← So Money with Farnoosh Torabi
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- [00:00]
Farnoosh Tarabi
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So money episode 1834 tax strategies for Creatives and Freelancers with Hannah Cole, author of Taxes for Humans.
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You're listening to so Money with award winning money guru Farnoosh Torabby. Each day get a 30 minute dose of financial inspiration from the world's top business minds, authors, influencers, and from Farnoosh yourself looking for ways to save on gas or double your double coupons. Sorry, you're in the wrong place. Seeking profound ways to live a richer, happier life. Welcome to SO Money.
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Hannah Cole
I felt a massive amount of intimidation both from being like from a field that is as far from accounting as you could possibly get and then also just from meta messages in my life that as a girl this stuff wasn't for me and so I didn't really pay the attention to it that I should have. And so when I had to file my first tax return I was like, oh no, it turns out this is for me and I do have to deal with this.
- [02:38]
Farnoosh Tarabi
Welcome to SEW Money everybody. I'm Farnoosh Chirrabi. What do you get when you combine an artist, a tax expert and a truth teller? You get our guest today, Hannah Cole. She's back on so money and just in time. You may know her as the founder of Sunlight Tax or from her game changing workshops that help creatives and freelancers make sense of their money and their taxes. Today she's here to provide insights from her forthcoming book Taxes for Humans, which just be the most approachable and funny textbook you will ever read. In this conversation, Hannah and I dive into the emotional baggage a lot of us carry around our taxes, including shame, intimidation and fear. She opens up about being dismissed by a traditional accountant early in her career and how that lit the fire for her to become a voice for those often left out of financial conversations. We also dive into how to avoid the dreaded tax bill shock, what the.
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IRS really cares about, why freelancers need.
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To understand quarterly taxes, and what you should know if you're married and your spouse is handling the taxes. The spoiler is you gotta pay attention. Plus, Hannah shares the number one thing new business owners should do to feel confident and in control of their taxes deductions you might be overlooking. Here's Hannah Cole. Hannah Cole, welcome back to Sew Money. It's so awesome to see you and have you back. Tax season has wrapped, but honestly, I'm back into the bookkeeping world as an entrepreneur, so I'm happy to have you on. It's never a bad time to think about taxes.
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Hannah Cole
It's never a bad time though. Sometimes people don't want to talk to me in the summer.
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Farnoosh Tarabi
True. So maybe, I don't know, maybe this will be a well referenced episode throughout the year. We wanted to have you back because you're on the road to launching your book this year and you're in preseason. So as a diligent author, you start your media early. And we are here to talk about your forthcoming book, Taxes for Humans, which is a hilarious title but also very on the nose.
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Hannah Cole
I know, totally. I feel like what's out there is your dad's tax books and I feel like I, I was really trying to aim for your punk rock sister.
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Farnoosh Tarabi
Your punk rock sister re familiarize us with you and your work. You've been on so many a number of times, but we have a lot of new listeners and everyone could use a refresh. Tell us a little bit about how you arrived at the tax world given that you have an artistic background. You're an artist by trade, but the.
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Two stories go hand in hand.
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I'm going to venture to guess.
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Hannah Cole
So I've been a professional artist for 20 years, and that came first. And so I always stayed far away from money stuff. I needed a farnooch in my life 20 years ago. But when I. When I first had my first year as a professional artist, and I'm wondering, like, I have grant income and residencies and all these. How do I manage this? Taxes hit me like a shovel to the face. And I sat down with my dad's accountant, and the first words out of his mouth were, so, when are you going to get a real job?
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Farnoosh Tarabi
Oh.
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Hannah Cole
I was just like, oh, my God. I have to, like, not only do I feel flooded with shame and embarrassed already. Like, it's already hard to be here. Now he's insulting me. It's just like, this is good for tax advice.
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Farnoosh Tarabi
Okay, let's focus. And I.
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Hannah Cole
And I know that as an artist, like, I know I am a weirdo, but honestly, I think all of us feel like a weirdo. Like, we're all human. We all make mistakes. None of us, like, came out of the womb knowing how to do bookkeeping.
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Farnoosh Tarabi
Yeah, maybe you should solve the book taxes for weirdos. I would have definitely gravitated towards that. Yeah. So you were. You felt shame, you felt confusion. You felt like you're at a dead end. Taxes are not something you can ignore. There's, like, that saying, there's only certain.
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Hannah Cole
That's the thing.
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Farnoosh Tarabi
Things are certain in life, death, and taxes.
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Hannah Cole
That's.
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Farnoosh Tarabi
How did you overcome that? Did you fire him right away? What happened next?
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Hannah Cole
I wish I'd fired him. What I did was quietly pay his fee and then did the taxes all over again on my own. Because he missed this $4,000 deduction. I had, like, diligently kept a mileage log because I had actually looked up the rules. I'm coming at this with the degree of professionalism I can bring. And I just realized, like, oh, he so doesn't take me seriously that he's not even looking at the actual materials I've put in front of his face. He's just. He had this very dismissive attitude. And I think, like, it's not just artsy weirdos. It's also, if you're a woman, if you're a person of color, if you're from a historically marginalized group, like, you can look at a person like that and just feel like, well, I don't see myself reflected in this room. I don't feel like this is for me, you know?
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Farnoosh Tarabi
Yeah. Because taxes are really an extension of money. Everything you just said, all of these biases we have in the money space and taxes are just an extension of that. Makes total sense. But I'll go so far as to say that most people, regardless of their background, what they look like, they are not inherently in tune to how taxes work. It's not. One plus one is two.
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Hannah Cole
No.
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Farnoosh Tarabi
A lot of the time.
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Hannah Cole
No, it's not at all. You know what? I made a mistake. When I was a young person, I really made a mistake and thought like, all those boys in class. And please understand, I'm not trying to say all boys are jerks. Not at all. Not at all. But there's that kid in class who raises their hand and they're trying to throw out terms. They basically. I didn't recognize that as insecurity, which is what it probably is. I actually thought that person, like, knew all this stuff and I was intimidated. I've now come to learn, oh, that person actually is fronting. They're trying to use tax terms. And now that I know the terms myself, I'm like, oh, they're using them wrong. He doesn't know either. So I. Yeah, I just. I felt a massive amount of intimidation, both from being, like, from a field that is as far from accounting as you could possibly get, and then also just from meta messages in my life that as a girl, this stuff wasn't for me, and so I didn't really pay the attention to it that I should have. And so when I had to file my first tax return, I was like, oh, no, I. It turns out this is for me, and I do have to deal with this.
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Farnoosh Tarabi
You worked with so many people across your podcast, your course, your speaking. What are the things that people. The basic things that people still need to grasp that they just aren't. Because this is such a taboo topic, we won't even open the book. We outsource it most of the time, like you did. But that's also. There are blind spots there as well. And so what do you want people to really know about their taxes?
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Hannah Cole
I think from a really big picture perspective, the IRS knows you're not perfect. Turns out they're pretty used to dealing with humans. Like, you don't actually have to be perfect to do your taxes. That's one thing, right? I know there's perfectionists listening who are like, are you sure? But the other thing is some things are important and some things are not. Like, if you make a calculation one way versus another and you get a little bit of a difference in the dollar. Some people freak out there. And the good news is the IRS is like, did you basically get it right? Did you make a good faith effort? Yes. Great, we'll take it. But the thing they do really care about that does really matter is meet the deadline. There's a deadline, you gotta do it. And then the other thing that people I think miss a lot, especially self employed people, because that's the DIY part of the tax world. So that's where people really can trip because we don't have a tax education in this country. So people don't understand what self employment tax is. And PS cheat sheet version is it's you paying into Medicare and Social Security. It's on top of your federal income tax. So it's additional money and it feels higher than it did if you were an employee because you are the boss and the employee when you're self employed. So you're paying the boss and the employee half. So 15.3% of your profit goes through Medicare, Social Security. That comes as a surprise.
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Farnoosh Tarabi
And that is one of the biggest shocks for especially new freelancers is the size of their tax bill. One of the best pieces of advice I ever got when it came to just preparing for my taxes was to every time I would get a freelance check, I would say 40% of it in a savings account and not touch it until I would have to pay the irs, which in some cases was quarterly. So is that still the number? 40%, regardless of where you live and how much you're making, 40% is nice.
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Hannah Cole
And high and probably covered it for you. So that's good. Yeah, I know that probably felt outlandish when you crazy, but.
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Farnoosh Tarabi
And I still do it. I still do it. And I'm always so thrilled when my accountant tells me that my bill is less and then I can. I feel like I just got a windfall.
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Hannah Cole
Totally.
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Farnoosh Tarabi
I got a refund.
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Hannah Cole
Yeah, totally. Yeah. The other thing that people miss a lot is quarterly taxes because you've got, if you think about like one way that I like people to visualize how their taxes work because I think a lot of people get worried like, oh, I've got this income, I've got this income. Will I break the system because I have this other kind of income. And the good news is no, you can't break the system. You just have one bucket where all your taxable income is going into and it just goes in the bucket. A new kind of income just tal. It's just going right into the tally bucket and we're tallying it. And then if you think about tax paying throughout the year, it's like spigots coming out of that bucket, filling your little tax bucket underneath. So that tax bucket, your goal is to fill it as much as you actually owe for the year. But you're guessing throughout the year. You have to be paying some kind of tax throughout the year. If you're an employee, that's really easy because your boss is already handling it for you, taking it out of every paycheck.
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Farnoosh Tarabi
Right?
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Hannah Cole
You don't think about the fact that you're paying taxes every two weeks, but you are. And so you have to translate that. When you're a freelancer, when you work for yourself, no boss is doing that for you. So you actually manually have to once per quarter make a payment towards your taxes and fill that bucket. And that way it feels scary because it feels like, wait, how do I do this? Where does that money go? Does it go in a black hole? What if I overpay? Will I get the money back? Like it's fearful. But you do get the money back. You do get credit for it. And the good news is if you pay quarterly taxes, every dollar you pay is a dollar off your tax bill. So it means you have a smaller tax bill and potentially even a refund. So it's like the way to prevent that like heart stopper of a tax bill that can happen. Those self employed people listening to you right now are like, oh yeah, tax day is a terrible day, right? Get that bill.
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Farnoosh Tarabi
It's a lot of us and sticking with the sticker shock of taxes, let's talk about reducing that through deductions. And you write in your book that even those of us earning a small amount from freelancing, maybe we have a full time job, but also we freelance and we can benefit from business deductions. That was me in the beginning of my career. I didn't quit my day job while I started to make income from freelance gigs because it wasn't enough and I was too scared to give up the 401k and all the things benefits. And then I got laid off and the choice was made for me, that's another show. But there are many of us who are straddling the nine to five and then freelance income and then the taxes get a little bit. You have basically two types of taxes that you're filling out essentially. What do we need to know for that? What does that person need to know in terms of compartmentalizing and preparing your taxes? If you have freelance income while you have A daytime job, a full time job.
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Hannah Cole
The good news is that you, you have some payment ability through the day job. And so that's great because you get in less trouble. And you can also, you can actually withhold more from your paycheck than you need to. And that will cover the tax bill that you generate with the freelance income. That's a little trick you can use to integrate the two. But the awesome thing, the US Government is really there to support small business. It's not like a charitable thing. They're like, you're growing the US gdp. And if you're like you farnoosh, like, even when you're integrating that with a day job, you might, I think Nike started nights and weekends in the garage, right? Yep. You might be the next Nike. And so we're trying to nurture that because you're, we're trying to nurture that. We're trying to nurture small businesses because they grow the US gdp. I mean, yeah, literally. So you're growing the economy. And then of course, if you, if your business is profitable, that's even better because not only do you grow the gdp, you grow the tax base. Like you pay taxes again. So, so you get to take deductions. You get all the benefits of a big business, even when you're teeny tiny working a side hustle.
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Farnoosh Tarabi
Yeah. All right, let's talk about DIY versus hiring someone. You started with this story of this nightmare of an accountant. Even if I'm getting all this, it takes time and I want to make sure it's done perfectly. And maybe I'm not the best person. I definitely have never done my own taxes. I will say, and it's something I'm very happy to invest in, in someone to do that for me as well. As a bookkeeper, how do you determine whether you're ready for those investments? How do you find these people? How do you vet them?
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Hannah Cole
I think the best way to think about it is the more complex your taxes are, the more you do want to consult a professional. Like, you can read a book about medicine. You can improve your health, you can improve your nutrition. But do you want to do your own eye surgery? Probably not. So there's some diyable tax situations. If you are right out of college and you have a W2, you probably haven't accumulated all those things that an older person has, like a house, like a mortgage and a spouse and dependence and child care and all these. But your taxes tend to get more complicated as you age because you now have investments. You now have a house, you gather things.
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Things.
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So right out of college, that's probably your very best time to DIY it. And I think just using like a commercial tax software is totally fine. Totally fine. But a real important thing for people to understand is that taxes tend to go smoothly. When your taxes when your income is the same, when your life looks the same this year that it looked last year. And that's a situation where diy, if DIY was working okay, it'll work okay now. But if you have a big shift in your income or a big shift in your life circumstances, that's when you might have a tax whammy coming and professional help could mitigate that for you. Yeah, so that's really something. If you get a huge bonus or you get married or you get divorced or you become unemployed, these are things that can really shift your income and you're going to have a hiccup in your taxes and that's where the pain is. Health is good in those situations.
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Farnoosh Tarabi
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Farnoosh Tarabi
Power.
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You reminding me of another issue, which is when you said marriage, divorce. And I'm thinking about couples and how they usually orient around their taxes. And usually, like with a lot of financial matters, there's one person that sort of rises to that occasion and does them or manages them. And I want to have you speak to the person who is not involved in their household taxes insofar as, like, maybe even going to the accountant meetings, understanding what they made, what's been owed, because maybe they don't work out of the home, they don't have a paycheck, they're not paying taxes, like, out of their own paycheck, or they just don't care or they're not into it or it's been said. I'll handle it, honey. I want to protect.
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Hannah Cole
Last words.
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Farnoosh Tarabi
Yeah, I got it. I want to protect that person, and I want to understand what they need to at least at bare minimum, understand about their taxes so that whether by mistake or on purpose, if their partner does something unlawful, that they're not also on the hook because they're co. Like, I assume if you're married filing jointly jointly, then you're on the hook, whether it's a good thing or a bad thing, for the refund and for the debt.
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Hannah Cole
You sure are. Yes. So this is a really important thing to know. And I love that you're bringing up the person we want to protect. If you file a joint tax return, P.S. that's not your only option. You can file married filing separately, that is.
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Farnoosh Tarabi
Yeah.
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Hannah Cole
But if we file a joint tax return, you are responsible for 100% of what's on it. It not just your part, but the whole thing. And that is something people don't. Accountants don't, I think, make that clear enough to the client. A joint point tax return cannot be undone. So if your spouse walks off the face of the earth, if you suddenly discover they've been doing all kinds of shady dealings, your signature on that tax return makes you responsible for everything on it. That signature says, I've looked at this and I approve. So you need to be really careful. You never, ever let your spouse sign the return for you. I definitely do think, and I say this with a lot of empathy because I understand there's not good education about taxes. Although truly with my book, I'm trying to change that. You want to do a review of the numbers and ask questions if there are things you don't understand. I know that can feel like some pressure because it can feel like, oh, I should know this, but I don't. You feel a little embarrassed, but I Just this year, I had a friend who is recently divorced who got her entire refund that she had. She had already spent. Basically, it was garnished from her because her ex for this year, he had never paid the taxes he was supposed to pay. They'd agreed he would pay, and it was a joint tax return. Their last year of marriage, he just walked out on the bill. And so she got her refund taken away from her. They're not even married anymore. But that's what I'm. That's a danger in a married. Filing joint tax returns.
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Farnoosh Tarabi
And she had no. She was not aware that he had walked away from this.
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Hannah Cole
He wasn't even aware he hadn't paid the bill.
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Farnoosh Tarabi
Yeah. Wow. Yeah, yeah, yeah. You're absolutely right about that signature. It's. It is. Cannot be undone. And I always say, too, it's important to know if. Especially if you're. Even if you're both working, because so many couples don't know what each other earns.
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Hannah Cole
Actually maybe have a ballpark.
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Farnoosh Tarabi
Yeah, yeah. I've seen studies about this, and I've also heard anecdotally. But you might know generally, like, my partner makes roughly X. But who should know actually what it is, because when you sign that tax return, you know, that's the page one information. It's what you both collectively made. And if that looks off, if that looks underreported, that's a red flag. And mistakes get made. So it's always important, even if you're not the one who is actively involved in the tax conversations, but to go to at least that last meeting or have a pipeline, to ask your accountant or bookkeeper questions and to not feel the shame, because I think that is it. That is the thing that keeps people from being proactive.
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Hannah Cole
I agree. I agree so much. I wrote a chapter in my book. I don't know if I'm allowed to swear on your show.
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Farnoosh Tarabi
You're like the second person this week that's asked me that. There's something in the air. People want to get things off their chest. And I will. I am here for it. We are here for you if you.
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Hannah Cole
Oh, lovely. All right. The chapter title is the Holy Matrimony or Holy Shit. Oh, okay. It's about those situations where the spouse goes rogue. And there are. The good news is the IRS does have some recourse for the spouse who's been deceived, walked out on. And I want to mention, just like this can feel like a very sensitive topic and people don't like to talk about it. But there are situations. If there's, like, domestic abuse happening, in 99% of those cases, there's financial abuse. Yes. And if you are living under threat, then the idea of pausing and asking difficult, confrontational questions is, like, probably not feeling like an option to you. There are ways to go to the IRS and undo a joint return. It's a little tricky, but it is something that is possible. And there are even provisions like a check mark that you can put on that application that says, don't share my address with the ex spouse for people who are, like, living in fear. So I do want to just mention, for those listeners who need that, I want them to know that it is out there.
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Farnoosh Tarabi
Thank you. You've been on the show a number of times, Hannah, and in the past, we've talked about. We've dedicated episodes to Versus S Corp. Which was a very popular episode. You have talked about using the tax code to benefit your retirement accounts. Because we know, like, things like Roth IRAs and traditional IRAs, there are. There are tax benefits to that. And you write in your book about tax code as a tool for good, where you say it has many benefits for freelancers and small business owners. We've talked about some of the deductions, but there are some aspects to the tax code that. That business owners are not aware of that can be very beneficial to them, which. Let's talk about that, because I feel like that's not something that comes up often. We often hear, oh, this is. This is the drag of it all. But what are you finding can be actually uplifting for business owners?
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Hannah Cole
What a great question. Yeah, I love this. Taxes have so much benefit. They have. They're such a direct way to put money back in your pocket at critical moment. I will say to you, Farnoosh, as I live in western North Carolina that got hit by Hurricane Helene, there are a lot of provisions in the tax code to help someone like me. Like, I have my studio and all my art for 20 years was destroyed. And because it's a federally declared disaster area, there's a lot of things that the government allows on my taxes. So I was allowed to take a law on that. That property that was damaged. So it really reduced my taxes in a moment that I could use the money. Yeah, that's one of those wonderful things. It's a wonderful thing because a bad thing happened, but it is a wonderful thing. Nice to get the support.
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Farnoosh Tarabi
Sure.
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Hannah Cole
There's provisions like if you are widowed, you get to take a qualifying spouse, like an extra big standard deduction. For a couple years to help get you back on your feet. There's. In business, the deductions that you get, if you think about it, are incredibly generous. Every single expense that you make that's ordinary and necessary towards your business. And this, you're just a freelance copywriter. You count, right? It's like your computer, your office space, your subscriptions. For all the different softwares that you use in your business, all of that is deductible and you don't pay tax on. So these are. And then also in your startup year, like a lot of people miss out on the early benefits of starting a business. The US really is ground zero for getting a business off the ground. We are such a, like, fertile soil for that. And there's a whole provision called startup expenses, which is this category of deductions you can take in your business in. In the year before your actual business started. So they're retroactive. That's pretty cool.
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Farnoosh Tarabi
Wow. Wow. That's a whole year because. Yeah, you don't LLC or incorporate right away and working on it. And I actually, with the Monclair pod that we've started here in town, it's an LLC and it's incorporated. And we for sure have been spending money out of our own pocket. Like we just got the bank account. Yeah, I guess that makes sense because you don't get all your ducks in a row on day one. No.
- [31:03]
Hannah Cole
And can we normalize that for a minute? Most starting a business like you are so busy when you start a new venture like that, there are so many tasks to do, they all feel urgent. You can't do them all at once. And so what I have found in this human world of taxes is that we're usually dealing with a cleanup. It's not. It's a rare human who gets everything perfect and buttoned up day one. In fact, I've never really met that person. You're usually going back in time and being like, oh, I paid that out of my personal account. Now I'm going to open the business account. Now, starting now, I'm going to start making sure that's always coming out of my business account. But for that first year before I realized that or got that knowledge, like, whoopsie, it was coming out of my personal account. Or we. We hadn't formed the business account yet. Cause we were waiting for the LLC paperwork to come through. So there are delays, there are messes. It's okay. You still get the benefits.
- [31:58]
Farnoosh Tarabi
All right, one last question. Advice for someone who's just starting to make freelance income like a primer on how to feel more in control of their taxes, whether they're running a small business or even a big one. I can't assume that just because you're in the infancy of your business, you don't know like a lot of us have been in business for 10 years and we don't feel confident around our taxes. Your number one piece of tip, your number one piece of advice.
- [32:23]
Hannah Cole
My number one piece of advice, get a separate business bank account because it will make all your tracking easy. So then spend your money out of that account. Deposit your checks into that account. That will become the basis of your bookkeeping. Whether you do that just very simply on a spreadsheet or whether you spring for monthly software, that separate business bank account, it starts to create that separation that is very important between your personal assets and your business assets. And it makes the accounting easier. So that's the number one thing. And then once you do that, you stop missing deductions because you're not going with a highlighter through your personal bank statements and trying to find those. Like was that trip to Home Depot for the office? I can't remember. So yeah, yeah, I think that's the best.
- [33:12]
Farnoosh Tarabi
I got some to dos to send to my co founder at the Montclair pod.
- [33:17]
Hannah Cole
I love it that you're doing that. It's so exciting. I think that's the other thing is you gotta celebrate and you have to make it a little bit fun.
- [33:23]
Farnoosh Tarabi
Yeah, yeah. But I'm, I'm. I can't say I like love the irs, but I'm very appreciative of the, of that. What you just mentioned, the startup expenses that I think. I don't even know if I took advantage of that about 15 years ago when I started my company, but definitely now as I'm looking to build from the ground up another media empire one local story at a time. Hannah Cole, everybody. Check out pre order her forthcoming book Taxes for humans. Simplify your taxes and change the world when you're self employed. We'll also link to your free visual guide to tax deductions.
- [34:00]
Hannah Cole
You're.
- [34:00]
Farnoosh Tarabi
You just. You make it so accessible. I love it.
- [34:03]
Hannah Cole
Thank you. I love it too. I really appreciate it and it's great to talk to you. Farnish, thanks so much.
- [34:11]
Farnoosh Tarabi
Thanks so much to Hannah Cole for joining us. A link to pre order taxes for humans is in our show notes. I'll see you back here on Wednesday.
- [34:18]
And I hope your day is so money.
- [34:33]
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Hannah Cole
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Everything.
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