How to Get Your Taxes Right
1/17/19 - You might be scared. Or you might be gearing up to beat the IRS at its own game. Maybe you're dipping your toe into freelance work and don't know what to ask. We talk to Claudia Yi León, the mastermind behind @TaxesforArtists to break it all down. She's accounting Xanax and we promise you will walk away with a good tidbit, whether you're terrified or all-too-well informed about managing your tax situation.
Transcript below.
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CREDITS
Producer: Gina Delvac
Hosts: Aminatou Sow & Ann Friedman
Theme song: Call Your Girlfriend by Robyn
Composer: Carolyn Pennypacker Riggs.
Associate Producer: Jordan Bailey
Visual Creative Director: Kenesha Sneed
Merch Director: Caroline Knowles
Editorial Assistant: Laura Bertocci
Design Assistant: Brijae Morris
Ad sales: Midroll
LINKS
IRS.gov has more and better info than you think!
Tips for tracking expenses:
Types of business entities:
S-corp
C-corp
LLC (partnership or can file as S-corp)
Sole proprietorship
Do you need an entity?
Are you operating solo and not likely to get sued? maybe not
Are you operating solo and making loads of money and/or likely to get sued? maybe yes
Are you in a partnership (working with collaborators)? YES
Red flags with tax preparers:
Get full scope of services in writing
A paid tax preparer should sign your return
A paid tax preparer should give you a copy of your return
A paid tax preparer should not base their pay structure on size of return they get for you
TRANSCRIPT: HOW TO GET YOUR TAXES RIGHT
Aminatou: Welcome to Call Your Girlfriend.
Ann: A podcast for long-distances besties everywhere.
Aminatou: She's Ann Friedman.
Ann: She's Aminatou Sow! [Laughter] It's so much more exciting to say your name.
Aminatou: I know. [Laughs]
Ann: How's it going over there?
Aminatou: You know, um, across from you, uh, it's going great over here.
Ann: I love it when the over there is across the room and not across the country.
Aminatou: I know. Well what's on our agenda today Ann?
Ann: Okay. On today's agenda is the tax situation. Your tax situation specifically if you are someone who has a creative business, if you are self-employed, if you have a side hustle that you are looking to make more of a main-course moneymaker. And our guest is CYG's accountant and friend Claudia Yi León.
[Theme Song]
(1:15)
Aminatou: Yeah, I mean taxes are tough because all the language around it is always so negative: talking about your tax burden, people always complaining about taxes. You know, two things are sure: death and taxes. It's just sure, sure, sure, sure, sure. I love taxes. Sometimes I just really think about if we really change our attitude about this thing maybe it would feel less painful because without taxes you don't have roads. You don't have schools. You don't have light. Nobody's fixing the potholes. We just don't have anything. I'm like I cannot afford as a private citizen to just homestead on my own so I need everybody's pot of money to pool in so we have infrastructure and it's the thing that makes me feel least American is that I love taxes. I just wish that everyone would pull their weight. It's okay to pay taxes.
Ann: I also love what taxes do and actually in sheer dollar amount styles paying taxes does not bother me at all. The American way of paying taxes and the American tax code do bother me and I really wish -- I'm not out here arguing for a flat tax or anything but something that is not quite so finnicky and ever-changing would greatly help the level of anxiety I always feel around the end of the year when I do business taxes for myself and CYG and then in the spring or like let's be real the fall when I do personal taxes. Lots of anxiety. It actually is sort of how I used to feel about math class as a kid where I understood that it had more to do with my interest and level of attention than my ability to figure it out and yet I could not bring myself to like lock in and do it right or do it well.
(3:00)
Aminatou: Yeah. There's an entire lobby of tax preparers that is the reason we have to use all the bad software. They bury the fact that even the software actually can do a free e-file for you. And also a thing that drives me up the wall is that the government makes you do your own taxes but when you make a mistake they know. So I'm like is it possible that you already know exactly how much money I owe you and you could just send me a bill for it in a nifty little postcard and we could take care of this problem and we don't need ten middle men and me paying, you know, TurboTax $34.95 or if you want to do a federal thing, blah, blah, blah, there's always a scam for the number. And you're right, it really does drive me nuts.
There are also some countries in the world which I really appreciate you can look up all your neighbors' taxes and every citizen and see what those fools are up to. It's just wild also that rich people have all these burden minimization taxes that the rest of us don't have.
Ann: Loopholes.
Aminatou: Yeah, it's very upsetting. Anyway do your fair share. I get very incensed about this. It's all of my feelings about why monarchy is bad and why Harry and Meghan are like kind of scammers is tied around paying taxes. I'm like do your fair share.
(4:20)
Ann: Wow, I feel like we could do a whole Harry and Meghan tangent. [Laughs]
Aminatou: Well you know one of the statements that was released about them about why this whole process is taking so long about them untangling themselves and I believe it was like their family, they're literally in a gang. I was like oh yeah, they're just trying to jump you out but you have to . . .
Ann: A government-assisted gang.
Aminatou: Right. You're in a gang, your family's a gang, and they're trying to jump you out but it has to happen during business hours so this is what's happening. But one of the things that, you know, the family is telling them is "Well, you know, the taxes are really complicated." Guess what? Many people live in many different countries that are not the country they're a resident of and those people happen to pay taxes. What's so much more complicated? Just probably that they have more money. But do your fair share.
Ann: I think everything feels complicated to the royal family. Like that's sort of how they justify their existence by being like it's more complicated than you'll ever know, and in fact . . .
Aminatou: I'm like no, all of us have family drama. Some of us are even from trashy families like your family. Don't worry, it's quite not complicated. But anyway the tax situation is bananas and your taxes can do great things like give you the BBC or they can do bad things like give you a family you have to take care of. I wish that taxes were easier on those of us who need taxes to be easier and also that there was not so much stigma on raising taxes or what taxes can do for you. Taxes are responsible for great things, but you're right about the anxiety of running your own business or just running your own life and trying to do them. April 15th is tough. If you are a freelancer like us you're actually doing taxes four times a year. That's also not fun or easy and it's a lot of money.
(15:55)
Ann: Right. And also like, okay, so we're talking about this at the top of the year in part because it seems like a good time to have a reset in your way of thinking about money. It's also like right now our inboxes are full of correspondence about our own taxes and getting things in order. And also like on that front in terms of how complicated it can feel one reason it's less complicated for us is because we have the privilege of working with some people who are really, really good at understanding the ins and outs of tax law and understanding our goals and our politics and helping us connect the dots between those two things. So that's why we wanted to talk to Claudia, our accountant.
Aminatou: Whose business aim is many happy returns and, you know, just seeing that email in our inbox reduces my anxiety greatly.
Ann: Gina who did this interview with Claudia referred to her once as Accountant Xanax and she truly is like in human form just so, so calming of our many stresses and anxieties about this process. And about being business owners in general, and so we thought we would share the wealth.
[Interview Starts]
Claudia: My name is Claudia Yi León. I run the Instagram account Taxes For Artists.
Gina: Which is great.
Claudia: Thank you. And I give tax consultations, speaking engagements, birthday parties. [Laughter]
Gina: Epic Halloween costumes. She does it all.
Claudia: And it's all tax-related, so I like to artsplain taxes to the masses.
Gina: Ugh, and that's what we're so stoked to talk about today because we're all about helping our listeners and ourselves get our money right which as a consultant you have done for Call Your Girlfriend so full disclosure there.
Claudia: [Laughs]
(7:45)
Gina: First I just wanted to ask you, you know, I think people are reasonably scared of taxes, scared of the IRS, don't want to pay more money. Life is expensive out here. When you first talk to an artist or someone who's really trying to get their taxes right what are the first things that pop to mind of like myth-busting or like things that people really need to know first and foremost about this?
Claudia: So people fall into two camps. They're either terrified of the IRS and terrified of being audited or doing something wrong or they're just trying to get over and pay as close to nothing as possible.
Gina: So too scared or not scared enough.
Claudia: Exactly. So I like to have people walk the middle road. First of all the IRS isn't our enemy. You know, taxes pay for everything. They don't just pay for wars and shitty stuff; they also pay for the CDC, the NIH, the EPA -- less and less.
Gina: Right, our environment, our health to the extent there's any social services left, Medicare.
Claudia: Well actually about 60 percent of our total budget goes to social security, Medicare, welfare, and other social outlays. So we're mostly, mostly making sure the baby boomer retirees don't die. That seems to be 60 percent of our budget for the near-term future. [Laughs]
Gina: Right. Which is, you know, people not dying is a good goal for government spending.
Claudia: Everyone loves grandma.
Gina: Yeah. [Laughs] Okay, so if the IRS isn't our enemy what is the right way to work with them? Because I think that most of us either have to just grapple with taxes at some point in the year -- I'm sure some of our listeners are the spreadsheet mavens who are right on top of this stuff. For people who are a little more unsure what are the right ways to go about getting help and getting your tax situation right, like how should people be planning? Particularly let's say they're about to start a new job or are leaving college and starting a new career. What's a way to think about this that isn't immediately like winning or losing the game in the terror or the huckster version of this?
(10:05)
Claudia: The first thing you have to realize once you get into the working world is you're going to have a relationship with the IRS for the rest of your life so get used to that that you're going to pay taxes forever. And it's okay, you know? We have all the wonderful things that we have through our taxes, so we should. We should be investing in our communities through taxes. This sounds really silly but just acquaint yourself with irs.gov. The website will give you about 95 percent of all the answers you're looking for and the publications are actually written quite well. Another thing too, outside of like April if you call the IRS helpline they're incredibly helpful. They will explain everything to you. They will hold your hand and explain all of your questions.
Gina: You had an experience with this, right?
Claudia: I did actually. I . . .
Gina: Before you got into working professionally in the tax world.
Claudia: Exactly. Before I knew anything about taxes I opened an S Corp because somebody told me to and . . .
Gina: And that's like when you have Inc. at the end of your business name right?
Claudia: Exactly. And then I realized there were all these responsibilities I needed to fulfill such as payroll. I had no idea how to do it, I called the IRS, and this nice lady walked me through every box of my W-2 and how to fill it out.
Gina: Wow. So there's real humans over there?
(11:50)
Claudia: There are real humans over there who, by the way, hot tip, did you know they all use stage names?
Gina: What?
Claudia: They all use pseudonyms. So when you call and you talk to Roberto that's not his real name.
Gina: What? Oh my god, he's like in IRS witness protection.
Claudia: [Laughs] Well you know a lot of people really, whether correctly or not, hate the IRS and it is for their protection.
Gina: Wow. Let's talk a little bit about, because I think there is often this warm glow around going freelance especially for people who love to follow beautiful plant-filled apartments on Instagram of like oh my god, I'm going to work from home. It's going to be amazing, like get away from my weird coworkers and just be on my own with my cat. So for someone who's been used to working at the kind of job where you get a W-2, your filing is pretty simple, what are the first things they might need to know about entering into 1099 life?
Claudia: So without getting too far into the weeds there are three taxes most people who work performing services -- that's a broad . . . basically work is what work for services means. There are three taxes that most people pay: IRS, your personal tax, your state tax unless you live in one of the non-taxing states, but the third one is the one we touched upon earlier that is really . . . you don't really think about too much but is 60 percent of our budget. It's social security and Medicare. And that is 7.65 percent of your paycheck on top of the personal income tax which is that progressive tax rate. You know how everyone falls into different brackets?
Gina: Right.
Claudia: So when you become a freelancer what that means is you are a small business whose boss is you and whose employee is also you.
Gina: Right.
(13:55)
Claudia: Therefore since you don't get paid on a W-2, so you go and work for a client. The client gives you a lump sum of money. At the end of . . .
Gina: You haven't paid any taxes on that yet which is why the checks can look good unless you're freelance blogging for 300 bucks for something you worked for 15 hours on.
Claudia: [Laughs] Exactly. So the money stacks up and you're spending it and then . . .
Gina: I'm pointing at myself here.
Claudia: [Laughs] And then comes April and you realize O F, I was supposed to pay not only my estimated personal income tax but also what will be due is something called the self-employment tax which is the freelancer's version of social security and Medicare, of payroll taxes. That can make your tax bill at the end of the year look really huge.
Gina: Right. And it's one of the reasons if you have that friend who is like the super -- again the spreadsheet maven, savvy freelancer, you'll hear about them paying quarterly taxes. This is one of the reasons is so you don't have a really scary number in April where I think if you've been used to working at a company that pays part of that on your behalf and they've taken it out from your paycheck to begin with it can feel like oh, I file and money comes back to me.
Claudia: You don't think about it.
Gina: Right.
Claudia: Yeah, when it's taken upfront it's like you never had it and it's just a psychological framing issue that having it and giving it back hurts a lot more.
Gina: Yeah. Do you have tactics either for yourself or that you advise clients to not feel that pain so hard?
Claudia: I think the most important thing is changing your framing and changing your psychology. My point-of-view is if you can hold on to your money as long as possible before giving it to the government you can put it in a high-interest bank account for example. I mean I know right now you can only get two percent APR.
Gina: At most.
(16:00)
Claudia: At most. But you know what? At the end of the year maybe you get 50 bucks. That's 50 bucks you didn't have and you can treat yourself.
Gina: Exactly. It's like you both get to decide what to do with it and it may grow versus growing for the government.
Claudia: You always . . . you never want to give up your assets before you need to because there's something called the time-value of money. You can always be doing something with your money at whatever market rate exists.
Gina: Mm-hmm.
Claudia: The other way to look at it is a bank is never going to give you an interest-free loan. Why would you give anyone including the IRS an interest-free loan? If you pay way too much upfront.
Gina: That means you're getting the big refund.
Claudia: Yeah. When you're getting the big refund either through too much withholding or too much estimated taxes, I hate getting the big refund because that was money that I could've had in my bank getting my crappy two percent return. So that's one way to think about it. But I'm not saying hoard all your cash until April 15th because there are statutory amounts that you are supposed to send to the IRS and to your state. And each state will have a different rule that mostly follows the IRS's rule but the IRS basically says if you want to be safe, however much tax you paid last year, pay that this year. That's your estimated taxes. So take that number, divide it by four, and send it in every quarter.
Gina: That sounds simple.
(17:45)
Claudia: What could go wrong? [Laughs]
Gina: I know. I'm listening to you talk, I'm like wow, I should've called you up four years ago.
Claudia: I can do this. [Laughter]
Gina: But you had one more thought about freelancing?
Claudia: I do have one more thought about freelancing and a very, very important distinction. Besides the fact that you're going to be paid in lump sum and you have to deal with your taxes this is more about your relationship with not your employer anymore but with your payer or with your client. And it's important to not call them your employer because they are not. If you are getting paid in a lump sum you are not an employee. You don't have any employee protections, discrimination, OSHA, whistle-blower.
Gina: Wow.
Claudia: So just keep that in mind. Overtime breaks, it is up to you to negotiate that yourself. So make sure you go in there and get as much as you can. One important thing you have to realize now that you are a freelancer on a 1099 getting a lump sum is that you can write off a lot of business expenses.
Gina: Yes. And this is an exciting and again scary proposition depending on whether you're the fearful or huckster type.
Claudia: Exactly. So the standard that the IRS has is ordinary and necessary. So is this expense an ordinary one in your industry? And is -- and was it necessary to give rise to the business income? So if you are . . . if you're a personal trainer you probably have a gym membership but if you are an accountant you really don't need that gym membership.
Gina: You might have it but it's hard to write it off. Yeah.
Claudia: [Laughs] Exactly. So there's a few expenses that the IRS has seen abuse in so they have specific regulations on how to track them and these ones are your auto expenses, there's specific rules for that. Meals have to be tracked separately because they're only 50 percent deductible. Gifts to clients, they are like 25 dollars per recipient so be a cheapskate.
Gina: Yep.
(20:22)
Claudia: And you can't write off entertainment expenses anymore so if you take a client to the LACMA.
Gina: Or a baseball game.
Claudia: Or a baseball game.
Gina: Or a strip club.
Claudia: Exactly. However if you go to LACMA to do research for a painting project that you have been hired for, that is research. That was not entertainment. You were working.
Gina: Yeah. And if you're an artist, LACMA, the LA County Museum of Art, can you write off your annual membership? Is that -- that's a totally different category right?
Claudia: Those are membership and if it's ordinary and necessary to producing your income then it should be deductible.
Gina: Yeah, but talk to your accountant to make sure.
Claudia: But talk to your accountant to make sure. Exactly. Thank you. [Laughter]
Gina: So we've been talking about deductions that are available for freelancers, self-employed people, but there are some that any of us can take right? Expenses that can reduce our tax burden. What are those?
Claudia: Exactly. And so these personal deductions, first of all you can either take itemized or the standard deduction. The standard deduction is basically just a big chunk of money that the IRS says we're going to subtract this from how much money you maid and we're not going to charge you tax on this amount of money. So a lot of us who have houses or a lot of medical expenses or a lot of charitable contributions can itemize which is taking the mortgage interest deduction, taking real estate taxes, state taxes, and any medical expenses or charitable contributions.
(22:05)
Gina: Right, and the reason to -- and I think for a lot of people, especially if they're preparing their own taxes, it's one of those like I'm just going to take the standard deduction and not worry about it and that's available to you. What's the benefit of itemizing?
Claudia: The benefit of itemizing is if you pass the standard deduction you pay less tax.
Gina: Right. And it sounds like those categories you mentioned are good ones to look into for reasons to itemize like if you had a lot of medical bills this year.
Claudia: Exactly, yeah. And the medical -- there's . . .
Gina: Because that's one of the biggest causes for people to go into debt so if you have medical bills and they can reduce your tax burden, you know, I'm sorry that you've been sick but also make sure that you get some of that money back.
Claudia: Exactly.
Gina: Claudia tell us the 100 percent never do this.
Claudia: Okay, so I mentioned the gym membership. Like come on, no. It's a fringe benefit for my own company. No, it's not. It's actually in the code, like no gym -- it actually says no gym memberships so no gym memberships unless you're a body building.
Gina: Yep.
Claudia: Clothing. A lot of people are writing off their clothing saying it's like costumes or I needed this dress to go to the Emmys.
Gina: You can tell we live in LA. [Laughter]
Claudia: But . . .
Gina: Don't do it?
Claudia: Don't do it. The standard we used in my masters of taxation program was the clown suit. I mean you could buy a very nice dress and you could say oh, I would never wear this outside because it's not my style but that won't fly. But a clown suit? You're not going to wear that outside so that's kind of the standard. Or, you know, if you work at a store that for some reason makes you buy your own . . .
Gina: Like uniform?
(23:55)
Claudia: Uniform, then that would count as well. Can I bring up some funny tax court cases?
Gina: Hell yeah.
Claudia: In Sweden, Sweden has sort of similar costume deduction rules as we do in the United States and Abba was able to deduct all their costumes because they were deemed so outrageous they could not possibly be worn on the street.
Gina: Is this where the Abba look came from?
Claudia: Yes.
Gina: Oh my god.
Claudia: The Abba look is about tax evasion.
Gina: Oh my gosh. If you see me looking like I'm wearing a costume it's because that's just how I dress. I'm not writing it off.
Claudia: [Laughs] Well and that's a good segue because Cher tried to do the same thing. She was trying to write off her fabulous costumes and said . . .
Gina: Oh my god, I mean they're so amazing.
Claudia: "I wear this on the stage. I could not possibly wear this on the street." To which the IRS countered "Oh really? Here you are on page five of Variety wearing that exact same dress at a party."
Gina: Wow, at Studio 54.
Claudia: Exactly. [Laughs]
Gina: Caught.
Claudia: Yeah, and that's another thing, if you ever do like go way down the rabbit hole of having like a face-to-face audit remember everyone can see Facebook and Instagram.
Gina: How many of us are like realistically likely to get audited? And what are the things that are going to make that happen if you're not someone who's regularly showing up on page six or appearing on -- in the tabloids?
Claudia: Very few of us get audited to be honest and you can actually look at the -- again if you go to irs.gov you can find . . .
Gina: Is this your homepage?
Claudia: I do not work for the IRS. You can find the IRS data book. They put one out for every year and it's basically all the data that they've collected from all the returns that they've collected. And it looks like just half a percent of all returns filed were audited in 2018. Less than -- like about less than half a percent of taxpayers with income between $25,000 and $500,000, that's a very, very big range, get audited. Unfortunately it goes up a little if you're under $25,000 because of the earned income tax credit. They don't want people fraudulently claiming it. So yeah, not a lot of people get audited.
(26:25)
If you do get audited the first step is going to be most likely a paper audit. 0.54 percent of us have gotten a letter in the mail I'm sure that says "Hey, we recalculated your tax. Now you owe $200." And then we usually just pay it.
Gina: Send it in?
Claudia: Yeah, exactly. Well you were audited. That was an audit, yeah.
Gina: Oh, wow.
Claudia: So it's not so bad right?
Gina: Right.
Claudia: So just read the form very carefully and you should be good. Follow the instructions and you should be fine.
Gina: Something I've really learned from talking to you about this stuff is read the fine print, and you're so good at that. And I think that sometimes these emotions whether it is about fear causes everyone to try to do everything but read the form that gets sent there. Like where's the part I detach and send something in and oh, there's that booklet. Throw that away.
Claudia: Yeah, exactly. Yeah. I mean a lot of these letters, they are written in plain English but there's a lot to read. So just take your time. They'll usually give you like a choose your own adventure at the end where you choose either to send your money in or continue with the adventure and protest. So the one thing to note is if you do not agree with the new assessment of tax you can send a letter back that says I do not agree and while this whole letter correspondence is going on your interest and penalties clock is suspended. So the interest clock isn't running while this is happening, and they'll pretty much only correspond with you either through the mail or through the fax machine.
Gina: This is so wild. I had to fax something in recently. [Laughter]
Claudia: They love the fax machine at the IRS.
Gina: Wow.
Aminatou: Let's take a break. We'll be back with Gina and Claudia in a minute.
[Ads]
(30:00)
Claudia: Can I give you like a totally like weird little factoid?
Gina: Yeah.
Claudia: Did you know there is a super-secret algorithm called the discriminate function system that many of our tax returns are sent through and they're scored? So basically the farther away you are from this average that the super-secret algorithm has decided is the average the more likely you are to get audited.
Gina: So you get graded by a computer?
Claudia: You get graded by a computer algorithm itself. You cannot FOIA request it but there was actually -- there was a statistician I think in the '80s or '90s who reverse-engineered the diff algorithm using just publicly-available IRS data that you can request.
Gina: Wow.
Claudia: So if there are any statisticians out there who want to do a project with me. [Laughs]
Gina: Oh my god, I love the nerd levels this can go to. What I always get from you about this is how fun it can be to nerd out if you have the time and patience and overall calm about this right? This is a rabbit hole that can pay literal dividends in terms of your career to know how it works and to be able to work it well.
Claudia: Absolutely.
Gina: To that end I want to talk a little bit about your personal story because when we first met you were working in film and post-production stuff like a lot of people we know in common because we've been friends for a while and you got deeper and deeper into this tax world. How did that happen?
(31:50)
Claudia: Yes, so I am one of those people who started freelancing one day and had to learn the hard way about taxes, estimated taxes, and you know, expenses, what to deduct, etc. So I went real hard into irs.gov.
Gina: Because like you said you're like oh, shit, I'm actually a business now. Here I thought I was just someone who made really awesome motion graphics.
Claudia: Exactly. And now the onus is on me to know shit. And so, you know, I went real hard into that but then I started taking classes at community college like basic accounting and basic tax classes just to really know what I was talking about and what I was doing and, yeah, through all this time I've been a working visual effects artist for almost 20 years now. A few years ago I had exhausted all the accounting and business classes at community college so I bit the bullet and I went to Cal State Northridge for a masters in taxation and I got my masters. And yeah, I'm still a working artist.
Gina: Not everyone is going to be Claudia level, like this may not be the thing you most want to nerd out about, but it is doable.
Claudia: It's absolutely doable if you aren't in a rush.
Gina: How did you allocate the time to make sure that you were patiently reviewing things for the IRS? Did you say like okay, one Saturday a month? Or how did you particularly do that?
Claudia: You know, it's funny because when I started it was so long ago that a lot of things were on paper or, you know, in spreadsheets. But I would say now just go straight for an app. Use apps. They really, really make your life simpler.
Gina: Do you have some that you like? Not endorsement but that you think are reasonable that you know people use?
Claudia: I do not have an endorsement relationship with this company but I love it so much. Wave Apps is the best.
(33:50)
Gina: I use it for invoicing. They make really pretty -- yeah.
Claudia: They make really pretty invoices. It's just like QuickBooks but without the complicated stuff which a lot of us really don't need, including myself. I'm not tracking inventory in my business. So yeah, Wave Apps is fabulous. But, you know, even -- and it's free. There's a lot of free websites and free apps that you can use. Even Mint is a good way to kind of just start keeping track of your money in and your money out. Another thing that will make it easier if you're contracting is just get a separate credit card. Put all your expenses there then at the end of the year you're not scrambling for wet receipts under your couch.
Gina: Everything that is business-related is in one place. And depending on what credit card you have sometimes they give you a little end-of-year analysis that shows what categories things fell into just based on their auto labeling.
Claudia: Exactly, or you could just leverage one of the apps to figure it out for you and you're done. It makes life so much easier.
Gina: That's great. I know you wanted to shout out saving for retirement because ideally all of us are going to live long and full lives and maybe one day we'd like to stop working. I don't know. [Laughter] How does that play with your tax return?
Claudia: So there are a few vehicles that you can shovel your money into.
Gina: But you're very pro.
Claudia: I'm pro maxing out your retirement accounts because A) you get a tax benefit so depending on a bunch of arcane rules that your accountant or your tax lawyer will figure out for you you can get a tax benefit.
Gina: So it's not only good for when you're old, it's good for right now?
Claudia: Exactly. And this can be a traditional IRA that will reduce your taxable income, a SEP-IRA if you are self-employed, and if you're super-advanced in your S Corp you can have a 401(k).
Gina: Mm-hmm. And then if you are an employee working on a W-2 you had some thoughts about retirement too which I think is around employer match and contribution.
(36:08)
Claudia: Absolutely. If your employer provides a 401(k) take all the matching. Just ramp it up. It'll reduce how much tax you pay and it'll also put you in a good place at retirement.
Gina: It's free money.
Claudia: Exactly, yeah. I mean if they're matching five percent you just got a five percent raise.
Gina: So I know we've been talking a lot about self-employment and one of the reasons is that there are, as complicated as it is, really important reasons that self-employment can be good for people, especially people from marginalized backgrounds. For example you own something. It is your business. If it grows enough that you're in a position to sell it that's something you have equity in. So there are definite dangers to be watching out for as Claudia mentioned in terms of discrimination and protections that employees have you may not have. On the other hand you have something that is wholly yours that can grow over generations to come and most of the predominantly white wealth in this country was built generations back from people building and growing businesses that get handed down. So that's your ability to control your destiny if things go really well. So those are really compelling reasons to do it, to start into the freelance self-employment game.
Claudia: Absolutely. And the thing about being freelance is I would never have been able to get my master's degree if I didn't have that flexibility in my artist gig.
Gina: Yeah.
Claudia: And I probably wouldn't have had the mentality of risk either because when we are at a W-2 payroll job we lose that zest for risk and we trade it for security. There's nothing wrong with security but we can be laid off for any reason. That's not really security.
Gina: Yeah, most places you're an at-will employee.
Claudia: Exactly.
Gina: So the company can let you go at any time.
(38:08)
Claudia: You're right, this is an at-will employment state.
Gina: Yes, but many states are. We're in California, that's the rules here, but that's true in a lot of places.
Claudia: Exactly. Yeah, so I think that security is very illusory.
Gina: So I just want to make that plug because I know it's sounding like self-employment is hella hard and it has some complicated factors but there are good reasons to do it. Once you get . . .
Claudia: Life is hard.
Gina: Yes. [Laughs]
Claudia: Working is hard.
Gina: Yeah. Once you get into that bucket you may reach this point as you're hearing some of these details where you think I probably want to work with an accountant. If that's the case what are your . . . I know you have some red flags for like knowing when your accountant is doing something muy mal.
Claudia: [Laughs] Muy, muy terrible. So I can't tell you exactly how to find a good accountant. A lot of people will suggest their own accountants if they really love them. It is a trust relationship. But there are also some things that you should definitely watch for. So first of all if this tax professional has some sort of certification. Not all tax professionals are CPAs. I for example have an MST but I have not passed the CPA exam nor do I need to. Actually to prepare a federal return you need exactly zero qualifications, did you know that?
Gina: Wow. So just to say that just because someone has a shingle out as a tax preparer you may not necessarily know what their qualification is other than they said "I'm good at this."
Claudia: Exactly. If they have licenses or degrees ask which ones they have then look them up online to make sure that -- like for example if they say they're a CPA make sure that is current, or an EA which is Enrolled Agent.
Gina: And they usually write that after their name or it's usually in the business name.
(40:00)
Claudia: Yeah. They worked hard to get that designation so it's going to be on there. [Laughs]
Gina: Right, right.
Claudia: And the type of advice you take from your tax professional you should also gauge what kind of credentials they have to give you that advice. So if they're giving you stock advice and they are not like, you know, certified financial planners do not take that advice.
Gina: Right. Right. Like I want your advice about how to calculate my capital gains, not necessarily which stocks to buy and sell.
Claudia: Exactly. Exactly. So some major red flags for tax preparers, and this is -- I had a friend who told me his tax preparer did this -- they don't sign your return.
Gina: Oh.
Claudia: Like they have you sign it as self-prepared. Big red flag.
Gina: Okay. And why is that?
Claudia: In California as a registered tax preparer you are required to sign any return that you prepare for money.
Gina: What I've always heard then is your tax preparer should help you if you get audited or they represent you if you have a tax issue with the IRS. Is that correct?
Claudia: That is not necessarily true.
Gina: Okay.
Claudia: So you have to again read the fine print, read the terms of your engagement letter.
Gina: Yeah, okay.
Claudia: Yeah, you need to ask all the questions upfront and you need to get it in writing.
Gina: Okay. But they should still sign it?
Claudia: Oh they should absolutely sign it, yes. Absolutely. [Laughter] Or if they don't give you a copy of your return . . . oh, if they guarantee a certain refund amount or their fee is contingent upon how much refund you get that is a big red flag because your tax preparer has a duty to you but they also have a duty to report correct numbers to the IRS. So if they are saying they're going to give you a big refund they are not fulfilling that second important duty.
(42:00)
Gina: So let's say that your freelance business is booming now and you're trying to figure out what -- like you were saying that you have an S Corp. I have an LLC. Call Your Girlfriend is an LLC. There are these different kinds of business structures. Some people are sole proprietors that when Jane Freelancer is trying to figure this out she may be sort of like what the heck, which say do I go? And there's often this advice to talk to your accountant and talk to your lawyer which is how we get into the oh my god, I have to find an accountant. Tell us a little bit more about that.
Claudia: So there are two main reasons people form entities, but the real -- and when I say entity I mean a corporation, either S or C, or an LLC which can file as an S Corporation or as a partnership. So if you form an entity the real reason you would form an entity is for liability protection. Basically if you are in an industry where you can get sued by your clients you want to protect your personal assets from your business's indiscretions. That is the main reason you should choose. If you're not going to get sued you may not need an entity and for certain levels of income the amount you spend administering an entity and complying with all the legal requirements on an entity may be eaten up by the amount of tax that you save. There can be a tax savings in for example filing as an S Corp.
Gina: That comes with a lot of rules like you were saying about payroll.
Claudia: So many -- you know.
Gina: Yeah.
Claudia: So many rules. So many rules, yes. So, yeah, and that's something that you would have to talk to your accountant about. [Laughter]
Gina: Right.
(43:55)
Claudia: So you would give your accountant look, this is what my income is going to be and this is what my expenses are going to be and they could do a very simple, quick analysis for you and compare what it'd be like if you just stayed on a 1099 versus in an S Corp.
Gina: And it's been my sense from talking to friends who are in this stage of their careers that they are often encouraged by a tax preparer to form an entity because the tax savings are beneficial. And from what I'm hearing from you you need to have some critical thinking for yourself about how much time that's really going to take and so make sure to ask questions of if I do this what are the requirements?
Claudia: Your time is money and then you may have further requirements like oh, now I need a bookkeeper. Now if I'm a corporation I need financial statements prepared at the end of the year, like what the fuck is that? And how much is that going to cost? So you need to factor those numbers in and it's like oh, how much does an S Corp return cost? Way more than TurboTax. [Laughter] So there's just a lot to think about there and a lot to consider. And yeah, long story short if you're not going to get sued you're probably fine.
Gina: Especially if you're working solo.
Claudia: Thank you for bringing that up. Yes, exactly. If you have partners in your business you should definitely form an entity to protect yourselves from each other.
Gina: Yeah. [Laughter] It's kind of like, you know, unlike marriages businesses require prenups. Like there have to be rules about who owns what.
Claudia: Exactly. Exactly.
Gina: And also like that no one gets married expecting to get divorced or so they say. But same thing about starting a business, you want to have as much clarity upfront as possible.
(45:50)
Claudia: Absolutely. Absolutely. And yeah, it'll just save you headaches later on.
Gina: And if you're not ready to form an entity, if you're in that earlier stage but you are working with collaborators, even just having some one-page documents, here's what each person owns, here's our percentages, and sign that. Like have something so that when you do start going to the lawyer or accountant you've had that conversation.
Claudia: Did you know that if you are in that situation you are in de facto a partnership?
Gina: Oh really?
Claudia: And are required to file a partnership return.
Gina: Oh my gosh. [Laughter]
Claudia: If you are sharing income and expenses together collaborating you are actually a partnership and must file a 1065.
Gina: Wow.
Claudia: Pain in the ass. [Laughs]
Gina: Thank you so much Claudia. I really appreciate you talking to us today.
Claudia: I really appreciate you taking the time to come over here and interview me.
Gina: And where can people find you on the Internet?
Claudia: You can find me on Instagram at @taxesforartists.
Gina: It's so good and so many great one-off tips like you heard today.
Claudia: Thank you so much.
Gina: Thank you.
[Interview Ends]
Aminatou: More Gina interviews! And more Claudia fixing our lives.
Ann: Yes please. [Laughter]
Aminatou: See you on the Internet.
Ann: See you on the Internet.
Aminatou: You can find us many places on the Internet: callyourgirlfriend.com, Apple Podcasts, Spotify, Stitcher, we're on all your favorite platforms. Subscribe, rate, review, you know the drill. You can call us back. You can leave a voicemail at 714-681-2943. That's 714-681-CYGF. You can email us at callyrgf@gmail.com. Our theme song is by Robyn, original music composed by Carolyn Pennypacker Riggs. Our logos are by Kenesha Sneed. We're on Instagram and Twitter at @callyrgf. Our associate producer is Jordan Baley and this podcast is produced by Gina Delvac.