I believe that being an entrepreneur is an incredible profession to choose. Creating an idea, bringing it to market, and getting the opportunity to change people’s lives for the better is a craft worth pursuing.
It takes a lot of skill, perseverance, drive and a bit of luck to build a company that provides a place for employees to flourish and grow, while meeting a need for society.
Watch why I explain why I think being an entrepreneur matters.
Thinking about raising capital? It’s a long journey and not for everyone. There are right and wrong ways to go about it, and there are better times to raise vs. going at it alone. Here are my thoughts on when you know it’s the right time to raise money.
Have you wanted to teach online, but didn’t know where to start?
I know, I know. I hear you. It sounds like a great idea, but how do you get going?
I’ve put together this post to help TakeLessons Teaching Partners prepare to become an online teacher.
Hi, my name is Steven Cox. I’m the Founder and CEO of TakeLessons.com. We’re a community and marketplace where consumers find, book, and take lessons ranging from music to languages to career education. Our instructors cover diverse subjects ranging from sewing and parkour; from Excel and Powerpoint, to SAT prep; from guitar and singing to conversational French and magic lessons.
Over the past 9 years, our team has helped over 100,000 freelance instructors and studios market themselves, earn more money, and more importantly, make a real difference in the lives of people around the world.
Here’s what you’re going to learn in this post:
The benefits of teaching online
The pitfalls when you teach online, and how to avoid them
How to get your physical space set up
What equipment you’ll need to deliver a WOW experience
How to help students get set up for their online class
Throughout the post, you’ll also see quotes pulled directly from our TakeLessons Partner Community that will give you their tips and feedback about online lessons.
Other instructors who are not part of TakeLessons will also find the post valuable, but it was specifically designed to help professional TakeLessons instructors.
This post doesn’t cover how or what to teach. It’s assumed the instructor already has course materials prepared.
Let’s get started!
Why Teach Online?
TakeLessons Teaching Partners have an internal passion for helping students learn, grow, and become the best they can be. Years ago, most private lessons instructors taught students in their city. But the problem was that there may be an oversupply of instructors or an undersupply of students. In either case, this makes it difficult for an instructor to make a good living doing what they love to do.
Today, the world is shifting into a new paradigm. More and more people are opting to learn online. In a white paper by The Learning House (2014), it’s estimated that almost 70% of college students are either studying fully online, or have at least some of their classes online. Kids are growing up with learning online not as a novel experience, but a familiar and common reality.
New learning technologies are making it easier to connect, communicate, and collaborate. Each year, companies compete to deliver faster Internet connectivity at lower prices. New breakthroughs in data transmission and an increase in camera quality helps provide a better learning experience than ever before.
Ruth. Instructor: Illinois.“I need some advice on how to set up for online lessons! I have over 35 students that are all in home or in studio, however, I will be moving to Colorado end of March and would love to keep as many as I can! Any advice on best platform, cameras, what I, or the student will need to have successful online lessons? Thank “you!!
At TakeLessons, we have continued to see an increase in student demand for online lessons. In 2013, online lessons made up less than 2% of total sessions. In 2016, it will be over 35%. By 2018, the majority of sessions will occur online.
Let me say that again…
ONLINE LESSONS GREW FROM 2% IN 2013 TO OVER 35% IN JUST 3 YEARS
Online Lessons Create a Big Opportunity
In some categories like Tutoring or Languages, students opt for an online experience almost 80% of the time. In other more traditional categories such as music or sports, online lessons still account for 15-20% of the business.
What’s more telling is that when we compare retention rates for online students vs. in-person students, we see no difference in retention between the two. This tells us that students are benefitting from online at about the same level as in-person.
Reina. Instructor: San Diego, CA. I LOVE online lessons. I teach voice to about 15-20 students using my iPad. There was a learning curve at first and I had to readjust how I teach some subjects but now that I’m in the swing of things it’s awesome. And, my online students are progressing at the same rate as my in studio students.
Students and TakeLessons Partners tell us they chose online over in-person for several reasons:
Convenience. Online lessons, as opposed to in-person lessons, can save 30-45 minutes in drive time. Instead of sitting in traffic or rushing to be on time, both students tell us that online simply makes it easier for them to get to their lesson and helps them stay more committed to the process. That extra 30-45 minutes is very important to a busy mom who is rushing between multiple activities for several kids. We also heard that students were more likely to find a slot that was more preferred when opting for online.
Choice. The power of online is that consumers no longer have to choose from the best person in their area. They can choose from the best instructor anywhere in the world. This allows for a more personalized experience for the student because they are more likely to find the instructor that best suits their individual goals and tastes.
Class Tools. Instructors shared with us that they find value in the tools associated with online lessons. They now can share digital documents back and forth and record lessons for students to reference once the class is over.
Leverage. Teachers also like the ability to leverage their time by teaching more than one person. Theoretically, this lowers the per-student price while maximizes instructor income.
Expanded Reach. While online gives more choice to students, online classes gives instructors a way to expand their reach. With local lessons, an instructor is tethered to the 2-10 mile radius around their neighborhood (and in the case of a city like New York City, the radius is much smaller). With online, an instructor can attract students from all over the nation and the world. As an example, during the month of February 2016, TakeLessons placed 19 students with the same Partner. None of the students were within 100 miles of her. This teacher – and many like her – are able to address a larger market size by using the power of online.
In summary, the world is changing and consumers are getting more comfortable learning through the web due to convenience and choice. TakeLessons Partners who establish themselves now as an online instructor will yield results for years to come. Those that do not may miss one of the biggest opportunities of their teaching career.
How to Overcome the Challenges with Teaching Online
When we spoke with TakeLessons Instructors, there were a few challenges with teaching online. In this section, we highlight them and provide suggestions on how to solve for them.
Challenge 1: The Quality of the Online Lessons Experience
Since this is a new experience for many students, you have to overcompensate to ensure a high level of quality. You only have a couple chances with most students, so make sure your mindset is going above and beyond in those first few sessions. Make sure your students have a super-high quality experience.
Here’s the formula: High quality means a better experience, which creates a better perceived value. Of course, more value means higher retention.
Focus on a high quality online teaching experience
For some teaching verticals, such as music or sports, there are nuances that better served by in-person coaching. The stance of a hitter, the swing of a golf club, the hand position on the frets of a guitar, and the posture on a piano. All of these are examples of subtleties that make in-person teaching a wonderful experience.
If you teach music, being able to play along with a student is important. Unfortunately, we all have to deal with latency, which is the small amount of time it takes to transfer audio over online learning platforms. That’s still a real issue. However, as systems continue to speed up, eventually the latency gap will get smaller and smaller.
Sometimes, an in-person experience is preferred, but it isn’t an option. So, the next best thing is to have an experienced instructor helping the student online.
Nicholas. Music Instructor from Atlanta, GA.“You lose out on the ability to touch your student’s arms to point out what muscles they should use (cello/violin/viola) and a bit of that personal feeling that only in person lessons have – but it is a great way to save money and time for both parties. I have found it to work well. You also have no traffic concerns – which is the biggest plus. I like it best when I have met the student in reality first, but that is a luxury. Meeting for a few in person lessons, even if it a bit inconvenient, seems to give the online lessons a lot of that missing personal feeling.”
Your goal, as an online instructor, is to apply your subject matter expertise to the new online medium and find ways to increase the overall learning experience. This may mean that you have to supply additional download material or perhaps learn how to angle the camera better in order for you to see how to help the student. As you become more adept to teaching online, you’ll find tips and secrets that will help your students get the most from their lessons.
As with any class, most of the quality of experience is determined by preparation and commitment. The more the instructor is prepared and the higher the level of commitment from both sides, the better the lessons will be.
Challenge 2: Online Classes Can Be Impersonal By Nature
Online, as a medium, is not as personal as, well, in-person. There’s no substitute for being able to stand with a student and guide them through a learning experience.
Kathy. TakeLessons Instructor.“I agree wholeheartedly with Alexis. I have online students and as hard as I try to duplicate the in-studio experience it’s not the same. That being said we live in the age of technology and we have to adapt or miss out on an entire demographic. Make sure your Internet connection, and theirs, is the fastest available. This helps to eliminate dropped calls and delays. Also, I suggest both teacher and student using an external Mic such as the snowball Mic, and external speakers to enhance the sending and receiving quality of the music.”
How to Make Your Classes More Personal. That being said, here are a few tips that will help you make your online lessons a little more personal:
Your studio Setting can help make it personal. Lights, Camera, Action! Set your studio up in a way that lowers the inherent disadvantages of online. Have a great camera with high definition. Arrange your lighting to remove shadows and make it easy to focus on you. Lower background noise from fans, heaters, pets, and other people that disturb the experience. By taking the time to set your studio up the right way, you’ve allowed yourself to focus on the connection with your student.
Be Real. Just as you would do with an in-person class, build bonds you’re your students through being genuinely interested in helping them succeed. Tell them stories of your own struggles and how the lessons you learned can be applied to their learning process. Set aside the time at the beginning to learn about the student’s WOW’s (Wants, Obstacles, and Wins). Find out what they want and the obstacles standing in their way. Help them get wins with every session and encourage and celebrate as many wins as possible.
Record the Classes. At TakeLessons, by the end of July, you’ll be able to record the student’s lessons for them and store them in ths students’ TakeLesssons account. This is huge. It gives you more ‘face time’ with them – even when you’re not around! Studies have shown that the more someone interacts with another person on a screen, the closer the psychological bonds. So, record those classes and build that relationship.
Your Attitude Shapes the Experience. Finally, remember that your students will pick up on your attitude. If you have a negative view of online lessons, your student will struggle with the experience. However, if your actions, body language, and words convey confidence and acceptance of the platform, they will mirror your attitude (most of the time) and have a wonderful experience. So, commit to viewing online lessons as an incredible way for you to help others and expand your business. Your students will thank you!
The largest area of concern we heard from instructors were the myriad of technical issues involved when getting set up to teach. Not only do you, as the instructor, have to get your side right, but the student has to have their side set up as well.
There’s no question that an instructor who is new to online classes will face hurdles – especially if the teacher is, ahem, “technically challenged”. The best single piece of advice I have for you is to pick one platform and master it. Don’t try to use several teaching platforms, each with their own nuances. Pick one, get good at it, and scratch those technical challenges off your list.
To help you get set up the right way, check out the next section.
How to Set Up Your Online Teaching Studio
To get your online classes studio set up just remember the Two E’s: Environment and Equipment.
The “Three E’s” give you a guideline and checklist on the easiest way to get your online teaching studio set up for online classes. Let’s cover each of them.
Your Physical Environment
The first step in getting your online studio set up is to establish the right physical environment. I’m assuming most of you are TakeLessons Instructors and have a physical studio set up. Many of you have the studio set up in your home. That’s great! You’ll use that same space for online lessons.
Susanna. Instructor from Pittsburgh. “I teach online lessons and use the following. I have a Mini Mac plugged into our Bose system. I use a Logitech webcam and have a Blue Yeti microphone. I use our TV for my screen. I teach out of my living room and I use a land line directly connected instead of wifi. I also have a wireless mouse and keyboard that works with the Mini Mac. I also have a tripod I put the webcam on so I can adjust the height for lessons. I teach strings, so I stand for violin and viola lessons, but sit for cello lessons. I also have two floor lamps I got from Ikea I use to light the room when I am teaching online. Otherwise my room is too dim.”
Here are some helpful tips to getting the right online studio set up.
Pick One Place. Pick one place in your home that you can use for online lessons. This could be a spare bedroom, an office area, or even your living room if you must. Just remember that the area should be quiet and give you the privacy you need to complete your sessions. But what do you do if you have a roommate? TakeLessons Partner, Rosita Ruiz, suggests that you hang or tape a sign on the door letting your roommate or spouse know whenever a session is going on.
The background. Make sure that your background is uncluttered and free from distraction. If you can, set your camera up to where the focus is on you. The less distraction the better. Some instructors buy a roll of solid paper from a photography supply store and hang it in the background. This gives a more professional look. While you’re at it, make sure your computer desktop is professional and clear of clutter–you’ll be glad you did when you start screensharing.
Check out this video for more tips about the background.Here are some helpful tips to getting the right online studio set up.
Your Clothes. Depending on your background, make sure your clothes and skin contrast against the background. If you have a lighter background, try slightly darker clothes, and vice versa. If you’re shooting against a white wall, then avoid wearing a white shirt. It makes you look weird.
Lighting. Your studio should be well lit in a way that provides a soft light for your camera to pick up and removes shadows. Here is a great video from the gang at Wistia that will help you set up an inexpensive light source.
Here is a picture of our DIY lighting set up we put together in a few minutes. It cost us less than $20. For this demo, we just attached the lights to two chairs pointing at the subject. Notice, the lights are behind the laptop (where you’re giving your online lessons).
$20 Lighting for Online Teaching
Here are the lights aimed towards the laptop, but behind the laptop. It provides a nice hue.
Noise, Echo and Reverb. Be aware of any external noise that would create distraction. Things like fans, heating ducts, appliances may create unwanted noise.
Also note that your room may produce echo that will make it more difficult to hear you. We suggest you ‘deaden the room’ a bit by using sound dampening tiles. If you don’t have access to those, try furniture with soft surfaces (cloth vs. metal, for example) and blankets.
Step 2: Getting the Right Equipment
Part of getting set up is to have the right equipment for success. For this section, I’m assuming you will be using TakeLessons Classroom as your online education software. Here’s what you need:
Computer: In my view, there are three things in life you shouldn’t skimp on: a great bed, comfortable shoes, and a fast computer. Get the fastest, latest computer your budget will allow. I prefer laptops to desktops for the portability, and I prefer Macs to Windows-based. The reason is that I’ve found Macs to be more reliable and easier to use. Both platforms will work, but a great 15” MacBook Pro is my choice. A 13” works well, too.
Opt to get the Belkin ethernet adapter that allows you to connect directly into your Ethernet on your modem or router. You’ll have better success if you ‘hardwire’ directly to your Internet source vs. going wireless.
Susanna. Instructor from Pittsburgh. “Most of my students use a webcam with their computer or laptop. They need to be in a well lit room and will need to be further back from the camera than they think. I do have a student who uses her IPad and sets it up on another stand or something so I can see her. Another student set up a webcam on her TV. So far, it has worked well for me. I have 11 online students so far and picked up all of them in the last two months from TakeLessons.”
Windows 7 or newer with the latest updates installed
Dual-core 2.4GHz CPU or faster (2GB of RAM recommended)
Video Card: at least 64MB of video memory
Sound Card: at least 16-bit
Cable modem, DSL, or better internet connection
A working onboard microphone, or externally connected microphone
A working onboard webcam, or externally connected webcam
Mac users should have:
Mac OS X 10.8 (Mountain Lion) or newer with the latest updates installed
Intel processor (2GB of RAM or better recommended)
VIdeo Card: at least 64MB of video memory
Sound Card: at least 16-bit
Cable modem, DSL, or better internet connection
A working onboard microphone, or externally connected microphone
A working onboard webcam, or externally connected webcam
Get the Right Browser
Have you tried using GoToMeeting or Skype but gotten stuck because you and/or your student had to download software or install it first? It’s a real pain.
TakeLessons Classroom solves that problem and does not require you to download any software. We produce the session inside of your web browser.
Use Google Chrome as your browser. That’s all you need. TakeLessons Classroom doesn’t support Safari or Internet Explorer.
What about Tablets?
Tablets can work, but we recommend using a laptop. With tablets, you have to connect over wi-fi, which can be spotty. If you must use a tablet with Chrome, you can, but it may be a less-than-desirable experience.
Your biggest point of frustration could be with the speed of your Internet being piped into your studio. Think of your computer as a car, and your ISP as the freeway. You can have the fastest car on the market, but if the freeway is narrow and clogged with other vehicles, you’ll never be able to race ahead. It’s the same thing with ISP’s. Get a good one with plenty of space (bandwidth).
Here in San Diego, I’ve chosen Cox Cable as my Internet Service Provider. They have the most reliable, fastest service for the price. I pay $80 a month and can regularly host video calls with 2-3 people with no issues.
Let’s assume you plan on teaching private lessons and small group classes. When choosing your ISP, you’ll want to look for speeds where download is at least 2Mbps and your upload is 512kbps.
“Look for minimum speeds of 2Mbps download and 512kbps upload”
I know it’s more expensive to order faster service, but look at it as an investment (and it’s probably a tax write off for you). You should be able to make up the cost of Internet for a year with one extra happy client that stays with you because they’re having a wonderful experience.
When you are teaching live, close all other applications that are connected to the Internet, other than the browser that you’re teaching through. This includes messenger apps, Netflix, YouTube, etc. If you are downloading or transferring files, cancel the transfer until after the video session is over.
Also, as I mentioned above, be sure to ‘hardwire’ into your modem/router. This means attach the Ethernet cable directly to your laptop using a dongle (for a Mac). This normally beats speeds you get from connecting wirelessly.
I’m asked all the time whether the teacher can use the webcam that came with their computer. Technically yes, you can use it, but the video quality for your students will suffer.
My recommendation is to buy the Logitech C930e. It’s a HD camera that plugs into your computer’s USB port. You’ll be happy you upgraded. It costs about $95. If you decide on another camera, make sure it has a minimum resolution of 1280 x 720.
Here is the difference between the internal MacBook webcam (on the left) and the Logitech C930e (on the right). I didn’t make any adjustments whatsoever. It’s pretty obvious which one rocks.
In addition to the Logitech, I recommend you use a little program for the Mac called WebCam Settings. It helps you dial in your webcam to give an even greater picture quality. It costs $8 and can be found at the Apple download store.
Finally, remember that your computer screen is below eye level. So, when you’re listening to your student, it’s OK to look at your computer monitor. However, when you’re speaking back, do your best to look directly in the camera as much as possible. This gives the student a good feeling that you’re speaking directly to him or her. If you look into your monitor all the time, it will make it just a bit less effective.
I’m a big fan of the Blue Yeti USB microphone ($110). It sounds great and allows you to choose between several settings, depending on your need.
It has a cardioid setting, which is better for voice alone where the instructor is speaking into the mic (think language instruction, tutoring, etc.).
If you’re using instruments (such as guitar lessons), then switch over to the Omnidirectional setting, which will allow the mic to pic up other sounds surrounding the mic.
TakeLessons Instructor, Phillip Fullerton, also points out, “You can use it with the attached tabletop stand or you can attach it to a mic stand, which makes it easier to adjust the position of the mic“.
Another cool feature about the mic is that you can plug your portable headphones directly into the bottom of the mic. This allows you to get a great mic and a separate pair of headphones.
If you don’t need the Omnidirectional setting, then check out the Blue Snowball. It’s another great mic, and it’s priced below $50.
I won’t get into all the details of headphones, but get a decent pair. Some people prefer over the ear headphones while others prefer in-ear. Really, buy something that feels good to you. You’ll be wearing headphones for hours a day, so a decent pair that is light and sounds good will help with ear fatigue. Headphones are highly recommended if you plan on teaching group classes online–it helps prevent feedback when multiple students start speaking at the same time.
I favor brands like Shure, Audio Technica, or Sony. Fender also has started making in-ear monitors that professional musicians use on stage. Prices start at $99 for the Fender headphones.
If you’d rather get a headset with headphones and a mic in one unit, then pick up the Logitech ClearChat USB Headset or the Plantronics PLNAUDIO478. Neither will have the quality of a good separate mic and pair of headphones, but they are convenient and cost-effective.
Now, let’s talk lighting! So many people overlook this critical component. You can have the best mic and camera, but if your lighting sucks, then the student experience will also suck.
I’ve personally made the DIY lighting kit that was suggested in this Wistia video and, honestly, it works pretty well! It’s really ugly, but if you’re on a budget, start here. I was able to rig up a set with great bulbs for about $30.
Finally, here is a short video shot on an iPhone that also shows you the difference of having even just a couple cheap lights.
The next step up would be a Softbox lighting kit. This provides you with beautiful, soft and even light. Depending on how bright the rest of your studio is, you can opt for a 700 watt system for under $80.
You might also consider the Studio Pro 2,000 watt softbox system. I purchased this one and really like it. I can dial up or down the amount of light that I need for every situation. It’s more costly, but it’s more versatile. ($138.95 for two). You can also just start with one 1,000 watt softbox ($68) and place it facing you, but behind your webcam.
If you want to move one more step up, then I recommend buying a LED light kit. The benefit of LED is that they last longer, use less electricity, and give off almost no heat. They are more expensive, but if you’re planning on doing a lot of online sessions, staying comfortable and not worrying about the heat may be just what you’re looking for. Prices range from $150 for one LED light panel to $300 for two.
Helping Students Get Set Up
When helping students, first understand how fast their internet connection is. You can have them run a test athttp://www.speedtest.net/. Hopefully, they have at least 1.5Mbps Internet speed. When speeds drop below 1Mbps, there is a higher risk for dropped sessions.
While you can’t control what speed they buy, at least you know going in whether you can expect connectivity issues.
Also, coach the student on how to get the most from their connection. If the student is on an online session, their family members should not use streaming services like Netflix or YouTube until after the session is over.
The rest of the student’s equipment is dependent on what they’re learning and their budget.
If the student is mostly participating through audio (subjects such as languages) or mostly watching you (arts and crafts, magic, Excel or Powerpoint training), then you can get by with cheaper equipment. The webcam in their computer will work, as will their audio. They can also use standard earbuds, but make sure the earbuds have a mic. Most students will already have a decent pair of earbuds with a built-in microphone.
Here at TakeLessons, we’re certainly seeing an overwhelming movement towards online lessons. It’s our goal to help you make a great living teaching, and I hope this post has helped you understand the benefits of teaching online while avoiding some of the pitfalls. You also learned how to set up your studio environment and what equipment might best serve your needs. Finally, I gave you some tips on how to help your students get set up for online lessons.
If this article has been helpful for you, I’d appreciate if you share it out to other instructors.
Recently, I did an interview with Mark Wilson, a pro tax accountant. Our goal was to help our tens of thousands of freelance educators, instructors, artists, musicians, and creatives with tips and tools they could use to help prepare taxes. The video below is the complete segment, followed by a transcript in case you want to follow along.
Transcript – Steven Cox – Let’s Talk Taxes
STEVEN COX: Hey, we’re live. Welcome, everybody. It is 9:00 and we are doing a webcast for you today called Let’s Talk Taxes.
MARK WILSON: Nothing more exciting.
STEVEN: Man, you like get up early in the morning. What do I want to do? I want to talk about taxes.
MARK: Yeah, this is usually how I put my wife to sleep at night – I talk taxes.
STEVEN: That’s awesome. Hey, so I’m here with Mark Wilson. Mark is a one million year veteran of tax law. He’s been practicing for about 20 years in San Diego dealing a lot with personal taxes, corporate taxes, business taxes and helping people just like you learn how to pay their taxes appropriately without, of course, paying too much. I’m sure you find a lot of folks end up paying too much for taxes?
MARK: We see that or they take too many deductions and then they’re in trouble so it goes both ways. But yeah, a lot of people pay too much in taxes.
STEVEN: This is one of the most important areas for you. I think as you’re looking at yourself as a small business, you are running a business, and one of the keys is not only the income side of the business, generating income, the second key is making sure you’re controlling your expenses, and the third piece I really believe is the management of taxes and knowing how to deduct what the government has accommodated and given you the benefit of knowing and actually taking these deductions means one of two things. Either if you know this information and this knowledge the money ends up in your pocket. If you don’t understand these things and you don’t know this the money ends up in the government’s pocket. So the question for you is which pocket do you want your money to go in?
MARK: Hopefully their pocket.
MARK: When we meet with entrepreneurs we talk to them about what their goals are and what they’re trying to accomplish. Often they are paying too much in taxes and as a general question we always get – what can I deduct. What type of expenses can I deduct? From a 30,000 foot view, the easiest way to answer that question is anything that is related to your business, anything you spend money on to make money will be deductible. So that’s true for most items but I know we have some questions that maybe people have sent in but we can go through some of those.
STEVEN: Sure. Yeah, we got a ton of questions in from the audience, very close to 100 questions. Obviously we won’t be able to answer all of those questions but I’ve divided them up into three main categories to help us out. We’re going to cover all three of these. At the end of this presentation you are going to be armed with more knowledge than you’ve ever had about taxes.
First, I want to also start by saying that TakeLessons, Mark, or Mark’s company is not giving you personal advice. We highly recommend that you get your own tax accountant to handle your own personal situation. Everyone’s situation is different so as a disclosure, indemnification, we’re not personally giving you tax advice. My attorney said we had to say that.
MARK: That’s important. That’s important to say.
Three Areas to Cover
STEVEN: Cool. What we’re going to cover, there’s three main areas. The first one is questions about company structure – do I need an LLC versus a corporation, those types of questions. The second set of questions was on deductions, one of our favorite topics. We’ll dive in deep onto that. Then the third is around organization – how do I get organized so I’m sure that I pay as few taxes as humanly possible. We’ll over those in that order.
Thank you for all your questions. First of all, we’re going to start with just a TakeLessons specific question. This came in from one of our tutors, Barbara, Barbara Ellis Warrock. I’m not sure where Barbara’s from but she wanted to know, “How do I make sure that TakeLessons is paying my corporation instead of me?” This is tied… We have instructors fill out a W-9 form and there’s some items on the W-9 that if they fill that out correctly then they’re paid as their corporation instead of them personally. What do they need to check there?
MARK: The most important part is put the right tax ID number on that form. As long as they put the corporate tax ID number on that form and give that to you guys, then they’re going to get a 1099 with the corporate tax ID.
Another question a lot of people have related to that they’ll ask is, “Is my corporation even supposed to get a 1099?” The answer is they’re not required to get a 1099 if you’re a corporation. However, it doesn’t hurt if you do so a lot of companies best practice is they’ll send out 1099s to everybody that they cut a check to over $600 and they’ll send out a 1099. If you’re a corporation, just make sure you get the right tax ID number on your form when you fill it out and send it in to you guys.
STEVEN: That’s normally called an EIN number.
MARK: Yes, your EIN tax ID number. Yes.
STEVEN: Perfect. Let’s jump into company structure. We had a bunch of folks, Michelle Arthur-Cohen, Cheryl O’Neil, they all asked around… I’ll read you the general thoughts then we’ll dive into it.
The questions are how do I go about deciding what sort of business entity do I chose, what are the pros and cons of each, are there things I can deduct if I’m a sole proprietor versus an S Corp versus C Corp, these sorts of questions. So for most of our folks, they’re single source businesses. How do they go about deciding which corporate structure is right for them?
MARK: Most individuals, it really has a lot to do with how much money they’re making. It’s a big part of it. If you are an individual and say you’re making $50,000 in self-employment income, generally speaking it’s probably better that you stay a sole proprietor or if you’re worried about any kind of liability being an LLC. The reason is because there’s additional costs that go into having a corporation and there’s additional costs for having an LLC.
But if you’re going to make more than that, as you start to get to the $70,000-100,000 range, we’ll start looking at whether or not they need to be an S Corp. The reason is individuals, sole proprietors, will pay self-employment taxes on all their net earnings. LLCs will as well. They get taxed the same way that a sole proprietor except they get an additional tax but what you get with an LLC is you get limited liability. So if you’re worrying about being sued or you want to protect assets, there’s risk in your business, then that’s a reason to have an LLC.
An S Corp is a really good option if you’re going to be making more than to that $50,000. Fifty thousand is right at that borderline but more in that $70,000-100,000 and above because self-employment taxes equal 15.3% of your net income. What that means is whatever you’re left with at the end of the day, whatever your net number, the number at the bottom, you’re going to pay 15.3% self-employment taxes plus your ordinary income taxes.
So if you are in the 15% tax bracket, you’re going to pay 15% tax on that money plus you’re going to pay 15.3% in self-employment taxes plus whatever your state income tax is, depending upon where you’re at. That’s really expensive earnings. It’s the most expensive earnings, the most tax, the highest tax you’re going to pay.
Self-employment taxes are really just Social Security and Medicare. When you work for somebody the employer will pay half of Social Security and Medicare and then you pay the other half and it gets deducted out of your net paycheck. You don’t have to do that if you’re an S Corp. The net income of the company will flow through to you and you’ll pay tax on that money but it won’t be subject to the self-employment taxes.
The catch is you have to pay yourself some W-2 earnings. It makes it a little bit more complicated. You have to run payroll now that you may not have had to run before. You have to file a corporate tax return so you generally have to pay somebody like me to do a tax return like that and you’re going to pay a minimum tax to the state. If you’re in California, it’s 1.5% of your net income or $800 – whichever is more.
It really comes down to how much money are you making and at what point should you switch from being a sole proprietor to an S Corp. I’m not a huge fan of LLCs in this type of structure because you’re going to pay tax on that money and there’s no real tax savings in the LLC. You only are protecting yourself from litigation. You get that same protection with an S Corp.
A C Corp is really, that’s if you’re going to have foreign investors or if you think you’re going to take your company public or there’s going to be some other money raises or other type of things. That’s reallya more complicated structure and you pay taxes twice in a C Corp. For a small company, smaller individuals, and I think our audience we’re talking to today, it’s either a sole proprietor or S Corp are the two decisions and then you can go from there.
STEVEN: Just for clarity, for our folks out there, you’re recommending two structures. The first one is sole proprietor in which you don’t file and set up a corporation per se and the benefits of that is first of all it’s cheaper, right?
MARK: It’s cheaper administratively, yes.
STEVEN: Cheaper, it’s less forms to fill out, the income passes through directly to you. The negative to that, the big one is your liability. With a corporation there is a shield, a legal shield, so if something happens people can sue the corporation instead of suing you personally which is something to keep in mind. I don’t know if anyone out there has been sued or whatever the case is for someone in their home or something like that. I could see the benefit of that. From a straight tax perspective, it might be more beneficial if you’re making $50k or less, $60k or $70k even, to go personal.
MARK: The reason is because the taxes that you save by not paying that 15.3% get eaten up in fees to CPAs and to paying taxes and paying payroll companies to run your payroll so the administrative cost is a little bit higher on the S Corp. But if you’re making $100,000 a year that’s $15,000 extra in tax you’re going to pay and you certainly won’t have that in administrative costs. So that’s the decision.
I think part of that question you asked – are there items that you can deduct as an S Corp or an LLC that you can’t deduct as a sole proprietor. The answer is no. If it’s deductible from one entity it’s deductible for another entity. Businesses can deduct pretty much the same across the board regardless of the entity structure. That’s a common misconception that I can deduct more if I’m a corporation versus if I’m a sole proprietor. We hear that a lot.
STEVEN: That’s good information. That takes us to our second topic. First of all, Maria, are there any questions so far on that particular topic?
MARIA: There is a question from Jill. Is there any sort of litigation that we, as lesson instructors, should be worried about?
MARK: That’s a great question.I would answer that by saying talk to your attorney.
STEVEN: Talk to your attorney, right.
MARK: That’s a really difficult question to answer because people can sue you for anything that they feel like suing you for. I don’t know if you’re in an environment that’s super risky.
STEVEN: Obviously you want to make sure that if you’re running your own studio that you don’t have things laying around on the floor so people can trip on them, these sorts of activities. Just run a good business would be the best thing and obviously have your own liability insurance.
MARK: I think most liability in service related work regardless usually comes down to billing. People don’t want to pay a bill or there’s something you can deal with without attorneys. Anyway, for protecting assets, that a decision that I think the viewers have to make.
Tax Deductions for Freelancers
STEVEN: You talked a little bit about deductions, Mark, and this was the area where we got the most questions so we’re going to dive into some of these particular questions. The bottom line is as you’re out there creating business and you’re producing income there are costs associated with producing that income. Well dive into details, normally those costs are deductible off of your income.
We’ll jump into a few questions. The first question was along the automobile. Rosita, Patrick, a whole bunch of people had asked questions about cars. Let me read through a few of these and then we can jump into car deductions. If I’m a 1099 contractor, which is what we are here at TakeLessons, can I write off gas when traveling to a student’s home to teach? How do I figure out mileage to and from a client’s home? Can I write off part of my car payment? What about insurance? What if I wash my car? Anything to do with automobile, how do you normally advise clients?
MARK: Automobile is a special type of deduction so there are special rules associated with automobile deductions. The IRS, and California adopts their rule, says that you need to have a mileage log to take a deduction and if you’re driving your personal car for work then the mileage that you track is going to be the source of allowing you to take that deduction. So you’re supposed to keep a mileage log.
You get to deduct either your actual expenses related to that percentage of business use… Youtake the total miles you drive and you take the total business miles and you come up with that ratio and then you multiply that ration times either your actual expenses or whatever the IRS your deductible per mileage deduction is.
You get one or the other. Somebody asked, “Can I deduct the gas?” The portion is for business use. You would take your total expenses for all your gas per year and then you would multiply that ratio times that. Or you take the IRS deductible allowable per mile you get to deduct. Am I explaining that right? I think I got confusing there.
STEVEN: Let me grab a board. I’m going to write this out just for our audience members. Look at this. We’re going whiteboard on you. I want to make sure our folks understand. Maria, make sure that you can see my writing on this. Okay?
Let’s say I drive 1,000 miles during the year. Can you see that? A thousand? Or no? If you can’t that’s okay. Maybe I can just talk about it.
MARIA: You might need to make it darker.
Steven Cox and Mark Wilson helps freelancers with taxes
STEVEN: We’re going to make it bigger. I drove 1,000 miles. Out of this 1,000 miles, half of the time I was using the car to go back and forth to clients. So, I have 500 miles that I’ve used to drive back and forth to clients to go teach them. What this means is that basically half of my car was used in business expense. So that equals 50%. What that means then is if I have spent $100 on gas I can deduct 50% of that, or 50 bucks, off of my taxes and auto insurance or car washes or anything like that at all.
MARK: Repairs and maintenance, vehicle registration, all of that.
STEVEN: This is why it’s really important to keep the auto logs because if you’re using your car 60% of the time or 50% of the time or 100% of the time for business, all of those expenses in accordance with the percentages can get written off against your income.
MARK: Every year I have clients come in. I’ll say how many miles did you drive last year as a deduction and they always tell me this.
STEVEN: Same as last year.
MARK: Yeah. I don’t know if you can see that or not. This is not enforceable with the IRS so it’s really important to keep a mileage log. It’s the only way to guarantee that you get the expense. We’ve had lots of clients be audited for this. Creating a mileage log after the year is over is really difficult but if you keep a log during the log it’s not that big of a deal. It’s an important expense and it’s usually a pretty good one.
More times than not, the IRS published deductible per mile deduction is generally comes out ahead. So if you just keep track of your mileage, take that as your expense. A lot of people want to make their lives easier. They don’t want to keep all their gas receipts and all of their payment and all of that. If you just keep a mileage log then you can take that against whatever the IRS published rate is. I think it’s right around 32 cents.
STEVEN: Mark, if I’m not mistaken, the big key like you’re said and it’s very important, keep the mileage log. Right? As long as you have done that then at the end of the year you can work with your professional tax advisor and they can take a look at your expenses, they can take a look at what the IRS allows, and then guide you on which path to choose.
MARK: That’s right.
MARIA: John mentions that there is software and smartphone apps that you would be able to keep track of that mileage.
STEVEN: Great. Does he have a particular app that he recommends.
MARIA: He said he does not but I’m sure we could find one in the app store.
STEVEN: Just go to the app store. Find mileage log or auto mileage log or something like that. I’m sure you could find something like that.
MARK: I’d say if you keep an electronic calendar, you could put the mileage log on that calendar. What’s nice about that is it tells you who you met with and so you have additional back up for that. Then I would print those out at the end of the year and keep them in a PDF because sometimes our digital calendars get destroyed or you upgrade your computer and that historical information goes away. That’s another good source.
If you do get audited the IRS will try to test the reasonableness of the miles. What they’ll do is they’ll look at some of your maintenance receipts to see how many miles you drove between oil changes and other things. If you worried about it that’s an additional step to protect yourself.
STEVEN: Good point. Who gave that recommendation? Was it John?
MARIA: John mentioned the app.
STEVEN: John who?
MARIA: John (unclear/Everal?? 00:21:12).
STEVEN: John, thank you. You will be sent a pair of these handy dandy, unbelievable TakeLessons sunglasses for your help. Thank you. All right, next question.
MARIA: There were two recommendations for apps also – TripLog for Android if anyone has an Android phone and then MileIQ. It doesn’t say which system that’s on.
STEVEN: So it’sTripLog for Android. If you’re on an Android phone look up TripLog. And?
MARIA: Yes. Then Heather would like to know what about the cost of purchasing a car?
MARK: If you’re purchasing a car, it’s the same story. If it’s 100% going to be for work you can deduct the purchase price under section 179, which has not been extended. Up until 2014 you could have deducted up to $500,000 worth of major purchases.
MARK: Yeah, well, it wasn’t just the car. There are special rules for cars but it’s not that high this year. But yes, if you purchase a car you can deduct that and it’s generally over five years. So whatever your purchase price is, you take it over five years if it’s 100% for work.
If it’s not 100% for work you’re going to still need the mileage and you’ll have to use the ratio to determine the deductible portion and it will be measured on an annual basis.
STEVEN: Got it. Let me ask one question for clarity purposes around automobiles. There’s a difference between buying the car and leasing the car. My understanding, and correct me if I’m wrong, is that if you’re leasing the car then that is an expense because you don’t own the vehicle and then those ratios that we wrote earlier on the board would apply. If I’m using that car 50% of the time for business, I write off 50% of my lease payment as a deduction.
MARK: Or the mileage deduction. Whichever is higher. Yes. If you’re purchasing the car and you’re financing it then the interest would be the deductible portion, not the principle portion of those payments.
STEVEN: Right. Got it.
MARIA: Then along those lines, Geo mentions he’s in New York City so buying a bicycle or using a Metro card, is that anything that would be able to be applied?
MARK: Absolutely, if he’s using that to drive around. The percentage that he’s using, spending that money, for business is absolutely deductible.
STEVEN: So if you buy a bicycle, Metro, your use of Lyft or Uber and you’re getting back and forth to clients, then all of those are deductible expenses as well.
MARK: Yes. Absolutely.
STEVEN: Super. The next line of questions, still under the deductions section, is on gear and supplies. Jason Martin, he’s one of our very early instructors out of the hundreds of thousands that have signed up – I think he’s in the first 100 actually. Jason, hey, how are you. He has a story probably similar to a lot of people out there. I’m going to quote from him because it’s pretty cool.
He said, “I own my own music school.” It could be language school or sports instruction, whatever the case is. “So I own my own school and it seems like I make close to zero after buying all the gear and crap that I need to actually run my business.” That’s very true. You think about the sports coach who has to buy gear and protective gear and soccer balls or whatever the case is. In Jason’s of course is his music business. He has to buy a guitar or an amp or these sorts of things. So his question was, “Can I deduct the gear that I use that I have to buy in order to teach?”
STEVEN: There you go.
MARK: Absolutely, you can deduct it. Back to what I said, Section 179. Section 179 is a special rule that says if you’re buying equipment that has longer than one year useful life that you can deduct the full amount of that purchase in the year that you buy it. So for 2015, it’s $25,000. I say it’s only $25,000 because it used to be half a million dollars. You can deduct the full amount of that equipment in the year that you buy it.
If that is not enough, the remaining portion of what we call depreciated value of those assets would go over their useful life.It depends on what type of asset it is. If it’s equipment that you’re using for your business it’s five years. If it’s a table and a chair that’s seven years. It just depends on the exact type of equipment it is but the general rule is if you’re buying equipment and 179 was not there you have to depreciate that over the IRS determined its useful life.
STEVEN: Got it. So right now the tax code has an accelerated system set up. For most folks out there the $25,000 threshold is pretty good.
MARK: Under 179.
STEVEN: Right, so in Jason’s particular case if he goes out and gets a new amp and he buys a new (unclear 00:26:46) and he needs a new keyboard and then buys sheet music, and a fact that you mentioned, needs a desk for the computer system, needs a chair for his students to sit in – all of that should be deductible under these sorts of things.
MARK: That’s right. I would say that sheet music is different than a guitar for guitar lessons because sheet music, I would classify that more like a supply that’s going to be used up in a year. You’re probably getting sheet music, you’re writing on it, you’re giving it to a student, the student might take that with them, it’s gone. It’s not going to last longer than a year but a guitar is going to last maybe a lifetime and so that’s a different type of expense. I would put the items that are going to be used up within 12 months in a different category than what I would call assets. Assets are things that last longer than a year. So sheet music, supplies, ink cartridges, that sort of thing, you’re going to use that up within 12 months, deduct it. Pencils, paper, all of that.
STEVEN: So deduct away. Yes, Maria?
MARIA: With that, Elizabeth actually points out music books, considering that those last a little bit longer than sheet music and then Heather has a great question in regards to what if she bought equipment before she actually went into business?
MARK: She can put that into the company as of the date that she started that business. So you can contribute assets to a company as long as you have not deducted them already through a previous business.
STEVEN: So, let’s say you own a guitar or let’s say you own ten guitars, which a lot of folks out there probably do, and they start a teaching business. They haven’t deducted those purchase prices before. When I start that teaching business then I can basically take the cost of those and deduct that against my first years income then?
MARK: That’s correct.
STEVEN: Wow! What an unbelievable cost savings.
MARK: Yeah, huge.
STEVEN: That’s thousands and thousands right there.
MARK: That’s huge. Yeah, so you can contribute that. That’s as if you put money into your company to start your business. Money is an asset, right, so you put the money in your company and if you didn’t have those guitars you’d have to go buy them to start your company. So it’s as if you put the guitars in your business and now you’re going to use them in your business. It’s the same as cash really at the end of the day because you’re using those to run your company.
STEVEN: Wow, so if you haven’t deducted those expenses before this is the year.
MARK: That’s a common missed item. That’s a great question. That’s a really good question.
MARIA: With that, actually this is a great one from Carl on top of that. Do you have to have individual receipts or can you simply print out a purchase history from a company?
STEVEN: The question is do you have to have receipts or can you use a purchase history like if they bought all of their items at Amazon, for instance.
MARK: Anything that supports your purchase is good to have. Of course, you need that if you get audited. The IRS will take testimony and they’ll measure whether or not it’s reasonable also. So best case scenario you have backup either from Amazon or a receipt. If you don’t, we’ve had audits before where a client might not have receipts but we take pictures and say well these things just didn’t appear. They spent the money, they paid cash, they don’t have any receipts of it. That has worked. I won’t say it always works but it can work.
STEVEN: I was talking to a friend along those lines, I was explaining our tax talk here and we were talking about the receipts. He said, “Well, yeah, I was going to write off this item,” I think it was actually a keyboard, “and I lost the receipt so I didn’t.” I think that’s a common misconception that is if you don’t have a receipt you can’t write it off.
MARK: Yeah, that’s not true.
STEVEN: It’s not true, right?
STEVEN: It basically helps with proof in case you get audited but one doesn’t proceed the other with respect to having to write it off.
MARK: That’s right. That’s right. If you’re spending money for your business, you know you spent the money, then deduct it. I mean you should deduct it. Then if you do get audited and the IRS refuses to accept it then you’re just going to pay a little bit more in taxes.
STEVEN: You’re not going to jail over it.
MARK: You’re not going to jail. You don’t go to jail. You just…
STEVEN: Lose the deduction.
MARK: You lose the deduction. You might have to pay some interest but…
STEVEN: Right. Okay, great. Next, under gear and supplies, Heather, Patrick, and Jessie and a few other folks asked about cell phones and these sorts of items and phone bills. The question, “My husband and I share a cell phone bill but we have separate phones and approximately 25% of my usage of my cell phone is for my teaching business. Can I deduct that percentage off of my phone bill as a business expense?”
MARK: Absolutely. You want to document your method for why you took the deduction, which is a tough one, right because you’re not keeping call logs because that would take a lot of work. Like I said, the IRS will take testimony. They will measure whether or not it’s reasonable or not. I don’t know about you, I don’t even have a home phone anymore. I have a cell phone. I have a cell phone that I use the vast majority is with clients or my wife. That’s what I use my phone for. Yeah, they will accept that.
STEVEN: What about the internet? A lot of our instructors are teaching online. In fact, close to half our instructors teach online. Obviously you need an internet setup, they have to buy a microphone or a camera. What about internet expenses?
MARK: Internet expenses are also deductible if you’re using it for work. You do need to be careful. It’s an item that the IRS will look at if they think that you’re taking 100% of it and it’s at your home and they know everybody goes on the internet for personal use. At our firm, we will ask how much are they spending on their internet and we get an idea of how much time they use it for work versus personal and then we take a position. Sometimes in taxes you just have to take a position. That might be 75% of their time they’re on the internet, we take 75% of their internet costs as a deduction.
STEVEN: So it sounds like what you’re saying is be reasonable with those sorts of expenses.
MARK: Be reasonable and usually the internet is not a massive deduction so it’s not a big risk item because of that. Cumulatively, and we can talk about risks later on, some of these expenses, but you sometimes just have to take a position.
STEVEN: Makes sense. Question, Maria?
MARIA: Yes. Barbara has a great question along with this. Do the expenses have to be from the actual business account or can they be from various credit cards that are personal?
MARK: Love that question. Okay, so the answer is it doesn’t have to be through the business account but we recommend always if you’re paying for any business items through your personal account that you create an expense report as if you worked for a company so you can detail what those expenses were and attach a receipt and so as if you were reimbursing yourself.
The reason is is we always recommend people that are self-employed have a separate bank account. More times than not they don’t, especially a small sole proprietor. They’ll just kind of mix it all together which makes it difficult for accounting purposes and also allows if you do get audited the IRS to go ahead and look through all your personal expenses.
MARK: So I recommend having a separate account for that and it’s better to pay it through your business account but it doesn’t make it not deductible if you pay it from your personal account.
STEVEN: Let’s dive in. So at the very base level, if we have folks that are just sole proprietors, they own a small tutoring company that’s just them, you’d recommend that they set up a business account and in order to do that they may or may not need a business license from the city.
STEVEN: Sometimes you don’t even need one. You just go to the bank and say I’m setting up in this case Mark Wilson Tutoring Company, set up a separate account with your bank, and then any business expense you have through there, just run them through that. If you have something on your personal account then expense back just like you would regularly and have your business account pay yourself back. But the more you can separate those two, the easier your life becomes at the end of the year and also the cheaper your costs to your accountant is because there’s less work for them to do.
MARK: And less headache for them personally, right, because it’s all in one spot. I’ll anticipate another question that they might have. If they have the business account and they’re just starting, how do they get the money back? Right?
All the money is going into the business account and they are paying their expenses and then at the end of the day they have what’s left over, right? You just write that check to yourself and then put it in your personal account. Just whatever’s left over and that will be called a distribution and that just goes to the business owner. The distributions are not deductible.
STEVEN: Got it. Darn it. So the last line of question on deductions is about home or rent, the place where you live. The majority of our instructors out there have a studio in their home that they have set up in order to teach out of. So how would they go about, in fact, how do I calculate how much I can deduct from my rent or mortgage based on where I teach and the size and this sort of thing?
MARK: That falls under home office deductions. Home office deductions are based on the square foot that is dedicated to your business. If you have a 3,000 square foot home and 1,000 square feet of your home is dedicated to your business, then a third of all expenses associated with your home are deductible.
STEVEN: Wow. Okay, so 3,000 square foot home, big home, you got 1,000 square foot studio, awesome size studio, so that means a third of my rent is marked off, a third of my utilities, a third of my home insurance, a third of, if I have a mortgage, a third of the interest that I pay is all deductible against the income associated with that business.
MARK: That’s correct. The way home office works, it will create an expense and it will go over to your Schedule C, which is where a sole proprietor files their tax return, and it won’t allow a loss. It won’t make your net income as a net loss. It only will bring it to zero. A lot of times those expenses are much higher than what the business income is going to be. So simply with the home office you can wipe out your net income often and not pay any tax.
STEVEN: That’s an important point. When he says wipe out your net income, you’re still earning income but your tax liability literally drops to a big fat zero. Nothing.
MARK: Zero. Donut.
STEVEN: How would you like to pay donut. That would be pretty cool, right?
STEVEN: That’s why when I go back, when I talked at the very beginning, three parts of your business – income, expense, and then the third category is really understanding and working with a professional on taxes because it can make a world of difference of how much money ends up in your bank account. It’s really important.
MARK: Yes, it’s important.
STEVEN: Yes, another question?
MARIA: We have a few questions on the studios. Heather asks does it qualify in utilities as a business expense require the structure to be physically separate from the house?
MARK: No. The total utility expenses would go on the same form and what that 1,000 square feet for your studio versus 3,000 square feet for your house, it creates that ratio and all of your expenses for the whole year go on that home office form and then carry over to your Schedule C.
STEVEN: Using that as an example, 1,000 square foot office so a third of all my…
MARK: Your utilities.
STEVEN: So if I have $1,000 in utility bills for the year, I write off $333 of that immediately, right out of the gate?
MARK: Right, as long as it doesn’t create a loss in your business, it just brings it to that zero.
STEVEN: Donut. Yes?
MARIA: You had mentioned, just backing up a little bit, he doesn’t know whether it’s beneficial or necessary to file a DBA.
MARK: It’s not required if that’s what he’s asking. You don’t have to file a DBA. You can be Mark Wilson, teacher and be in business. Generally speaking, however, if he’s going to have a separate bank account, most banks will require them to file a fictitious name filing and some publication, a business journal, or some publication to open up a bank account So by doing that he’s kind of filed a DBA at that point.
STEVEN: Right, and if I’m not mistaken, it could be each city or each state certainly has their own rules around this particular piece and you have to look at your particular city and state to have the correct answer to that.
MARK: That’s true. That’s the same with business license. I think you alluded to that earlier. Every county and city in the country has different rules related to business license but they’re easy to find. You could Google that real quick and find out what is required.
STEVEN: We’re here in San Diego. I can go to sandiego.gov, in your particular city there’s probably a .gov as well, web address and look in there under getting started with a business or how do I start a business in the city of San Diego and there are complete instructions on how to do that. Some of them are a little janky. They don’t explain things that well and that may be why you want to work with someone who can help you do that and get it set up the right way to start with. It’s not that much of a cost to make sure that you’re protected on having the right way to get things set up.
Organize Your Freelance Business
That takes us to this third area. How are we doing on time? Okay, a couple more minutes. So, this is under getting organized. We’ll wrap up with this third area. We talked a little bit about business licenses. Rosita as well as Suad had asked the same sort of question, “If it’s just me, no employees, do I need to get a business license?” We just covered that and that is basically look at your city.
MARK: It depends.
STEVEN: Yes, it depends. If you’re going to get employees you certainly need some sort of…
MARK: Well, if you need employees you still might not have to have a business license but it comes back to whatever the county or city requires. If you’re going to have employees you have to get an EIN, or tax ID number, which is the same thing. You have to go to your state and file with your employment department there and make sure you get an ID number for that because you have to file payroll taxes both to your state and to the IRS. It’s an additional layer of complication but it’s not that… You just make sure you’re dealing with somebody who can walk you through that process.
STEVEN: Let’s jump into multiple sources of income. These are basically the same question. We had several people ask about this. Let me explain it here and get your opinion on this. Barbie, Carl, Ian, and several other folks had asked this. “I teach but I also receive a significant portion of my income from performing.” Or if you think about coaching, I teach but I also play on a certain team that earns income. “Do I need special preparation since I have two sources of income? Can I combine the income or do I have to have two different businesses because I have two different sorts of income?” What do you think about that?
MARK: I don’t think you have to as long as the type of income is similar. What I mean by that, you can’t combine rental income with teaching income. Those are two different types of income. Rental income is taxed differently than what we call earned income. I don’t want to get too complicated by that’s earned income. Rental income is passive income so they are treated differently for tax purposes.
Anything that you are earning that is not a W-2 you can put on the same form. Anything you get a 1099 for, you could put that on your Schedule C and you could file one Schedule C. You can say that you do different things. For example, we’re a CPA firm. We do audit work, we do tax work, we do consulting work, we do accounting work. We don’t file different entities for each one of those services. They’re all somewhat related. If you’re teaching and you are tutoring and you are doing private consulting related to your particular business then I don’t see why you would have to have multiple Schedule Cs for that.
STEVEN: So using that example out there, I’ll just use me as a proxy for this. I could have Steven Cox, professional and that’s the name of my business of which I teach and I derive a certain amount of income for that. I also consult with a company along the same lines of whatever I’m teaching. That could be considered income and I go and I play gigs at night. All of that has to do with my professionalism, my artistry as a musician or as a tutor or whatever the case is. So instead of having to set up all of these different entities and separate all of this, you can call that all a part of one business and all of that just simplifies your life times x.
MARK: Right. So if you get ten 1099s for that – you’re getting 1099s from all these various entities that you are providing these services for – as long as the total amount of gross income, that means the sum of all of those 1099s and any income that you don’t get on a 1099, as long as that number is larger than all the 1099s you get on your Schedule C sole proprietor tax return, then you’re fine. If it’s less then you’re going to get a letter from the IRS asking why you unreported income.
STEVEN: Right, so make sure you report that income first and foremost. If you get a 1099 it goes on your taxes. No question about it. That’s the way it should work.
MARK: Right, and even if you don’t get a 1099 you’re supposed to report the income.
STEVEN: Yes. That is the law. We’re almost out of time. Estimated taxes – we have some questions regarding estimated taxes. Let me find the questions here. I’ll read two or three of them and then we can just have a conversation.
I read something about estimated tax payments for independent contractors. Is it necessary? How do I estimate it? Should I set aside income so I have money to pay? How do I set things up so I’m not scrambling to get enough money together to pay for self-employment taxes? All of this is about organizing correctly. What about estimated taxes? What do you find? Let’s say this average is kind of around the $50,000 mark for income. What do you suggest there?
MARK: Net income $50,000? That’s what you get?
STEVEN: Let’s say gross. Gross is the amount that comes in your front door but you have all of these deductions so it’s going to be a lot less than that with respect to what you pay. What would you recommend with estimated taxes?
MARK: The answer is it depends really on the individual. Estimated taxes are related to your complete tax situation. That means if you’re married you’re going to file a joint tax return. All of your income gets tallied up and whatever you’re left with, whatever you either owe or you get a refund back, depending upon how much money you’ve paid in during the year.
That’s really what we’re talking about here is how much money have you paid in the year to cover what your tax liability is when you actually go to file your tax return. In our tax system, they have a system called pay as you go. The IRS wants you to pay taxes as you earn it during the year. They don’t want you to owe a bunch of money at the end of the year because they have learned that they don’t get it all the time.
So what they will do is if you do owe too much money they will penalize you and they will add interest to the money that you owe. So if you are supposed to make estimate tax payments on a quarterly basis. The quarterly due dates are not completely intuitive. The first quarter estimates, for example, are due April 15 but the second quarter is due June 15, before the quarter is over. Then the third quarter is due September 15 before the quarter is over but then the fourth quarter isn’t due until January of the following year.
STEVEN: The IRS is so clear. It’s wonderful, isn’t it?
MARK: At least they’re consistently inconsistent. The answer to the question is yes, you should be making estimated payment to avoid penalties. Depending upon how much tax liability you may owe at the end of the year… I have clients that say, “I don’t care. I’m not going to give them any of my money until my returns are filed and I’m just going to deal with the interest and penalties,” because it’s not enough money for them to have to worry about it. That’s an okay position. Just know you’re going to pay a little bit extra.
If you want to get to the right number, then you need to be either good at filing tax returns and being able to estimate where you’re going to end up during the year or you need to hire a tax professional to do those estimates for you so you can know how much you’re supposed to pay in. If you pay in at least as much as you owed the prior year, if your total taxes, not owed, if your total tax liability was $5,000 for 2014 and you’ve paid in at least $5,000 for 2015 then you’ll be fine on having no penalties as long you paid it throughout the year.
It’s what I call a quick question that isn’t always a quick answer because we have to really know everybody’s individual situation.
STEVEN: It sounds like the correct answer for that as well is this is where it really pays to work with someone year after year on your particular tax situation.
MARK: Yes, because then they really know.
STEVEN: It could be that you shouldn’t be paying any quarterly taxes. It depends on your personal situation.
MARK: Right. So back to netting $20,000. That may or may not turn into a major tax liability but if all of that… If you’ve already deducted all of your itemized deductions and all of the income from your Schedule C is taxable, you’re going to pay 15.3% tax on that money plus 15% ordinary income tax plus whatever your state income taxes are. That’s 30-40% of that money if that’s the only thing we’re talking about. It depends on what their overall situation is.
STEVEN: Cool. We have time for one last question. It’s coming from Nicolette as well as Jessie. I hope I pronounced your name right. Do you recommend going to an accountant versus doing taxes myself and what do you feel about places like H&R Block versus just a real… I don’t know if that’s the right words – a real accountant. Not saying they’re not. If there’s anyone from H&R Block out there don’t hate on H&R Block. What do you think about that? I have my personal opinion which I’ll give after yours but please, you first.
MARK: I think oftentimes people think they’re saving money by doing their own tax returns and they are upfront. If you have a simple tax return, simple 1040, a W-2 and that’s about it then you probably don’t need a tax professional. But if you’re self-employed, you have rental properties, you own a home, you have multiple places you work, it gets a lot more complicated.
More times than not you’re going to make a mistake on your tax return, either for your benefit or to your detriment. It’s hard. That’s really where people get audited more times than not is when they take really large deductions.
I’m actually embarrassed to tell you. I’ll tell you a story real quick. I won’t say his name but…
STEVEN: This guy I know.
MARK: A family member of mine does his own tax return because he doesn’t want to bother me with it. Took way too many deductions and creative a massive red flag and of course he’s being audited. So, yes, he paid less in taxes than he would have with us but now he has a huge issue…
STEVEN: The pain.
MARK: The pain and suffering. The other way, it goes the other way oftentimes too. People are too worried about what they can deduct. They don’t know really where we’re taking a position. Sometimes you have to take a position and you really need a professional to help you know where the line should be drawn in the sand with that. I think the difference between a CPA firm… I should back up.
You have H&R Block like somebody asked about. The people who can do tax returns are people with what they call a CTEC certification, an enrolled agent, a CPA, or an attorney. All of those people have different continuing education or education requirements. So it depends on what you really need. H&R Block is a fine company. They are large and they’re huge and they do a lot of tax returns. Their education requirements are much less than mine. For example, I had to get a degree. I have to do 40 hours of continuing education every year and we really are advocates. We are licensed by the AICPA.
CTEC and those others are licensed by the IRS so they have a different regulatory body they answer to than we do. We are focused on being an advocate for our clients and we’re not… The IRS, I wouldn’t say they are adversary but they are certainly not who we serve. We serve our clients so it’s a little bit of a different relationship. But H&R Block is a fine company.
STEVEN: I think the key personally for me, I’ve used an accountant now for 12 years, 13 years, the same one and there is a rhythm that you get in when you use the same person who is good over and over who understands your situation and then can advise you near the end of the year, as the year is going on, if you’re about to buy a home, you’re about to buy a new car, how do I take these deductions. What I have found is that I have saved so much money in taxes that I would have paid by working with a professional than if I wouldn’t. So I personally just from my two cents, I’d personally recommend it.
It’s the same if you think about it for all of our musician instructors out there. It’s the same as someone watching a video on YouTube versus hiring you. You know what I’m saying? It’s like you could probably get by with YouTube, maybe learn a little bit, and kind of do your own thing but why do that when you’ve got a professional sitting here who can really help you out. I think that’s how I would personally view it is if you’re serious about your business and serious about making teaching your career that it’s worthwhile to find a reasonably priced, good accountant, CPA firm who can grow with you as you continue to grow.
MARK: It really comes down to the relationship you have like you’re saying. It’s important to have that if you’re going to be self-employed for any extended period of time. You need somebody. Even if you’re goal is to buy a house maybe you shouldn’t be so aggressive on your deductions in a particular year. Those are questions and answers you need to have with your CPA.
STEVEN: Great. Thank you. We are out of time. Maria is giving me the old cut it thing. We’re out of time. I wanted to thank Mark for being with us today.
MARK: Happy to be here. It was fun.
STEVEN: Mark, if folks wanted to get in touch with you or your firm, I’m sure you have a website?
MARK: Yes. You can go there and find us. You want my phone number?
STEVEN: Sure. Absolutely.
MARK: You can tell I’m a huge sales guy. I’m a CPA. It’s 858-565-2700.
STEVEN: That’s if you’re in San Diego or even in California. I’m sure you do most of your work there.
STEVEN: There are other great CPAs if you’re on the east coast. I’m sure there’s folks in your local area that also have similar certifications but you want someone that’s good at doing taxes if you decide to reach out for help.
MARK: Yes. Just make sure that you’re doing your homework and that you’re taking deductions that you’re entitled to.
STEVEN: Thank you again for your time. We really hope that this has been a tremendous value to you. We wanted to really make sure that you a) could take all the deductions that you need, b) know how to organize properly, and c) answer the questions on how to get your either sole proprietorship or corporation set up. Thanks again. I hope you have a wonderful awesome Christmas season, holiday season, coming upand we will see you the next time we see you. Thanks. Take care. We’ll see you. Bye bye.