Let’s get our tax facts on with my tax accountant.
Megumi | One of the topics I get the most questions about is taxes. Especially for people who are full-time freelancers or those of us with side gigs, staying on top of our taxes is both so important and also very confusing. I mentioned in the side hustle episode last season about how important money management, including taxes, are for your side hustle work and your freelance work. So, I am really excited today to be able to dive further into taxes with my accountant, Allen Walbert. We’ll touch on taxes for everyone, but we will mainly be focusing on filing taxes if you do any freelance or contract work. Allen has specialized in personal and business taxes for over 40 years, so I am very happy to have him on this episode. Thanks for being here, Allen! |
Allen | Well, thanks, Megumi. It’s nice to be here. |
Megumi | Is it true that you filed, or you did your first tax return when you were in college? |
Allen | Yes, my first year of college, I filed a tax return for a friend of mine who actually went to the same college as I did from my hometown. |
Megumi | Oh, wow. So you’ve been doing this for a long time? |
Allen | For a long time, a very long time. |
Megumi | So I know that, like you’ve said when we were talking before, every single person’s situation is unique, depending on what they’re doing, how much they make, where they live. So just for everyone listening and watching, this is going to be sort of broader general guidelines. But now that that’s been said, what are some general rules on how we can prepare for tax season, whether we are full-time or freelance? |
Allen | Well, if you’re full-time, the best thing to do is to start a folder that you put in anything you get in the mail that says this is an important tax document. That’s step number one, whether or not you do your taxes yourself, or you take them to somebody to help them prepare your taxes for you. If you’re a freelancer, you still want the same folder, but you’re going to collect all your receipts that have to do with your side hustle. And one of the other things you want to add to that, and you want to get into the habit of doing it, there are apps for your phone now that you can install that will help track your mileage for business purposes. It does not do anything for you if you work for somebody else, unless they reimburse you for mileage. But when you work for yourselves, you get north of 50 cents a mile for every mile you drive for work, not necessarily for commuting, but when you drive out to the post office, you visit clients, etc. If you’re a personal trainer and you go to somebody’s home, that mileage out and back is deductible. And you get, as I said, a minimum of 50 cents a mile for that. So if you have an app that can track it for the year, then all you have to do is write down the number at the end of the year right off the app. And it makes it so much easier than having a log. And you can also save that log from the app and print it if you need to. Again, all your receipts. And you need to think about the administrative side of what you’re doing. You have to be your own administration. So you need to organize it because no accountant wants to get a box just filled with receipts, because the longer it takes somebody to do your taxes, the more you’re going to pay to have them done. |
Megumi | Right. Does that mean that we should be taking photos or scanning our receipts so that it’s categorized and digital? Or can we still submit paper receipts but have them labeled and categorized already? |
Allen | Well, as an accountant, what I would want you to do is give me a spreadsheet that has all your receipts listed and your income listed and from that, I can prepare a pivot table – if it’s in Excel – and put an income statement together for you. I don’t want to see the receipts. I’m assuming that you have the receipts. If you get audited, we’ll need the receipts, the same thing with charitable contributions and things like that. But beyond that, if you’re a first-time client, yes, I might want to see them just to see how aggressive you may be trying to be or if you think that the whole world owes you something and you’re going to try to be more aggressive with your taxes than somebody else would want to be. And I’ll be very honest with you: about the most valuable thing a tax preparer gives somebody today is their signature. It’s because the IRS has put the onus on us to review everything. So if there’s a problem, the first person they come to is us. So if I put my signature on something that’s blatantly false, I have just as much not more severe penalties than the taxpayer. |
Megumi | So then for someone who is working full time, not talking about freelancers, but you only have one source of income, you have your W2 or whatnot, can someone like that not work with an accountant? Is it okay for them to file themselves or work with services like TurboTax or H&R Block? |
Allen | Sure, they can do that themselves and a lot of people have some experience. The IRS figures that it takes somebody about 11 hours to do their own taxes, which is just an incredible amount of time when you’re looking at how much you could get done with 11 hours of leisure or playing with your kids or something else. A lot of tax programs you can buy from Office Depot. Best Buy has them, Wal-Mart has them, for TurboTax and things like that, or QuickTax. The program may be somewhere between $75 and $125. And if that’s all you have, a W-2, then honestly that’s about all it should cost you to get your taxes done with a local preparer. But you can do it yourself and some of the apps now where they say, “Okay, input your information and we’ll fill it out from there,” that’s great. And one of the downsides to that is if you just scan it in and it fills in the blanks, you have to really know what look at in the return that you’re getting ready to file because you’re attesting that what they did was correct and once you’ve attested to that, their liability for any penalties for doing it wrong are gone because you reviewed their work and said, “Yeah, I agree with that.” |
| And that brings to mind something that happened about two months ago where a Marine, a son of one of my clients, filed his own taxes for 2019 by using the TurboTax app. And it was just scanned in. He said, “Yep, looks good,” and filed it and he was expecting a return of, I don’t know, a couple of hundred dollars and the IRS sent him a letter back saying that, “Well, you owe us more money,” because one of the things that this tax returns showed was that they had allocated tips and dependent care benefits that he didn’t claim on their tax return. Those are other forms that you have to say, “Okay, I have dependent care benefits and I used it in this way,” so that it’s not taxable. Well, they wanted their taxes on that money. And as it turns out, Turbo Tax had it so wrong that instead of giving back, I think he was expecting $600, they said he actually owed $1,200. He spent $60 because no program is free. No app is free. The government has said that there are certain large providers that have to have a portal for people to file their federal taxes for free within certain guidelines, but they charge whatever they want for the states. So it’s going to cost you at least $50 to $75 to have the program file your state returns, even though there’s usually no reconciliation, no other adjustments that need to be made once you input your federal information if you just lived and worked in the same state and they’re just getting $75 from you just because you hit the button that said enter. There is some more work usually if there’s two states involved and there are some extra fees for that, usually no matter who does the return. So you still have to know what you’re doing even if you use your own forms or use the app or apps. |
Megumi | You still have to– you can’t just rely on the app. You still have to go through, make sure everything is correct, and also realize that at the end, when you check that box that says, “This is correct,” if something is not correct, whether it’s through a mistake or you just didn’t check things properly, it’s going to be on you versus having worked with an accountant where you can go to the account and be like, “What happened? Can you help me?” |
Allen | Yes, that’s right. And most accountants, if they make an error, will pay the penalties and interest. You’d be responsible for any additional taxes that were due because you would have paid the taxes anyway. But we all carry what’s called errors and omissions insurance to cover our mistakes. |
Megumi | Right. And I think another thing you had said when we were talking before is that these employees, right, if I call– I’m using TurboTax as an example, not just trying to hate on TurboTax, but TurboTax, H&R Block, whoever, the person who I talk to is not going to be a full-time accountant like you are. |
Allen | Well, they may not be doing taxes full time, because if they were doing taxes, they wouldn’t have time to sit and wait on phone calls from people that have questions. I mean, it’s interesting. If you see the ads, there was a current one out there where a guy is going by with his desk and the girls playing the clarinet and says, “Can I write off my clarinet lessons to correct an overbite? “And the guy says, “Sure, you can.” [laughter] Well, I did some research with that and if you get a dentist to prescribe you to play the clarinet to correct an overbite, there has been a court that says, “Yes, that’s fine.” I think that you would have a better shot at getting a doctor to prescribe that you needed a hot tub or a pool in your yard or a ramp to your house so that you could deduct it from your taxes under certain circumstances, than the benefit of playing the clarinet versus just getting braces. Because when you look at the cost of buying a clarinet and the lessons and the time involved that you’d have to actually play the clarinet to show a market difference in an overbite versus just wearing braces, it is astounding. [laughter] But I guess, it can be done. |
Megumi | Yes. It does make for a good commercial, I guess. [laughter] |
Allen | Yes, it makes for a good commercial. Most tax people look at it and just cringe. [laughter] |
Megumi | I think another thing that’s key is– and I know this is something that we’ve talked about before, is that living in California, there’s different tax rates, different requirements, what have you, versus living somewhere else, right. And that’s part of the reason why, like I said at the beginning, everyone’s situation is going to be different. And I know, for example, with TurboTax, like you said, you can pay to file your local and state taxes and there might be some prompts based on where you live. But having a relationship with someone who is working full time on taxes and know all the different changes and what’s going on in your region is also going to be super helpful. |
Allen | Yes, it is very helpful because there are– as an example, when you used to be able to itemize your taxes, somebody local is going to know that a terrific hailstorm went through. And you might have had hail damage. And you might have had some losses not covered by your insurance that would be deductible on your tax return. They’d be able to ask you, “Hey, were you damaged by the hailstorm that came through last May?” And that’s just one of the things that when you see somebody, year in and year out, that would know and get to know what you’re doing, how you’re doing it, and stuff like that. |
Megumi | Right. Yeah. And also,I know that sometimes you’ll ask longer– I don’t want to say interviews necessarily, but just asking them for life updates that might have been missed on an app. |
Allen | Well, yes. And actually it is an interview. There are a lot of preparers that– and now these aren’t going to be the H&R Blocks of the world or Jackson Hewitt or Liberty Tax, but other firms and individual clients that do taxes. And they send out what’s called an “organizer”. It’s usually about 30 pages or so. And it takes what you did last year, puts it on the form and says, “Okay, tell us what happened in these same areas this year.” And then there may be some other questions. “Is there anything else that you can think of that we might need to know about?” But primarily, what they’re looking for is, “Whatever happened last year, let’s make sure we cover that.” And there is no interview. There’s no sitting down with somebody and asking, and that interview process to me is very important. |
| I had a client come in, in February of 2020, to get their taxes done. And she was single. Nothing looked out of the ordinary. I did her taxes and sent on her way. She called me in September of last year and said, “Hey, I want to bring my fiancé in. We want to set up some businesses.” I said, “Sure.” Well, they came in and she had a baby. And I said to her– I said, “Were you pregnant when you were here in February?” She said, “Yes,” and I’m sitting there looking at myself. That’s not a question I’d normally ask. But it is part of my interview process. I do have a list of questions that my associate and I go through when somebody comes in every year. And one of them is, “Did anybody move in and is mooching off of you?” or, “Did you have any more kids?” But I mean, I was completely clueless. And if you didn’t do that and somebody didn’t prompt them, you might miss a child. And that is a significant tax credit with the current tax laws of at least $2,000. So that being able to sit down and talk to somebody conversationally. It’s not like a job interview or anything like that. You just sit down and you chat and you just catch up. And you pick up on certain things and let the conversation go where it may. It may only be five to seven minutes, but you get a lot of information from that. And you want somebody to feel comfortable calling when life changes happen, so that you’re not getting to April 15th, the next year, and say, “Oh, I’m sorry. You owe $4,000 and here’s why. We have to fix it for next year. But unfortunately, we’re already five months into the new year. So you’re going to be behind the eight ball. But your daughter quitting college and moving out and she’s no longer a dependent? Well, that was a kick in the teeth of about $4,000 in additional taxes you owe because there are things you can’t write off, and credit you’re not getting now.” So having somebody you can pick up and call when those things happen, if you happen to think of them, is very important. |
Megumi | So then for freelancers, contractors, including people who are doing it full-time or people who are doing side hustles, at what point do they need to worry about paying taxes on the side hustles, what kind of forms do they need? |
Allen | Well, they want to keep track. They want to keep track of their income and expenses. If it is truly a side hustle, they will owe taxes pretty much from dollar one of their net profit. And the first $400, it’s just going to be taxed at whatever their current tax rate is. And I would imagine somebody with a side hustle that is not married, that’s making 50, 60 thousand dollars a year is going to be about the 12% tax bracket. So they’re going to owe 12% in federal income tax. Once it goes over– and there are some other things that change that. As an example, and this is really getting in the weeds, but there are some other credits available for some qualified business income. But we’ll just leave there. Once you get over $400, then your taxes go up an additional 15%. So you have 12% and the 15% and that’s just federal. Now, let’s look at California as an example from dollar one of profit, you’ll owe let’s just say 10% because it’s the easy number to calculate. |
Megumi | Sure. |
Allen | So you have 10% and 12%, which is 22%. So you’re sitting good. You’re 22% from dollar one of profit. Once you go over $400, then anything over $400, you’re going to owe an additional 15.3%. So you’re looking at about 38%. |
Megumi | Right. |
Allen | So a rule of thumb is: if you just figure that you’re going to pay 40% of your profits in income taxes. And the reason why it seems so high is that you’re paying both sides of Social Security tax. When you work for somebody else, you pay 7.65% and the employer pays 7.65%. And you pay all those other taxes anyway. You pay 12% federal and you pay the– let’s say, 10% to the state if you’re California, New York. But beyond that it’s that other 7.5% that’s just a kicker. |
Megumi | Right. |
Allen | But if you figure on 40%, and that’s conservative, let’s say it is too much. But if you have that money set aside, it’s a whole lot easier to see that you have extra money that you could do something with than trying to go out and scrape it together to pay your taxes because you don’t have the money. |
Megumi | Right. So then for people who are– just to clarify, like for myself, I do freelance work on the side, but because I also have my full-time salary, all of my side hustle income is taxable. |
Allen | Yes. All your side hustle profit is taxable. |
Megumi | Profit. Right. So hypothetically, I think this is the situation I asked you about before. If I teach a spin class or a yoga class, let’s say two times and then I make $200, and that’s my only side hustle, the only money I make. Even though it’s only $200, technically, I owe taxes on that. |
Allen | Yes. It is the responsibility of the taxpayer to claim all their income, whether or not they receive a 1099 from anybody or a W2 or any other form that reports income between you and the government. It is the taxpayer’s responsibility. Now, using that example that you teach spin classes, let’s say you teach 24 a year and you make $2400. Well, if you have a bike, that spin bike is an expense of your work. If you use the internet to get new clients, your internet costs, at least partially, if not wholly, would be deductible. If you use your phone to contact your students, your cell phone could be partially deductible. When you add all those expenses up, if you made $2400, your actual expenses, figuring that you didn’t write the bike off all at once, you may only owe taxes on $400. |
Megumi | Right. And that’s why we need an accountant to help us get that [laughter]. |
Allen | Yes. There are a lot of things that you can write off. If you take a physiology class on– or teaching a class on how to do it better, that type of continuing education could be deductible. |
Megumi | Right. |
Allen | Anything that helps make you better, more sellable can be deductible. |
Megumi | Got it. But it sounds like them for baseline purposes, it’s good to set aside 40% of your profit– |
Allen | Right. Of profit. |
Megumi | –for taxes. 40% of profit for taxes. |
Allen | Yes. As you’ve calculated it. Now, once you sit down with the accountant and they ask you all those other questions about your cell phone bill and your internet and bikes and any continuing education, any dues and subscriptions you pay, God willing you have too much set aside and you get a big bonus at the end of the year. |
Megumi | Right. Yeah, that’s true. Actually, this is a question that has come up as well. Now that a lot of people are working from home, even if they’re not doing a side hustle situation, they’re just working their full-time jobs from home, are they able to write anything from home off like internet, phone? |
Allen | No, they’re not. The tax law changes of 2018 took that away from everybody. If the employer chooses to reimburse them for some of those expenses, I haven’t heard many that do, that income would not be taxable. It’s just a reimbursement of expenses. But most people already have the internet at home and cell phones and stuff like that. And the employers have provided the computer and the special set ups for voice communications and things like that, and video. So unfortunately, there is no employee business expenses anymore that you can write off unless the company that you’re doing it for reimburses you and it’s at their expense, not yours. |
Megumi | Got it. Womp, womp [laughter]. |
Allen | Yeah, that was a tough one. |
Megumi | So then going back to freelancers, what is the key, or what are the key things that they need to keep in mind before and during tax season or even throughout the year? |
Allen | Well, the key thing is to put a spreadsheet together. And I’m working on one to give you now to put on your website so that it’ll be interactive, where they can put their information in. If it is a side hustle, then they will actually be able to put in what their salary is and what their withholdings are. So that’s a starting point. And then we add to that what your profit will be. And then it will calculate and let you know, based on what your withholdings are from your job, from your full-time job, the amount you should owe, or could owe, on your taxes. |
Megumi | Right. |
Allen | And if your side hustle is your full-time job, then this will calculate that for you within– it’s probably not going to be right on. But it’ll give you a rough idea. What people will have to input is their effective state tax rate. |
Megumi | Okay. So basically, just keeping that spreadsheet updated, whether you use this one or your own, making sure that we’re documenting everything throughout the year. |
Allen | Yes. Yes. The easy thing to do is just enter your information weekly because you’ll be able to remember what that expense was for. Write notes on your receipts. If your side hustle is big enough, having a separate banking account is key. And if your side hustle is your job, a separate bank account, because that’s the one – if you get audited – that you want audited. You don’t want to mix personal and business expenses together. That just makes it a mess for everybody trying to figure out what happened. |
Megumi | Right. And it’s hard to remember what that $10 receipt from three months ago was for. |
Allen | Oh, yeah. It’s much easier to write down now that that was for promoting. Or you gave $10 to the local school to have your name put up on the gym as a photographer for the sixth-grade dance as an example. That type of thing is deductible as promotions and advertising. |
Megumi | Yeah. So then for someone who is working full-time and has a side hustle, does it make sense to just increase the amount of taxes that they pay on their full-time job, change the withholding through their salaried job, instead of worrying about their side hustle taxes? |
Megumi | They can do that. Depending on how big their side hustle is. Once you start talking about having to pay thousands in extra taxes, well, if you’re talking about an extra $100 a week or every other week coming out of your pay, that could be a pretty significant change to your living. |
Allen | Right. |
Megumi | And it will come out automatically every payday. If you happen to have a bad month on your side hustle, it’s still got to be paid in. Now, the upside to that is that you may be overpaid, and you’ll get a refund at the end of the year. Or let’s say you have a bigger month than average. And business is cyclical. So some months are up off your base, and some months are below your baseline. So if you plan on doing $1000 a month on your side hustle, one month is $500, and the other month is $1500, you’re right in the middle of $1000. |
Megumi | Right. |
Allen | And you know what your costs are, and you need to pay in $200, or $400 extra a month in taxes. You can do that, but when you start talking that kind of money, where you’re talking thousands in taxes, it’s usually worth it to talk to somebody to make sure you’re on the right track. |
Megumi | Yeah, that makes sense. Another thing that has come up is these quarterly payments, right? Or I guess, semi-quarterly payments. Cause, if you think about it, your full-time job, they some taxes out of every single paycheck whether it’s weekly, every other week– |
Allen | That’s right. |
Megumi | –what have you. And so, who needs to worry about paying their taxes quarterly? And what is the process for that? What does that even mean? |
Allen | Well, quarterly estimated payments are taxes that you pay that are in extra if you have a job and a side hustle, or if you’re just self-employed working for yourself. You pay your taxes in quarterly. It’s four times a year, they’re not every three months. Matter of fact, your tax payment for the final year, your final tax payment with your tax return is due by April 15. Your first quarterly payment for the first quarter of the year is also due April 15 [laughter]. The next payment is due on June 15, which covers the period of April and May. The next payment after that is September 15, which covers June, July, and August. And then, the last payment is due your choice, either December 15 or January the 15 of the next year, the following year. And that covers September, October, November, December, for four months. |
Megumi | Right. |
Allen | So it’s just– it’s all over the place [laughter]. And if you’re big enough, honestly, I would be suggesting that you formed an entity. You form a company, and you become an employee of the company, and you draw a paycheck just like anybody else. And there is some business planning that goes with all that, looking at your business income and how it flows, so that you take this paycheck every week or every other week or every month, and the business cash flow so you don’t miss a paycheck. |
Megumi | Right. |
Allen | You may have some extra money sitting in the bank, but you have to treat yourself at that point as the employer and the employee. You’re giving yourself a paycheck, and you’re paying your taxes just like you would anyplace else. You actually are paying the same percentages, because you are the employer and the employee, so your tax rates are still higher. But you’re making those payments every time you write yourself a paycheck. |
Megumi | Got it. And there’s some form, right? On the IRS? So we can go to estimate– |
Allen | Yes. |
Megumi | –our quarterly taxes or something? |
Allen | Yes. So, it’s a 1040-ES, and every state has one that is some combination of ES, and Missouri is 10-0-ES, in Kansas, it’s K-40 ES. And Pennsylvania is it’s PA-40, something like that. |
Megumi | Sure. |
Allen | And if you know what you want to pay, you can go to the IRS website or one of the state websites, and fill out a PDF fillable form and then print it and send it in with your check. I’m not sure I’d use any of the websites to help calculate what you need to pay. Because as an example, the IRS W-4 form, which is how you tell your employees to withhold your taxes, used to be 1 page. Now it’s about 12. [laughter] And I get more questions from clients and their employees about how to fill out the form than–because it’s just, you almost need an accounting degree to do it. It’s just so hard. So the key is to know the basics. And honestly, I would say that what most people should do is, do what they’re good at – making money – and hire somebody to do what they’re good at – to help you through everything else. But you can prepare the forms and send them into the IRS in most states. And the IRS in most states, you can do that electronically. With the federal government, it’s called the EFTPS System. And you can register as an individual and go online and look at your account to see if there’s anything outstanding and to see if you owe money, if there are any notices, if they’re waiting on answers. You can also make estimated payments and tell them what it’s for, what type of form and things like that. And most states have that also where you can do it online. |
Megumi | Got it. Well, that makes it a little bit easier. |
Allen | Yes, it does. |
Megumi | So then at what point should people work with– and I know this is kind of related to what we talked about before, but at what point should people definitely work with an accountant versus working with one of these app services or filling it out on your own, if you really want to spend 11 hours doing that? [laughter] |
Allen | Yeah, the apps are interesting. I don’t think anybody should use the app unless you really have a grasp on the ease of it and can review it on your phone or computer. Anybody that has just a W-2, a 1098-T, or a 1098-M for mortgage, maybe 1099 dividend or 1099 interest forms, if you really have a grasp on being able to do it, I would honestly much rather see them buy the program and input the information, then trying to do it using an app. If you have a side hustle, I would say when you get above $2,000 in profits where you’re owing about $1,000 dollars in taxes, you need to raise your hand and say, “I need help. I need to find somebody.” And the key then is to who you find and where you go to look. And I’m sure that’s something we’ll get to here shortly. [laughter] |
Megumi | Well, so then let’s go there. How much generally is a tax accountant? Is it an hourly fee? Is it sort of a yearly, I don’t know, like a flat fee commission? |
Allen | Well, we’re not allowed to charge a commission. We’re not allowed to charge based on what we get you back. That’s highly unethical. And there are a lot of people out there you can go to. And I’m going to pick on some of the other ones, just three. H&R Block, Jackson Hewitt, and Liberty Tax may be owned by accountants, but the front-line people that do the retail side of the get them in and get them out tax returns are homeowners, for the most part, it seems like. They bring them in. They put them through a tax class and they pass the test and they get stamps. You’re now prepared and go out there and prepare taxes for us. |
Megumi | And how extensive of a class is this? |
Allen | It’s 10 hours. It’s enough to get you through a depreciation, knowing whether or not somebody is a dependent, where things go on the tax returns and things like that, but it’s not a business acumen to know what could be included as an expense or not on a Schedule C or Schedule F, which is for a farm. If you get into details with buying and selling stocks, or futures, or selling stocks short or long, and everything else, that that’s not what the course does because there’s just not enough time to go through that. And you only get that kind of experience by actually doing it. Or oil and gas leases. I’ve done banks tax returns. The ability to do those kinds of things. The returns that are done best by those services are the very easiest returns. And what most people don’t know is that their fees fluctuate so much from year to year because they use an on-demand billing system. So if they’re really busy right now, the prices are higher. If there’s nobody in there, your price is going to be lower. And I know this because I used to work for one of them. One season. And that’s all it took for me to realize that’s not how I wanted to– and it was a side hustle. It was a side job that I took to do some other returns. And it was a miserable experience. You would do a return for somebody that had a couple of kids, maybe a W-2, and maybe the spouse babysat or had a side hustle and did something. And the biggest thing that they had coming to them was the earned income credit. Well, this tax return, if you were prepared, honestly, took you maybe a half hour to prepare, collate, staple, get their signatures and everything else. And the fees were six to eight hundred dollars. |
Megumi | Wow. |
Freelancers & Side Hustlers! Don't forget to save about 40% of your profit for tax season.
Allen | And they’d be getting probably a $6,000 refund. The whole purpose of these credits is to get money into the hands of people that need it. And it seems like the purposes of some of these firms that prepare taxes was to take their piece of the pie. And I personally just disagree with that. Sure, my expertise, paying for my experience, because I can do a tax return maybe in 5 or 10 minutes, yes, you should pay for my experience and my knowledge, but not some exorbitant fee. When you have somebody who’s been maybe doing taxes for 10 minutes and they charge you $800 to do a tax return. I don’t care who reviews it, or the process or anything else; that’s just outrageous. You can go to the big firms, and you’d be hard-pressed to spend $800 on that tax return. So anyway. |
Megumi | I know this will vary by state, location, things like that. But in general, how much would a tax return cost then? Is it around $50, $100, $200? I know it’ll vary, but. |
Allen | Well, I get this question a lot and the problem is– it’s like somebody walking up to a doctor at a party saying, “Oh, I have this problem. What is it?” And to accurately diagnose something like that, you have to know the whole patient history. You just can’t say it’s a cancer cell, or it looks like this or looks like that. And the same thing with taxes. I can throw out a low number to get you in the door. But the problem is that I’m locked into that number without knowing all the information. So somebody that just has W-2s, maybe you live in Kansas and work in Missouri, my fees are $175 for that tax return. And you’re looking at two state returns, one federal return, and if they have W-2s, maybe some interest and dividends or sales of stocks and bonds when you get to investments, it depends on how many you have. But even then, my max fee is about $250. |
Megumi | It’s really not that much considering what you can help them get in returns, and on top of the liability issue– |
Allen | Yes. |
Megumi | –and the potentially future help that may be needed. |
Allen | That’s right. Where my fees tend to get a little higher, depending on how big the business is, is if there is a side hustle or there’s a business involved, because that’s where my liability for my signature really escalates. But there’s also the greatest potential there to help somebody save money. |
Megumi | Right. |
Allen | I’m a believer that everybody should pay their fair share, but only their fair share. |
Megumi | Yeah. Any final tax tips, whether for the general public or specifically for contractors, or people who have side hustles? |
Allen | Well, the biggest thing is to keep your folder system together and create an Excel spreadsheet, or something like that, to track your expenses. And do it weekly, and just stay on top of it. And if you do that, you’ll know what your cash flow is, and you’ll know what your profits are. Balance sheets and everything else are great when you get bigger, but you’re going to fail or succeed based on cash flow. So you need to know whether or not you have cash flow, because if you don’t, you’re out of business. Also, don’t sell yourself short. Honestly, a lot of people that do side hustles sell themselves short, or don’t realize all the costs that are involved with what they’re doing. |
Megumi | Right. |
Allen | But the government will, because if it ends up looking more like a hobby instead of a true side hustle they’ll disallow it. |
Megumi | I see. |
Allen | So you actually definitely want to have a profit motive if you’re going to be doing it. |
Megumi | And then if you do– if someone does listen to this episode and they decide they want outside help, what is the best way for them to find the best accountant for them, or program for them? |
Allen | Well, honestly, word-of-mouth. I mean, advertising is great, but I’ve never advertised. It is from doing somebody’s work, and they’re pleased with my work, and somebody asks them, “Hey, can you recommend somebody?” So I would ask somebody if they have somebody they could recommend. |
Megumi | Yeah. |
Allen | And for most side hustles, I will say this — I’m going to back up a little bit– for most side hustles, as you get bigger, the key is to find a mentor or two that can help you grow. And they can help you if you don’t already have somebody who can help you with your book work, payroll and taxes. That mentor, or even somebody like myself, who can help you figure out what your cash flow is, and what your price point should be. If you’re making coasters to be sold, you have some wood laying around, you want to make coasters, and you think you can sell them for $3 each, without realizing that you’ve put four hours into each one of them [laughter], so you’re making 80 cents a coaster for your time, not thinking about what it costs you for any of the material or tools that you put into it. |
Megumi | Right. |
Allen | Anyway. [laughter] |
Megumi | That’s a good point. |
Allen | But a business mentor, somebody that can help you with your books, and somebody that can help you with things you haven’t thought of, or maybe a direction you can take your side hustle, or introduce you to people. Those people will probably be the ones to help you find a good tax accountant, or somebody that can help you with that. |
Megumi | Thank you so much, Allen. This was really helpful. And I hope that everyone feels– I mean, it’s still like this confusing world, but I hope that [laughter]– |
Allen | Yes, |
Megumi | –people feel, at least a little bit more comfortable with the language, and understanding at what point they need to get help, or at least how much they should be putting aside. |
Allen | Yes. Well thanks, Megumi, it was nice talking to you. |