Embedded - 150: Sad Country Song

Episode Date: May 4, 2016

Torie Charvez spoke with us about what it takes to start and run your own business in the US. We talked about starting your own consulting company, selling your latest gadget, and all of the bookkeeping, tax issues, and details involved. Torie's company is Tax Goddess. The write-off publication she mentioned is on the IRS site isChapter 8 of Publication 535. Elecia mentioned her Snow White's Guide to Your First Stock Options.

Welcome to Embedded, a show about the many aspects of engineering. I'm Alicia White, alongside Christopher White. Many of you have asked us about getting into consulting. And we've talked about the personal network part and the technical skills, but there's a business side to it that's a bit intimidating. For that, we've asked Tori Chavez here to help us unravel it. Before we get started with her, last week I mentioned that Planet Labs winners, and it turns out Jonathan really is a repeat winner.

He entered for the amusement of controlling satellites, but has graciously opted to let the book and t-shirt go to the next winner, Yash. So thank you and yay. Yay also that this is episode 150. Since we do 50 shows a year, that means this is a birthday episode. If you would like to get us a present, well, what we'd most like is for you to tell someone about our show. Write a review on iTunes, post a link of your favorite episode to Reddit or Hacker News, or mention us at work or school or lunch or social media.

That would be the best thing. So thank you for that. And... Hi, Tori. Thanks for joining us. Thank you. Could you tell us about yourself? I am a tax geek.

So amongst other kind of geekiness, I enjoy tax preparation. So I'm a little strange. I own my own business in Campbell called Tax Goddess Incorporated. And you're an enrolled agent, which is a special form of tax consultant. I'm not allowed to use the word accountant. We think CPAs have that copyrighted. They're the only ones who can use that word. It's like realtors. Exactly. They're the only ones who can say they are. My licensing is actually a little different than a CPA.

My licensing comes from the federal government, but I do not work for them. So our name's a little misleading sometimes. Okay, well, we'll unravel a little bit more of that. But before we do, let's get to lightning round. This is where we ask you random questions and hope that you answer with short one or two word answers and then if we're behaving bad well if we're behaving badly we'll ask you for more detail if we're behaving well then um then we'll just snap through this really fast like lightning right okay it's never happened should we bring back the dinosaurs i think in some cases a dinosaur is needed, so yes. Scotty or Geordie?

Scotty. Yeah. When you were young, what did you want to be when you grew up? An opera singer. Favorite fictional robot? The one from Lost in Space. Beach or mountains? Beach.

Gryffindor or slytherin gryffindor chaotic good or lawful evil i guess that's the same question isn't it kind of but i'll lean toward lawful evil what's a work day like for you long she's good at this. That was the end of the lightning round question. That's the one that's supposed to come up first. I like this part. No, really.

What is, you go into work, what happens? I go into work. I deal with any emails coming in from clients who are having tax issues or questions about their returns. I get on the phone with the IRS and attempt to unwind issues clients are having. And then I proceed to do tax returns, bookkeeping, and go home after about 10 hours or so on a non-tax season day. Wow. So, you see, your business is very seasonal. You do tax season, you must be putting in far more hours, given when I get emails from you.

Yes. A tax season day can be 18 hours easily. That's a lot. A lot of work. Is it because you own your own business or is it just the nature of what you do? It's actually the nature of what I do. From January to April, the government expects us to file corporate tax returns, individual tax returns, 1099s, payroll sales tax. all these returns for all the governments have to be

submitted in this short window, which is why at times we're thankful for extensions because it gives us an extra six months. But I'd like to play the rest of the year. It just doesn't happen. I do work year round. Okay, So, so back to, back to us, back to engineering. If someone wants to start consulting, wants to hang up their shingle to do engineering on their own, what do they need to know from a, I guess a federal perspective,

a US federal perspective, because we do have international listeners, but I bet they'll skip the show. Darn. I think have international listeners, but I bet they'll skip this show. Darn. I think things still apply. It's nice to know the patterns. Yeah, the concepts are good. Well, one thing someone needs to know when they're going into their own business as a

consultant, regardless of what industry, but for your industry, they need to know that that business is separate from them. They have to treat it almost like a job. A separate entity, I guess. The word entity is important in some of our paperwork. Yes, the word entity is very important. And the separate and the job thing, when, part of that is making sure that you pay yourself, but also

having the company pay things. Well, we're skipping ahead to company. I mean, when I first started consulting, I didn't know any of this, and so I just signed a contract as myself and got 1099s. So, why would you want to form a company? Well, you'd want to form a company because the difference between operating as a sole proprietor

entity who just gets a 1099 versus a corporation who files its own taxes because in the eyes of government, it's its own company. And we'll just start with the basic corporation before we get into any kind of details there. There's a lot more taxes that you have to be responsible for. And as disciplined as engineers are, they're not always disciplined enough to pay their taxes. Oh, you have to be more disciplined if you're a sole proprietor, if you're doing it yourself. That's right, because no one is taking taxes out of a payroll check, because as a sole proprietor, independent contractor, you don't have a payroll check. And so if company A pays a sole proprietor $1,000 and that consultant goes out and spends it all, then the government's going to come at the end

of the year and say, so that $1,000, you owe us some of it. Where's our $350,000? Well, yeah, where's our, depending on the state a person lives in, but we have, where we are in my state of California, you should be putting aside 40% of that for federal and state taxes. Right, so it's easy to get in a lot of trouble at the end of the year and have a huge bill that you can't pay. Exactly. Like if you were in Texas, you'd only need to put aside, say, 30% or 35% because there's no state taxes in Texas. And this is different than my income tax because the 1099 isn't quite the same or is it the same? It's a combination of you're paying income tax on all of your income less some deductions and exemptions then you have to pay self-employment tax on what's left over after your expenses. So you're paying two taxes and the self-employment tax is the social security

and medicare taxes that you're not paying anymore because you're not an employee. That's right. Your company usually pays those for you and you don't even really know about it. No, you don't. And NSDI and a bunch of other little things that no longer are coming out of your check because now you're a vendor to that company. And so when they say we charge too much, part of the reason, part of the way you have to calculate your fees is to take into account both the taxes you have to pay that you didn't have to pay anymore, that you didn't used to have to pay, as well as all of the other things, which

we have a spreadsheet we go over sometimes about that. But that self-employment tax was a surprise to me. Yeah, and that means if you calculate your rate saying, you need to pay me $100,000 a year, just like I was making $100,000 at Company X, that's not what you're making.

That's not what you're making at all. You're making a lot less. You're not making a lot less than that, but you are making a percentage less than that. Yeah. Okay, so when do you decide, when should someone decide to go from doing this themselves

to forming a corporation? And what about LLCs? How do they work into? I'm not a big, well, let's start with the LLC. I'm not a huge fan of the LLC entity. And that's only because it's really just a glorified sole proprietor. And in some states, you end up facing double taxation because you pay a tax on your gross receipts,

then you pay a tax on your income. And then you have extra tax returns to file. It can get a little more expensive than if you just get the same and better protection from going and moving into a corporation. And that's what we did for a long time. Yeah, we still had to deal with our own taxes, and we had to remember to pay everything in self-employment tax, and it was kind of a pain.

And we paid ourselves, but we paid ourselves whatever was sort of left over after all of that. We didn't have to do payroll. Right, and that's where corporations actually come in. Right, once you move into a corporation setting, now we talk about payroll, which is a real benefit for the person who isn't as disciplined at paying their estimated taxes quarterly, because you don't want to come in at the end of the year getting that first 1099 and being told, I owe what? Yeah.

You owe this. How did that happen? No one told me. So when you're on payroll, you're now back kind of half employee, but you're still operating independently. Because you're really an employee of the corporation now. Even if you own the corporation,

even if the corporation is only you, you get payroll just like you did when you worked the corporation, even if the corporation is only you, you get payroll just like you did when you worked for Google, Apple, whatever. Exactly. I am a corporation. I am actually the S-corp version of a corporation and I'm my own employee. So I am beholden to my company, but I get a paycheck. But I run the company and independent and I can make those decisions accordingly. Okay, so S-Corp, what does S stand for? S stands for sub, it's actually sub-corporation. It's not a sub-par corporation, but it means that it's what we call a flow-through entity. In a regular corporation, the profits stop at the corporation

and the corporation pays its own taxes because it's its own entity. It's a person in the eyes of the IRS. In S-corp, the profits go out to the shareholders and the shareholders pay the tax based on their tax rates. Wait a minute. Don't big companies do dividends and stuff? Isn't that the same as profit sharing? Nope.

Totally different. A dividend is a payout of profits that are reserved. You're basically the retained earnings or the accumulated profits. And then the corporation comes in, hey, we need to give our investors some money back. That's at the corporate level. At the S-corp level, there's no dividends because all the profits flow out to the shareholders on an annual basis. Yeah. And so at the end of the year, when if Chris and I still have money in our account, we just give ourselves profit.

I was hugely amused to find out that that was actually what the category was. We were just supposed to write our check under the category of profit. Now you write it under shareholder distribution because you've paid tax on the profit, and then it moves into the accumulated earnings, but you've already paid tax. Now, you get to take a check out of the company tax-free. It doesn't have to be compensation or some other form of loan or anything like that.

You've already paid tax on it. It's your post-tax distribution. Now you get to go on vacation. If only. Okay, so we do payroll taxes, and that keeps us from falling into a giant hole that we would do if we were an LLC or just a sole proprietor. Correct. And payroll, I mean, we use QuickBooks

because that's what you told us to use. And it's annoying as all get out. And yet probably still not the worst choice. I think that QuickBooks is a far better choice than some of the other softwares I have seen or the shoebox. Oh, seen, or the shoebox. Oh, come on, the shoebox. It only happens three times. Well, that depends. It might have only happened three times with you, but I have those clients

that have come in with the shoebox and now they're going green. They're bringing in the reusable shopping bags. Really, do people seriously, I mean, do they just throw their receipts in a shoebox and bring it to you? I do have some that do that. It's so easy to take a picture of it and then, I don't know, I guess then I stop and I know I'm supposed to mail it to something or attach it to QuickBooks or something. So I guess I'm still a paper killer. Even though my office is paper light, we scan everything at the end. But to put it all together, I have to touch a lot of paper. Okay, so shoeboxes. Yeah. QuickBooks, I guess was where this was started. QuickBooks does payroll for us, and it's the way that we keep track of all of the

things we buy and all of the clients we have and what we've invoiced them for. And it bills them. And it bills them. You have a full charge accounting program in QuickBooks. It will do your billing, it will run your payables, which is all the bills of you've got to pay to people. And you can also add the payroll part to it so that it's in all one place instead of having to have payroll handled by this program over here and billing through this program over here, which I do have a few medical professionals that use two different softwares. But ultimately, it all goes into QuickBooks. Yeah. Even invoicing, we use two different things for invoicing because

credit cards are special and annoying. But that's totally unrelated. Okay. Is Excel a reasonable alternative to QuickBooks? Excel is a reasonable alternative. Because when I get an Excel spreadsheet from someone who's put all of their stuff in two categories by month, and they've brought an organized shoebox, at least it's got monthly hanging folders with the receipts in each month, I can then create a tax return out of that. But you don't want to. It's not that I don't want to. I don't mind. It's more time consuming than being able to go into a client's QuickBooks, print out a profit and loss, a balance sheet, look at it and say, oh, hey, you know, your advertising went from $600 last year to $6,000.

What did you do? I bought a lot of shoes. Shoes are not advertising. Those are uniforms, maybe. No, no. I put embedded stickers on them so you know. Oh, you put logos on them. That's different.

Okay, let's finish with corporations. S-Corps are good for a lot of things. But when do you decide to go to a C-Corp? You would start as a C-Corp, actually. Everyone starts as a C-Corp and then elects to become an S-Corp. I thought C-Corps were more complicated. Not necessarily. It's the, every person needs to make the decision as to what works best for them.

So when I sit down with a client that's coming and saying, I think I want to form a business entity. I actually had a new client yesterday that came in to talk about wanting to be a corporation. They said, well, what kind of assets do you have? What kind of product are you offering? Is it something where we need to have a full protection where nothing flows out to you personally and it all stays within the corporate entity? And in his case, he's a software engineer and has no assets.

He's about three, four, five years away from actually having a product. So I've told him he should stay a sole proprietor for a little while longer because he doesn't have anything he needs to protect. And what he's creating isn't going to get him sued for anything. His app isn't something where he would be sued for what he's doing. So that brings me to my next question, which was we've talked about kind of the financial advantages to having a corporation, but there are other advantages to separating things out, right?

So you just mentioned getting sued. Are there other things? How protected are you by being a corporation? And what other kind of protections do you get? As a sole proprietor, you have no protection. I like to use my hairdresser as an example. You give somebody a bad haircut, they're going to sue you. But what are they going to sue you for? A bad haircut? No. You're a dentist and somebody's jaw gets locked up and falls off. They're going to sue you. If you're a sole proprietor dentist, they can come after all of your assets above and beyond any kind of liability or error insurance. And they can take your house. And your dog. And your dog and your car,

and then you'll just be a sad country song, okay? So as the corporation, they come in and they can sue the corporation, and that's where it stops. They can't come after you as the shareholder of the corporation unless they have a really good lawyer who can say, well, you know, they paid for that vacation to the Bahamas out of the

corporation. So they broke their corporation. Then they can come through the corporate veil. But that doesn't happen very often. That's where the corporation protects you and your assets because they can only go after the corporate entity because now that's the person. And as engineers, we might not think that's important until you're the person who's responsible for all the safety systems on a medical device and you screw something up or

something goes wrong and that company comes after you for ruining their product, right? So there's definitely ways you can get into trouble that you might not anticipate. Whereas as an employee, that's a different situation. Yeah, as an employee, you're not responsible for anything but giving your job. If you do something wrong as the employee, it's still the higher-ups and the corporate entity itself that will get in trouble. You may lose your job, but... But that's better than losing a lifetime's worth of accumulated assets. Correct.

I have more questions before we leave corporations. Go, go. So, and we kind of alluded to this, but engineers tend to think they're very smart. And very good at math. And very good at math. And very good at math. So, what do you say to somebody who comes to you and says, I don't need any of this stuff. I can do all this on my own. You know, this is all just a bunch of numbers.

Having done this for a few years, I know that's all not true. But how do you help somebody protect themselves from themselves how do i help them protect them from themselves engineers especially because we're so sure we can learn anything we probably can and and you can you're very smart i mean you wouldn't be engineers unless you were smart. But you don't know tax. And unless you go and study tax, and you're engineers, why would you take the time to go study tax? That's what you have people like me for. I just have to remind, sometimes I have to remind some of the engineers of the horror stories.

Of this is why you want this, because it's going to take twice as long to compile your information if we don't have some kind of a accounting system. And you're going to put your numbers where you think they belong. And that's not where they belong when I go to do the tax return. And it takes two or three times longer to unwind it. And this actually is really important because I am the worst. Every time we talk to Tori, we go in and we have everything presented and we're pretty good at it. Chris is good at making sure our personal is good and I do our business and I put everything in the wrong category. As far as I'm concerned, it's an office supply. Not everything. Just that funky thing you bought from some weird expo that is actually something for research and you put it as an office expense.

And these things, why is that important to have them in the right categories? Because it's how we expense them out on the tax return that makes the difference. If you go out and buy a computer, to you as an engineer, a computer is an office expense or an office supply. It's an office supply. Reusable, but still, you throw them away after a week or two. Well, see, the IRS doesn't see it that way. The IRS says a computer is a five-year capital asset that gets... Five years?

I know. You'd think they'd catch up with the times. Actually, they're doing better. They just upgraded to, I think, Windows XP. Maybe. I think they took their 1970 computers and now they're using 1990.

So they're a little behind on understanding technology. That's why you're on hold so long when you call them. But in all honesty, the IRS as a computer is a five-year product. And we have to depreciate that over five years. There is an allowance that allows us to expense it, but it's not an office supply or an office expense. So we have to move it into a fixed asset.

So what about travel? You mentioned taking vacations and writing them off. And as engineers, we sometimes see these sales folks who seem to go out to dinner every night and clubs, and they put it on their corporate card. And then we start companies, and we're like, we could do that now. How do we find the lines there? Defining the lines, there's some great, I have some great publications that I can give you some references to if you want to pass them on at some point. There's plenty of stuff on the IRS website, but that's the rules. The real rules are it must be ordinary and necessary for business to be taken as a business expense. And that's not your definition of ordinary and necessary. Because a contractor is going to think the kitchen sink that he put

in his house was ordinary and necessary for his business. Because he had to see how it worked first before he put it in someone's house. Trust me, I've heard just about every excuse there is in the book. But travel is why are you traveling? Are you going to a seminar, continuing education, meeting with a new prospective client? All of those things are legitimate travel. Even if it is in the Bahamas, maybe you and a client have to go to the Bahamas for your meeting, but you better have plenty of days of meetings, what you're discussing, why you're discussing it, and what was the reason you had to go to the Bahamas? Because if you're audited, I have to convince that in the Bahamas for a week and we will have the same hour-long meeting, but we'll all write this off and it will be super fun. Correct.

But if you're meeting somebody from Europe. Then the Bahamas might make sense. What about, you said continuing learning, so conferences is definitely on the list of reasonable travel. Yes, conferences, seminars, and you'd want to keep track of what the conference was, which sessions of the conference you attended. The example I like to give is a conference down in the Anaheim area of California where all the amusement parks are. We had a meeting on the Matterhorn. Did you have a meeting on the Matterhorn? No. Who were you talking to? The Abominable Snowman? The metal one?

The animatronic one? I wanted to see how it worked. Nice. Well, if you want to go to disneyland you can do that if your conference is already there your flight there and home is 100 deductible because your original intent was to go for this conference if you extend your three-day conference to a seven-day trip several of those nights are not going to be deductible because you went for personal reasons. But the three nights of business and seminar or conference are still going to be deductible. Do engineers tend to underestimate their write-offs or overestimate their write-offs when they start consulting? That's a difficult question because I've actually seen it both ways.

Yeah, that makes sense. I mean, there's not one engineer archetype. No, that's why I enjoy tax because every tax return is its own puzzle. And each one comes with a distinct personality of its owner. Oh, no. Now the question is, what is our personality? But I'm too afraid. I don't think I can ask.

You guys have it dialed in. You've worked it out. I spent three years training you. There is that. But there are things that we didn't think we could write off for quite a while and it became clear that we weren't writing off some things we should be

cell phone exactly things that are used in the normal course of business but that we also had normally yeah but that's where abuse can also take place so it's a fine line and then there are things like um like all of those toys that were on our tax return last year that i took apart and i've been writing articles for and writing a book for and so they're definitely they're definitely things that have an impact on our business research and development um but then

there's these lines of well chris was looking at getting a higher-end quadcopter and it still is research because it's still we're still going to write software for it but what about the little super nifty not quite necessary necessary controller that he wants. Oh, he's looking to buy a controller for his nifty helicopter. Oh, that's probably going to stretch the limits of a business deduction. And I would say it's probably personal. Yeah, I put that on the personal card, while the quadcopter, which I'm going to tear apart and write about,

I didn't, so. Yeah, perfectly good deduction. It's what you do with it afterwards that we need to discuss. Are you going to be using that quad? Are you going to put it back together? I'll sell it to myself. There you go. Well, I mean, we'll use it for a while,

because there's not only just taking it apart, there's actual modules we can add to it, which are pretty cool. I'm sure it's fine. It'll be fine. We'll explain that one well. We'll cut this from the show. But we also did talk about whether or not the nifty controller was a business expense and decided it wasn't because we weren't going to write software for it. We weren't going to take it apart. We weren't going to do anything with it other than play with the other thing we'd

already got. And that's coming from a base of knowledge of having learned over the years in your own business that, hey, I need to question the validity of a business deduction versus a personal deduction. But do things fall under education that, that maybe people wouldn't think about like a normal engineer who has, uh, contracts working for various companies. If they wanted to buy an oscilloscope and some electronic dev kits and kind of do projects on their own that might not be part of their business

necessarily, but are continuing education. Is there a line there? Well, continuing education means you're going to a class to enhance your stuff, your knowledge, your knowledge base in a particular subject area. What you're talking about is tools or supplies that enhance and work that you need to conduct your business.

Okay. Yeah. And for us, writing things up helps a lot because we can buy things so we can write about them. And we write about them because that's good for our business for advertising as much as anything. All right. Well, I think I'm going to get off write-offs, although I find them endlessly amusing. And terrifying.

They are. They're terrifying. I always get nervous. They're fun. We would rather be conservative because the IRS is terrifying. Oh, they're just a bunch of teddy bears. I know how to handle them. Do you, one of our listeners asked, how much does an accountant cost? Well, that's a really good question because an accountant is going to be a CPA.

And a CPA's average charges depends on your area, but the average starting price of a CPA to walk in the door is usually about $300 an hour. And what about an enrolled agent like yourself? An enrolled agent like myself, we kind of vary. We run around the 200 to 250 area for starting. Some are more, some are less. Depends on specialties too. And there is another field in this and that's bookkeeper who will take my shoebox and put it into QuickBooks so that later an accountant or a world agent could finish for me if I didn't want to do that step. Right, which is actually the other facet of my business. I do bookkeeping as well. That's another reason I do work year-round is I manage books for a lot of my tax clients because they don't want to deal with the shoebox.

They would rather have someone else do that. So I actually run both sides. And some CPAs do that as well. They offer financial statements. I do everything a CPA does and can. I just do it a little differently, more focused on tax. How much are the bookkeepers usually? A good bookkeeper who really knows what they're doing, not just data entry, but understands the ins and outs of your general ledger, should start around $75 an hour. Okay. So none of these are cheap, unskilled labor. They're all good ones are worth it. Why? Good ones are worth it. it why because if i have someone who brings me in a set of books because they have a bookkeeper their tax preparation is going to be less expensive

because i've had to spend less time unwinding their numbers versus someone who walks in with a shoebox i have to compile it all and i charge them bookkeeping rates to do that. I don't charge tax rates to compile someone's data. I do that for the tax return preparation part. So it's time consuming. It delays the process unless we're doing it all year long. The other way to ask that question is how much does it cost to not have help? It can cost you three times as much on a tax return preparation to not have someone helping you. I will have to say people who self-prepare their returns are amazingly brave. But I thank them because they keep me in business when they get their letters from the IRS because there's a problem.

Yes, we've seen those letters, and they're not very friendly. They're not friendly, are they? They're very threatening, and they're designed that way. And unfortunately, the IRS is in a bit of a system right now where it takes about six notices for them to finally resolve an issue. And it's not because they want to send them, it's their computer generated. And we just have to keep bugging them to say, hey, we already sent you this. We already sent you this. Hey, look, we already sent you this.

And then the agent says, well, fax it to me. And I honestly, truly believe that when I fax them something, the other end of the fax machine is a shredder. And of course, the letters that they send them get increasingly threatening. Oh, increasingly nasty. Intent to levy, intent to seize, and people freeze up at that point. And then the IRS can intimidate. Some agents, when you call the IRS, will intimidate the public because they really don't know any better. Whereas when I call the IRS will intimidate the public because they really don't know any better. Whereas when I call the IRS as an enrolled agent, and the first thing I say is I have a power of attorney, and I am an enrolled agent, the attitude changes when they're dealing with me as a

professional, because they can't intimidate me. So is there a plot by Intuit or someone to keep the tax codes too complex to be understood? No, it's Congress loves to simplify the tax code. And every time I hear a president or a presidential candidate say they're going to simplify the tax code, I jump up and down and go job security. Because every time they try to simplify it, they make it more complex. That's exactly what happens. The law that just got signed into effect December 18th, 232 separate laws were affected and changed in the tax code itself with that tax act. How do you stay current on that?

I mean, the taxes are already so full of minutiae that doesn't even seem consistent. How do you learn about these things? I have a continuing education requirement of 30 hours a year, two hours of which are ethics. And that's, the IRS says that I have to have 24. The professional organization that I'm the first vice president of says I have to have 30. And then I teach. I teach classes. And when I teach a tax class, I become more adept at that tax law because I have to research it more. It's not something you can memorize. I tell my students, don't memorize the tax code. If you have insomnia, read the tax code. Otherwise, learn how to research. Some of it stays in there by osmosis, but a lot of times

you'll have to research new stuff. What's your favorite part of doing what you do? The people. Actually, I love meeting with clients and solving their tax issue and showing them how it all goes together into this piece and why they don't owe this year, or if they do owe, how we're going to fix it going forward. And I bet a lot of people get kind of emotional at times. Yes, I have a box of Kleenex on standby for the really, really bad ones. And at times, you know, there's a little bar next door that I can take them to for a drink if it's super bad. And then break the news to them.

You're going to jail, but not for very long. Oh, no, no, no. No one goes to jail. Unless you're a celebrity or someone who is a tax protester. Actually, they will eventually throw tax protesters in jail. It's unfortunate, but it does happen on occasion. So back to having a company and off of taxes for a little while. We've talked about setting up a corporation even for ourselves,

if we're doing our own company. But it gets more complicated when you have employees. They're a constant drain on the bank account and there's all the interpersonal challenges, but there's even more to it. What do we need to know about hiring someone? You need to determine if you need an employee first and why you need an employee. I was very content the first year of owning my own company to try to do it all by myself. And then I found that as I was trying to do more and more by myself,

as the business was growing, my services were declining. So I knew I needed to get a person to help me. But then we're control freaks when we own our own company. We don't like to give up control to other people because no one does it as well as we do. So I don't always think that it's the employee that's the problem. Sometimes I think we, the employers, are the problem because we're not giving them some of the tools. But you have to interview. You have to test. What are you going to have them do as an employee? Test them and make sure that whatever their resume says is reality.

I have been bitten by that myself way too many times. But what about from the corporation standpoint? Corporation standpoint, it's a write-off. You get to write off the 100% of the wages. You get to write off the employer portion of the payroll taxes, which is half the Medicare, the Social Security, and the SDI, and any unemployment. Oh, yeah, as the employer, you pay into the unemployment funds. The employee does not. That's why when they apply for unemployment, they have to pick it up as taxable income because you have paid it, not them.

You don't have to offer benefits. Benefits is something that you as a corporation or you as a business entity decide to offer or not offer other than whatever your state law says you have to do. Like in California, we have mandatory sick pay now. And so changing the business from being just us to having an employee is a pretty big change to me, not just because of the hiring and monitoring and managing. That's all stuff I've done at other companies, but I've never had to do the business side of even having an intern. Well, an intern's a different animal, but when you say the business side, to me, that's all the hiring, the firing, the getting the paperwork, making sure that you have verified their legality of being able to work in the U.S. That's, to me, all the business side.

So maybe you could tell me what you mean by the business side. I just mean filing their paperwork. I mean, I've never had to do a W-2 for somebody else. Well, it's no different than doing it for yourself. It's just one more W-2 that you have to print out when you're printing out your year-end payroll. That's why by having a payroll module like you do in your QuickBooks, you just add that employee into your system and it just does it like it does your payroll. And so it's really not that much harder once you have a corporation.

It's not that much harder in any entity to add an employee, actually. It's the, if you're doing payroll for yourselves as corporate officers, you've already got the process down. You know to cut the checks, pay the taxes, file the returns, and then give the annual reporting information out at the end of the year. It's just a few more pieces of paper

that are going into those numbers and a few more dollars that are going into those numbers. It's for the person who's never done payroll before that there are processes and steps they need to go through. Getting the right numbers, getting the forms, getting the stuff from the employee and setting up the system. One of the downsides with employees is that they do get paid. Yes, they do expect payment. Servitude went out the window with the Civil War. That wasn't what I meant.

I was taking a breath. Do they get paid before officers of the corporation? If the company is going badly, what are the duties of the corporation towards officer employees or regular employees? Well, the Department of Labor says your employees need to be paid. So if you're going to be bringing on employees, you probably want to make sure you can pay your employees especially first, because they're going to be the first ones to sue you if you don't pay them. They're going to expect their paycheck, just like you would if you were an employee of a corporation. That's kind of how I try to tell employers to look at it. Look, if you were an employee still, would you not be going up to the boss on Friday if that's payday

and saying, where's my check? And he says, well, you know, the company's not doing so well. That's not my problem. That's your problem. You hired me to work for you. Where's my check? Yep. And that's always been a thing that I've worried about with hiring someone is making sure that they get paid first.

Right. I counsel some of my clients that when they start getting into employees to open a payroll account, a payroll bank account, and make sure they transfer everything they need for that payroll into that account, either weekly or bi-weekly or monthly, but at least have one month's wages for your employees in that bank account at any given time. That way, if you do see the companies going badly, you can cover their payroll if you need to make changes to your workforce. How do companies go out of business with respect to the bookkeeping and irs side i will see companies go out of business because they didn't pay their payroll taxes because that's a fiduciary responsibility it's

not your money you took it out of the employee's check it's it's actually the government's money that you're holding not paying your own taxes um you pay your income taxes from your personal side, but you don't do the corporate side. You just let that go a couple years and say, oh, I'll catch up on it later. If you're not an S-corp, it doesn't show as quickly because it's its own entity. But then eventually, the IRS will come in and shut you down. They'll say, hey, you're not paying your taxes. And they'll see that, you're not paying your taxes. And they'll see that if you're not paying your taxes as a corporation, guess what you've done? You've broken your corporate charter.

Now they can come after the shareholders. And they'll come after you as shareholders individually. Okay, that question went entirely the wrong way for me. Let me try this again. Sorry. Let's say my company is going out of business either because I took a full-time job somewhere else and I want to be done or because I don't have enough business

and I can't pay my employees, I can't pay myself and I'm ready to be done. How do I close it out gracefully? Oh, yeah, that's different. Oh, that is different. That's very different. Instead of just going out of business, how does a company get forced out of business? You want to close your business down. Or if I don't want to, I'm admitting that I need to. You're admitting that you need to. It's time to throw in the towel.

This, by the way, is not us. This is not us. I'm not worried about you guys. I have some others that I am worried about in my office right now. Throwing in the towel, you would basically let the state first that you're in, because every state has its own registration requirements for your business, you would basically tell, say, the secretary of state that I've decided to close my business, I'm dissolving, I'm getting out. Then you file your final tax return and distribute any assets. There are steps. And then you tell the federal government with a little checkbox on the tax return, hey, IRS, this is our final tax return. And it shows that there's

nothing left in the corporation and that your balance sheet is now zero. There's no more assets. The cash has been distributed. The bills outweigh this or whatever the situation is. And then you would close out any payroll tax ID numbers, any sales tax ID numbers, if you're doing anything that has a product. And that's really it. And you close out your books. And then you'll get some letters for the next, say, year saying, hey, why didn't you file this tax return? Because maybe the IRS missed that you checked the final box. So you'd send them a copy and say, no, we didn't you file this tax return? Because maybe the IRS missed that you checked the final box. So you'd send them a copy and say, no, we closed this. Here's our closing paperwork. But there's formal steps that you take. And it takes about six months overall to close everything,

notify everything. And then I'd say another six months before the dust settles. You mentioned sales tax. We haven't talked about selling things. Selling things is not something we have done yet. How is it different than just having a consulting business? Selling things means you've created a product, and now you're going to be selling it to the general public. Well, that's great, but guess what? Some states require that the end users require that you pay sales tax. So if you sell me, let's say you're going to build helicopters, module helicopters, you know, remote ones. I want to buy one. You have to collect the price of the product plus sales tax for me. Well, that sales tax isn't your money. That sales

tax belongs to the state. So you have to forward it to them on a quarterly or monthly basis, whatever they decide. And I have to do more bookkeeping because now I have pieces, things, physical parts coming in that are going to be used in my product that I then get paid for. Now we have inventory and we have what we call work in progress, widgets. Widgets and what's nots that go into that product. And that does complicate the bookkeeping a little more. And at that point, I would probably say, don't do your bookkeeping anymore. Hire a professional to be assisting you with it. What's nuts?

Yes. Thingamajigs. Thingamajigs. Doohickeys. Doohickeys, gadgets, widgets, all these things. All of those things. Why bookkeeper at that point? Is it that much more complicated?

It can be. You want someone who's going to review your stuff on a more regular basis. If you get into things that have inventory or product building, because then you have this thing called WIP, work in process. What's coming out of the inventory and going into the cost of the goods? Are you pricing your product right? And so you want someone reviewing those books on a more regular basis, like quarterly or bimonthly, so that nothing gets out of control at the last minute. Why aren't we making any money on this product? Well, four or five steps ago at the second month, you should have seen that there was a cost increase. And maybe

you're not noticing that because you're trying to do the books and build your product. That's not even talking about things like returns and... Credit memos and returns. Defects and, yeah. Exactly. It brings on a whole nother level of just issues, a series of issues that you should discuss with someone who can assist you with those books, a professional. And you don't necessarily have to bring on a full-time bookkeeper. You just have someone reviewing your books. I do a lot of book review for some of my clients where I only meet with them once every two months. We look over the

books and I go, I've noticed this trend. I consult with them more than do their bookkeeping. We look at their financials and go, okay, I see a problem here. Because numbers are numbers. Well, and I've met a few bookkeepers who are also very, very good at ordering things, which for some areas of our industry, if you actually can figure out how to source some of this material and do the bookkeeping, that they were some of the best people to work with. You could find anything at a good price.

There you go. There's options. There's options in everything you do. How do I make your job easier? You already have. You're on QuickBooks. You do your payroll. You follow up on yourself. You maintain. And when we see an issue, when we're meeting to go over tax stuff, you make the correction and I don't have to tell you again. So being responsive, all the things you do. Like if you're paying someone money to give you advice, you do what they say.

Yeah, you don't ignore me. On the other hand, I also want to run my business doing what I love, which is not playing with QuickBooks. How do I avoid as much of this as I can? What are my options for just throwing my hands up and saying, I want to play with computers. I want to play with hardware.

I don't want to do any of this stuff. Make Chris do it. Not going to happen. I think we already had this conversation and I lost. Oh, okay. I think you won had this conversation and I lost. Oh, okay. I think you won in some twisted way. Well, if you don't have the option of making a significant other, we automate a lot of it, which is in your case what we've done.

You have the bank linking with your QuickBooks and a lot of it becomes a lot of matching and easy stuff. Determining how much time you really need to spend on your QuickBooks. In people in your field, engineers sometimes will overplay in their QuickBooks and then get frustrated with it. Sometimes it's really you just need to sit down with it once a week and go through the numbers depending on the size of your business. Once a week. Really? Sometimes some people only need to do it once a week.

I have a personal trainer who only touches his QuickBooks on Sunday morning and he gets up, he gets his cup of coffee, he reads his paper, and then he sits down and he does all of his QuickBook work. Wait, are you watching us through QuickBooks on Sunday morning and he gets up, he gets his cup of coffee, he reads his paper and then he sits down and he does all of his QuickBook work. Wait, are you watching us through QuickBooks? No, no. Then I have a couple people who are on there every other day.

I guess we're more once a week-ish. And if I as much, for a while every time I touched QuickBooks, I whined about it on Twitter. And then I realized it made it sound like I was always, always doing bookkeeping. But the truth is, if you total up the amount of time I spend on QuickBooks every month, it's maybe an hour. See, that's a good indication that you have control on your books and you're not letting them run you. It's the business owner who steps in and lets the QuickBooks run them

and they're spending more time on their QuickBooks and trying to figure it out than conducting the money-making part, the rain-making part of their business. If that's what's happening, stop doing that and get a professional to work with you. Well, yeah, and QuickBooks has this little thing where it has a list of tasks it wants you to do, and they get ever more pointless, but it doesn't really tell you that. That's true, because QuickBooks is designed to help people run their own books if they don't have someone helping them. Okay, what about stock and having a business?

Right, that's part of a corporation. Yes, stock, having stock. When you form your corporation, the initial investment money that you put in to open the bank account can be your stock price. I mean, you can say, well, I put $1,000 in the bank, so I want 1,000 shares based at a penny a piece. Really doing stock at the level we're talking is a lot of times an arbitrary number and an arbitrary amount of shares. Are you going to be selling stock at a later time because you're looking for investors? That's a whole other level of corporation and planning.

Yeah, and if you want to know more about that, listeners, I do recommend Dan Shapiro's Hot Seat. And if stock is brand new to you, then you should check out my recent post about Snow White's Guide to Stock Options, which I found hilarious. I don't care what the rest of you think. I found it hilarious.

But I conned Chris into letting me have an extra share when we did our 100 orders or 100 shares of stock, or however many we did, so that I have 51% of the company. And I did that because I see it, women-owned companies are eligible for some things. We've never actually tried to use it. But do you see people doing things like that? Does it really matter?

I see people who do that, and I see people who don't do that. I always try to cancel my two shareholder corporations, whether it be a husband and wife or just two people in business together as partners. One person needs to have a controlling vote. Otherwise, you can sit there and go round and round and someone needs to be able to pull the lever and say, look, I'm the majority shareholder. Even if it's by one share, this is what we're going to do because now we can make the decision and move forward. Woman-owned businesses, the three or four people that I work with that have the woman-owned side, nobody's ever used it. And I actually recently had one of my corporate people tell me it didn't do them any

good. They applied for things and it wasn't what they thought it was, being majority woman shareholder. So maybe it was just the things they were applying for. Well, yeah, I guess I'm on that list. I never used it. I thought about it, but yeah. How do we go about firing clients actually no let me change that do you ever fire clients i recently have fired clients why and how i if a client is consistently trying to buck the system not work through the system properly, or just wanting to do their own thing and not wanting the advice of a tax professional, it comes to a point where it's, I'm spinning my wheels and I don't feel that I'm servicing them well. Then I basically say,

I'm really sorry. I think you and I have outgrown each other as preparer and client. Or they start asking for unreasonable things. Yeah, you know, it's April 14th and I would like you to revamp my entire business. Oh, by Monday, please. No, April 18th this year, they walked in the door in the morning and said, you can file my return right now, right? No, and unfortunately, I can't. I can put you on extension. That's unreasonable.

You've done this for me for years. Well, not anymore. And here's the name of a person who can help you. Did you give them Bart Simpson's cards? No, I gave them another EA's card that I don't like very much. All right. See, I told you I don't like very much. Alright. See, I told you I lean towards the evil side.

Polite evil. Yes. Well, I think we're about out of time and since it is a birthday show, we all have cake to get to. Yes. Chris, do you have a... I don't know. The cake is a lie. You don't know. The cake is a lie. You don't know.

I know. Do you have any last questions, Christopher? Well, we've sort of danced around a few things, and so you may have already kind of answered this, but I'm curious what you think are kind of the most common mistakes that people make or that maybe engineers make that are different, but what are the easy ways to get into trouble that people maybe don't really realize? Really thinking that they'll be able to pay all their taxes when the tax return is done.

That is really the biggest mistake I see because they get those checks, they get them in hand, they go spend all the money and put nothing aside for tax, even after they've been told time and time and time again, don't spend it all, put it away, put some of it away. That's the most common mistake I see. That's insane. I'm just thinking what would have happened to us if we hadn't paid our payroll taxes and if we hadn't put money away knowing. Yeah. Wow. And planning. Planning and keeping track.

You know, they come into the office. I never think, well, what do you mean you need to know what I spent on my office supplies or my mileage or my meals and entertainment? You needed all that stuff? Yeah. That hour a month is an annoying hour, but it's probably worth it at the end of the year. Because if you don't bring me expenses, you're going to pay taxes on that whole 1099, which you did not save up for. And then you're just giving extra money to the government. Exactly.

And who wants to do that? All right, Tori, any last thoughts you'd like to leave us with? No, I'd like to tell you thank you for having me on the show. This has been a real fun experience. Well, we really appreciate you coming. You're not our normal engineering guest, but I hope you've answered a lot of questions. I think we helped some people. I think so.

I hope so. I hope so. I wish that we had had this show to listen to a few years ago when we were getting into it. So that was our goal. Back then we probably would have been just yelling back at it. It doesn't apply to us. My guest has been Tori Chavez, enrolled agent and owner of Tax Goddess. Thank you so much for being here. Thank you for having me. Thank you also to Christopher for producing and co-hosting. And of course, thank you for listening. Please check out our blog and newsletter. You can find it all on the Embedded FM website,

along with a contact link if you'd like to say hello. We'll be here next week. In the meantime, I have a final thought to leave you with. This one from Albert Einstein. And yes, I did check to make sure on Quote Investigator that it is an actual Einstein quote and not just something attributed to him. Mr. Einstein, Professor Einstein had this to say, the hardest thing in the world to understand is the income tax. Embedded FM is an independently produced radio show that focuses on the many aspects of engineering. It is a production of Logical Elegance, an embedded software consulting company in California. If there are advertisements in the show, we did not put them there and do not

receive any revenue from them. At this time, our sole sponsor remains Logical Elegance.