Updated: Oct 23
I talk with 5-10 different Insurance Agents, Medical Sales Reps, and Network Marketers each week and they all have one thing in common. The struggle of transitioning from employee to entrepreneur. I help business owners make the tax law work for them, specifically 1099 earners. The main thing that contributes to their struggle in transitioning is the lack of preparedness they receive from the companies they have partnered with to start their business.
Now don't get me wrong, these people are completely equipped with how to overcome their fear of rejection in order to make sales. They are also trained on how to efficiently build a sales team. They have been trained on how to talk with everyone except the IRS. What they are told is lacking greatly of any substance. I've heard "you'll get a 1099 and you have to pay your own taxes" and "you may want to create an LLC. Talk with your CPA." At first I didn't believe it but the more entrepreneurs I spoke with I realized it must be true. Everybody can't be making up this lack of information in training.
So what happens when someone has all of this money reported on their 1099 and doesn't know what to do with it? According to a study conducted by United Way Worldwide "74% of millennial respondents indicated they felt some level of stress around filing their returns." This stress leads to inefficiencies and under performance, which in turn is costing the companies money.
Millennials are currently 23-38 years old, which means a large portion of our workforce and entrepreneurs fit into this category. They're leaving money on the sales table due to financial stressors, one of those being taxes. The same study showed that a common stressor was making a mistake according to 48% of the participants. Go figure! The IRS reported in 2017 that average 1040 takes 15 hours to complete and these business owners have had no training on it. Not to mention that is 15 hours they are taking to "figure it out" when they could be making sales. Kathi Koenig says in her article, Three Tips on How to Survive an IRS Audit, "...they say the number one fear of most people is public speaking, after 26 years in the accounting profession, I think being audited by the IRS has to be a very close second." Believe me, it shows! That is why I put together this list of three things missing from the training but critical to the success of a 1099 earner.
1.The United States has a pay as you go tax system.
When you are an employee your employer withholds taxes each time you're paid and then they are responsible for making sure those payments are made on time. As a business owner you are now responsible for not only making sure the right amounts are set aside but paying them on time. If you had a tax liability of $1,000 or more than you are required to make quarterly estimated tax payments. Please note that even if you received a refund in the prior year that does not mean you didn't have a tax liability. It means you overpaid your tax liability and were refunded the amount you over paid. Also, if you do not have at least 90% of the tax liability paid by tax day you will be subject to underpayment penalties.
2. You now have to pay self employment tax.
Self-employment tax often throws a lot of people off when they first become a business owner. When you're an employee you may notice on your W2 that money is withheld from your check for social security and medicare. What you don't see is that your employer pays the same amount that you do. Well guess what happens when you become an entrepreneur. Congratulations! You get to pay both halves which ends up being roughly a whopping 15.3% of your net income. These payments are made with your Federal quarterly estimated tax payments. This 15.3% can definitely hurt if you're not prepared for it. Who am I kidding, it hurts when you are prepared for it!
3. Business expenses must be ordinary and necessary.
It is common knowledge that business owners can deduct a lot of things for their business. However a lot of people confuse that mean business owners can deduct anything for their business. That is not how this works. That is not how any of this works at all. Attempting to deduct frivolous and or unnecessary things will put up all types of flags signaling the IRS to audit you. When purchasing something you have to ask is this necessary to run my business? Is it something ordinarily used to run this type of business? The purchase also can not have a personal use. For example, a business suit. Yes, it is required that you look nice to make sales. However, as soon as you wear that suit outside of work it then takes on a personal use and benefit so it would not be considered a business expense. Now, if you have to wear scrubs to make your sales or steel toed boots because you are making sales on construction sites those would be considered both necessary and ordinary with no personal use.
I hope you find these helpful. This is not everything you need to know but it is a good start. If you would like a checklist of different things that you can deduct as a 1099 earner you can download The Direct Sellers Tax Toolkit here. If you are interested in having me come train your company or sales team on tax preparedness I'd love to chat with you and you can book a free discovery call or e-mail email@example.com.
Timalyn S. Bowens EA is America's Favorite EA and Louisville's Tax Expert that will work hard to find a legal solution that is customized for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.