November 26, 2019
In today’s episode, Lindsey and Evie dive DEEP into the nitty gritty of taxes with CPA Michael Hendricks.
Michael is not your ordinary accountant. If he’s not baggin’ peaks, skiing, or hiking glaciers in the alps, you might find him headed to a local crag up the canyon in his hometown of Logan, Utah.
Something about numbers just clicks in Michael’s brain. He’s a CPA and has a master’s degree in accounting and financial economics. He worked for one of the biggest accounting firms in the world and just had a side hustle working with a small group of his own clients until he realized it’s so much more fulfilling to make a difference in people’s lives, specifically entrepreneurs like him.
It’s been a wild ride over the last four years since he dropped the corporate gig to focus full time on his own clients and he’s never looked back!
Michael covers everything from when to start paying attention to taxes, sales tax and all the stickiness that comes from that topic, write-offs for your business, keeping receipts and records, all the way to a touch of financial planning, investing, profit, and how to find a CPA who is PERFECT for you. Taxes DON’T have to be overwhelming and they are SO vital to understand as an entrepreneur. Today, Michael breaks down so many different angles of taxes and finances in such a simple and clear way. If taxes stress you out or feel overwhelming, this episode is about to rock your world. Michael is an absolute genius with finances and taxes – so much so that he works with Evie, Lindsey, and The Heart University.
Grab a pen + paper and roll up your sleeves, because this episode is a full notebook’s worth.
Michael graduated with a master’s degree in accounting and financial economics. Right out of school he worked for one of the biggest CPA firms in the world, PwC. Michael eventually transitioned to running his own practice full time.
Michael didn’t always know what he wanted to be. In college, he had to take an accounting class and his professor would always say, “Isn’t this fun?” or “Look how fun this is!” By the end of the semester, Michael switched his major to accounting and started to believe that accounting was indeed, fun.
Most of Michael’s clients are small business entrepreneurs that are service-oriented in a broad range of industries.
Everyone has a side hustle or gig that brings in a little extra money. By running a business, you are responsible from day one. There is no get out of jail free card just because you are starting out. From the very first penny that you earn, you should understand what that means for you when it comes to taxes.
One of the main issues entrepreneurs run into is sales tax. If what you do is subject to sales tax, you need to be collecting that from your client from the very first bill you send out. If you don’t, it is going to cost you later on. If you are even considering getting into a side gig or business, do yourself a favor and avoid the pain that might be later on and figure out sales tax from the very start.
The information you can trust, in regards to sales tax, is whatever is published on your state’s department of revenue website. Sales tax is location specific and there are rules to what is subject to sales tax. There are tons of websites that have information regarding this, but you have to make sure it is coming from your state’s department of revenue website. Do your homework because even an accountant can steer you in the wrong direction.
Talk with your CPA and learn exactly what your responsibilities are and make sure you cover all your bases.
Having an accountant does not mean that you are not responsible anymore. You don’t get to pass off the baton. You are the taxpayer; it’s your name and signature on your tax return. An accountant should help educate, give suggestions, and help you understand how different aspects of finance work in your business. They should be willing to help you set up your business in a way that allows it to run more efficiently. Because of them, you should feel more comfortable taking ownership of your business.
If you are going to be an entrepreneur, you have to have a knowledge of accounting and taxes. That is just a fact. An accountant should be someone who consults and acts as a business partner that helps you run your business more efficiently.
There are several different taxes that apply to you as a small business owner. Those can be federal, state, social security, and medicare taxes. You start out with your income and are allowed to subtract your business related expenses. The amount that is left over, your profit, is what you pay your taxes on.
So what is characterized as an expense? First, let’s look at what qualifies as a deduction. The IRS has two ways to describe what counts as a business expense. The first is it must be ordinary for your industry. The second is it must be necessary for your business to operate. For example, if you are a photographer, your camera is both an ordinary and necessary business expense.
Equipment, supplies, travel expenses, and your office space are all deductions you can take to help offset your business income and ensure you pay the correct amount in taxes (not just less). Having a system in place to keep track of these deductions is incredibly important.
Michael speaks for all accountants. Do not give your accountant a box of receipts when it comes time for tax season.
There is always a chance you will get audited. If you list out expenses of $5,000 worth of equipment you need to be able to prove this to the IRS.
How do you do this? If you have a receipt you can point out exactly where the business expenses came from. When you buy something, get in the habit of snapping a picture of a receipt and put it in an album in your phone called “Business Receipts”. This is going to protect you as a business owner.
Make sure you know what the business purpose of each receipt is. Several are intuitive and others may be a bit trickier. If you are out at a business lunch, write down on the receipt what the lunch was for and who it was with so when you reference this receipt later on you will know.
Software and programs can simply this process. If all of your business expenses go through your business account, programs such as Quickbooks will collect all of the information.
Accounting, finances, and taxes can be such a source of anxiety for people, especially for entrepreneurs and people with creative mindsets. There is a stereotype that you are either a numbers person or a creative person and the two can’t mesh. This is false. No matter who you are or your personality, you can understand the numbers side of running a business. People have different learning styles. Find a CPA who you can relate to and that will talk to you in a way that allows you to implement these things.
The goal of hiring a CPA is to make the financial aspect of your business not a source of anxiety. A CPA should make it easier for you to be an entrepreneur.
Don’t be afraid to tell a potential CPA that you are unsure of what questions to ask. Get the conversation started and go from there.
Sales tax is something that you, as a business owner, are responsible for collecting from your client and remit to the state. You will need to file a sales tax report, which will vary from state to state whether this is monthly, quarterly, or yearly. If sales tax applies to you, you need to collect this from your client, know how much you collect, and set this aside to send to the state.
Your taxes are based off your profit, you income minus your expenses. As a rule of thumb, transfer over 20-25% of your income before your expenses. This habit will prepare you to pay your tax amount that is due with more than enough left over to fund your retirement account.
Entrepreneurs are notoriously bad at paying or investing in themselves such as saving for retirement or budgeting to have a livable amount of money to pull out of the business.
You have to run your business in such a way that you can support yourself. Pay yourself and set money aside for you. In a regular job, your employer usually has a 401k set up and helps you save money for retirement. When you are self employed, you need to be responsible for this. Get in the habit of paying yourself to invest in your own retirement. Nobody does this for you, you need to take ownership of this.
You should not be paying yourself last in your business, it should be first and everything else flows out of this. Your operating expenses come after you take your income. Earn money from what you are doing and invest in your future.
Every state has different rules when it comes to sales tax. When you travel to different states, it is possible that you could be subject to that state’s rules. Definitely have a conversation with your CPA to discuss the nitty gritty details. Every situation is different and every state is different.
The more proactive you can be, the better.
It comes down to who you can trust. A CPA is someone you really need to trust with a big aspect of your business.
There is a whole network within your industry. Talk with friends about their accountants. Take recommendations from friends and others in your industry, but take this with a grain of salt.
The key is to talk and ask questions, but always be careful. Just because someone is a CPA does not mean that everything they say is true.
Set up consult calls. If it’s the right person, you should get off a call and feel like a weight has been lifted off your shoulder. They should be able to simplify things and grasp a hold of what your business is.
If you have questions or want to set up a consult feel free to email Michael at firstname.lastname@example.org.
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Michael’s email: email@example.com
WASSUP FRIENDS. We’re Evie + Lindsey, co-founders of this wild partayyy called The Heart University. Our goal is to empower entrepreneurs to kick freaking BUTT in their businesses, dive down into the heart of their why and how, and serve you with all possible tools you’ll need to up-level your business game and CRUSH those goals of yours.
Whether you’re coming to an in-person workshop, joining our online course, or soaking up all the strategies via this blog or our podcast, we’re STOKED you’re here + can’t wait to see you out there kicking butt.
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