Hi, everyone. This is the How to Lower Your Tax
Bill podcast. I'm your host, Terrence Hutchins.
I'm a financial and tax advisor in the Dallas
-Fort Worth area. And the goal of this podcast
is to help you listeners get educated on different
tax strategies that you can implement to improve
your tax situation immediately. Each episode
will break down useful tax tips you can use to
save money, no matter what your personal or business
income situation. Cause our motto is keep more
of what you earn. So let's get into today's episode.
All right. So welcome back to the how to lawyer
tax bill podcast. I am back after a brief hiatus,
but we are getting into a very important concept
today, thinking through business owners and the
decision, whether to start a business or not.
So I'm with my esteemed cohost, Miss Kelly, say
hi to the people. Hey, great people. How y 'all
doing out there? And so this is going to actually
be a three different parts. So you have to come
back and listen to the other two. And the third
was actually going to be a counseling session.
So if you are interested in understanding the
dynamic, the mental hurdles it takes to become
an entrepreneur, make sure you come back for
the third part. Today, we're actually gonna walk
through kind of a checklist that I've talked
to clients about in relation to whether they
should start a business. And number one, I've
talked in the past about our president, he paid
$750 in taxes. How can I do that? As we've mentioned
before, your taxes are a representation of your
actions and the facts of your circumstance. And
many times people know the tax code rewards people
who start businesses because those people who
start businesses are people who create jobs for
other people. So when you create jobs for other
people that stimulates the economy, the government
is able to collect taxes on those people as well.
And so they give you tax breaks as a result.
So a lot of people think, let me start a business
to save on taxes. However, the goal of a business
is to make money. Right. And so we have to keep
that in mind, number one, so that even if it
gives you an avenue to maybe save on taxes based
on the amount of money you make, we still got
to think, is this business going to help me make
money? Okay. So tell me to me, have you ever
heard that concept or what was your perspective
as you kind of started getting into the tax game
on the impact or benefits of owning a business
from a tax standpoint? So actually, I'm thinking
about it now, Terrence, we probably should have
put this under one of those myths that we talked
about a few podcasts ago. And that is to start
a shell of a business to really save on taxes.
Right. If you're going to start a business or
pursue a business or ask the question to yourself,
is it worth pursuing? You really got to say,
am I in this to make money? That's a valid question,
right? Or are you really in it to save taxes
or whatever scheme you're trying to get at, right?
It really is to make money. And so for me, what
I've heard is you start a business when your
passion, your greatest, your greatest purpose
on life is what you're passionate about, right?
That sounds good. And I actually started a nonprofit
because I was so passionate about it and still
needed a full -time job because clearly it did
make me money. It did not make me money. So those
are some of the things I've heard about starting
a business is that there was no structure around
it. There was no financial wisdom around it.
It was simply, are you passionate about this?
And let's get going. Gotcha. Gotcha. Well, non
preceded profit. We want to make sure that everyone
is pursuing profit, number one. And I always
think about passion. It's funny because you hear
that with a lot of younger kids, you know, pursue
your passion. But I found, hey, you know what
I'm passionate about? Things that I'm good at.
And part of it is, are you going to put the work
in to be good enough to where you start liking
it more? Right. Because every business, whether
you're passionate or not in the beginning, has
challenges you're going to have to overcome.
And just because those challenges come doesn't
mean that it's not something you want to stick
with. In our case, we're helping people financially
determine, is it actually worth your time? Because
the time is the only asset we can't get back.
And so when we think about the business, I always
want to think through, is this actually worth
pursuing? And so I have to think about, is it
worth my time? And I got one value. What is my
time worth at the moment? And so one of the things
I would do is think about, well, what am I getting
paid to do currently? So if I go to a W -2 job,
my employer is paying me, and that's effectively
what the market is valuing my time at. Now, you
might think you're worth way more than that.
And hopefully you will get that money, all right?
But ultimately, you're worth what the market
is paying you. So when you go to your employer,
I think about, all right, my salary is X, my
benefits are X. and the taxes that they pay on
my behalf are why. So hey, what does that work?
So let's just say, hypothetically for EasyMath,
you make $100 ,000 once we do all that calculation.
A normal working 40 hour a week W -2 job is about
2 ,000 hours. So it's 2 ,080 to be exact, but
let's just say we just did the EasyMath. So if
you make 100 ,000 and you work 2 ,000 hours,
you're worth $50 an hour, all right? So now I
have a baseline to determine. If I go start a
business, can this business pay me at least $50
an hour based on the profitability of it? Right.
All right. So you've followed this so far to
me. Okay. Now that I have that, I need to think
about what am I going to do in order to make
this money? So is the business I'm going in,
does it solve a problem? Is there a market? You
know, are people already paying for something?
Do I have the resources to see it through? And
so many times you can do something either faster,
cheaper or better. So I take what someone else
is already doing. I do it faster. People will
pay you to do it faster. Amazon, instead of it
taking seven days to ship, I go to Amazon and
it takes a day or two. I'll be willing to pay
for that value. I could do it better, right?
Someone is doing X amount of work. I do it better
than they did. They'll be willing to pay me either
more for the same type of work that just does
better, or they'll pay me the same. I'll just
replace whoever they're getting it done before
if it's better. And then cheaper. Now I do not
recommend you go the cheaper route. Okay. So
to me, you probably learned this in the tax season,
right? Cheaper is not always valuable in your
business. Okay. Now, because the thing is, when
you are providing a service, I always go with
the mindset of can someone else provide this
service? So if I have to pay someone else to
eventually do it, cause if I own a business,
I ideally have tried to create a job for someone
else. So I don't have to do all the work myself
because ultimately I get paid and we'll talk
about this in a second. I get paid to do the
work, but if I own the business, I get paid to
own the business. Those are two separate functions.
So I had to value my time for the work I do.
That's where that $50 an hour comes in. But then
if I own the business, I get the actual profits.
So that means if I'm only valuing my time at
the work level. I don't value my business ownership
in the risk I'm taking in the actual time and
mental capacity. Listen, I'm going to tell you
guys, this is so, and I know Tense is going to
get into the math here in a second, but certainly
I want you to really hear what he's saying about
value your time because this is work you have
got to do upfront. If you're thinking about starting
that business, you've got to know what your time
is worth. And I say that because if you don't
know and you just start. What will happen is
if they don't value your time, you will get burned
out. You will feel unappreciated. You will get
burned out. And then the people won't get the
service from you because you're feeling undervalued.
When, if you would have done the math at the
beginning, before you started the business, you
could have priced accordingly. And this happened
to me in the tax, and Terrence will tell you.
When you start doing escorps, when you start
doing schedules, when you start doing so many,
that takes time and a lot of time, especially
when you want to do it right. You know, the reading,
the updates, you know, the questions, when people
bring those shoe boxes of receipts, that takes
time. And you want to make sure you're valued
accordingly, because if not, you will get frustrated.
So hear him clearly, guys. When you were thinking
about starting a business, not only is it does
it solve a problem, that type of thing, but what
are you worth and what are you bringing to the
table and how do you stand apart from the rest
is so important. And part of the challenge and
this is why you also value your time, but you
also want to be confident as the owner because
it is going to take a lot of mental strength
to overcome the challenges, but also to think
about the idea that If you're not valuing your
time, other people probably won't. Right. OK.
And they won't because they want a deal. They
want a discount. They want a deal. They won't.
But you have to kind of get out of this lack
of abundance mentality where, hey, if I provide
a service that's valuable, other people are going
to want that service. And so I can't be chasing
every customer. And I just try to price myself
so low to get someone to say yes, because that
lack of abundance, that's just saying, hey, What
I'm doing isn't very valuable. And if you don't
value it, other people won't. Okay. So I get
off my soapbox on that. And let's kind of go,
let's go through some numbers here. So if we're
now valuing our time, let's say our time is worth
$50. Well, then generally with any business,
there's going to be some type of upfront costs
that are associated with it. So it could be,
you know, your initial website, whatever it is.
Now the IRS, they give you two things you could
deduct upfront when they're talking about organizing
the business and starting the business. So if
I'm starting the business, I might be doing research
on the business. I might actually go and travel
somewhere to do that. I might have to get organizational
documents. I might have to train people on how
to do what I'm doing, depending on the type of
business I'm at. So the IRS says, hey, look,
we will let you deduct up to $5 ,000 of what
are called organizational expenses and $5 ,000
of startup expenses. All right. That is a deduction
that you can just take upfront. So theoretically,
I could just take, if I spent $5 ,000 to start
my business, I could just take $5 ,000 as a deduction,
assuming that that business was going to lead
me to a profit motive. Now, if I start the business
and I don't make money, then the IRS says, hey,
if you don't make money, then you eventually
will have a hobby. unless you were showing us
that you have a profit motive and there's a kind
of nine things that they do to show that. So
we won't get into that, but as it relates to
you started the business, that's what I could
do up front. I could write that off on a schedule
C, so I was thinking to image it. And I just
want to document that. Then I get into, okay,
what are the actual costs to deliver the service
itself? Those are my direct cost or my cost of
goods or cost of service. So I wanna think, all
right, if it, and in the early stages, I would
encourage you to include your time in this. So
if I say, hey, here's the service I provide,
it's gonna take me two hours. Well, if my time
is worth $50, I wanna put that $100 as the cost
of the service, plus whatever other items are
involved. If I sell shirts, what's it cost to
make a shirt? If it costs, you know, if I need
supplies, I need something else, I need to build
that cost in as my direct cost. Then I got to
think, okay, what are the other expenses it takes
me to operate the business? To me, what are some
of the things that you found? Hey, actually,
when I start on this tech side, I actually got
to incur this extra cost. What are some examples
you remember from this past season? So the incurred
the extra cost, I would say now don't laugh at
me, people. I like to print because I like to
highlight and I like to really... She's an old
soul. And so just really when you think about
your testing, right, I like the AFSP. So you
got to pay for that testing. You gotta pay for,
you know, to be a part of different organizations
to make sure you stay in the notes and make sure
you're up to date. You want to make sure you
have resources available for your customers to
go through those questionnaires or check marks.
All of those things, you may think, okay, that
was like $30 to print a whole book, or $40 to
print a whole book. One test can cost, or one
CE course can cost maybe $60. The other one can
cost 20. But you, I... I wanted to have all of
that complete before the tax season started in
January. And so even though it wasn't the crazy
amount, it was still unaccounted for because
I didn't know, okay, well, to take the CEA is
going to be like $60 for this course, or I'm
trying to get a free course or something. So
that's the cost. Not to mention the time, the
time, my time of just studying and creating my
own systems to be able to take their first customer.
Yeah, those were some costs you incurred. But
shout out to my boss who helped with some of
it. So shout out to my boss for that. We appreciate
it. You know, cost of actually delivering the
service. Yes. And then we have just the operating
expenses of the business. Oh, yes. That's what
you call it. So you need to determine, hey, do
I need insurance? Do I need supplies? Do I need
software? Because I might be paying some of those
things on a monthly basis. And I need to say,
OK. What are my direct costs? What are my operating
costs? And then that off the top is just you
think about, OK, how many man hours do I need
to do just to pay for that stuff? Right. And
so that helps us kind of back into what I would
say is your minimum revenue requirement. And
I really want to be able to hit that after the
first year. So let me give you an example. So
let's just say that you have a business and your
direct cost. If you factor in your time, materials
is $10 ,000. All right. You say, okay, it's $10
,000, but in order to keep the business going,
I got to pay $5 ,000 a year. All right. So that's
my operating costs. Is that what you're telling
me? Correct. Exactly. Yeah. So that's $15 ,000
to basically deliver the service. plus to operate
the business. And so now I got to think because
sometimes this might be a side hustle, let's
say. So you think, you know, I can devote 10
hours a month to this activity or 10 hours a
week or whatever the case is. So you got to think,
all right, if I'm devoting 10 hours a week, that
essentially is 10 times 50. That's five hundred
dollars. So ideally, I'd be making two thousand
dollars a month on this side hustle. But in order
to make that, I gotta add in the direct cost
and I gotta add in the operating expense, all
right? So for me to make that $50 an hour at
the $2 ,000 a month or $24 ,000 a year, all right?
I gotta add that extra layer in to say, okay,
if 15 ,000 is my expense, that means I gotta
have $39 ,000 of revenue to back into my 24 ,000,
okay? So that would be, hey, that's my minimum
revenue target after a year. So if you're thinking
about what you provide, that will help you determine,
well, how many customers do I need to make $39
,000? What do I need to price what I offer? Because
you've got to think, well, that could be 10 customers.
That could be 100, right? Depending on what you're
doing. So that might help you determine. Each
customer takes X amount of time to deliver. I'm
going to have X amount of time to do it. So that
kind of gives me a good feel for how many customers
can I take on? And then how much do I need to
price that based on what I offer? Okay. So that
I can back into my revenue number. Okay. So you
follow me. So what I hear you saying, okay. Cause
listen y 'all that third podcast we doing is
going to be about me. But what I hear you saying
is, basically, we really got to take time, right?
So don't be reckless with just going after spending,
right? Once you figure out your idea, once you
figure out, you do those questions that he mentioned
about, is this even worth starting, right? Does
it solve a problem? Is it clear market? Are people
paying for this? Once you do those questions
and you figure out, okay, yeah, this is something
I want to pursue. That I would say also take
time to do the math because as as Terrence is
talking y 'all, I don't think I've done the math
Oh my gosh, because those direct costs are Serious
that that materials those equipment that software
that costs money and I think what is the misconception?
Is that when a new business owner sometimes when
they're setting their budget They're setting
it from the standpoint of what do I have to pay
now? and separating that from The direct cost
which is yours seems like your startup versus
your operating which you're going to have to
pay monthly those insurance those licensing that
marketing that's real I think it's going to be
beneficial what i'm hearing you saying is to
have a degree of separation between the two First
just having this overall budget. You really need
to do the math to start up because What can be
your direct cost is not going to be your operating
expense going forward? And so that's going to
help with the math going forward. So This is
good. Continue. Continue. Help me out. So now
you think about, okay, what do I price? And you,
so I always tell people there's kind of six things
why people will pay you. They'll pay you to make
them money. They'll pay you to save them money.
They'll pay to save them time. They'll pay for
you to provide them convenience. They'll pay
for you to offer an experience of some kind or
for you to make them feel important. So if I'm
looking at the lens of what I do, I got to think
about what are the value drivers that people
were willing to pay for, that I provide to them,
and then I need to be able to communicate that
to them that justifies the price that I sell
at, okay? So it's like, hey, some people can
do their taxes. I mean, some people's taxes are
fairly straightforward and simple, but it does
take time and it's inconvenient. All right, so.
you know if it's something that you hate doing
it might be easier just to outsource it to someone
else and say you know what I'll pay a couple
hundred dollars whatnot for someone else to do
this so because it's a function I don't want
to have to deal with right same thing why you
might pay someone to change your oil if you know
how to do it yourself Now, some people don't
have the expertise on how to do it. So that's
where you're not only charging for the time savings
plus the convenience, you're also charging for
your expertise. So you gotta think, hey, how
am I justifying what I charge? Well, I gotta
think about the value levers that I'm providing
to the client. And that might help you mentally
process through increasing what you charge and
hopefully being able to make more and less time.
Now, this is a tax podcast, I think. So. If we
do have profits, we got to factor in the tax
component. So generally, when I start a business,
the iris considers me self -employed. And so
as a self -employed person, I have to pay taxes
in actually three different buckets. I have to
pay taxes as an employee, which is tied to Social
Security Medicare. I have to pay taxes as an
employer that's also tied to Social Security
Medicare. And then I have to pay federal taxes.
And depending on the state you're in, if you
relocated to Oklahoma, Now you got to pay state
taxes versus if you're in the great state of
Texas, you don't pay any state taxes, all right?
So you may have four buckets in that case as
far as the taxes you pay. So if I have a $10
,000 profit and I'm self -employed and I make
that $100 ,000 I mentioned earlier, depending
on my being single or married, let's say I'm
in a 22 % tax bracket. If I did zero tax planning
and I have a $10 ,000 profit, I'm going to owe
22 % tax on that $10 ,000 that I just made. Plus
I'm going to owe another 14 % on the employee
and employer taxes. So think about that. That's
36 % not counting the state, which could be another
three to 6 % generally on top of that. So you
could be at 40 % taxes on this $10 ,000 that
you make. So that probably should reshape. Man,
is this really worth it? Right. I'm out here.
If you're out here hustling, doing this side
hustle to make an extra $6 ,000, let's say on
that $10 ,000 profit. after taxes, then that
also should go into the equation. Right. Okay.
And your value too, cause clearly. So now when
it comes to the business itself, just a few housekeeping
things, and this is partly myths. So it may make
sense for you to set up an LLC. So we'll get
into that more so in our next episode, but it's
not required. Right. If you do owe taxes and
you owe more than a thousand dollars, as we talked
about in a previous episode, you do need to factor
in, I got to actually pay in. the taxes before
I file. A lot of people, they'll wait to the
end of the year or when they file to figure out
how much they owe. Well, I'm telling you, look,
you need to set aside taxes as an expense. That's
almost an operating expense and you need to tie
it to your tax bracket or work with someone directly
to help you determine what that exact percentage
should be so that when you do file and you owe
money, you're not scrambling to try to write
stuff off, which is normally what happens. to
try to reduce this tax bill that you just got
that you were unexpected. And I would say this
too, Terrence, hopefully one day you'll do a
podcast specifically for self -employed people
who don't have an LLC. Because another thing
that I've seen is that self -employed people
who don't have an LLC, that they can just take
cash and just pocket the cash, not pay taxes,
just, you know, just make the money and that
type of thing. Now, if it's under $400, that's
the IRS standard. It's like, hey, if you made
less than $400, then you don't have to report
it. But most people in that case, they're making
a lot more than that. And even if it's in cash,
the IRS may not know about it, but that doesn't
mean you're not supposed to report it, okay?
So that's a whole nother thought there. But just
a few other housekeeping things, and we'll get
into, like I said, more in a future episode.
As far as the expenses, you have the startup,
which you talked about was the 5 ,000. And then
we have the operating, which is going to be considered
ordinary, necessary or reasonable. So you think
if I have an expense that would be in that category,
then I can write that off on my taxes. So the
revenue I bring in, I can reduce that by the
exact cost. Now, the best expenses are things
that you already would be paying for. OK, so
for example, that's why it's important to say,
hey, if I use my car for work, I use my cell
phone. If I use my internet, if I have a home
office, let me set up the proper things in place
because those are extra expenses that you can
write off or now going to tax benefit for that
really didn't cost extra money out of your pocket.
True. Okay. So we will do a future episode on
that relating to business owners because that's
normally one of the biggest things that a value
add or why you would want to work with someone
who has the expertise to say, Hey, Can I actually
reduce my tax bill without spending more money?
Which is the goal versus, hey, let me go spend
money to reduce the amount of taxes I owe. And
then I end up basically losing money in the process,
right? Like I said, don't pay a dollar to save
30 cents. The math still doesn't work out from
that standpoint. Okay. So give me your takeaways
from our episode. And then next time we're going
to talk about more on the granular part of the
LLC. What are some of the other things you need
to consider when you start the business? And
then we'll have our counseling session for part
three. So for me, I would say this was so helpful
for me and I want to start backwards, meaning.
when you got into the tax piece of it or the
taxes that I would have to pay that really kind
of sparked my interest in terms of like the self
-employment, the federal income tax, the estimated
tax, all these different tax things that I have
to pay as a business owner. And so that led me
to thinking. okay, Tamia, you really need to
take the time to evaluate your worth in your
time and you know what you're selling your product
for, if you will, to make sure that you are at
least breaking even and not taking a loss. I
would also say for the person who is thinking
about starting a business or even if you've already
started a business, right, it's never too late
to evaluate your expenses and your budgets. It's
never too late. to really take a step back and
look at your overall picture. And even when you
were talking about the direct costs and the operating
costs, I've put those things in one bucket. So
now I need to go back and look at it from a separate
standpoint. What did I have to pay upfront that
I'm no longer paying for? And what am I paying
on a monthly basis? And to make sure I'm making
a profit, because it don't seem like it based
on what you just said. So those are some things
that I've taken away. It's one, always consider
your taxes. Two, always consider your profit.
I'm not in this for fun. I need to pay bills,
right? And maybe save some money. So I think
those are the things. And then the third thing
is really make sure that you are valuing your
worth because if you don't, they won't and you'll
be frustrated. and that will impact the longevity
and quality of your business. All right. Well,
that was a great summary. So I look forward to
getting into the future episode, but we'll talk
more on after you start the business, other considerations.
We'll talk about just maybe some rules of thumb
you should think about as far as what you charge
and things like that. And then some of the tax
impacts of the decisions you make. And I know
we're teasing the counseling session, but you
want to make sure you see that. And as we say,
keep more of what you earn and we will talk to
you in the future.