- Unwrap the holiday savings at Citadel Outlets. Shop the early access Black Friday sales for the best deals of the season. The all night shopping party starts Thanksgiving night at 8 p.m. Visit citadeloutlets.com for more information. - Side Hustle Show 94, tax saving tips for side hustlers. - Welcome to the Side Hustle Show, where aspiring part-time entrepreneurs learn how to turn their side hustle dreams into reality.

Because your nine to five may make you a living, but your five to nine makes you alive. And now your host, Nick Loper. (upbeat music) - What's going on? Nick Loper here. Welcome to the Side Hustle Show. This is episode 94, tax saving tips for side hustlers. It's tax season, at least here in the US, and that means that you may be thinking about how much you owe Uncle Sam, or hopefully, how much you're gonna get back.

But one thing is for certain, and that's that, as a side hustler, you have some distinct advantages come April 15th that the regular old W-2 earners do not. And here to help break down all of those advantages is Joshua Sheets from RadicalPersonalFinance.com and the Radical Personal Finance Podcast. If you're a money geek, you're gonna like this one.

Or just if you don't like giving your hard-earned money away to the government, you're gonna like this one. Josh is a certified financial planner and has a whole host of other acronyms after his name. I'm not sure if they all mean, but I'll take it to signify that he's a smart dude.

There's some really juicy stuff in this call, especially in the second half of this interview. But like the disclaimer on his site, RadicalPersonalFinance.com says, it would be dumb to take the financial advice of some random dude on the internet. So be sure to always do your own homework, your own due diligence, and your own research before putting any of this into action.

And I'll let that serve as my disclaimer as well. Now, as is per the usual, all my notes and highlights, along with Joshua's top tips for tax savings are available to you in free downloadable PDF at sidehustlenation.com/94, or through the link in the episode description of your podcast player app.

News and updates before we get into a real quick update on the public coaching project. Thank you, thank you, thank you so much for all the people who applied, got more than 70 applications for this thing. So I'm going through them as fast as I can and we'll sit on the progress.

I really, honestly did not expect half that many. So really overwhelmed and flattered with the response. I just know this is gonna be a ton of fun to put together and see what comes out of it. But I do wanna make sure to be fair to everyone who took the time to submit.

So it's gonna take a little bit of effort to go through all those. And with that, let's get into the show with Joshua Sheets. Or the first question that I get a lot of the time is, you know, when do I need to incorporate? Do I need to set up a legal entity for my side hustle?

- So you have to start with the most difficult question I get, don't you? (laughing) So this one's kind of interesting because the answer is extremely nuanced. And I'm gonna give some information on it, then I'm gonna kind of sidestep around it. But this is actually one of the more difficult questions to answer because there is no one right answer.

Most people do immediately start with this and people talking about the rich tax code and the poor people's tax code. And they say, well, the rich people get all the tax breaks. But that's not, at least in all the years I've studied tax, I can't find any of those tax breaks for the rich.

All the tax breaks go for the poor. But there are two tax codes, and they're the business tax code and the personal tax code. The mistake that many people make is they immediately think that in order to take advantage of the business tax code, they have to establish some sort of corporate entity.

They have to set up Joshua Sheets Inc. or Joshua Sheets LLC. And that is not the case. All you need to do is simply declare yourself to be in business and then pursue your business and you can immediately take advantage of the business tax code. So this question of should I incorporate is very challenging to answer because it's extremely fact dependent on one individual situation.

Now, the way I would answer it is I would say probably don't worry about it, at least not to start with. Again, each structure has its own advantages and disadvantages. And if you ever read an article where somebody says, always do something, always file an LLC or always set up an S corporation, flip to the next article 'cause it's probably not to be trusted unless they're just simply saying, here's one aspect of why you should.

Generally, in my experience, people are displaying their ignorance with articles like that, not recognizing all of the different variables that would impact the situation. So I'll give some of the variables. The first thing I would say is just simply focus first on simplicity of the business. The goal is not to incorporate so that you sound fancy.

The goal is not side hustle nation, Inc. So everyone thinks you're big and impressive. The goal is to have a business that prints money for you, right? So once we start with a business that's printing money for us, then we can fix everything else. So just simply go get started in business and don't worry about the tax stuff.

And then once you're making some money, we can fix all the entity stuff and fix all the tax stuff. And that's fairly normal. Most businesses will go through a progression and there's a natural progression where they may start off as a simple sole proprietorship. They may transition into some form of limited liability company or some form of S corporation.

And they may transition onto a C corporation. But the key is be making money. - What I kind of, I guess what I would recommend to most people who ask me that is, I would, like you said, focus on generating revenue, focus on the business side of it. And kind of you can run everything as a sole proprietor, still have the benefits of being a business.

And you're not gonna have the liability protection of that third party entity at first, but you can set that up after the fact. Now, my setup is a little bit more complicated. I have an LLC with an S corp election because at some point I read that you could save on self-employment tax by doing that.

And it makes things a lot more complicated. And for some years during that stretch, the revenue probably doesn't or did not justify that extra layer, that extra complexity. - Now in getting started, the sole proprietorship is the key and that's the best place to start 'cause it's simple. And the only tax form you need is to file a Schedule C on your normal personal return.

And you can basically file an unlimited number of Schedule Cs. So if you are building up a side hustle and you're pursuing a side hustle for six months in one business, and then you're pursuing another one for four months in another, and then a third one you're picking up at the end of the year with three months, you can file a separate Schedule C for each of those individual businesses.

And that would make sense if they're distinct, unique businesses. Now, the question, I mean, people say, well, when should I collapse them? You collapse them when it makes sense. So if businesses are integrated and everything is just an offshoot of that, then you go ahead and set those up.

So at this stage, for me, radical personal finance is simply a sole proprietorship. And the reason that it's a sole proprietorship is to date, it is not profitable. It is a pure loss. And so one of the things that's most valuable about a sole proprietorship is that there is essentially what they call in the tax business, I have an unlimited ability to deduct, excuse me, to deduct my losses as an ordinary loss.

So all of my losses with radical personal finance are fully deductible against my other forms and sources of income. If I were, as an example, if I had established an S corporation and if I were choosing that to be my business entity, then under that scenario, my losses are only deductible, what's called up to my basis, up to the amount of money and capital that I've contributed to the company.

And depending on the structure of a business, that may or may not be a problem. So it may be that somebody is contributing the capital to a business where they, you know, it's gonna be limited and that's the only losses they're gonna be able to take. Or it may be that they're anticipating that there'll be losses in excess of the capital contribution.

And that's the case for me with radical personal finance. So at this stage, it's a sole proprietorship. Now, as the business becomes profitable, then at that point in time, I'll transition it into another form of entity, most likely an LLC taxed as an S corporation. - Okay, okay. So if you're going through the expense and the headache of setting up this corporation, you may actually be hurting yourself by not, especially in like the early years of this business, by not being able to write off those, especially if you have some capital investment, you're buying websites and hosting and graphic design and marketing and all this stuff that you may be needing to spend money on, developers, contractors and stuff like that.

- Exactly. - Okay, so there's an advantage to staying as a sole proprietor for that. So do I need to file anything with like the Secretary of State to do that, with like my local city, with the federal government? Does any of that matter? Or do I just say, "Hey, I'm Nick, I'm in business, hire me." - Yeah, that depends on whether or not, that depends on the rules of your state, but in general, you can probably just be in business.

Now the challenge is when people start writing you checks, are they writing checks to Nick or are they writing checks to Side Hustle Nation? - Okay, okay. - And so if you need the people to write checks to Side Hustle Nation, you'll file a simple form with your state called a DBA, which stands for Doing Business As, and all that is is it's Nick Loper DBA Side Hustle Nation, and then that allows you to take that down.

You can open up a business checking account in your business name, and then people can write checks to Side Hustle Nation. For some businesses, they never need that. You know, I've run businesses for years in the past where people just made checks out to Joshua Sheets and it was no problem, or there was a cash transaction and that's no problem.

But then in some businesses, it can look a little strange if somebody's writing a check out to Joshua Sheets and they'd much rather write a check out to Radical Personal Finance. - Okay, okay. Yeah, plus you feel, I don't know, you feel kind of cool. It's like you're doing business as.

I don't know, I was back in college, I first set up my very first company. I was in a rush to incorporate because I thought it would be really cool and then I could get a tax ID and I could set up a bank account and all this nonsense.

And I was like, none of this really mattered, but it was just maybe a little bit of an ego trip. - Right, and that may have its place. It might be that for one business, you need to look big and you need to look impressive. Certainly in many things, perception is reality and that you need to understand how people are going to perceive you in your activities.

But for many people, it's just, it's overkill. And what's not talked about enough is people always talk about the advantages of incorporation, but they never talk about the disadvantages of incorporation. And the primary reason to establish a corporate entity is for liability protection. So you have to ask yourself, do I actually face significant amounts of liability that can be protected from at a corporate level?

And for me sitting here on my computer, creating a podcast, what's my liability? My primary liability is if I were to give investment advice of some kind that were pointed out to be improper in some way, and if I had represented myself as an investment advisor, then I'm personally liable for that.

But I don't have a team of delivery trucks. - What's your best investment advice? (laughing) - You're not gonna get me there, been doing this too long. But I don't have a team of delivery trucks out on the roads where one of my delivery drivers gets in an accident.

I'm not managing a multi-unit apartment building where it's possible that one of my tenants could be injured falling down the stairwell. So any liability exposure that I have is primarily personal liability. And a corporate entity doesn't protect me against acts of personal liability. So there's very little need for me at this stage in my business to have that liability protection.

- Yeah, so for people starting out, I think the gist of this conversation was, at least in California, save the $800 franchise fee and just do sole proprietor until you've got some revenue to justify it, and then you wanna go big and be official and all that stuff instead of hyper global megacorp right out of the gate.

Actually, do you remember in Four Hour Workweek how he talks about setting up his title, right? Instead of being president and CEO, it's like VP of Marketing, Tim Ferriss. And so to make the company appear a little bit bigger, like there was other players and setting up these different voicemail options, like press one, and it all like wood forward to him anyways.

- That's funny. - How about some common deductions for side hustlers? - There are as many deductions for side hustlers as there are expenses that are incurred in their business. And the key, I always start with deductions, is remember this, there's no 100% tax bracket. We've gotten in the United States up to as high as 94%.

That was the highest tax bracket back in 1945, but we've not yet gotten to 100%. So you never wanna take a deduction just simply for the sake of taking a deduction. And today the rates are, there's nowhere near 94%. - 94%, so every dollar you earned, you would, after a certain point, every dollar you earned, you would keep six cents.

- In 1945, every dollar you earned in excess of $200,000 was taxed at a 94% rate. - Oh my gosh, and people are complaining about the tax rates now. Oh my God, well, it's come down since then. - Yep, it does. So that's the key to keep in mind.

And there are some guiding principles, and I'll give you some examples that would be specifically helpful for side hustlers. But the problem with going straight to specific examples is if you don't have a framework into which you can fit those examples, then you're often subject to the whims of whatever the next article that you read is.

A couple of pieces of the framework. Number one, run your business right. Simply pursue your business and focus on profitability. And then over time, you'll naturally have expenses that are associated with the business. If you're doing something only for the purpose of the deduction, you probably have a problem.

And the only expenses that you can deduct in a business are the expenses that are ordinary and necessary to the course of your specific business. That's about it. That's basically the guiding line. So people ask about all kinds of stuff. Can I deduct this? Can I deduct that? Can I deduct the other thing?

The answer is, well, is this an ordinary and necessary business expense to you and to your business? So I like to joke, I love to travel, and so I like to joke about the filming of the Lord of the Rings movies in New Zealand. Do you think that Peter Jackson's expenses of going to New Zealand and filming the Lord of the Rings movies were deductible?

- No, for sure. - Of course they were. Of course they were, 'cause they're associated with him as a movie, creating movies. Now, if I decide to take my family on a family vacation, and we just get on an airplane and go to New Zealand, are my expenses deductible?

- Well, are you gonna have a meeting there? Are you gonna have a client meeting? Are you gonna make some deals? - Yeah, unless there is something specific, and that's the reason why we're going, which if I'm going as a front man for leading out in the Lord of the Rings movies, then yes, it would be deductible.

But if I'm just going on vacation, and it's clearly vacation, then it's not deductible. Now, here's how this matters. Let's say that I'm just going on vacation, but I say, you know what, I'm gonna make a movie, and I'm gonna toss this thing up on YouTube, so I film a family movie while I'm there on YouTube, and I put it out on YouTube.

Are my expenses now deductible? No, because I don't have any history. I don't have any ability to prove that I'm actually, you know, that this is actually a serious business expectation. - Well, this could be a fine line, right? What if you're just starting out, and you have the aspirations of being a future YouTube star, and this is the first film of your business?

- Exactly, okay, so this is a fine line, and this is where you have to look at each individual situation. So start with the perspective of, this needs to be an ordinary and necessary expense. Now, the other thing, to be able to deduct something in a business, there must be a profit motive under the business, and that's what the IRS says.

You don't actually ever have to show a profit. In fact, there are courses, excuse me, cases in the tax court where businesses have lost money for 20 consecutive years, and all of those losses were fully deductible, but there must be a profit motive, and so there are a few facts that the IRS would look at to say, are these expenses deductible?

The first one is the manner in which you carry on the activity, so are you actually pursuing this in a business-like way? Example, if I'm gonna film a video, and this is gonna be the first part of my YouTube stardom, then I'm gonna make sure that I'm probably gonna call ahead, I'm gonna schedule appointments there in New Zealand, if I'm gonna be filming, I'm gonna be applying for film licenses and film permits.

I'm gonna get an authorization from whatever authorizations I would need to go, or just need to get, I would be arranging things in advance, coordinating equipment, carrying it on in a business-like manner. Number two is the expertise of you and your advisors. So if you have some history, or have invested some study and some knowledge into your film production capacities, that would be a mark in your favor, that whereas if I just came in off the street and bought an iPhone on the way to the airport and said, oh, I'm gonna film a movie, that's probably not so impressive.

Number three would be the time and effort expended by you in carrying out your business activity. So if I go to New Zealand and I say, you know what, I'm planning this for weeks and weeks and months in advance, coordinating everything that's needed, and then I go and I'm doing my filming there for a week, doesn't matter that I had fun there while I was filming.

Or it doesn't matter even if I was there for a month and I had fun while I was filming. The question is, what was the time and effort overall expended, and was this actually pursued in an excellent way? - Okay, so if I'm buying fabric and I have the intention of setting up an Etsy shop, there's gonna be some paper trail, there's gonna be some direction to say, oh, I'm gonna turn this into Nick's custom handbags or whatever and put that on Etsy, or I'm gonna take some photography court, like advanced iPhone photography, right, and I'm gonna turn that into some photo booth business or something like that.

There's some, okay, so it sounds like there's some ways to make these expense. How about everyday stuff? If I'm, since most side hustlers are doing this from their home office, from their kitchen table, from their spare bedroom and stuff, like my internet expense, my cell phone, any stuff like that, is there, can I say, okay, a certain percentage of that every month could be a business expense?

- So each of those is different, and yes, there are some common expenses. So home office, utility costs, some other ones are probably more common, meals and entertainment with prospective clients or prospective business associates, business travel, all of these have their pluses and minuses. Now they're different. The cell phone is actually the most liberal these days, where for me, I've only deducted the cost of my cell phone in my business and have for years.

The IRS has made that one, and there's some specific private letter rulings where I would, I certainly, if I didn't have a business, I certainly wouldn't do that, but it's so hard for them to differentiate, and because now things are fully integrated, that the cell phone is one of those where they're a little bit less likely to be all persnickety on it.

The longstanding rule for business, for telephones, was you needed to have a separate business line, and you could deduct the business line. You needed to keep a call log in your office. But the cell phones, I'm not aware of any recent court cases where that one is coming into focus.

And so that can be a real benefit. Now, home office, things like internet, here you get into the home office rules, which is an area of real fear for many people. Many people don't take home office deductions simply because they're too scared to take it, and they're worried about triggering an audit with the IRS.

And the rules on the home office are fairly straightforward. The office needs to be used to conduct administrative or management activities of your trade or business, and there must not be another office where you conduct substantial administrative activities. And then you must use the home office for business exclusively.

So depending on your actual setup at home, as long as you meet those standards, that that's where you do administrative and management activities of your trade or business, that's where you don't have another location where you do substantial administrative activities for your business, and the space is used exclusively for your business, and that's the big one, 'cause most people don't do that.

They say, "Oh, I've got the spare bedroom," but if I were to look at a picture of the room, there's a computer in the corner, there's kids' beds and a guest bed, and there's a bunch of personal effects and personal books and all kinds of personal stuff all over the desk.

What you should do if you're gonna deduct that, clear out half the room and make half the room business only and there should be no personal effects in that half of the room. There should only be business and snap a picture every six months of it and put it in your tax record files demonstrating that here it is.

Here's my home office. - Oh, okay, okay, okay. - The key is proof, and this is the big one, is that he with the most proof according to the law is going to win. So if you're gonna do something like deduct a home office, yes, every January 1st and probably January 1st and June 1st, snap a picture of the space.

If you're going to be using your car and deducting your mileage, you need to have a careful mileage log in the car and you need to have careful records, and this is where most people don't, the reason that most people don't take all the deductions to which they are entitled by law is simply because they don't have good records, and because they don't have good records, they're nervous about it, and because they're nervous about it, they're scared to go and say, oh, I'm gonna take these deductions.

If you have good records and you've built yourself and you can build an audit proof tax records, then you'll save substantial money just by doing that. - Yeah, and I've gotta think that, unless you're a really, really high earner in your day job and you're showing some big business loss on your Schedule C, like I've gotta reason that the IRS has bigger fish to fry than coming after a side hustler who's trying to make a thousand bucks a month on the side or something.

So I'm looking up at my home office, so the treadmill desk takes up half the office, takes up half the room, so I just need to take a picture of it every now and again. - Right. - The problem with tax savings is there is no one thing. People always ask me, Joshua, what's the one thing I can do?

There is no one thing. There are just dozens and dozens and dozens of little things that you can do, which add up to a lot over time. - Okay, okay. Any commonly overlooked things that sometimes your clients are not claiming that they should, like we talked about the home office 'cause people are scared.

Anything other similar ones like that? - I'll give three. Number one, people don't move when they should. And this is, in my opinion, probably the biggest one is that people don't look into moving. And they don't look into moving from one county to another where there are lower taxes.

They don't look into moving from one state to another. One of the things that opens up when you get your income disconnected from your geographic location is you have the ability to earn from high-income places and live in low-expense places. And so whether this was Tim Ferriss's geo-arbitrage or whether it's just simply-- - Earning dollars, paying in rupees and living on pesos.

- Right, and this can be done within the United States or it can be done outside of the United States. I did an example on my show recently where I calculated just a very simple, kind of somewhat ordinary example of moving from, I think it was, I used Pennsylvania.

And I said, let's say that there was a young, like a 30-year-old couple earning a couple hundred thousand dollars a year of income. And the only change they made was to move from a state that has a state income tax to a state that doesn't have an income tax.

They moved from Pennsylvania to Texas or moved from Pennsylvania to Florida or even to a place like Tennessee where there is a more advantageous personal tax situation even though there are still some taxes, still saves. Well, if you save 5,000 bucks, that decision right there over the course of a 40-year career, that can be, depending on the investment return, that can be anywhere from a million to $2 million of assets available at middle or older age, at 65, if we're gonna do the traditional retirement idea.

A simple decision like what state do you live in can be a difference of a million extra bucks. But it's very rare that somebody asks me and says, so Joshua, I carefully sat down and thought about my state. There was an anecdote recently. You live in California, right, Nick?

- I call it the sandal tax, but go ahead. - So there was an anecdote. Tony Robbins recently wrote a book on money and it was much loved. But one of the anecdotes, very popularly, it was everywhere in every podcast. He did a great job with his marketing of the book.

But one anecdote that he told in that was he finally, a few years ago, New York, excuse me, California adjusted the tax system and they increased taxes retroactively on the residents of the state. And finally, after years, he had enough. So he went on kind of this massive, him take massive action.

So he went around looking for a new place to live. Well, he wound up in Palm Beach, Florida, right where I live. I live in West Palm Beach, Florida. And he wound up buying a brand new house on Palm Beach. And he bought, there's different scales of Palm Beach, but he bought it at one of the more expensive places where you have the ocean on one side of your property and you have the intercoastal waterway on the other side.

So you have water on two sides of your house. And he bought this massive, brand new mansion. And he said he paid for the entire cost of that mansion, purely with the savings from his California state income tax for six years. Paid for the entire cost of a massive mansion with only just the savings on his state income tax.

And the challenge is, you say, well, I'm not Tony Robbins. Yeah, but a million extra bucks-- - It adds up. - For a building from a 5% state. It adds up over time. - Yeah, it's kind of crazy to think about. Like, and that's the thing. So we're three and a half hours away from state line in Lake Tahoe, Nevada.

No state income tax, no business tax. It's just like they make all their money from gambling. So it's like, okay, they don't need it. It's just a completely different environment. And it really makes you think, like over, and you bring up a good point. It's not that much on a monthly basis, not that much on an annual basis.

But compounded and invested over your lifetime, it's like, that can make a big difference. And we're just talking about locally. We're not even talking about, move to Vietnam, move to Thailand, where you can rent a place for 500,000 bucks. - Right, exactly. And by the way, there's a great website that you might enjoy and that listeners might enjoy called Savetaxesbymoving.com.

And you can put in there the state that you live in, and then you can pick a different state, anything that you are interested in, and you can calculate, okay, if I just simply moved from one state to another, still within the US, 'cause what happens is, everyone says, well, I have to move to Thailand.

Well, I don't wanna move to Thailand. I wanna live in the United States. But I might be willing to just change from one state to a bordering state. And I just ran the math here. 5,000 bucks a year invested over 40 years, say from 25 to 65 at 10% annually, with just level 5,000 bucks, comes out to be $2.4 million.

- Yeah, I think one of these recent years, we paid 10 grand to the state of California, just for the privilege of living here. It's like, it hurts. It's crazy to think about. Oh my gosh, okay, so people don't move. That was overlook deduction number one. - All right, number two is, they don't, people don't pay attention to the little ways to align your activities in a way that are beneficial to you, to align your business activities in a way that are beneficial to you.

Example here, let me give you an example of business travel. Many times, I just got back from a conference last week in Dallas. Now, this one for me, I needed to go there and get back. So I just, I flew out there, and it was literally gone two nights, and it was just there and back.

There wasn't any fun associated with the conference for me. It was pure work. I worked if I wasn't sleeping, and that was it, and I got home. And that was what I needed to do at this point. But something like a conference can be a really great way, if you understand the law, can be a really great way for you to do business, but also have some of your expenses defrayed by the tax code.

So simple things like if you, let's say I had a conference on Thursday and Friday, and I had business meetings on Monday. Well, under the tax code, I can stay through the weekend, and my weekend expenses are deductible as part of my business travel expenses. Or if there's even a holiday, let's say there's a holiday where there's a Friday, if I have pre-scheduled appointments on Thursday and Monday, well now if I'm staying in a town, those now are business expenses.

Or one that I hope to use in the future is I like to drive. And under the IRS rules, as long as I drive 300 miles in a day toward my business destination, 'cause the IRS doesn't say how I get there. They don't say I have to take the cheapest, fastest, they do say most direct, but I don't have to take the cheapest, fastest plane ticket I can find, fly in on the morning and fly out the day after, you know, the evening after to save on money.

I can choose to drive. So if I chose to drive to Texas, as long as I cover 300 miles in a day of driving on a direct route from my house to the business destination, now that's a deductible business day. And so all of my travel expenses associated with that day are now deductible.

So little things like that. There's no reason why I can't arrange my affairs to visit some friends along the way. And then by understanding the number of days that are business versus the number of days that are personal, I can go ahead and slide in a couple of days of personal expenses in there.

They won't be deductible. Personal expenses are simply not deductible, but I can defray some of the costs by including that in with business travel. So little things like that, understanding the actual rules and figuring out how do I maximize, for example, if you have a side hustle business, and let's say that you're married and you have two cars, you wanna make sure that you try to drive both of those cars for business, deduct business miles 'cause you'll get more of a deduction for driving both cars than just putting it all on one car.

Some of the little ideas and the little math tricks are really helpful and add up over time. - Okay. And so if you're meeting clients locally, your mileage to that meeting is deductible, I assume? - Right. As long as it's not commuting. Commuting expenses are never deductible, but as long as I'm traveling from a place of business to a business appointment, then it's deductible.

And for someone like you, your place of business is probably your home office, then now all of your miles to go and visit clients, wherever that is, or potential business connections, those would now be deductible business miles. - Right. And I think we should make the important point, not to go out of your way to rack up expenses 'cause it still costs you money.

That doesn't make sense to spend money for the sake of spending money for the sake of a deduction, like you said, 100% tax bracket. 'Cause we would meet people in the car business who would come in every December and be like, might as well buy a truck. Like, okay, I mean, if you're gonna buy it anyways, I guess it makes sense, but we'll take the business.

Okay, so aligning your activities to kind of some business or beneficial activities. Okay, what's number three? - Number three is understanding how to, probably understanding how to shift income would be an example that I would use. When you run your own business, then you have a little bit more flexibility with simple things like who works for you and when they work for you.

So, there are some serious advantages, if you can, to hiring family members to work for you. So, you can hire your spouse and you can hire your kids. And essentially what you can do is by shifting income from you to a spouse or to kids, you may be able to take advantage of a difference in tax brackets.

They may be earning at a lower tax bracket. And then you can, that'll save you a lot of money. And that also can be beneficial to employ your spouse because, or to employ family, because if there are business expenses that are associated with your employees, those expenses are deductible.

Give me an example. If I go to a conference, I don't employ my wife in my business. And the reason I don't is simply because she doesn't want to work in my business. So, she's not open to this. But if she wanted to work with me in my business and if she was able to actually be an employee, and that's very important that you have careful records, that she's doing work.

This is not the kind of thing where, oh, I'm just writing her checks and we'll just call this wages. No, she needs to be actually working. But for many people, they like working with their spouses. Well, if my spouse is employed in my business, that can be helpful in multiple ways, including the fact that now we can travel together to a conference, we can travel together to business events, and now our expenses for both of our travel are fully deductible.

Because if she's not an employee in my business, then the only expenses that are deductible are my expenses. So, something as simple as that of hiring a spouse, that can be a big one. Hiring kids can be really, really valuable. You know, the joke is, if you want to pay for your kid's college with deductible expenses, hire them to work in your business.

- Yeah, yeah, no, I've heard this. And this is a fascinating one to me. Like, so, I had a friend, you know, this was several years ago, working in real estate. And so, like, his kids would pass out flyers or they would, like, you know, model for, like, really random, so they would model for his, like, advertisement flyers or something, or like, oh my gosh, remember on Smart Passive Income where Pat had Keone read, like, say smart, smart, say passive, passive.

Do you think he was paying him? Like, that would be, do you think he was, like, that was like, okay, now he's a podcast co-host. - So, it's an interesting question. One of the things that you want to be careful, it's great to be inspired by friends who have examples, but the problem is you don't actually know if those friends, A, know what they're talking about, and you don't know if what they've been doing has been tested by an audit.

So, ask your friend, have you been audited and has this held up? And if so, you know, give a little bit more weight to what they've done. The key with any kind of expense is that you want to make sure that whatever expense that you're paying is a market rate.

The IRS has no predetermined, that I'm aware of, there's no predetermined amount that you could actually pay somebody, or no predetermined, you know, number. For example, this is what's frustrating to so many people when they establish an S corporation with the goal of lowering their self-employment taxes. Then they say, well, how much should be wages and how much should be dividends?

The only answer is the amount of wages, it should be wages, is the amount that should be wages is the amount that you would have to pay somebody to do that work in your area. And so, one of the keys of making yourself audit-proof is doing good research and recording it.

So, if you were passing, if I hired my kids to pass out flyers and that was their goal, then what I would wanna do is I would wanna see what can I hire somebody in my local area to pass out flyers for? And I'd like to, it'd be good to have some way of externally verifying that.

It's probably not $50 an hour, but it might be nine or it might be 10. So, let's say it's 10. Now, that can be a real benefit 'cause I can pay my kids $10 an hour, whatever the market wage is for that. But, if I'm paying them $50 an hour and the market wage is 10, then that is certainly gonna be disallowed.

So, what, so the question, if I'm hiring my kids to model for me, what would I need to hire somebody, what would I need to pay somebody to model? And so, there's no reason not to pursue it. You call a local modeling agency and you get a couple of quotes and you say, I need some child models, here's the event, they're gonna be performing in this video, they're gonna be taking these pictures, what would be the fees?

And then, if you go ahead and you track that, and I would put that into my records for the year and make sure that I had that information, then that would be a reasonable fee to pay to your kids for their modeling efforts. So, you can do it, you just gotta do it carefully and do it right and substantiate your research.

- Yeah, I really like that one, then funneling that into some investment account for their education, that's cool. - Right, and there'd be multiple ways of doing it. So, for example, people often talk, and you can do this, you can set up a Roth IRA for your kids, that's valuable.

The rules with establishing retirement accounts are all based upon earned income. So, let's assume I hire my son and he earns $3,000 working for me over the course of his summer vacation. What I can do is I can pay him $3,000 and then I can go ahead and gift him $3,000.

And what we do is all of his earned income, the $3,000, can go into a Roth IRA, and then he can go ahead and spend the $3,000 that I gave him for his personal expenses. That's a way of me getting money into a Roth IRA for my 13-year-old son, if I had a 13-year-old son.

Or if I have a 19-year-old son and the tuition bill is $10,000 and I wanna deduct that $10,000, I can go ahead and hire him, he can work for me enough time to earn $10,000. Now I've deducted the $10,000 of wages that I'm paying him and I can go ahead and give him the money for school.

Now I've deducted, in essence, the school expenses. - That's genius. - He's still gotta work, so they gotta earn it. So it's good on both accounts. It's good on taxes and it's good on character. - Absolutely, no, and that's really cool. One of the, I mean, we could geek out on this stuff for a long time, but one of my favorite things is, especially when it was full side hustle income for me, when I still had the day job and everything, one of my favorite things was to funnel almost all of that money into investment accounts, into retirement accounts, 'cause I didn't need it to live off of.

It was, and with the S-Corp rules or something, you can invest 25% of your compensation, I think. And so just straight into that. And then what's also cool is you can, a company match. So I have a company match, one to one, up to whatever the limit is. And so that's gonna be a business deduction as well, and for the retirement account.

- Right, I mean, in the right situation, and this is, what's frustrating to people when they hear advice like this is that it's all gotta be personally customized based upon what benefits do you have at work, what benefits do you not have. For example, if somebody's covered by an employer plan, a qualified plan such as a 401(k), that makes a difference.

But in essence, you can set up, and with a side hustle, the rules on retirement contributions are all based upon earned income. So if you have a side hustle that's earning, let's say 50,000 bucks, what you probably did was a SEP IRA, and there you're limited to 25% of your income into that account.

But if you set up something like a solo 401(k), and if we write the documents correctly, you could in essence wipe out 50,000 bucks of profit right into a solo 401(k) in your own business. And with the right entity, I could set up a defined benefit plan. If you have a C corporation, and we can do what, just sound fancy tax sounding words, but you can set up a non-qualified deferred compensation program.

And there are ways that we can get 'em set up where we could get $200,000 a year of contributions into the accounts. It's complicated, it's not necessarily easy. The SEP IRA is gonna be very simple, a solo 401(k) is pretty simple. But there's no reason why you shouldn't be, if you wanna fund retirement accounts, there's no reason why you shouldn't build up and use some of that external income and use that money to fund those accounts.

- I like it, Joshua. If there's, here's a question for you. Because a few years ago I was interviewing different accountants or CPAs, and eventually settled on one, but didn't end up seeing a ton of value from it. Like I still had to provide all the numbers, which I expected, but there wasn't much going on in terms of consultation or tax savings or kind of strategies, conversations along those lines.

It was like, I'm just gonna punch these numbers into my form for you. Like, well I can do that myself, if that's all you're gonna do. And so that's what I've been doing ever since. So do you have any tips, and this could be a shameless plug as well, like for finding somebody who's worth it?

And I kicked the idea around on Twitter. Like the performance-based accountant, that's all I want. If I, you know, take a percentage of what you save me. Like that's what I'm looking for, but I guess that's against some sort of guidelines and stuff. - Yeah, that's actually one of my backup plans that I would love to do.

And I'm not an accountant, actually. In fact, I'm completely unqualified to give tax advice from the technical perspective of, I don't have a CPA license, and I'm not an enrolled agent. I am a certified financial planner. So that does give me some, I think I do have professional responsibility in that case, but like I'm not an accountant.

And the reason I have studied this stuff and know a good bit about it is because I had the same frustration that you had. Is I found one good accountant that was a friend of mine and he helped me out tremendously, but then he left the area and I've never been able to find another good one who was able to do a lot of proactive planning.

And so what I would say is that you've gotta shop and shop for someone that can help. But the key is don't shop at tax time. So the time to go to your accountant and ask for advice is not March, it's not April. It is probably not February, although February is when you should be doing planning.

If you wanna get them while they're able to, they'll talk to you, it's probably January and yeah, very early February. But the key is that as we record this, it's February 17. This is the time to be doing planning for 2015. Not for 2014. 2014 is done. There are a couple of tiny tricks that can be done, but pretty much, which by the way, I have a show on that, that is last minute tax planning strategies that can be done.

But even that was a December show. But there are only a very small number of things that can be done in April. So shop for an accountant in February or January and be willing to pay an offer just simply for an hourly rate and a consultation. The trick is to understand what your accountant is doing that is getting paid.

And so usually an accountant is being paid for the preparation of tax returns. And so if you want them to not be focused on the preparation for tax returns, you need to pay a consulting fee and offer two, 300 bucks in advance and say I don't want a return, I want you to sit down and look at my situation.

And in that situation, you need to be prepared with good data so that they can talk you through and help you with actual answers. - Okay, I mean do you just go to Yelp and say who's a high rated accountant in my area? Or do you kind of, is there, is there any other-- - I have no idea.

- Check it out. - Yeah, I have no idea. This is pretty, would be very business specific. So for example, if I were a real estate investor, I would want to make sure that my accountant were only practicing with real estate clients. Needs to be state specific because different businesses are very different.

Let's say as a side hustler, it would be unusual that you would have large capital expenses, you know, that you're spending $3 million or $4 million per year on plant and equipment. So that would be a different type of accounting structure. You would want someone who's very familiar with that.

You would want someone who's up and knows how to sit down and do a cost segregation study and figure out, okay, of this plant and equipment, what's, how quickly can I amortize these expenses versus the others? That's very different than a side hustler who's working from a spare bedroom building up an internet business or something like that.

So I simply don't have a good answer. It's one of my backup business plans at some point if I can make the time. Maybe I'll start a tax firm of accountants that only exclusively do consultations 'cause I've never been able to find one that would help me with that.

- Yeah, and it seems like that's the fun part of the business trying to help people save money. - It is, but it's hard. Here's the problem. - Free business idea for anyone listening. - I mean, if I came up to you and let's say I found $50,000 worth of savings, are you ready to pull out a checkbook and write me a check for 25 grand?

That's the challenge, and I'm sure that's why most people don't do it. I've never tried to ask people for that $25,000 check for that service, but I would love to do it. I'm just not sure that people wouldn't chicken out at the end when they're ready to write the check for what I saved them.

- Yeah, I don't know. You just doubled your money. I don't know. That seems like a no-brainer, but it's a big check to write. Joshua, thanks so much, everyone. It's RadicalPersonalFinance.com. Awesome podcast over there. Check it out. Joshua, we'll wrap up with your number one tip for Side Hustle Nation.

- Number one tip is this. Calculate your actual income and your actual expenses. The biggest mistake I've seen in the years I've been doing financial planning is that nobody knows what their actual income and what their actual expenses are. By actual income, I mean start with your gross income.

Don't start with what you see on your paycheck. Start with your pre-paycheck number, and then calculate out that number, including what you pay in tax. In the years that I've been asking people and simply saying, "How much did you pay last year in tax?" I have yet to find someone who knows that number.

So when I ask, "Dear Mr. Client or Ms. Client, "how much did you pay last year in tax?" usually the answer I get is, "Oh, I got a refund." No, that's not the question. How much did you pay? And so here's how this can be impactful. If you actually do it, and you actually know those numbers, then what you can figure out is what's the cost of working versus doing something else?

So many people in your Side Hustle Nation will be married, and one spouse is pursuing something. So I've prepared an example here. I'll just run you through, and this is a real life type of example of what I've seen time after time of listeners of my show have written back and said, "This helped." So let's say that you have two spouses.

One is earning 80,000 bucks, and the other is earning 40,000 bucks. And both of them are employed outside the house. Both of them are earning wages. Well, if you take $40,000 of gross wages, and you pull out 7.65%, that's the employment taxes, that's Medicare and Social Security, that loses you $3,060 of employment taxes.

Then assume that you have, at that rate, let's assume that you have a marginal effective tax rate, including your federal, state, and local taxes, if you have 'em, of 20%. That's a pretty conservative number. There you're out 8,000 bucks. So now we're up to $11,060 of missing income solely due to tax.

So you went from $40,000 down to under $30,000 just for tax. Now the big one is then calculate the cost of working. So for many families, let's say you have a two-parent household with kids, many families, that includes daycare. So assume 1,000 bucks a month, $250 a week for daycare.

Now you lose $12,000 for daycare. Then calculate all of the other job-related expenses. Do you drive to work or does that cause you to need to keep two cars instead of being fine with one? Or do you pay for workday meals out? Or the big one is just what my wife and I, when both of us worked outside the house, was we found a lot of times we'd just eat out at night 'cause we were too busy to make something and we were too tired.

Or do you have work closed? So if you pull out something like $300 a month of extra gas costs or insurance costs of maintaining a second car, $100 a month of having extra food expenses, whether that's lunches or dinners that you have to buy instead of make, and maybe, I don't know, 50 bucks a month for fancy work clothes, what you wind up with is $40,000 minus $3,000 of employment taxes minus $8,000 of income taxes minus $12,000 of daycare minus $3,600 of vehicle costs minus $1,200 of extra food minus $600 of work food, and you're left with $11,540 of net profit.

- That's your net profit from your job. - That's your net profit from your job. - Which is so sad. And that's why people end up not going back to work 'cause it's more expensive to pay for daycare. - Exactly. And then divide that into the number of hours you're actually working, meaning being at work, commuting to and from work, answering emails from home, et cetera.

And assume that you're doing that only 50 hours a week, which is probably low for many people by the time you include commuting time, especially in California. If it's 2,500 hours a year that you're actually working, your net pay is $4.62 an hour, and you have no benefits from the tax code for being an employee, period.

So if you did nothing else as a result of this show, sit down and calculate those numbers. I had a listener call my show last week. He sat down and did this over a period of time, did his financial statements the way that I teach people to do it.

He said, "My wife," he called me, "It was his wife's last day of work, "and they're saving $30,000 per year for her not working "with the tax benefits that I taught them about, "with the costs of working. "They're saving $30,000 for her not working." And it's remarkable when you look at the numbers.

Now, everyone's individual numbers will change. That's just a made-up example. But if you actually look at your numbers, you can coach yourself through to whatever you desire. - That's really eye-opening, I think, at least it can be for a lot of people. It's like, well, what could I do elsewhere to make more than $4 an hour, or to make back this and probably have more fun doing it?

So, awesome stuff. Joshua, thank you so much for enlightening us. I know I've got some homework to do. We'll put all of this stuff together in the show notes for you, and a little cheat sheet as well. So, thanks so much. We'll talk to you soon. - Thanks for having me, Nick.

- All right, hopefully that show sparked some ideas on how your side hustle can save you money come tax time. Now let's go and get those returns wrapped up so we can get back to work. All my notes and highlights, along with Joshua's top tips for tax savings for side hustlers are available to you in a free downloadable PDF at sidehustlenation.com/94, or through the link in the episode description of your podcast player app.

Thank you so much for listening. Until next time, let's go out there and make something happen, and I'll see you next week in episode 95 with a very, very special guest. You're not gonna wanna miss it. Until then, hustle on. ♪ Let me tell you how it will be ♪ ♪ There's one for you, 19 for me ♪ ♪ 'Cause I'm the tax man ♪ ♪ Yeah, I'm the tax man ♪ ♪ Should 5% appear too small ♪ - Thanks for listening to the Side Hustle Show at www.sidehustlenation.com.

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