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Success With Jewelry
122 - Liz Interviews Hannah Cole, Professional Artist and Tax Expert
00:41:10
Welcome to the Success With Jewelry podcast, hosted by Laryssa Wirstiuk and Liz Kantner, two experts passionate about helping independent jewelry artists thrive. Welcome to Success with Jewelry Episode #122! This week, Liz is chatting with Hannah...
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- [00:00]
A
Welcome to the Success with Jewelry podcast where we invite you inside our conversations about business success and marketing for jewelry designers and entrepreneurs. Welcome to episode 122. In this episode, I'll be chatting with Hannah Cole, a professional artist and tax pro. She believes that creative and mission forward people like us should have access to clear judgment, free info about taxes and managing our money. She will be answering all of our tax questions. Plus, in the bonus content, Hannah will share her top tips for making tax season stress free. Hey, Hannah, let's get into it.
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B
Awesome. Thanks for having me. Liz.
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A
Thanks for being here. It's funny. I've heard about you endlessly. I live in Asheville also. I've been here for almost nine years, and I've heard about you a lot and I'm glad that we're finally connecting. Me too.
- [00:50]
B
It's so nice. And you and I must have moved to Asheville around the same time. I'm just hitting up my 10th year here.
- [00:55]
A
Oh, my goodness. I love Asheville.
- [00:58]
B
Me too.
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A
And I'm so sorry for everything that's happened with Helene. For you.
- [01:04]
B
Oh, man. Yeah, I can barely even handle it. I'm like, dealing by not dealing with my studio, but. Yeah. Were you okay in the flood?
- [01:16]
A
Yeah, we were okay. I have some tree damage I still have yet to deal with, but it's on the list. I think that I do a lot of consulting calls and I talk to a lot of designers and they're always like, how's Asheville? And sometimes I don't know how to answer because we're okay for the most part, but we're not okay.
- [01:38]
B
I know. It's weird that way.
- [01:41]
A
Mm.
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B
Yeah.
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A
And Larissa's in L. A, so she had. She's fine. Her house is fine, but she had to deal with the fires, and it's like, it's tough out there for everyone.
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B
My goodness. Yeah.
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A
Anyway, sorry. Sorry to start on that kind of grim note, but I know people do wonder how Asheville's doing. There's still a lot of cleanup that needs to be done and a lot of people who still really need help.
- [02:05]
B
Absolutely. Yes.
- [02:08]
A
Okay, well, let's get into taxes, which is also another, like, on the list of topics that I like to talk about. Or I find joy from taxes and Hurricane Helene are probably at the bottom. No offense. You probably hear that a lot, but taxes are not my favorite thing.
- [02:24]
B
No, it's. You're in good company.
- [02:28]
A
My. My. Actually, my dad does my taxes and we're, like, working on them together, and I just. This is probably my least favorite time of year in business. But again, I'm sure you hear that a lot.
- [02:41]
B
I get it, I get it. I mean, I honestly always felt that way myself. And it's only really going back to school to actually formally study it that I was like, o. Okay, now this is, like, my thing.
- [02:54]
A
So why don't we start with you introducing yourself. Introducing Sunlight Tax, and then we'll dive in.
- [03:01]
B
Sure. So, yeah, so I'm a painter. I've always been an artist. I've been a painter for about 20 years at this point. I graduated from my MFA in painting in 2005, so. And I'm represented by galleries one here in Asheville, the Tracy Morgan Gallery. So, like, you know, and I've worked in a group show right now. Like, I'm active. I'm not. Like, I used to be a painter, but the whole reason I did this really bananas thing and went back to school to study accounting and taxes is because when I graduated from art school, taxes hit me like a shovel to the face. I was sort of like, wait a minute. Why did nobody explain that what was going to hit me? You know, like, quarterly taxes, bookkeeping. Like, I got no warning. And then when I went to my dad's accountant to try to, you know, get my taxes done as a professional for the first time, he was like. He was so demeaning. He was like, oh, so when are you going to get a real job? And I was just like, what? Like, not only do I, like, did I feel like art school served me badly in this, but now I have to come here and feel insulted, like, I couldn't believe how bad it was out there. So, you know, there's like, a longer story. I had a baby. It turned out it was in New York City. I was like, money situation was absolutely terrible, but I just was like, okay, listen, like, we need better. We need better. And I know, like, I have a business idea. I want to be a safe place where people like me, people like creative people, my community that's, like, upheld me, uplifted me for so many years of my creative journey. Like, we need this. We need to do our taxes. And not only that, but, like, we need savings. We need to. I want us to be able to take advantage of IRAs and solo 401ks and all, like, the good stuff in the tax code without having to endure the humiliation of, like, sitting with an accountant who is acting like what you do is not valuable, because I believe the opposite. I think creative people are doing what the world needs so, yeah.
- [05:14]
A
Yeah, I completely agree. Creative people are doing what the world needs. I mean, I think that's our pull quote there. That's so true. And it's interesting. I started my own business, marketing consulting, nine years ago, and even going in to get, like, figure out, like, a loan for a house or, you know, how I could pay a mortgage and stuff like that. Like, the bank looked at me like I was crazy. And I'm not even an artist. I'm just. I'm a marketing consultant. I was working for myself, and I got that kind of same reaction. So I totally understand that feeling and where you're coming from. But also finances and money and taxes feel like just an unapproachable thing. And I think it's come up before in this podcast and certainly in conversations I've had with artists, but, like, how art school doesn't prepare you for the business side of things.
- [06:02]
B
I do think art schools are starting to get the message and get better about it. I certainly can tell you that quite a lot of them hire me to teach workshops on taxes, which I love. I mean, it's one of my favorite things that I do. But. But, yeah. And then not only that, but I think there's this stereotype that gets perpetuated about people like us that does not serve us at all. And I don't frankly, think is true in the first place, which is that, you know, creative people are super flaky, bad at business, bad at money. And the fact is, like, if you believe that stereotype, you can make it come true, because you can say, like, oh, this isn't for me. I won't. I don't need to pay attention. But in. It's very empowering to know how this stuff works. And I mean, here's the thing. Like, creative is a synonym for resourceful. Like, can you name a more resourceful group of people than creative people? I mean, I just think, like, it's such a misdirect. You know, we're really good at stuff. We make miracles happen. And so, you know, why should we not be equipped with this stuff? That would just make us more powerful? So that's kind of like my belief. But I think, you know, like, that stereotype about us, it's very toxic and it's very disempowering. And I'm just here to never give it air except to say, like, hey, this thing is complete, complete BS and we need to get it out of here.
- [07:28]
A
I want every artist I know to know about you, because, I mean, just having A conversation like this is, even for me who went to business school feels intimidating. And so for people who don't have that foundation, I mean, you know, it's, it's tough. Let's start with kind of like what are the most common mistakes you see when it comes to taxes?
- [07:52]
B
Sure. So I think the most, one of the most common mistakes that I see for like creative people is that in general, when you're doing creative work, usually that's self employment. Not exclusively. Like it doesn't have to be. You could be a creative person who's an employee somewhere, that's fine. But most of our creative work is self, you know, generating self employment income. And that's where taxes are hard. And it's not hard because you're bad at it. It's hard because it's hard because when you're self employed, you're actually seen as a business under the US tax code. And so there's a couple of things. Like one, you have to be very aware that under taxes you're treated like a business. So you're entitled to all these great business deductions and benefits. But also it means you have to do the business stuff. You have to do a little bit of bookkeeping. And you also have to pay quarterly taxes. And the other thing that I think is the most maybe misunderstood or misjudged for creative people is that when your income is self employment income or partially self employment income, all of that income is subject to self employment tax. So a lot of people underestimate their tax bills because they don't know, first of all, the self employment tax is a thing or what it is or how it works, but it applies. It's 15.3% of your profit on top of your federal income tax and state income tax. So it can make your taxes feel a lot higher than you kind of thought it was. And that. So that can be a big mistake as well.
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A
And why is quarterly, why are quarterly taxes so important to pay?
- [09:37]
B
Sure. So the whole US tax system is called a pay as you go tax system tax system, meaning that it's actually the law that all of us are supposed to be paying our taxes throughout the year as the year goes, which is already a little funky because your tax rates don't actually get determined until you've made all the income for the year. In other words, during the year, you're kind of estimating, guesstimating how much money you'll have for the year. But of course, as anyone in western North Carolina can tell you, sometimes you don't know what's coming. And sometimes things can surprise you and that's okay. Like a little bit of, there's a little bit of wiggle built into the system. But effectively when you're an employee and you're paid with, you know, through payroll, you already have some prepayment, mostly all of your prepayment of Medicare and Social Security and federal income tax taken out of every paycheck. So you've been paying your taxes every two weeks when you're an employee, but you don't really have to think about it. So employees have the luxury of just like not having to even check in at all. Whereas when you're self employed, you don't have any prepayment going in and paying your taxes. And so the terrible trouble that you can get into, and of course I see it all the time and it makes me very sad, is that creative people don't know the rules and they'll earn, they'll have a great year in business, right? Make a bunch of money for the first time, not realize that they were supposed to be paying taxes all along quarterly, and then get faced with a gigantic tax bill that they've underestimated because they didn't know that self employment tax was a component. And then they're. And then suddenly a good year turns bad really quickly because you're like, wait a minute, what I owed $16,000, I don't have that money, you know, so knowing it's coming, knowing how it's work, how it works, and also knowing that quarterly taxes is your path out of the tax stress, those are all things that can help empower you and kind of keep you ahead of things rather than behind.
- [11:44]
A
I've been in my early on self employment years, I was hit with big tax bills and that's always a tough place to be.
- [11:54]
B
But I bet it made you learn though, right?
- [11:56]
A
It did. I do. I am adamant about paying my quarterly taxes now. And I tell people that's like the one thing I do know about taxes. But it's, it's. The information is hard to find. And so if you're creative to your point, and you just want to create art, then you have to like learn all these things and like go and find all of this information that is not easy to find.
- [12:18]
B
Yeah, it's really tough. And then on top of that, when you go to somebody, you're trying to get the information and then they insult you. It's like that's even, even another layer on top. But yeah, it is, it's Tough.
- [12:31]
A
And I saw your emails, I'm on your email list and I saw the, the small queen course that you put out about what was that thing that just that change that just had to be made?
- [12:41]
B
Oh yeah, the beneficial ownership information reporting.
- [12:45]
A
Yeah, I had no idea until I got your email and then I did it.
- [12:50]
B
Oh, I'm so glad. That makes me happy. For all of you who are listening to this right now, March 21st is the new deadline. And if you want to learn what we're talking about, you can go to sunlighttax.com llc. But effectively this is a report that is mandatory for all LLCs, even teeny tiny ones. So yeah, it was easy and your.
- [13:13]
A
Step by step guide was very helpful. And I will put that link in the notes because that was great. But I mean, without having following you or knowing somebody, you know, who would let you know that. How would you know?
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B
I know, I know it's really difficult. And I think if you're a larger business and you're paying an accountant to do like monthly accounting, which you have to be a pretty big business to be hiring a monthly accounting setup. Yeah, that is who gets this information. But if you're, if you're small, if you're a solopreneur, like it could be pretty hard. So this is a hole that I try to fill with the work that I do. You know, obviously I can't reach everyone in the world, but I try.
- [14:00]
A
Well, right now you're talking to jewelry designers, which is great. A new sector of the market, the.
- [14:06]
B
Creative market for you, which is awesome. Also, I'm a big, big fan.
- [14:10]
A
I know she is wearing hot pink Laura Wood earrings right now. I think that's. What color is that? The fuchsia color or the azalea color? I don't know. They're beautiful.
- [14:22]
B
I don't know what she calls it. I call it hot pink. It is so fun. I love them.
- [14:27]
A
Those are great. Okay, let's get into understanding deductions. So for like a typical jewelry business, what would the write offs be?
- [14:37]
B
Yeah, well, the IRS says so as a business, you're allowed to deduct any of the expenses that are. And here I'm air quoting ordinary and necessary. So that's actually really generous in. In general, it means almost all the things that you spend money on in your business are deductible to your business. There's a couple exceptions, but it's more generous than you think. So stuff that probably has occurred to you are like your materials, your tools, your workspace, any Sort of office related things or software that you use, you know, to communicate to people. So maybe you, if you pay for like a CRM tool or a, like a email ser. Like an email service or web hosting, all of those things are deductible as well. As well as a portion of your cell phone, your Internet, also your driving, like your mileage if you drive to a trade show or to, you know, the big crafty, if it's hosted in another city. Those are all deductible business miles, which are also, and, and also like meals that you have with potential clients or merchandisers. Or you can, you can prompt me for the kind of meetings that you're taking, Liz. But you know, if you have a business, if you, if you do business over a meal or drinks, half of that meal is deductible as well. So it's, it's really generous. The rules are generous.
- [16:10]
A
What about like studio rent and things like that?
- [16:14]
B
Yeah, so studio rent. If you rent a studio outside your home, that is just straight up a business expense. And you can deduct the whole rent. You can also deduct like, the utilities at that space and any other costs that you incur there. If you have a studio in your home, that is also deductible as long as you follow the IRS rules, which basically say it has to be exclusively used for your business. So you can't deduct your dining room. If you do all your jewelry, you know, all your work at your dining room table, that's too bad you don't get to deduct your dining room. But if you have a dedicated workspace in your home, then that square footage as a percentage of the larger living space is, becomes deductible. So it's really, it's really cool. And that actually makes for a pretty big deduction for people.
- [17:07]
A
Is there anything that creatives often overlook when it comes to deductions?
- [17:13]
B
Yeah, I think the most common ones I tried to touch on, but the most common things that people overlook are things that are sort of mixed use between business and personal, like your cell phone and your Internet or your business mileage that you use in your personal car. Um, and I think mostly people overlook those things because they don't know the rules or how, how to do it. But as long as you do follow the rules, then like the percentage of your cell phone that you use for your business is deductible. So are the miles that you drive in your car for business purpose, not a commute, but outside of that. So it's really? Those things are really good to know. I. I don't know if you know this, Liz, but I have like a visual guide to tax deductions and I would be happy to put the link in the show notes for that as well because I have it kind of laid out visually. All the home studio rules and the mileage rules and stuff like that, which get a little nitty gritty, but they're good to know.
- [18:17]
A
Yes, that would be great and super helpful. I had a question that just flew out of my mind. I don't know where it went. Okay, moving on to handling sales tax, which is a big one for a product based business. And this is where I get really confused. Are there any sales tax considerations that like what are the best practices for collecting and reporting sales tax?
- [18:46]
B
Yeah, so it's really difficult to speak to sales tax at all and I want to be careful how I talk about it because there's over 10,000 different sales tax jurisdictions in the United States. So there's no universal. Anyone listening to this podcast, you know, someone in one county versus another, they're going to have different rules. So you need to be kind of cautious when it comes to sales tax and actually know where you have what is called nexus. So that's kind of the key thing to know when it comes to sales tax. Nexus means where you're triggering an obligation to collect sales tax and remit it to the state. Sales tax is a totally different system from income taxes. It's run by states and like state and local government, as opposed to income tax, which is run through the federal government and then state after that. So it can get complicated pretty quickly. But in general, I usually recommend that people assume you have nexus where you live or where your office is or your studio is. Assume you have nexus there and start there, right. With the assumption that you do owe sales tax there and you want to just go to the Department of Revenue for your state and just look at their FAQs to see kind of what the rules are in your state, because that's the one you're going to be triggering most often. Then if you have like a place where you, you know, cross state lines or do business on a regular basis, or if you do like a big craft fair in another state, you want to look up those Nexus rules and see if you need to collect sales tax there. So I would go kind of start where you make your most sales, start there and then go to the second most, etc. And kind of look up the rules for each place. But the resources that I will just share with you for like kind of getting started on sales tax. And I'm not going to lie, sales tax is super annoying. You want to go to in your state, you can look up rules at your state department of revenues. That's a good source of information. You can generally call them and they're pretty nice, like, especially if you call them not at their busiest time of year or right by a tax deadline, they're like happy to walk you through stuff because like they recognize that you're someone trying to do the right thing. Second, there is a software company called TaxJar. I like them a lot. I mean, I don't pay for them, I have no affiliate relationship with them. But they're a good service. If you have a really complex situation, it might be worth paying a service like Tax Jar to help you with your sales tax compliance. But even if you never pay, they have a great blog and you can look up, they have like a Nexus finder. So you can go to that site, Tax Jar and look up places that you might have Nexus. And that is a really important first step. And then the other thing that's really important to know is that you have to register with the state in order to be able to collect sales tax. And so that's your first move, registering with the state. And once you do that, they will assign you a filing frequency. And so you have to then remit sales tax on that frequency. And it's based on your sales volume. So you, you had a very little sales in that state. Like maybe it's a one time craft fair. You do, you might owe once a year, you might be an annual filer. A lot of people with a little more steady business might be a quarterly filer. And then if you're doing like a huge volume and you know, God bless, I hope you are, then you might get assigned a monthly frequency. So it's kind of dependent on how much basically how much money is passing through your business.
- [22:30]
A
So yeah, if you're selling on like a Shopify platform, do they handle that for you?
- [22:38]
B
There are sales platforms that do. I'm not, I don't personally use Shopify, so I'm not, I'm not sure I could speak to it. I, I run a program and I do it through a teaching platform and they, I did set up basically through a combination of my teaching platform and what do I use? Stripe. I connected it so it will collect sales tax for people in certain states. Basically the states where I have a sales tax nexus. So yeah, it's definitely. Even if you're paying a little money for that, it's well worth it. If you've ever done the headache of, like, collecting sales tax, you. You might be willing to pay a little money to get that done properly. So might be worth a little fee.
- [23:24]
A
Oh, my gosh. Sales tax. Don't love it.
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B
I don't love it either.
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A
How do you go. I remember my question from earlier. How do you go about like, documenting and keeping track of all this? Like, you know, with deductions, for example, like all of your receipts and all of your, you know, all of the things you need to keep track of to make taxes easier?
- [23:45]
B
Yeah, yeah. So this is the thing that I want you. I think this is a helpful framework for this question, because when you have it all kind of mixed together in your mind, it becomes overwhelming. But here's what I want you to do is let's separate the categories. So you've got receipts, you've got tax documents, and then you've got your number tracking, like bookkeeping. And what you want to know is that these are three separate systems. They're not all mushed together. So keeping your receipts is actually super simple. Doesn't have to be complicated at all. All you need to do is dump them in a file folder. And you want to. In general, you want to keep them in order. So, you know, what I recommend is just like if you're getting a physical receipt from somewhere, like a paper receipt, just put it in the front of your wallet when you get it, and then when your wallet gets full, dump it in a file folder with those receipts in the front. And what that'll do is it'll keep all your receipts in chronological order. So that's my receipt recommendation. Don't forget that digital receipts are still receipts. So all online purchases, you still get a receipt for those. And that'll come in your inbox. So that's even easier. You just create a folder in your inbox and you keep your receipts in there. So that's. That receipts are for deep storage. Second, tax documents, that is just a kind of. Mostly that's just a January concern. When tax documents, you know, your 1099s, W2s, reporting statements, when those start coming in the mail in January, you want to just have a place designated in your house where you put them all so that you don't lose one. Right. That's important. Then the third system that you need, which is separate and especially separate from receipts, is bookkeeping. And really the way to do bookkeeping is first. Your first move in order to keep your bookkeeping kind of nice and doable is you want to make sure you have a separate business bank account. That's the key unlock. When you have a separate business bank account and you deposit your money from sales in there and you spend your, you know, deductible expenses out of that account, think about what that does to your bank statement. It means that you start creating a paper trail, a bank statement that shows all the activity of your business, all the income, all the expenses. And from that bank statement, that becomes your basis for bookkeeping. So what we don't want to do, what's going to drive you mad and make you lose your mind, is trying to do bookkeeping off of your receipts. That. That's a path. That's a path to unpleasantness. Doing your bookkeeping off your bank statement, that's a way for it to be neat and clean. I'm not saying it's no work, but it's much easier that way.
- [26:39]
A
More straightforward. It's all together.
- [26:41]
B
Correct.
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A
Makes sense.
- [26:42]
B
Correct.
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A
Can you talk a little bit about the different types of business ownership? Because there's an llc, sole proprietorship and S Corp. What's the difference?
- [26:55]
B
What should we be sure? Yeah. This is a great question. It's juicy and I could go for a long time, so I'll give you the shorter version. First of all, what's important to note is that when it comes to your income taxes, the IRS sees you as a business starting when you first advertise. So what I want you to understand is the threshold is not once you're profitable. It's not once you, you know, make your first dollar. It's nothing to do with money. It's about your intention. Are you trying to make a profit? So the definition of a business to the IRS is that you have a profit motive. What I just want to make that super clear because a lot of people think that they don't count until they're profitable or until they form an llc, and that's wrong. The tax collector is not, like, waiting around for you to, like, get to, you know, get yourself to a lawyer to start an llc. They're like, no, no. Tick tock. Time to pay now. We see you already. So that's really important to know that there's a distinction there. By default, your tax gets reported on a schedule C on your income tax return, and you're a business as soon as. As soon as you have a profit motive. In other words, as soon as you, you know, say out Loud to the world. Hello, I'm open. Right? Like that's the moment your business starts. But if you want to. An LLC's purpose is for legal liability protection. So it's not a requirement to be official. Like that is not a good reason to get an llc. But if you want to shield your personal assets from a lawsuit, that is the role of an llc. That's why you get one. So are you nervous about being sued? Do you feel like you need protection from a lawsuit? Okay, great. That's the reason to get an llc. I mean, if I were, I think you may know this person, but I know someone in Asheville who like runs a really cool jewelry studio on Haywood Road. Why don't I name check them called Torched and they, they teach kids classes, right? And maybe a kid at some point might hurt themselves on some material. Like they might be doing some soldering and they might like burn themselves. Right? Like that's a person who probably should get an LLC because.
- [29:18]
A
Great. By the way, if anybody's looking to take a jewelry class in Asheville to Torched.
- [29:23]
B
Awesome. I, I've been wanting to sign my kids up for a while. I'm a little behind on that task. But yeah, they're great. And so yeah, like that would be a place where I would be like, yeah, I think maybe an LLC is a good idea for you, but it's for liability protection. It's about a lawsuit and a lot of people seem to just feel like, well, you can't, you're not official unless you have one. And they go and they don't even know the purpose of an llc. So I just want to warn you against like doing expensive things for your business that don't, you don't actually need at all. So if you need that, that's the reason. And S corp. Oh, and the other thing to know about an LLC is that it's, it has no status for your taxes. If you're a single owner of your business and you form an llc, it doesn't change your taxes in any way. And frankly a lot of lawyers don't know that and say the wrong thing to their client. Like, lawyers are great with legal advice and that's where you should go for that. But tax advice, you should go to your tax people. So that's just a thing to know about llc. But an S corp, the purpose of an S corp really is to potentially save you some money on self employment tax. Once you earn above a certain threshold. I would not even consider an S corp until you're making at least 50 or 60 thousand dollars in profit. So that's after expenses, and that should be nice and consistent. There's a lot of obligations that come along with an S Corp. You have to run payroll. You are on the hook for employment law in your state, and that is not a joke like you. You. They take it very seriously. So you need a certain amount of administrative capacity. It's basically, for once, you're a little further down the line. I would not do an S Corp too early. That will cause you pain and cost you money. But later in your business, it could save you some money. So was that helpful?
- [31:23]
A
That was super helpful. I'm questioning a lot of decisions after this conversation, and I might circle back to you offline.
- [31:31]
B
Absolutely. I welcome that. Sure.
- [31:35]
A
I wonder if anybody else is feeling the same way. Like, what am I? I just did the things that I thought I was supposed to do without, you know, looking into them as much. And I think for a lot of people who have a vision or a dream of a business or like, their creative journey or to sell their product, they're just like, I want to do this. I'm just going to go down this road and do what people tell me and not necessarily dive in and look into it. Especially when it's something tedious.
- [32:00]
B
For sure. For sure. And it's really easy to just like, get online and hear advice coming out of the Internet and be like, oh, my gosh, this. I keep getting these Instagram ads that say I should form an S corp. I swear to you that that must be a powerful ad algorithm, because, man, do I see a lot of people who start S corps and lose money with them have, like, get in trouble with employment tax law. Like, it's. It's. Can be very ugly. You don't. You don't want to do it.
- [32:30]
A
Yeah, I've been served those same ads. I know exactly what you're talking about. But kind of on that employment conversation, what's the difference between hiring contractors and employees? And how does that affect taxes?
- [32:43]
B
Sure. So it's a big deal how you classify the workers who work for you. And I think a really important thing for you to know is that the way that you classify a worker is not something that you just get to choose out of your own convenience. It's actually a technical definition from the IRS that you must follow. Um, and it's about control. So it's okay to hire contractors. It is possible to legitimately hire someone who's genuinely a contractor. But you want to be cautious because too many people try to hire only contractors and not employees. And you can get in some really big trouble if you misclassify someone that you're treating like an employee. If you misclassify them like a contractor, that's a really ugly audit to get into. It's one of the most punitive that exists. So it's I not recommended. But basically, if you control somebody's hours, workspace, you provide the tools, you direct how they do the work. If you have that level of control, then that's an employee. And it doesn't matter what you're calling them, it is an employee. And if you are audited over the issue of worker misclassification, then you will be nailed. So you got to be really careful if you hire a contractor, what you want that to look like. I'll give you an example of a. Like a legitimate contractor. A plumber is like the perfect case scenario for an independent contractor. When you hire a plumber, they tell you when they're coming, not the other way around. Right. It's on their schedule. They bring their own tools, they assess the work that needs to be done. They do the work. You don't get to direct how they do the work. You don't get under the sink with the plumber and say, no, I'd like you to use that wrench, not that one. Right. That is fully their call. And then when they're finished with the work, they send you an invoice. That is what it looks like to be an independent contractor. So you can hire people that way? Absolutely, absolutely. Like, I'm wearing these beautiful earrings by Laura Wood. I'm sure that she makes the whole thing. But if she were to hire someone to put the enamel on them, for example, and it was an expert in enamel, that would be fine. She could send 100 pairs of earrings out to have an enamel artist do their treatment. Right. And then that person would invoice her. That would be completely legit. Right. If she's sending it out, they assess how to do it, they use the tools, and then they send her an invoice. That's totally fine. But if she brings them into her studio, she teaches them how to do it, she gives the tools, she tells them when to show up, then that's her employee. And so when you have an employee, you have to, you know, you have to pay them on payroll, so you have to set up payroll. You become an employer in the state, so you're subject to employment tax law, which is no joke. And you also have to, withhold you have to do withholding for them. And then you as the employer have to also pay into their Medicare and Social Security. So 7.65% of what you pay them, you pay out of your pocket into their Medicare and Social Security. That is a cost of having employees. You know, under civics, we say that, you know, employers should share the cost with the employee of that person's future medical and retirement benefit, Social Security and Medicare. And so that's why we set that up that way. But a lot too many people try to avoid that obligation by just calling everybody a contractor. Skip out on payroll taxes. And that's the reason that those worker misclassification audits happen. And that you need to tread very carefully and be sure that you check all your boxes when you hire somebody.
- [36:43]
A
That's really good to know. The last thing I'm going to ask you before we close out the main part of this episode is about taxes for unprofitable businesses. How do you handle those?
- [36:55]
B
Sure. So the important thing to know is that it is a benefit of being a business. And remember that business to the IRS means you have a profit motive, doesn't mean any of the other stuff. So if you're trying to make money, if you're trying to be profitable, it is possible that you aren't yet. Right. So all business go through, all businesses go through a startup phase. Right. Expenses always come first. That's not because you're broken. That's. That's normal. Right. You're not going to be able to make any jewelry if you don't have some kind of workspace in order to make it. Right. And some basic tools and some basic materials. Right. So you're going to have to outlay money for those things first. And so it might take you a little while to then market your jewelry to get your name out there, do some branding, like cultivate some clients, et cetera, before you start actually making sales. Sales. Right. So when you think through that logically, it makes sense. Right. So during that phase, before the money's rolling in the door, like, you aren't profitable yet now. So that would make you in the startup phase. Now, that's perfectly fine. You're allowed to be. And having a loss on your schedule C, which is where you report your business income. When you're a small business, having a loss in your schedule C is absolutely legal and fine so long as you have a genuine profit motive and you can document that. So you want to be careful that you, like, document your advertising, document your, like, sales methods. Have a business plan. That stuff is important. And the loss, when you have a loss in your business, in other words, higher expenses than income, that loss actually gets subtracted off your other taxable income. So it's actually a tax benefit. It's a. It's a legal tax shelter. So it actually saves you money on taxes. And that's a really awesome benefit that is there deliberately to help businesses through that delicate baby phase, right when you're at your most tender. And it's also there for businesses like, like yours and mine, that. That may have suffered during a loss, you know, that had nothing to do, was completely out of your control, like Hurricane Helene, which destroyed my studio five months ago. So, like, losses can be absolutely legitimate. The most important thing is that you have to have a documentable profit motive. So that's the key. If you have losses for too many years, then the IRS legitimately can ask you the question, well, like, do you really have a profit motive? Are you really trying to make money? And what can happen is they can say, hey, you know, this is a lot of losses here. Looks like maybe you might be taking advantage of this piece of the tax code, maybe a little too much. And we're going to say, I think maybe you might be a hobby. And if you disagree, you can prove it to us that you're actually a business. But if you can't prove it to us, we're going to take back all that tax savings you got on your expenses. So that's how that works. It's something that you're entitled to if you're a genuine business, but you need to be cautious with and conservative with.
- [40:15]
A
I've learned so much, Hannah. How can everyone find you?
- [40:20]
B
Sure. Well, my website is sunlighttax.com and there's lots of resources there, like that deductions Guide and that LLC course on filing that BOI report. So, yeah, come come to sunlighttax.com and, oh, and I have a podcast which probably answers 10 of the questions that you didn't get to ask. So the Sunlight podcast is, you know, available on whatever podcast service you listen to. So that's also a great way to just like, plug into a little weekly nugget of, like, tax info.
- [40:53]
A
Yeah, thanks so much for being here. Are you stressed about taxes? Let us know. Visit patreon.com successwithjewelry and if you love the podcast, we'd love to hear from you, send us a message or leave a review. Thanks for being a part of the Success with Joy community.