It's Not About The Money

Solopreneur Taxes 101: From W-2 to Schedule C
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On Resolutions and Journaling
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[00:00:00] Steve: Tyler, are you a fan of New Year's resolutions? We had the New Year recently.

[00:00:06] Tyler: I a fan of them? I would say probably no. I don't tend to make news resolutions. What about you?

[00:00:12] Steve: Oh, interesting. I don't either. Uh, I'm,

[00:00:15] Tyler: Well, that was a short

[00:00:16] Steve: I'm curious why That's it. Cue the, roll the, roll the intro tape. No, uh, uh, why? I, I'm curious if you have, if you have a reason.

[00:00:27] Tyler: I don't have a well thought out reason, but I suppose like many

[00:00:31] Steve: philosophical high horse

[00:00:32] Tyler: Yeah. Yeah. I suppose like a lot of people, I probably dabbled in new year's resolutions as a younger person and realized that they never accomplished anything for me because I didn't, they didn't have any staying power or there was no systems in place or processes in place to like make them a reality of just like a, my new year's aspiration, lose weight or, you know, whatever.

[00:00:55] Steve: Yeah. Okay. That, that is kind of how I feel about them as [00:01:00] well, which is maybe, maybe says more about me than about New Year's resolutions as a concept themselves of just, I see them as like aspirational, like non measurable thing or like the pie in the sky kind of goals. And so they never worked for me because I didn't implement them properly perhaps.

I heard somebody once talk about using not January, the new year, but spring as a. Season of life as a, as a time for setting goals. And that kind of resonates with me a little bit more

[00:01:34] Tyler: Cause the weather is more cheerful.

[00:01:37] Steve: right. The, the world is waking up, like it's, it's new beginnings out in nature. And so that's kind of a, like a springboard for your own renewal, thinking about growth.

I don't know. Spring resolutions.

[00:01:50] Tyler: makes sense. Well, you should try it. My favorite, like New Year's, uh, Tradition, maybe. I don't know. This is something private. I don't like do it with other [00:02:00] people. It's just something I think about New Year's is I, there's a poem called ring out wild bells. I don't know if you've ever heard that poem.

It's let me see who it's by here.

Lord Tennyson.

[00:02:09] Steve: Alfred comma Lord Tennyson.

[00:02:12] Tyler: Alfred, Lord Tennyson. I don't know what that means. Anyway, it's a

[00:02:16] Steve: isn't that how his name is written?

[00:02:18] Tyler: Yes, it

[00:02:20] Steve: I don't know why the comma is in there, that's, I just always thought that was unusual.

[00:02:24] Tyler: But you just pulled that out of your brain like you knew that there was a comma?

[00:02:27] Steve: Yeah, yeah,

[00:02:28] Tyler: that's crazy. Steve, you know the most random things. I, I don't know what to make of that. Uh, cause I, I just Googled the author of this poem when it's Alfred comma Lord Tennyson. And I was like, well, that's a weird typo.

Well, apparently it's not a typo

[00:02:43] Steve: turns out, alright, so read this poem,

[00:02:46] Tyler: Well, I don't need to read the poem. You can go look it up if you want, but, but the, there's a line in there. I just love the sentiment of it because it's about the, well, there's a line in there that says "the year is dying in the night. Ring out wild bells and let [00:03:00] him die," and I just love that.

It's like it's over. Last year happened It's in the past, move on, and of course it goes on There's like lyrics of hope and things, but I've heard it set to music a few different ways, and it's always like super somber, minor key, like depressing sounding, I'm like, so it's kind of macabre, it's kind of weird But I like the poem and I like the songs that it's turned into and it's it's kind of like Yeah, an interesting way to move on from the past, I guess.

[00:03:30] Steve: I like that,

Over the last, uh, I dunno, week or two, I did a couple of journaling prompts of like remembering the year and it was kind of fun to look back, uh, like one of them was, uh, it had you go through each month of the year and write down, something big or important or memorable that happened in that month. And some of them were real easy to remember. And some of them I had to go back and look through my calendar. and journal and find them. And it was really fun to [00:04:00] remember like, Oh yeah, that happened this year. And like, a lot of things have happened this year and there's been a lot of growth. And that was nice to have a moment to reflect on that and see what has happened. But also, this, this idea of the, from the Lord Tennyson poem, laying that to rest and like, that's all done.

We're moving on to the new year. What are we going to do with that now?

[00:04:24] Tyler: Yeah. Well, that's cool. Do you think you would have? Okay, let's say you hadn't done this exercise where I had you like purposefully go back month by month and think of like the best thing that happened in that month or whatever, like, do you feel like it's easy to forget? And if you hadn't done that, you would just be like, well, I guess another year just passed and like, uh, whatever, time to move on.

[00:04:43] Steve: Uh, yeah, it would have been easy to forget. We did a couple of episodes on here that helped me remember the business related ones, but there were a lot of like family related things and personal things that I maybe would have forgotten about or wouldn't have been as strong in my memory if I hadn't taken the [00:05:00] time to go back and purposely remember them.

[00:05:03] Tyler: Yeah, that's very cool. That sounds like a good exercise.

[00:05:06] Steve: Yeah.

[00:05:07] Tyler: Uh, I did a similar one. I had a question that I reflected on that was, what were the biggest, the six biggest wins of the year? And actually one of the six biggest wins I put on here is releasing 30 episodes of a podcast with Steve Ney. So you made the list.

[00:05:23] Steve: I'm honored.

[00:05:25] Tyler: I didn't do the same thing that you did exactly, but it's interesting. I also took some time to reflect over through like all my journal entries and kind of pick out the highlights of the year, which I've never done before. And it was massively rewarding. I remembered so many good things that happened that I wouldn't have remembered otherwise, and it just felt good to think about them during like a cold, dark winter's night.

[00:05:45] Steve: Mm

[00:05:45] Tyler: refreshing. Yeah.

[00:05:47] Steve: Yeah.

Well, good. Dear listener. Hello, I'm Steve.

[00:05:57] Tyler: And I'm Tyler. And this is another episode [00:06:00] in a new year of It's Not About The Money, where we discuss a wide range of topics related to creating and running small businesses.

[00:06:07] Steve: Tyler and I both run small businesses like you perhaps, and this podcast is our attempt to make sense of the world one episode at a time.

Set the scene: You have a W-2 job but are considering starting a business
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[00:06:20] Tyler: So Steve, I've noticed looking back at our past episodes that the ones that tend to resonate with our audience are, well, a lot of them have to do with like taxes, surprisingly, or bookkeeping or the more technical things that we talk about, which, you

[00:06:34] Steve: Well, that makes me feel good.

[00:06:35] Tyler: yeah. So you should feel good about that. You know, I think people are often maybe seeking information about those things.

So today we're talking about how. I have had somebody else doing my taxes for so long that I basically forgot how taxes work. And so it's a good opportunity for you to give me a primer or a refresher on how taxes work and, review some important topics related to that.

[00:06:58] Steve: Okay. That sounds like [00:07:00] fun. Well, fun for me. I don't know. Hopefully fun for you too.

[00:07:03] Tyler: I will survive. No, I appreciate our conversations on here about, about these topics because I genuinely learn a lot.

[00:07:09] Steve: Well, that's good. I thought maybe it might be useful to come at this from a perspective of like, me five years ago, still working a W2 job, hadn't yet started a business. Like, what kinds of things would I want to know about taxes and how they work for me in that situation? But also what to be aware of as I'm moving into small business ownership.

Does that seem like a, a useful paradigm from your perspective?

[00:07:34] Tyler: It does because I think it's Really similar to my paradigm and it will help kind of refresh my memory on how both work as something I have to navigate still, like every other person. And, you know, if there's anyone among our listeners who is thinking about starting a business and maybe the transition from one type of tax situation to another, I think that could be helpful too.

So yeah, let's do it.

W-2 jobs and withholding
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[00:07:57] Steve: Okay. Let's start with [00:08:00] you have a W-2 job. Your employer is in charge of withholding taxes from your paycheck. every two weeks, every month, whatever it is. Uh, they send that money to the IRS, and then at the end of the year, you file a tax return that says, here's how much I earned, here's how much tax has already been withheld, and then at the very bottom, you'll figure out, uh, I overpaid the IRS, and so I'm getting a refund, or I did not withhold enough, and so I still owe taxes.

[00:08:32] Tyler: Okay. So can we talk about that for a second? Like what are some scenarios where you may have. Like, what would cause you to have underpaid, since it's your employer who's actually withholding the money, and not yourself?

[00:08:43] Steve: Mm hmm.

[00:08:44] Tyler: How do they know how much money to withhold?

[00:08:47] Steve: good question. You fill out, typically when you start employment or when you have a big life change, you'll fill out a form called a W 4. Which, uh, it used to be like, uh, you'd specify a number [00:09:00] of exemptions. Like, there's me and my spouse and I have two children. And so they would add up those exemptions and then they would look up in some table, like, what percentage of the income needs to be withheld from each paycheck.

Uh, now it's slightly more complicated. And the IRS has a little wizard that you can walk through that'll ask you for, like, hard numbers. And it'll calculate it much more precisely.

[00:09:24] Tyler: Are you talking about this is for the employers who are withholding the taxes, or?

[00:09:28] Steve: no, this is for you as the employee, you fill this in and give it to your employer and then they plug it into their payroll software and it does the calculations for how much to withhold.

[00:09:37] Tyler: Okay.

And how, you know, how much control, if any, do we have over that?

And also, are there advantages to asking them to withhold less or more?

[00:09:47] Steve: So the short answer is you can control it to a degree. You can, especially if you want to withhold more, there's a line on the W 4 where you can say also withhold X amount [00:10:00] additional each paycheck. And so that could be especially useful if, like if you are the W 2 employee in the household and your spouse runs a business, that doesn't have payroll withholding, and so you want to withhold extra to be able to cover their income. You can do that on your W4, just withhold it out of your paycheck. The advantages of withholding more during the year is that you're more likely to get a refund at the end of the year, which a lot of people like getting the refund

[00:10:31] Tyler: Feels like a little

[00:10:32] Steve: a big, right, it's a, it's a windfall all at once, a big chunk of cash that kind of falls into your lap.

You were paying it the whole time, but,

[00:10:40] Tyler: Right.

[00:10:40] Steve: uh, but you notice it more. So depending if you like that kind of a reward. At the end of a year, that could be useful. If you don't like giving the IRS an interest free loan on your money throughout the year, whatever, you know, I don't, I don't find that argument particularly compelling, but it is technically true, [00:11:00] uh, then you might want to withhold less, like, so that you're just right on the money exactly.

You don't owe anything, you don't get a refund at the end of the year. I mean, it's kind of hard to do precisely, but

[00:11:10] Tyler: Yeah, yeah. Well, as someone who once Who, as a W 2 employee, ended up owing a lot more in taxes than was withheld one year. I can tell you that psychologically, that is worse than getting a refund. Much, much worse. It was because of the sale of a home. But, uh,

[00:11:28] Steve: Ah,

[00:11:28] Tyler: anyway, unfun.

[00:11:31] Steve: Mm hmm. And it's, it's easy to forget that you are paying taxes all throughout the year and that when you come to file the taxes, you're just kind of reconciling with the IRS rather than, like, especially if you, if you owe taxes at that point, then you're like, well, where did this come from?

And when really you've been paying it all along. And if you had just increased the withholding a little bit each month, it wouldn't feel so big

[00:11:55] Tyler: Right. I mean, you owe what you owe. You can't really escape it, apparently, you know. But,

[00:11:59] Steve: [00:12:00] Right. There are some things you can manage, uh, as far as deductions and, uh, the size of your family and selling things or not selling them as far as capital gains, that kind of stuff.

Uh, how much you contribute to retirement accounts, that kind of stuff. So there, there are like some knobs and levers you can pull throughout the year, uh, to change that, but

Withholding vs. estimated tax payments
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[00:12:21] Tyler: So can we talk about withholdings, which is what we've been talking about versus estimated tax payments? I don't understand what that means.

[00:12:29] Steve: So withholdings versus estimated tax payments. The idea here is, um, the IRS would like to get the money throughout the year evenly as much as possible. And so, uh, on a paycheck for a W 2 employee, that's built in the withholdings throughout the year. That's expected. But if you're a small business owner, especially when you're starting out, you may not be paying yourself on a paycheck.

You're just, uh, the, the [00:13:00] business is making money and having expenses throughout the year. And you're in charge of figuring out how much profit you're generating throughout the year and how much of a tax burden that's going to end up being. And you are supposed to be paying estimated tax payments every quarter throughout the year to cover that tax liability.

When you're just starting out or especially small, this may not matter a whole lot, uh, and especially if you also have a W 2 job and you bump up the withholding there. You might be able to get away with not doing estimated tax payments at all, if you can cover the full tax liability with the withholdings, but once it starts to get big enough, there are penalties for not paying sufficient estimated tax payments throughout the year when it comes time to reconcile on your tax return.

And so that's why it's a good idea to sit down and figure out what that's going to be and start paying that throughout the year.

Rules of thumb for estimated tax payments
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[00:13:56] Tyler: So that sounds like something that's different. Like, you mentioned where you were 5 years ago [00:14:00] was just a W2 employee versus now as a business owner. That sounds like a big difference.

[00:14:04] Steve: That is a big

[00:14:05] Tyler: the potential option to, to make payments quarterly.

[00:14:08] Steve: Mm hmm. I have seen. Clients get tripped up on that, especially when they're just starting the business. They don't necessarily know that this is a thing that they need to be doing. So that's part of my job is, is explaining like, what is this and why is it necessary? Cause it, it feels kind of like an imposition of, you know, I'm, I'm earning this money and you're asking me to pay taxes on it.

And it's not even April 15th yet.

[00:14:32] Tyler: Right. Are there any like rules of thumb? Like, I know it's your answer is going to be, it depends. I've learned that

[00:14:39] Steve: You know me

[00:14:39] Tyler: about talking about taxes, but are there any guidelines or rules of thumb, like thresholds for when you would need to start making quarterly or think about talking to your accountant about making quarterly tax payments?

[00:14:52] Steve: Okay. So before I answer this, uh, what have you heard on the internet? And maybe we can, uh, [00:15:00] prove them right or debunk them.

[00:15:02] Tyler: so

[00:15:03] Steve: of folks get advice from TikTok that is sometimes correct and sometimes dubious. So I'm curious what you've

[00:15:08] Tyler: Yes, so the TikTok advice that I've heard on this there's a guy named Caleb Hammer that does kind of like an entertaining show where he audits people's finances. And sometimes they're self employed and they haven't been paying taxes and it's just like a, it's a disaster.

It's very good entertainment. I have no idea if it's like, good advice. But, he always tells people if they have their own business to set aside 30 percent of their income for taxes. So that's what I've heard from, that's, that's my TikTok education.

[00:15:35] Steve: So 30 percent of their income from the business. I think that's a good rule of thumb. And I will, I will give you the, it depends caveat

[00:15:44] Tyler: Sure.

[00:15:45] Steve: Uh, uh, the tax that you will owe is on the profit from your business, not necessarily the revenue.

So if you have expenses, those come out before taxes. And it will also depend on what your tax bracket is. [00:16:00] And where the, uh, how, how, what the percentage actually ends up being, but that is a good rule of thumb. And at any rate, I think it's a good idea to set aside like 30 percent of your top line revenue in a savings account for taxes, whether or not you actually pay that throughout the year to the IRS.

That, that will depend a little bit more, but that you have the money available. That when taxes come due you're not surprised by it. And it's not like, Oh, Now, that now the business is going under because we don't have the cash to

[00:16:31] Tyler: Yeah, it's better to have the money than to not have the money, it is better to have more than you need. But, interesting, you're saying 30 percent of top line revenue is, is opposed to net, like after expenses.

[00:16:44] Steve: Well, the after expenses is what you're actually gonna owe taxes

on. So it's, it's kind of like how much of a cash buffer do you have in the business? Would it be better for your peace of mind to set aside 30 percent of top line or 30 percent of profit, which is what you actually [00:17:00] need. Yeah, it kind of

[00:17:01] Tyler: Right. Okay. Well, I'll just, I'll just say TikTok was right in this case, generally

[00:17:08] Steve: yeah.

[00:17:08] Tyler: rule

[00:17:08] Steve: as a, as a general rule of thumb, I would agree with that

one. And then we can get into more complexity of like the safe harbor guidelines of like exactly how much you need to pay to avoid penalties and all that. But I don't think we need those details in this kind of an episode.

[00:17:23] Tyler: it might be worth just throwing out there that like, cool, it's a rule of thumb, but in reality, you're going to need to talk to your tax pro about your situation and exactly how much taxes you're going to owe and they can help you out with that. So.

[00:17:35] Steve: Yeah. Uh, so when I run a tax return for somebody, one of the things the software will spit out for me is estimated tax payment vouchers, which say like, assuming that everything is the same this year or the same next year as it was this year, here's how much you should pay each quarter. And so that's kind of a, another good rule of thumb.

And it's obviously going to vary depending on if your, if your revenue is growing [00:18:00] or shrinking in the next year those numbers will not be accurate anymore, but that's kind of the default thing that you can get out of the software from your tax pro. So if they're not giving you at least that you can ask them for those numbers.

Uh, and then it could also be useful throughout the year to say, here's the revenue we've made so far, this is our projections for the rest of the year. How does that affect our estimated tax payments? That we should be

[00:18:22] Tyler: yeah, so already I'm starting to see, so as someone, like I said, I'm formerly also just a W 2 taxpayer. And so I've never really had to think about this before. And so the value of having a tax pro to work with on an ongoing basis as a business owner is really starting to make more sense to me at this point because it's kind of complicated potentially.

[00:18:46] Steve: It is like, uh, at, at the size that you are right now, you could still do everything in TurboTax yourself. Um, and especially if the business is running a loss. . But yeah, as you say, like as things continue to [00:19:00] grow.

Having the advice of somebody who's, uh, does this day in and day out to be able to look at your situation and, and say right off the bat, like, here are the things you need to pay attention to. and and these are the things that don't matter so much for where you're at right now.

[00:19:15] Tyler: yeah, that makes sense

[00:19:17] Steve: Bring some sanity to the things you hear on, on the internet.

TikTok tax myths are, are so fun

[00:19:24] Tyler: know,

[00:19:25] Steve: because like

there, there's usually like a kernel of truth in there. And the, and the answer is like, yes, that is a good strategy for these kinds of situations and it's a terrible advice for everybody else or, or something like

[00:19:37] Tyler: Yeah, yeah okay.

[00:19:39] Steve: So that's a, that's the difference between withholdings and estimated tax payments that you're going to have to start paying attention to as the business income grows and especially if it eclipses your W 2 income.

[00:19:51] Tyler: Yeah.

Deductions for individuals
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[00:19:52] Tyler: Okay. So now might be as good a time as any to just talk about tax deductions and how that differs between a W 2 [00:20:00] income and small business income.

[00:20:02] Steve: Hmm, this is another great question. On the personal side, most personal expenses are not deductible unless the law specifies otherwise. And we had an episode actually on deductions recently, that I'll put a link to in the show notes, where we went through some of those, but roughly they're like home ownership, having children, retirement contributions, purchasing an electric vehicle, energy efficient upgrades for your home. Those are, those are some that are currently in the law that, uh, a few years from now may or may not be, or it might look different. Like this, this kind of stuff is changing all the time, depending on what we want to incentivize right now.

[00:20:43] Tyler: Okay. So speaking of the tax law changing all the time, can we talk about for a second how you literally texted me of a video of yourself opening your, like, what was that, your tax law update package with glee?

[00:20:55] Steve: I have it right. here. The, uh, TheTaxBook deluxe [00:21:00] edition 2023 tax year. It's this, this book, I don't even know how many pages long it

[00:21:05] Tyler: it looks hundreds of pages. Yeah.

[00:21:07] Steve: of, like, well, for practical purposes, the electronic version is more useful, but I like paper things, and so I thought I would buy the book this year, just to have it on the desk.

And I did actually open it today to look something up.

[00:21:19] Tyler: Oh, amazing. Just a symbol of your massive knowledge.

[00:21:23] Steve: I know where to find the answers. Even if the answers do not live in my head constantly.

[00:21:29] Tyler: So just for, just so people know what we're talking about. So I guess the tax code like changes all the time, right? It updates every year maybe, or more often. And so you, as part of your job, you have to stay on top of all those changes. So you know how to serve your clients.

[00:21:43] Steve: that's right.

So, so to give some examples, some of the things that have changed recently, there used to be a deduction for employee business expenses where like your employer requires you to do something, and you would not otherwise need to purchase [00:22:00] that for your personal life. You're just doing it because that's what your employer requires, but they don't reimburse you for it for whatever reason.

It used to be you could deduct some of those kinds of things on your tax return as employee business expenses. That is no longer the case. Uh, I believe the, the 2017 Tax Cuts and Jobs Act did away with that. And, well, there, there were a lot of changes in there. That was just one of them.

[00:22:24] Tyler: But the ones they wanted us to know about were the tax cuts and the jobs, Anyway,

[00:22:29] Steve: right there in the name.

Yeah, that was also the one that, uh, changed the corporate tax rates. So that was, that was kind of the big selling point for, business on that side. But anyway, uh, there was that, uh, and then more recently, the energy efficient kinds of thing, electric cars, um, home upgrades, those kinds of things, there are incentives in the tax code for those that were implemented more recently.

And even since they've been implemented, they've been tweaking [00:23:00] them slightly and changing like what kinds of vehicles are eligible. Can you, is it as a used vehicle eligible? Those kinds of things.

[00:23:08] Tyler: I actually just saw a headline today about that on The Verge, which It seems to indicate, I didn't read the article, but the headline seemed to indicate that the number of vehicles that are qualifying for the full 7, 500 credit has gone down quite a bit.

But it still exists for a number of them.

[00:23:23] Steve: It does. Uh, when we put solar panels on my house, there was a. Certain you'd get a certain, uh, tax credit as sort of a rebate for the amount that you spent on it, and the percentage was changing each year. And so if you got it before the end of 2018, it was 30%. And then in 2019 it was going down to something.

So that, those kind of things, they're, they're always getting tweaked a little bit,

Deductions for businesses
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[00:23:49] Tyler: okay. So what about for business deductions?

[00:23:53] Steve: Business deductions, that the general rule is if it is an ordinary and necessary [00:24:00] expense, that's the IRS's verbiage, ordinary and necessary, then you can deduct it off your top line revenue. Before you get to taxes. So this is things like if somebody in a similar business would also agree that this is, ordinary, like this, this is something that everyone else in your industry does, and it is necessary for the business to operate, in, in the way that you do, or that is customary. That's, you know, so it's, it's a little bit, uh, vague, but that's. That's kind of

what Ordinary and Necessary

[00:24:36] Tyler: Cause It depends

[00:24:37] Steve: on the facts and circumstances. So, uh, but, but that's the general test. And so if, if it qualifies under that, if you can make a good case for it, if you ever got audited, then you're probably okay. That's not tax advice. Like, obviously get individual tax advice from your tax pro. But that's the kind of the rule of thumb there. And so [00:25:00] the, the idea behind Letting business expenses be deductible is, uh, one, that we want to encourage business. We, being American society, I guess, want to encourage business.

And, uh, the other is that a lot of your expenditures as a business are going on to become income for other businesses. businesses and individuals. And so it's kind of, it's money moving around the economy. And so we will tax you on the money that you keep that stays in the business, rather than everything that comes in the door, just off the top.

Does that make sense?

[00:25:39] Tyler: Yeah. Yeah. Sounds like it just incentivizes us to, you know, to spend money basically, right? Keep that economy going.

[00:25:47] Steve: Uh, right. Yeah. And, obviously don't spend the money just for the sake of getting the tax deduction, because that's, it's probably not worth it just for its own sake. [00:26:00] But if it, if you need that expense to operate the business. If it's going to make the business run better or bring in more customers or improve your revenue, then, then yes, go ahead and do that.

And then the tax deduction is a nice bonus.

[00:26:16] Tyler: Yeah, that makes sense.

Self-employment taxes
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[00:26:19] Tyler: Okay, so we've covered a few of the main differences, or a couple of the main differences between taxes as a W 2 versus self employed and Just to kind of summarize for myself here, one is, you know, the withholdings that happen as a W 2 employee, as opposed to the estimated tax payments that you may need to make, right, as a business owner, depending on your profits and revenue. And then, kind of some differences in what can be deducted, and that's determined by the law, and it's changing all the time. But generally those are to incentivize certain behaviors that society has deemed useful or helpful.

[00:26:55] Steve: Yeah, that's a good summary.

[00:26:57] Tyler: Anything else you want to add to Taxes 101?[00:27:00]

[00:27:00] Steve: One other thing that I should mention, uh, at the beginning we talked about, withholding on your paycheck.

That's for your federal income tax burden. There's a couple of other lines on there that you've probably seen. One is for Social Security and the other one is for Medicare. Those two together are called FICA taxes, F I C A, not that you need to know that, but that's what they're called. Uh, and when you are self employed, you're filing a Schedule C on your tax return.

Uh, you have to pay those taxes too, still, but the, the, the trick is You have to pay both the employee portion that you were already used to paying on a W 2 and you also have to pay the employer portion because what you may not have seen on the paycheck is that your employer is also paying the same amount on those two lines as they are deducting from your paycheck.

When you're self employed, you have to pay both of those. The employer portion you get to deduct as a business expense, but you still have to [00:28:00] pay it. So it's Anyway, that's, that's, uh, one of those surprises that, uh, you might encounter starting a business and it feels a little unfair, but there it is.

[00:28:11] Tyler: that actually happened to me years ago. I, I didn't start a business, but I did some freelance work, you know, 1099 contractor work for a company kind of on the side.

[00:28:19] Steve: Yeah.

[00:28:19] Tyler: And, uh, I remember feeling that unpleasant surprise. So it's better, you know, all disappointment comes from unmet expectations. So that's, I think what we're trying to do here is like set your expectations properly.

Like there are some additional taxes involved in being self employed, right? And if you know that you're not going to be disappointed or, you know, surprised in a negative way when it happens. Like I was

the first time I did it years ago. So

The way to avoid all taxes
---

[00:28:46] Steve: Mm hmm. Yeah. Going out on your own, uh, is not, it's not all easy

[00:28:52] Tyler: sunshine and rainbows.

[00:28:53] Steve: sunshine and rainbows. There you go. Uh, yeah, but kind of knowing what you're getting into. We'll avoid some of [00:29:00] those surprises. And that, you know, you still have to pay the taxes, but at least you know, going in, that you're going to have to pay them, so.

The way to avoid all of those taxes is to be unprofitable.

[00:29:12] Tyler: right.

[00:29:13] Steve: So, there's that.

[00:29:15] Tyler: You know, it's funny you mentioned that, uh, years ago also, I was talking to my, the, the guy who does my taxes. Um, and I was like, kind of, I think at the time I was kind of on the borderline of a new tax bracket. Which was like, kind of exciting, but I was like, made me nervous for some reason. Cause I'm like, wait a minute, like, cause I didn't understand how it worked.

Right. So I was like, is there ever a scenario where it would be better to avoid making more money to like avoid paying more taxes? And he just looked at me and said, it's always better to make more money. I was like, oh, okay.

[00:29:48] Steve: Yeah, good advice.

[00:29:49] Tyler: Anyway,

[00:29:50] Steve: yeah, funny you should mention tax brackets. We're not going to talk about those today, uh, but, and they, they get adjusted every year for inflation and other reasons, but uh, yeah, that's something else [00:30:00] that we could talk about on some other episode. They're, they're, they're not as scary as they seem, I guess, to, to your point of like, it's, it's always better to make more money.

You'll, you'll still come out ahead even if you end up in a higher tax bracket.

[00:30:12] Tyler: yeah, yeah. It's weird, I've heard that, uh, I don't, where have I heard that in my life? I don't know, friends, acquaintances, family, I'm not sure. Kind of like this cynical view, it's like, oh, if you make more money, you pay more taxes. It's like, yeah, but,

[00:30:25] Steve: Yeah, that, that's how it works.

[00:30:27] Tyler: but you also make more money. So It's, it's fine.

Okay. Yeah. That'd be good. Let's, let's do that. Let's cover that in a future episode. Cause I know there's a lot of interesting nuance there that, that makes it less scary about, you know, going up into a higher tax bracket. So cool. Well, thanks, Steve. I mean, as always, I always get a few little nuggets when we talk about taxes, uh, someday, if you're not careful, you might actually educate me on this.

So

[00:30:53] Steve: Mm hmm.

[00:30:56] Tyler: You're, you're doing your best.

[00:30:57] Steve: We'll get there. And hopefully, for our [00:31:00] listeners, this was also useful. You're welcome to email us anytime. hello@notaboutmoney.Com, whether that's tax questions or YNAB

or anything else, just to say hi. honestly, we love those emails too, so send them in. We're real humans on the other end of this.

[00:31:16] Tyler: two nerdy humans.

[00:31:20] Steve: We'll see you again on another episode.

[00:31:22] Tyler: Dun dun dun. All right.