00:42:11.120 | and be willing to pay an offer
00:42:14.320 | just simply for an hourly rate and a consultation.
00:42:16.800 | The trick is to understand what your accountant is doing
00:42:20.120 | that is getting paid.
00:42:21.120 | And so usually an accountant is being paid
00:42:23.480 | for the preparation of tax returns.
00:42:25.440 | And so if you want them to not be focused
00:42:28.000 | on the preparation for tax returns,
00:42:29.880 | you need to pay a consulting fee
00:42:31.840 | and offer two, 300 bucks in advance
00:42:34.720 | and say I don't want a return,
00:42:35.880 | I want you to sit down and look at my situation.
00:42:40.200 | And in that situation, you need to be prepared
00:42:41.760 | with good data so that they can talk you through
00:42:43.880 | and help you with actual answers.
00:42:47.080 | - Okay, I mean do you just go to Yelp
00:42:48.920 | and say who's a high rated accountant in my area?
00:42:51.400 | Or do you kind of, is there, is there any other--
00:42:53.880 | - I have no idea.
00:42:55.000 | - Check it out.
00:42:55.840 | - Yeah, I have no idea.
00:42:57.120 | This is pretty, would be very business specific.
00:42:59.880 | So for example, if I were a real estate investor,
00:43:02.880 | I would want to make sure that my accountant
00:43:04.200 | were only practicing with real estate clients.
00:43:07.400 | Needs to be state specific
00:43:09.000 | because different businesses are very different.
00:43:10.820 | Let's say as a side hustler,
00:43:12.520 | it would be unusual that you would have
00:43:14.520 | large capital expenses, you know,
00:43:16.880 | that you're spending $3 million or $4 million per year
00:43:20.520 | on plant and equipment.
00:43:22.120 | So that would be a different type of accounting structure.
00:43:26.280 | You would want someone who's very familiar with that.
00:43:30.160 | You would want someone who's up and knows how to sit down
00:43:32.840 | and do a cost segregation study and figure out,
00:43:35.120 | okay, of this plant and equipment,
00:43:36.360 | what's, how quickly can I amortize these expenses
00:43:39.240 | versus the others?
00:43:40.200 | That's very different than a side hustler
00:43:42.480 | who's working from a spare bedroom
00:43:44.080 | building up an internet business or something like that.
00:43:47.080 | So I simply don't have a good answer.
00:43:49.020 | It's one of my backup business plans at some point
00:43:50.920 | if I can make the time.
00:43:52.280 | Maybe I'll start a tax firm of accountants
00:43:55.000 | that only exclusively do consultations
00:43:57.000 | 'cause I've never been able to find one
00:43:58.280 | that would help me with that.
00:44:00.240 | - Yeah, and it seems like that's the fun part of the business
00:44:02.240 | trying to help people save money.
00:44:03.880 | - It is, but it's hard.
00:44:05.440 | Here's the problem.
00:44:06.280 | - Free business idea for anyone listening.
00:44:08.440 | - I mean, if I came up to you
00:44:09.560 | and let's say I found $50,000 worth of savings,
00:44:12.200 | are you ready to pull out a checkbook
00:44:13.500 | and write me a check for 25 grand?
00:44:15.500 | That's the challenge,
00:44:16.340 | and I'm sure that's why most people don't do it.
00:44:17.800 | I've never tried to ask people
00:44:18.760 | for that $25,000 check for that service,
00:44:21.440 | but I would love to do it.
00:44:22.840 | I'm just not sure that people wouldn't chicken out
00:44:26.120 | at the end when they're ready to write the check
00:44:27.380 | for what I saved them.
00:44:28.520 | - Yeah, I don't know.
00:44:29.800 | You just doubled your money.
00:44:30.760 | I don't know.
00:44:31.580 | That seems like a no-brainer,
00:44:32.420 | but it's a big check to write.
00:44:34.520 | Joshua, thanks so much, everyone.
00:44:36.520 | It's RadicalPersonalFinance.com.
00:44:38.760 | Awesome podcast over there.
00:44:39.840 | Check it out.
00:44:40.800 | Joshua, we'll wrap up with your number one tip
00:44:43.120 | for Side Hustle Nation.
00:44:44.680 | - Number one tip is this.
00:44:45.960 | Calculate your actual income
00:44:47.960 | and your actual expenses.
00:44:49.520 | The biggest mistake I've seen in the years
00:44:50.920 | I've been doing financial planning
00:44:51.960 | is that nobody knows what their actual income
00:44:54.260 | and what their actual expenses are.
00:44:56.160 | By actual income, I mean start with your gross income.
00:44:59.160 | Don't start with what you see on your paycheck.
00:45:00.680 | Start with your pre-paycheck number,
00:45:02.520 | and then calculate out that number,
00:45:04.420 | including what you pay in tax.
00:45:05.880 | In the years that I've been asking people
00:45:07.600 | and simply saying, "How much did you pay last year in tax?"
00:45:10.360 | I have yet to find someone who knows that number.
00:45:12.760 | So when I ask, "Dear Mr. Client or Ms. Client,
00:45:15.400 | "how much did you pay last year in tax?"
00:45:16.960 | usually the answer I get is, "Oh, I got a refund."
00:45:19.360 | No, that's not the question.
00:45:20.400 | How much did you pay?
00:45:21.760 | And so here's how this can be impactful.
00:45:25.000 | If you actually do it,
00:45:26.320 | and you actually know those numbers,
00:45:27.980 | then what you can figure out is
00:45:29.160 | what's the cost of working versus doing something else?
00:45:31.580 | So many people in your Side Hustle Nation
00:45:33.640 | will be married, and one spouse is pursuing something.
00:45:36.880 | So I've prepared an example here.
00:45:38.960 | I'll just run you through,
00:45:40.320 | and this is a real life type of example
00:45:42.600 | of what I've seen time after time
00:45:44.320 | of listeners of my show have written back and said,
00:45:46.920 | "This helped."
00:45:47.760 | So let's say that you have two spouses.
00:45:49.120 | One is earning 80,000 bucks,
00:45:50.800 | and the other is earning 40,000 bucks.
00:45:52.400 | And both of them are employed outside the house.
00:45:54.600 | Both of them are earning wages.
00:45:56.120 | Well, if you take $40,000 of gross wages,
00:45:58.640 | and you pull out 7.65%, that's the employment taxes,
00:46:01.920 | that's Medicare and Social Security,
00:46:03.720 | that loses you $3,060 of employment taxes.
00:46:07.960 | Then assume that you have, at that rate,
00:46:10.200 | let's assume that you have a marginal effective tax rate,
00:46:13.040 | including your federal, state, and local taxes,
00:46:15.280 | if you have 'em, of 20%.
00:46:16.920 | That's a pretty conservative number.
00:46:18.560 | There you're out 8,000 bucks.
00:46:20.440 | So now we're up to $11,060 of missing income
00:46:23.720 | solely due to tax.
00:46:24.600 | So you went from $40,000 down to under $30,000 just for tax.
00:46:28.960 | Now the big one is then calculate the cost of working.
00:46:31.880 | So for many families, let's say you have a two-parent
00:46:34.520 | household with kids, many families, that includes daycare.
00:46:37.480 | So assume 1,000 bucks a month, $250 a week for daycare.
00:46:40.780 | Now you lose $12,000 for daycare.
00:46:43.100 | Then calculate all of the other job-related expenses.
00:46:46.040 | Do you drive to work or does that cause you to need
00:46:48.800 | to keep two cars instead of being fine with one?
00:46:51.000 | Or do you pay for workday meals out?
00:46:53.200 | Or the big one is just what my wife and I,
00:46:55.040 | when both of us worked outside the house,
00:46:56.860 | was we found a lot of times we'd just eat out at night
00:46:59.020 | 'cause we were too busy to make something
00:47:00.460 | and we were too tired.
00:47:01.400 | Or do you have work closed?
00:47:02.760 | So if you pull out something like $300 a month
00:47:06.680 | of extra gas costs or insurance costs
00:47:08.880 | of maintaining a second car,
00:47:10.440 | $100 a month of having extra food expenses,
00:47:13.100 | whether that's lunches or dinners that you have to buy
00:47:15.820 | instead of make, and maybe, I don't know,
00:47:17.020 | 50 bucks a month for fancy work clothes,
00:47:19.220 | what you wind up with is $40,000 minus $3,000
00:47:23.740 | of employment taxes minus $8,000 of income taxes
00:47:26.980 | minus $12,000 of daycare minus $3,600 of vehicle costs
00:47:31.440 | minus $1,200 of extra food minus $600 of work food,
00:47:34.940 | and you're left with $11,540 of net profit.
00:47:38.460 | - That's your net profit from your job.
00:47:40.140 | - That's your net profit from your job.
00:47:40.980 | - Which is so sad.
00:47:41.800 | And that's why people end up not going back to work
00:47:44.240 | 'cause it's more expensive to pay for daycare.
00:47:46.380 | - Exactly.
00:47:47.380 | And then divide that into the number of hours
00:47:49.940 | you're actually working, meaning being at work,
00:47:53.220 | commuting to and from work,
00:47:54.680 | answering emails from home, et cetera.
00:47:56.540 | And assume that you're doing that only 50 hours a week,
00:47:58.460 | which is probably low for many people
00:48:00.180 | by the time you include commuting time,
00:48:01.620 | especially in California.
00:48:03.020 | If it's 2,500 hours a year that you're actually working,
00:48:05.700 | your net pay is $4.62 an hour,
00:48:08.740 | and you have no benefits from the tax code
00:48:12.260 | for being an employee, period.
00:48:14.380 | So if you did nothing else as a result of this show,
00:48:17.100 | sit down and calculate those numbers.
00:48:18.700 | I had a listener call my show last week.
00:48:20.340 | He sat down and did this over a period of time,
00:48:22.220 | did his financial statements
00:48:23.520 | the way that I teach people to do it.
00:48:25.060 | He said, "My wife," he called me,
00:48:28.180 | "It was his wife's last day of work,
00:48:30.020 | "and they're saving $30,000 per year for her not working
00:48:34.940 | "with the tax benefits that I taught them about,
00:48:37.080 | "with the costs of working.
00:48:39.440 | "They're saving $30,000 for her not working."
00:48:42.460 | And it's remarkable when you look at the numbers.
00:48:44.180 | Now, everyone's individual numbers will change.
00:48:46.380 | That's just a made-up example.
00:48:47.820 | But if you actually look at your numbers,
00:48:49.620 | you can coach yourself through to whatever you desire.
00:48:53.820 | - That's really eye-opening, I think,
00:48:56.180 | at least it can be for a lot of people.
00:48:57.580 | It's like, well, what could I do elsewhere
00:49:00.380 | to make more than $4 an hour,
00:49:02.620 | or to make back this and probably have more fun doing it?
00:49:06.740 | So, awesome stuff.
00:49:08.260 | Joshua, thank you so much for enlightening us.
00:49:10.900 | I know I've got some homework to do.
00:49:12.580 | We'll put all of this stuff together
00:49:14.460 | in the show notes for you,
00:49:15.300 | and a little cheat sheet as well.
00:49:17.440 | So, thanks so much.
00:49:18.420 | We'll talk to you soon.
00:49:19.700 | - Thanks for having me, Nick.
00:49:21.100 | - All right, hopefully that show sparked some ideas
00:49:24.620 | on how your side hustle can save you money come tax time.
00:49:28.100 | Now let's go and get those returns wrapped up
00:49:30.500 | so we can get back to work.
00:49:31.860 | All my notes and highlights,
00:49:33.200 | along with Joshua's top tips for tax savings
00:49:36.100 | for side hustlers are available to you
00:49:38.580 | in a free downloadable PDF at sidehustlenation.com/94,
00:49:42.860 | or through the link in the episode description
00:49:45.020 | of your podcast player app.
00:49:47.260 | Thank you so much for listening.
00:49:48.340 | Until next time, let's go out there
00:49:50.500 | and make something happen,
00:49:51.500 | and I'll see you next week in episode 95
00:49:54.500 | with a very, very special guest.
00:49:57.860 | You're not gonna wanna miss it.
00:49:59.140 | Until then, hustle on.
00:50:01.600 | ♪ Let me tell you how it will be ♪
00:50:06.600 | ♪ There's one for you, 19 for me ♪
00:50:13.520 | ♪ 'Cause I'm the tax man ♪
00:50:17.840 | ♪ Yeah, I'm the tax man ♪
00:50:22.840 | ♪ Should 5% appear too small ♪
00:50:29.640 | - Thanks for listening to the Side Hustle Show
00:50:31.960 | at www.sidehustlenation.com.
00:50:35.800 | (upbeat music)
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00:50:53.320 | for an unforgettable kids day presented by Pear Deck.
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