Mistakes Online Tutors Make When Organizing US Taxes

Getting started with taxes can be difficult when you are transitioning from a job to owning your own business. Take a look at what changes you need to think about when it comes to taxes and how you can solve them so you don't owe the government a ton of money at the end of the year.

In this YouTube video I was featured on Joanne Kaminski’s channel talking all about Taxes and things Entrepreneur’s can do to get themselves organized for tax time!

What is the difference between a hobby and a small business?

I think this is such an important question to ask yourself. So, let’s start this one by talking about intention. Are you intending to have a hobby on the side of your day job? Do you intend to move away from your 9 to 5 and have this hobby be your full-time gig?

The IRS defines this as: A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.

Financially speaking you’ll need to start paying taxes above $1,000 net profit.

IRS FORM 1040-ES for Estimated Taxes: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

Page 1 “General Rule: In most cases, you must pay estimated tax for 2020 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2020, after subtracting your withholding and refundable credits.”

What do online tutors that are just starting out need to think about as they are getting started?

Here are some general ideas for you, but I encourage you to go back and talk with your CPA/Tax Accountant so you can get advice directly for your business.

Keep good records - When you keep good records, not only will it help you start identifying patterns of spending, but it will help you transition to hiring a bookkeeper when the time is right.

Create a system that works: I love using systems. Systems help keep things organized. Find a system that you can use to keep good records, start immediately so that when things start to ramp up, you can trust that the system you have in place will be a strong foundation. I love using Asana as my project management tool. I have a YT video explaining what I do specifically for my bookkeeping clients that I’ll share with you in the comments.

Asana Video Link: https://youtu.be/sN69OO7mk_c

What expenses can a tutor list as business expenses?

Anything that is related directly to your business. This will vary based on how you do your business, so I won’t speak to specifics.

Know Your Expenses: Make sure to always have the backup to substantiate the expense. Know what the charge is for, know how often the charge happens, and know which account is being charged. Try your best to put it in a broad category, like Marketing and Advertising, or Travel, or Website. When you move to hiring an accountant those categories will help so much!

Trim Expenses - There are a lot of monthly recurring charges that can come out of your accounts, and you wouldn't know it because these are charges that are set-up to happen every month. When you start becoming familiar with what is necessary for your business, then it is the perfect time to start trimming other areas where you are spending money.

Source: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses

Why do small businesses need to pay taxes quarterly instead of at the end of the year?

When we are in a 9 to 5 job, we don’t see the tax side of things UNTIL it is tax time. But, all year long you are contributing to your tax bill by what employer’s know as a FORM W-4. This is a form that your employer asks you to fill out when you first accept a job. The reason why I am starting here is because this is the piece of paper that actually calculates your tax rate based on the answers you give. As entrepreneurs we have quarterly estimated taxes… But, we don’t have an employer to calculate the taxes for us anymore - we get to do that ourselves! So, not only does the IRS require us to make quarterly estimated tax payments, but it’ll actually help us out come tax time. If you don’t pay your quarterly estimated tax payments that could mean penalties and interests will be charged to you when you file your annual taxes.

Resource: www.irs.gov/payments

What percentage should a tutor put aside for tax purposes and why?

You can use last year’s taxes as an estimate of what you should be setting aside. Another way to do this is to set aside about 25 to 30% of your net income. You can also use page 6 of the link I am providing to you, there is a way that you can calculate your current year’s taxes.

Resource: https://www.irs.gov/pub/irs-pdf/f1040es.pdf (Page 6)

What is the difference between sole proprietor, LLC, and S-Corp? Which would you suggest for a tutor that is making $400 a month vs. $4,000 a month?

I’m going to provide general advice here since I can’t speak to everyone's situation. I would also like to encourage all your online tutors to consult their attorney and/or CPA/Tax Advisor before making any drastic changes to their entity type. Typically speaking when you are simply starting out your business you’re going to start as a Sole Proprietor. When you start earning an income then I would highly suggest that you register with your state and become an LLC, which provides additional protection to your personal assets. When you have a growing booming business and are starting to pay yourself a salary, then you need to discuss with your CPA / Tax Advisor if you should change over to becoming an S-Corp. Make sure to have that conversation as there are cut off deadlines each tax year. Most of us will fall under the Sole Proprietor or LLC - which means we are pass-through entities. The pass-through entity designation is how you will file your tax return. Which means most of us will be using a Schedule C.

I’ll share a great podcast episode from an online lawyer friend of mine who has some really great advice on this topic!

Resources:

Legal Paige Podcast episode:

https://thelegalpaige.com/blogs/blog/episode-5

What the IRS says about Biz structures:

https://www.irs.gov/businesses/small-businesses-self-employed/business-structures

If your business is audited, what should you make sure to do so that you are prepared?

As far as audits are concerned - they are mostly random! I have only been through a few audits but they will really want to see ALL of the back-up to substantiate your income and expenses. Here are a few things to keep in mind with regards to keeping your books clean for audits.

Please please please keep a separate bank account for your business expenses to your personal expenses. Try your very best to not tap into your business accounts for personal use.

Lean on the systems that you created and stick to it. I always check in with my finances on a weekly basis. If you are new and just getting started you might not need to check in weekly, so put a calendar reminder to do this on a monthly basis. If you are further along in your business, I might have a higher frequency when to check in on your accounts, maybe even 10 minutes each day.

How long do you need to hold onto your receipts? Are digital options just as good as having a printed receipt?

I love having duplicate systems. So, I have physical copies as well as digital copies. I generally clean out my files on an annual basis. But there is a grid that tells you how long you need to keep certain documents, so I’ll share the link with you in the comments. If you want to be REALLY safe, I’d say keep it for 7 years.

Some of the online file storage systems, find something that works for you and create a habit of always uploading your receipts: