Ted Jenkins sits down with ASBN to discuss what it means as a business to get a 1099 and what financial action you should take when starting out with your business. Ted Jenkin is the founder and CEO of Oxygen Financial and he helps businesses to understand the mistakes that small businesses could be making.
JIM: Ted Jenkin the founder and CEO of Oxygen Financial, thanks for joining us back again here at the Atlanta Small Business Show.
TED: Thanks for having me on the show.
JIM: Great, so let’s talk about those people that now receive a 1099. If you receive a 1099, you’re in your own business aren’t you?
TED: That is absolutely true. Most people don’t realize the moment you get a 1099, you are actually in business. And that’s defacto. We have freelances, and web designers, independent contractors, people having side hustles that are out there, and those that get a 1099 have something new to file on their tax return. It is called a Schedule C. That’s where you list all of your income, and take off all of your expenses. One of the big decisions a lot of 1099s will have up front is do I just file Schedule C, or should I open an LLC. That’s what a lot of people talk about, which is a limited Limited Liability Company.
TED: Really what the difference is is that a Schedule C, you have unlimited liability if somebody sues you, then you can actually be sued not only business-wise, but also personally. But if you have an LLC, it now provides a shield that allows you to protect yourself from just the business assets, and that way your personal assets are on the side. A lot of people don’t realize that.
JIM: So let’s say that I’m working from my home, and I’m taking in maybe $500 a month. I’m a writer, and I write for a magazine, or what have you. I’m receiving a 1099, should somebody like that, should somebody like me in that position open up an LLC?
TED: Probably not. If you’re only taking a little bit of income, you’re just doing one blog here and there and getting paid for it, or you sell some candles out of your house, this is not something that you’re probably going to open an LLC, because you liability is at a minimum. One thing you should think about it is, “Is this a business, or is this a hobby?” When it comes to the hobby, and starting to deduct expenses, if you show a loss on your tax return, and you do that in three out of five tax years, the IRS could come back and say, “This isn’t a business.” It’s really a hobby at that point. So why it makes sense to keep copious notes of the business. You may want to have a website or business cards to prove that you’re legitimately in business.
JIM: Sure, and also, if it is a business, it’s much easier to take those deductions that are business related. Correct?
TED: What we recommend for all people out there, to separate church and state. This is a big mistake people make when they have a 1099, that they bleed all of their personal expenses, and their business expenses together. So, you should open up a separate checking account. You should have a separate credit card, because when the IRS comes in, and you tell them that that computer, that meal, the office supplies were actually something that you paid for in your business, they’re going to ask, “Well why is it on your personal credit card? Why did the money come out of your personal bank account?” It’s a huge mistake when people get a 1099, they get in business, or they start a single member LLC, it’s a big mistake not separating church and state.
JIM: You had mentioned, you touched on keeping records. So even for those dinners or those lunches that you might take a client out under a 1099 arrangement, it’s important that you even keep the information as to who you took out, and what company they were with, right?
TED: That’s right. We tell a lot of people that when it comes to things like your mobile phone, go to Verizon or ATT or wherever you have your mobile service and title the phone now in the business. Or if you have a Costco account, or if you have a membership to one of those clubs, you want to title it in the business, because, again, down the road, you’re going to have to prove that you actually had those expenses. It’s an easier way to prove. When it comes to meals, you need to make sure you’re legitimately talking about business at that meal. Take notes as to the date, the time, the place, the person and the IRS comes back, that’s really what they’re going to be looking for. Or what do you notes look like, was it a legitimate business expense?
JIM: Yeah, for sure. At the end of the day, it’s just so important for those people that are, I just mentioned if I’m a writer and I’m only taking in maybe five or $600 a month, but for a lot of the small people or small business people that are out there working from their homes, they might be taking in $500 a week, and 2000, $3000 a month. So, they really have to focus on opening up a separate LLC for their business. Is it safe to say that if you’re bringing in that kind of money, you should have an LLC?
TED: Yeah, I think once you get to a 1000 or 2000 a month, you probably are legitimately in business, and it’s not just a side hustle.
TED: And if you work out of your house, you need to keep extra good care of your expenses, because some of your expenses at home may be deductible. The IRS just changed the laws a few years ago about your home office deductions. So, you can either take square footage from the house, or you have a standard formula that’s about $5 a square foot. You can kind of chose what that will look like in terms of your formula. But all the other expenses, can I deduct a piece of my cable, my electricity, what about the food I buy at Whole Foods, can I deduct a piece of that as well, are the kind of questions that we get. You want to make sure that you take good records, so if you do get audited, the IRS know what should have been deductible.
JIM: And, any kind of a home based business is usually a red flag for the guys and girls at the IRS, right? They say, “Wait a minute.” When they start to claim things, we want to make sure they are legitimate.
TED: It’s actually the contrary. It’s so interesting in this having advised businesses for more than 25 years, I have never seen the IRS actually go and audit somebody’s house. But yet, a lot of people won’t take the deduction, because they think they are going to get audited. Here’s what you should be doing. If legitimately you are working out of your house, you don’t have another place of business, nobody provides you a space to do your business, then take the deduction. If it’s not legitimate, and it’s your kids playroom, and you also use it as a business, that’s probably a problem.
TED: One of the things I see within these small businesses, especially when you get a 1099, is about paying taxes. When you’re a W2, your employer takes the taxes out of your paycheck. When you start getting a 1099, it’s up to you to take the taxes out of your paycheck. So many people don’t set up a separate account called an Estimated Tax Payment Account. You really should because that tax payment is going to rely on the bottom line profit in your company, not the gross revenue you bring in your business. So you have to kind of calculate, “If I make $50,000 as a 1099, how many expenses will I have? What will my net be, and what will the tax be on that?” It’s complicated. And if you make a mistake, I will tell you there’s so many 1099s that get the sticker shock at the time they file their taxes, because they’re like, “I didn’t know I owed any money.” Well, yeah, you did, you just had to estimate it during the course of the year.
JIM: And for those businesses out there, or those people out there that receive a 1099, you can be sure that the company that you received it from also reported to the IRS that they paid you that much money.
TED: That’s the funny thing. “Well nobody ever sent me anything.” Well, when you get the 1099, they also told the IRS, we paid you the 1099. So now the responsibility falls solely on your shoulders to deal with everything else. Self employment tax, state income tax if you have it, federal income tax, and if you don’t set aside buckets of money for that, you will absolutely have a big surprise when you file your taxes.
JIM: Exactly. Ted Jenkin, CEO and Founder of Oxygen Financial, I want to thank you so much for joining us on today’s show.