Money Rehab with Nicole Lapin - Side Hustle Perks that Will Pay Off

Episode Date: May 13, 2021

Nicole’s accountant says that the perks of running your own business are so good that EVERYONE should do it. Why? Listen to find out! Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. One of the questions I get asked most often is how to start a side hustle.

Before I can answer that question, I normally ask a few questions myself. The two most important questions are, one, do you have an idea that's a good candidate for a side hustle? And two, are you a good candidate for a side hustle? Next week, we'll be tackling how to decide whether you can turn your hobby into a side hustle. But to side hustle or not to side hustle, well, that is the question for today's episode. So to answer that question, and in honor of the looming new and improved tax day, I called up my accountant. Randy, welcome to Money Rehab. Thanks for having me.

You talk about taxes in a way that's so passionate and so accessible. I really feel like you have figured out how to live in this space that makes taxes, dare I say, fun. And so that's why I was like, okay, I need this guy to be my friend and maybe even my own accountant, which ended up happening. So I broke up with my old accountant for you because I was that impressed with all of your thoughts on taxes and entrepreneurship. You're welcome. Oh, yeah. It's quite an honor to be your accountant. Thank you. I appreciate that. Tell us about why everybody should be a small business owner. Well, I mean, I'll give you a couple of easy examples, right? So you're a W-2, let's just say,

and, you know, and all of a sudden you go, well, I have to drive my car to work. Do I get to deduct it? Nope. I'm going to go buy a car. Do I get to deduct it? Nope. How about I lease it? Nope, nothing, right? I mean, across the board, you're paying everything with after-tax dollars. Just getting a business, and again, it might just be a side hustle. I mean, it doesn't have to be Amazon to count for the IRS. And you go get a network marketing business or something along those lines. And now all of a sudden, you buy that same vehicle, or you lease that vehicle, and now you've got a ton of deductions. I mean, in fact, I think one of them that I talked about when we were at Honor to Lead is the Range Rover deduction, which I think is just like the best name, because more

Range Rovers get bought on the last two days of the year than any other day. And it's because people literally get to the end of the year and go, oh crap, I didn't do any planning for my taxes. Oh, if I go buy a Range Rover, I can deduct a hundred percent of it. And I don't even have to buy it in cash, like great deal. And W-2, just to rewind for a second. So for folks who don't know, W-2 is what you would get from a company if you were just an employee of that company and filing your taxes that way. Okay. So then what do you do? So let's say I work in an office and I am a designer at a big design firm and I get a W-2 and I say, hey, Nicole and Randy, I want a Rover. What do I do?

Yeah. Well, the first thing is you got to start a business. And it really doesn't matter what type it is, as long as it's legitimately a business. I like pre-established businesses that have been around for long periods of time. And I mentioned network marketing earlier. So, you know, I mean, everybody knows somebody in network marketing, you know. So you got a buddy in Beachbody or doTERRA or whatever. be in network marketing. So you got a buddy in Beachbody or doTERRA or whatever, and you go over and you pay $70 or whatever the initiation is to buy your business. And now you're getting some great product, whatever it happens to be. But now you're actually a business owner. You go set up

some type of an entity. Now you're officially a business owner. Wait, hold on. I'm going to stop you along the way and double click on a few of these things. So when you say doTERRA, that's like the oil company, but that's an MLM. So you think even an MLM type business? Well, first of all, it's network marketing. MLM is only what people call it when they're not in network marketing, but that's okay. I'll let you off the hook on that one. But it's the same, same.

I mean, network marketing is a euphemism for MLM, correct? MLM is network marketing. So any kind of thing that you do on the side that you can get an entity for. So an LLC or an S-corp or what? Tell people. Yeah. So I mean, yeah. So to kind of put a bow on it, I think it's something like a network marketing. Absolutely. It's, it is a, it's an existing business structure. You're already

moving into it. There's already, you know, tens of thousands of people that make money doing it and run it as a business. So it has more legitimacy versus you starting a lemonade stand. Not that your lemonade stand isn't legitimate, but for somebody that's just doing this as a side hustle, it's nice to have a framework. So, but you know, some people might say, hey, I'm gonna go buy a rental property, or hey, I'm gonna go start something else, or, you know, fine, I don't care what it is, as long as you can show that you have a profit motive, meaning, you know, I'm going to try to make a profit. And as long as you can start getting revenue over the first, you know, few years, and it doesn't have to be a lot of revenue, but you start getting some revenue, you know, you're not going to run into issues because I'm sure you've heard when

people go, oh, well, if you don't make a profit in three years, that's going to be considered a hobby by the IRS. First of all, that's not true. Amazon up until like, I don't know, what was it? Six years ago, never made a profit. Not one. Yeah. A lot of big companies don't. I mean, if you imagine the IRS knocking on Jeff Bezos' door and being like, Jeff, hey, man, is this really a business? Is this just a hobby? Like, I mean, it's asinine. I mean, but whether it's a hobby or a job, it also depends on revenue.

Obviously, Amazon's bringing in revenue. So you have to do something with it. You can't just create it and do exactly what you did before. Correct. Yeah, I mean, that's exactly right. So over the first couple of years, I want to see revenue. If you see revenue coming in, it's a legitimate business, especially if it's over 600 bucks over the course of the year and you're getting a 1099 because now the IRS also knows that you're getting that. You're also

getting that non-employee compensation. So for them, you know, this is, this is an indication that it's absolutely a business. So give us some other examples like, okay, network marketing, getting an investment property, selling tie dye shirts, whatever. I mean, let's say it's, you know, just things that people are good at that they might turn into their own side hustle, right? So they go, well, I'm a pretty good graphic designer. Great, perfect opportunity, right? I mean, technically being an accountant, there you go, that's a side hustle for some. They just literally do it during the tax season. Some big nerds want a side hustle as accountants.

Just because I have tax books behind me doesn't mean you have to pick on me, okay? So if you start a side hustle, teaching people something, performing, selling something, having investment properties, you have to make 600 bucks in revenue, but you don't have to make profit for a few years. Is that right?

I mean, in fact, arguably you never have to make profit. But when I'm looking at that for a client, I wanna see, you know, you start to make some revenue over the first couple of years. And if we can get it over $600, it feels great because now it's going to be recognized by the IRS. And then what happens? How do you set up an LLC? There's a few types of entities. You could do nothing and you technically default to being called a sole proprietor. If you have a partner, you can be a partnership. You could be an S

corporation. You could be a C corporation, or you can do an LLC. you can be an S corporation, you can be a C corporation, or you can do an LLC. The advantage of an LLC is that an LLC can elect to be taxed like any of the other entities. So an LLC, I mean, that's not actually a form of tax. In fact, when I have an LLC, like in your situation, I'd say, OK, Nicole, let's do an LLC and then tax it like an S corporation. And the actual process of setting up an LLC is simple. And at this point in time, there are so many services out there that will just set it up for you. Like what? I use Arrow Victory LLC. I use Quantum Services, any of those kinds of things. And they'll set up an entity for you. And how much does it cost? I mean, you're going to look at anywhere from $500 all the way to, if you have an attorney do it,

it might be, you know, three, four, $5,000. But what if somebody is like, yo, I'm just selling my tie dye shirts and I'm making like 500 bucks. So why would I spend 500 bucks setting this up? Yeah. I'd say, well, at the end of the day is the goal, you know, to try to just make a profit in your business or is it to lower your overall taxes? Because think about it. That guy's selling tie dye shirts. He makes 500 bucks, spends 500 on, you know, on the LLC creation. But then he's got his vehicle. He's got his home.

Forever. Like you don't have to pay that every year. That's just a one time thing. And then do you pay a little bit every year? to pay that every year. That's just a one-time thing. And then do you pay a little bit every year? Most of the time, depending on where you, you know, where you set up your LLC, if you don't actually live in that state, you'll pay for a registered agent. And you're talking about, you know, less than $20 a month at that point. What should you then be spending on your, let's say you get a credit card for your LLC, right? To sort of track your expenses that way for the business

or whatever side hustle you're doing and you have a normal credit card. So what is the stuff that I'm gonna put on my LLC credit card? And what's the stuff I'm gonna put on my normal card? Anything that is ordinary and necessary for your business. Now, I know that sounds like a big hurdle. You know, in fact, we call it the 162 deduction.

I know tax nerd stuff. Don't worry about it. I'm going to explain it. But the whole idea is it's ordinary and necessary. And so the necessary part scares people. Ordinary is like, OK, fine. Well, the Supreme Court has ruled on what ordinary and necessary means. And it comes down to, is it helpful for your business?, is it helpful for your business? And is it useful for your business? There are so many things that are helpful and useful, you know, within your, within the business world that you could run through your tie-dye t-shirt, you know, business and, and, and best case scenario, you know, you end up running a loss. So you've got your tie-dye shirts, you sell $500

worth. But with all your expenses, the computer you bought, the vehicle you have, the inventory, all this, you spent $30,000. And you go, OK, well, how does that help me? Well, let's say that person's got a W-2 over here, and that W-2 is for $100,000. Well, if you have, you know, if you have a $29,500 loss on your business and you have, you know, and you have a $100,000 W-2, they go together. And now all of a sudden- Net, net, it's $69,500. Oh, good math.

Is it? No. No, it's 60, it's $70,500. Oh, good math. Is it? No. No, it's $70,500. Oh, there you go. Well, there you go. Apparently, I'm a horrible accountant. So I thought your math was good. Oh, God, you're doing my taxes.

This scares me. It should. I need a calculator. We all do. but but now but the advantage for the per for the you know for the average individual that does that is they had taxes withheld on you know their w-2 automatically right i mean you have to have taxes withheld for making a hundred thousand so now all of a sudden they didn't make a hundred thousand you know they made seventy thousand five hundred and so now all of a sudden they're getting a fat refund and they're like wow i didn expect that. And now life is pretty good.

Now they've got more money in their pocket to go do something with, invest it, save it, you know, enjoy it, something along those lines. So I can put stuff like a car, a computer, all of that to lower my taxable income across the board and sort of offset whatever I'm making at my design job at the design firm. But remember, had you not had the side hustle in the first place, that car, not deductible. That computer, not deductible. So now all of a sudden, just because it's useful and helpful for you to have certain things that are in your business, I mean, now all of a sudden your taxes are lower and

you still get to enjoy the same things you were doing before. Okay. But then let's paint the entire picture. So I get a hundred grand of salary for easy math at my design job at a big company. How much am I paying in taxes? Because I'm in what tax bracket? I mean, what state are you in? Are you in California? Yes, I'm in California. Okay, so let's just say that you're going to be roughly in a 25% federal rate. Let's just say for easy math, you're at a 10% rate in California. So you're paying $35,000 roughly in total tax.

Now, I mean, the reason I'm saying roughly is we are in a graduated income tax system. So like the first $20,000, you pay 10% or a little over 20, you pay 10% and then you kind of graduate up. But that math is going to get real complicated real quick. So let's just say you're going to pay $35,000 in tax on that. But it's a really good point to note that not all of your income is taxed at the highest rate. And so it just increases. So when people freak out that they get a raise for $1,000, it puts them in another tax bracket, only that extra amount is taxed at that higher rate. I think that's a really important, great point.

Okay, so back to the example. So you 35% tax for easy math of $100,000. And then what happens? So, you know, if you have no way of lowering that, that money is coming out of your W-2. It's being taken out every single paycheck you have, and that's it. So if you have, in our example, $29,500 of profit, I guess, so then you're taking that and you're subtracting it from what? The $65,000? Of the $29,500 loss, you're going to actually deduct it from your income. So now all of a

sudden that $29,500 is coming off of $100,000 and now your income is $70,500. But you've already paid tax as though you made $100,000, right? So then you get that back. Do you get that back? Absolutely. You only pay tax based off of what your actual taxable income is. So if you've got, I mean, in the number, it doesn't matter what the numbers are. You could have a million dollars of W-2 income. If you have a $950,000 loss, your income is 50 grand.

And that's what you pay tax on. Why don't more people do this then? I mean, $64,000 question. I have no idea. I mean, to me, I think it's a no-brainer. But after all the returns, after all the people I've talked to and all this, I still have no idea. And here's a tip from Randy you can take straight to the bank. What are some of the other tax mistakes people make? There's probably like three really basic mistakes that I see people, you know, make all the time. One, they're not putting anything into any of their retirement accounts that they might have through work or whatever, especially when they get a match.

I don't get it. Like, so you have a 401k and your employer goes, hey, I'm going to give you a match of up to 3% or up to 6%. And then people don't put any money in. What other world, if I said to you, Nicole, hey, if you just put in this account for you, I get no benefit out of this. You have an account for you. Go ahead and put in $500. And I'm going to just put another $500 in because I'm nice. I mean, would you not put $500 in? It's crazy's crazy to me, you know? And so people don't do that. And even if they want to do something outside of their employer plan, like an IRA, you know, they go, oh man, I missed the deadline. Things like that, those can be funded all the way up until higher tax returns. Right. So you have some time. If you didn't invest in an IRA,

returns. Right. So you have some time. If you didn't invest in an IRA, you still can do that even after the last calendar year is over. Up till the time that you file your tax return, including extension. So even if you extended your taxes out to October, you can still make the payment up until then. So I think it's a big mistake when people miss that. And for those people that either one, don't want to have any more pre-tax dollars, fine. But put some money into a Roth. What do you think right now? I mean, historically, you think our tax rate is high or low right now? Historically, our tax rate is low. That's, you know, that's not fair.

I've asked you that before. No, you haven't. Yes, I have. No, no, no, no, no. Because I just wrote a freaking book about this that I sent you. You are correct. So the highest tax rates ever been in this country is 94%. And if you go back to 1913 and take the top tax rate from every

year from 1913 through last year and average them together, our average tax rate, top tax rate in this country is 60%. We're 37 right now. So historically, we're at a really low rate. So, you know, if you believe tax rates are going up, which a lot of people do, and I think the thing is, is, you know, we're still historically at a very low rate and the government's spending a lot of money. So taxes are probably going up. So if you can put some money into a Roth now, let it grow tax deferred, and then take it out after 59 and a half and have no tax on it? Like, why wouldn't you? I just, I mean, it's crazy. Right, because Roths, you pay tax now.

And then the traditional 401k and traditional IRA, you pay taxes when you're an old lady. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. Michelle Lanz for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.