Are you ready for the IRS when earning extra income?

Ralph
00:00:00

Are you earning extra income through side gigs, freelance work, or online sales? Well, let me ask you a question. Do you understand the tax obligations with that? You know, with the growing gig economy, it's essential to know the tax implications of your additional income streams. So today we're getting into how to prepare for the IRS when you're earning extra money.

The truth is the gig economy has opened up countless opportunities to earn extra income, but are you prepared for the tax consequences? If you're like most people, you're feeling overwhelmed by the complexities of self-employment tax, income tax, sales tax, and all other kinds of taxes, you are not alone.

So join me today as we break down the essentials and provide you with actionable steps to ensure you're compliant and most of all, financially secure. So if you're wondering, am I ready for the IRS when earning extra income, this episode is for you.

Podcast Announcer
00:00:53

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth to break the bondage of financial despair.

Get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph
00:01:33

Well, hello everyone and welcome to another episode of the Ask Ralph Show. I am your financial evangelist, Ralph, and I am thrilled you're joining me today. We're gonna be talking about taxes, which sometimes can be a little boring, but I'm gonna make it exciting and the thing I understand is your time is valuable. So I appreciate so much that you've joined me and I'm committed to making sure today's show will impact your life positively.

Now, if you missed yesterday's show, we talked about divorce and we talked about does it have to be painful?

Does it have to be that difficult financial situation? I also talked about tax traps and some of the financial things you want to consider. I explored how to navigate those financial complexities in that divorce process to ensure you're both protected financially and emotionally. So if you missed it, I'm gonna encourage you to go back and check it out.
You can catch all of our episodes at askralph.com.

Today's listener question comes from Daniel, and Daniel has got a great question for us, and he says this, 'Ralph, I started selling handmade crafts on Etsy this year, and it's been a dream come true. I've also been doing some freelance graphic design work on the side. I've always loved crafting and designing, and now I get to share my creations with the world.

However, I'm also worried about the tax implications. I've heard horror stories about people not being prepared for the IRS and facing huge penalties. I'm not sure where to start with tracking my income, understanding sales tax, and making estimated tax payments. Can you help me understand what I need to do to stay compliant and avoid tax penalties?
I don't want this new venture to turn into a financial nightmare.'

Well, Daniel, that is a great question and I want to thank you for reaching out. I appreciate your concern and your anxiety that come with these tax obligations. This is what I do for a living. It's not what you do for a living and especially when you're first starting out.

You are not alone feeling this, this feeling of overwhelm. You got these complexities. You're not sure about how to handle this extra income and how to handle the tax responsibilities that come alongside this. But let me assure you this. The right information and taking the right steps. I can help you navigate this successfully.

I've helped many clients with this just like you over the past 30 years, and I'm sure that today I can help get you on track. I. Because the truth is earning extra income through side gigs, through freelance work or online sales can be a great way to boost your finances. I talk about that on the show all the time.

It's a great way to bring some income into that bottom line, but you've also got to be aware of the financial responsibilities that come with it. So let's break down those key areas because I want you to focus on being in compliance and being prepared for the IRS.

I just wanna remind you, if you've got a question just like Daniel, I would love to answer that. The best way to reach me is to go to justaskralph.com. When you hit that website, you'll see a box. You can just put your question right in there because the truth is I love answering questions because it's the heart of what I do.

It's the heart of what we do here as a show. And it's my goal to provide you with the answers that you need to achieve financial success and peace of mind, all with that idea of bringing faith into the whole picture.

So Daniel, before we get into the specifics for you, let's ground ourselves in scripture.
And I found this verse, it's a little long today, but I think it is so apropos for what we're talking about today, and it comes from the book of Romans Chapter 13 verses one through seven. And this is what the apostle Paul writes. He says this, 'Let everyone be subject to the governing authorities, for there is no authority except that which God has established.

The authorities that exist have been established by God. Consequently, whoever rebels against the authority is rebelling against what God has instituted, and those who do so will bring judgment on themselves. For rulers hold no terror for those who do right, but for those who do wrong. Do you want to be free from fear of the one in authority?

Then do what is right and you will be commended. For the one in authority is God's servant for your good. But if you do wrong, be afraid, for rulers do not bear the sword for no reason. They're God's servants, agents of wrath to bring punishment on the wrongdoer. Therefore, it is necessary to submit to the authorities, not only because of possible punishment but also as a matter of conscience.

This is also why you pay taxes, for the authorities are God's servants, who give their full time to governing, and this is the part that everybody always knows when I get to this part of the verse. And it says this. It says, Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue;if respect, then respect; and I love the way this ends. And if honor, then honor.' that is such a great passage, and it's a long one. I get it. But think about what it's saying in there. That passage reminds us of the importance of obeying the laws of the land, including our tax obligations. We have an obligation as a witness, as a Christian to do the right thing and see it's not just about that financial responsibility.

Paul was very clear about that. He's very clear, he says, but it's a matter of conscience and obedience to God. If you think about it, this is my whole show, the whole show, the Ask Ralph experience is all about that. To find that balance between financial responsibility and obedience to God, this is why I turn on the microphone.
I turn on the camera because I truly believe that is where our purpose lies.

Today, I'm grateful for the opportunity to help people like you, Daniel, navigate the complexities of earning extra income and tax compliance. It kind of makes me excited. This is what I do every day because the Lord has blessed me with experience and with understanding to guide others through these challenges.

And I am honored to be a part of your journey towards financial freedom. And at the same time, towards financial faithfulness,

Well, let me start today with a client story. I always like to bring in stuff that goes on in my practice because it really is where the rubber meets the road.

I'll tell you about a person I met with and worked with a few years ago. Her name was Amber, and Amber started selling these vintage, clothing online. It was with, I would say, looked like they're all torn up and they got holes in it, but she called them vintage clothing and she also did some freelance writing just like you, Daniel.

Now, Amber was really passionate about her work. And she was really making a significant profit. She had an eye for this. She would show me stuff and I'm like, look, to me, it looks like clothes you got at a secondhand store. But then I looked at the prices she was getting for this stuff. I'm like, wow, okay, vintage.

I'm gonna start giving all my clothes away and call them vintage. Maybe set up an Etsy store. Well, maybe not, but that's the beginning of the story. But like Amber. Amber and like most other people, when it came to taxes and finances, she felt completely lost. She had no idea how to report her income.

She had no idea how to manage sales tax, and she had no clue how to keep accurate records. Man. She could see a pair of jeans or a blazer or something like that, and she was like, Ralph, this will sell. This will be great in my shop. But when it came to doing any of this financial accounting or tax stuff, man, she was lost.

She came to me, she says, Ralph, I saw your advertisement on Facebook and a couple of your, what I call my brand ambassadors mentioned I should come see you. And she was getting worried because she says, I feel like there's something I should be doing, and I'm afraid I'm gonna get this IRS notice. I read these terrible things about the IRS can come and get you and garnish your wages and put liens on your property.

So when she first came to me, you know, she had that pile of receipts and invoices, but no organized system at all to track her income and expenses. And this is something I've seen many times in our term, we call it the old shoebox full of stuff. I've had many clients that have come to me and they literally have a shoebox.

And in that shoebox are receipts. There's bank statements, there's credit card statements, and that's about the extent to the organization that they have. And that's the same thing that Amber brought to me. And when she sat down, I could tell she was stressed, she was anxious, and it was clear to me that she needed help.

But hey, that's what I'm here. I'm the problem solver. And I sat down with her and I shared the importance of understanding those tax obligations I expressed to her. Yeah, that's great. Your business has taken off. That's great. You're selling a lot of stuff online. But listen, if you're neglecting this part, if you're neglecting the "business of the business", you're gonna get yourself in trouble.

So I started to explain to her the tax obligations. I started to tell her about the steps she needed to take to stay in compliance, because that's the key man. You can have a great online store, you can have a great side gig, but if you're not staying compliant with the IRS, man, how do you put your head on the pillow at night and have any rest?

And this is how I broke it down for her. And I wanna share this with you today, Daniel and anyone listening, because this is really the way that I work through this.

So when I sat down with Amber, we started talking about the most obvious thing, and as soon as I said this, she knew what I was talking about.

I said, okay, first there's income tax. Now most people understand income tax. They're used to paying income tax. Usually they have a W2 job where they go to a job, they get a paycheck, and the money's withheld from their check. And then at the end of the year, they either file their return or some people come and see somebody like me to get the taxes done.

But the thing that Amber didn't really understand was how to connect the dots, because what she didn't get is that any profit you make from that, those side gigs, that freelance work or online sales is considered taxable income. So whatever that is. Now, a lot of people get hung up on this. I'm not gonna get into the details, but it's the taxable income part is the net part.

Just like when you're working a traditional job, when you get that W2 at the end of the year, that is your income. Now there are some exceptions. You know, for example, if people sell stuff, personal items and they lose money on that, that's not income. But for her, if you're working on a side gig, and listen to me on this one, if you've got a side gig, you're doing any kind of freelance work,

if you're doing online sales, you've got to report that because that income is taxable income to the IRS. And if you don't report it, you are going to get yourself in trouble. And here's the deal. The amount of tax you owe is gonna depend on that overall income. It's gonna depend on your filing status and your deductions.

So that's why it's so important to, first of all, understand you've got income tax. I'm gonna talk in a few minutes about how to keep the records so that we can reduce that income tax. But that's the first thing you need to understand is there is income tax. Second thing, and this one was a surprise to Amber and many people are surprised by this, and it's a term we call in my trade self-employment tax.

So what that basically means is if you're self-employed, meaning you're not an employee of another company, you're not going to work for somebody, they're not giving you that paycheck at the end of the week or every two weeks. You've gotta pay what's called self-employment tax. It's basically your Social Security and Medicare taxes that are typically withheld from your paycheck when you work for somebody else.

Now I've got some strategies on how to limit that, but that's gonna be a topic for another show. So make sure you stay tuned and join our email list. You can do that by going to askralph.com, so you'll know when I'm gonna talk about that. But this self-employment tax is a big deal because when you are self-employed, you pay what we call both sides of that.
When you work for somebody else, you pay half and then your employer matches it. But when you're self-employed, that's a 15.2% additional tax. So think about what I've said so far. You've got your income tax and then you've got this self-employment tax on top of it. I'm not gonna go into a great deal, but then you could as well have state taxes.

But all those are based on the income. Now, one of the other things that a lot of people don't think about when they're doing online sales, not so much in the gig economy when you're going somewhere and working because you're pretty much staying in the state. But one of the things that a lot of people don't consider is sales tax.

And this is something that gets really complicated. It depends on your state. Like where I'm at here in Delaware, we actually don't have a state sales tax. We have something called a gross receipts tax, which I'm not gonna get into that today, but it's basically a tax based on the gross sales that a business has.

But here's where it gets complicated. Every state has different rules, and it could be where the customer lives and it could be based on where that state and where you're doing business is you might be required to collect and send in sales taxes for online sales. Now, this is an area that is super complicated.

It's something that is actually growing now that we got more people doing these online sales, and like I said before, the thing you've got to understand is sales taxes vary from state to state and ready for this one, they vary from city to city. So for example, you might have a New York State sales tax, and then in New York City there's a New York City sales tax at all.

Well. You might say, Ralph, well how do I figure this out? Well, the thing you need to understand, I'm gonna spend a couple minutes talking about this because this is crucial if you're doing any kind of, not in person, but online sales, and that's a concept called Nexus. And lemme tell you, this is a real hot topic right now.

There's so much happening online and the states want to get their share of the cut. They wanna get their share of the revenue, and that's what this is all about. Let me just take a little sidetrack here for a second. The bottom line is these states wanna make money based on the stuff that's being sold in their state, whether you're delivering it to them, whether it's an online thing, the states want to get their money.

Now, in the past, Nexus generally meant you had a physical location such as a store or a warehouse. You know, you had a physical location there. There was a place where a brick and mortar they would call, where somebody would go and you know, you'd have a retail shop or you'd have a service place. Then came this Supreme Court decision called South Dakota v. Wayfair.

Now, if you know Wayfair, they sell online furniture. They sell, I don't know exactly what they sell, but they sell all kinds of stuff online. And this case completely changed the landscape of online sales taxes. Now you'll hear this called the Wayfair decision. If you do any kind of online commerce, you can do a Google search and you will find all about this.
But let me tell you what that really meant. So the Supreme Court got this case. It had gone through the appeal process and the state, and this is what the Supreme Court said. They finally said, yes, states can require online sellers to collect and what they call remit or send in sales taxes based on economic activity.

Even if, and this is the clear part, even if your business doesn't have that  "physical presence" in the state. You might be saying, Ralph, wait a second. What did you just say? Yes. The Supreme Court said that states can require online sellers. You don't have a location. Here's a simple example.

I'm in Delaware. If I sell something online to someone in Pennsylvania, it's the next state over, and this one goes. And assuming that I have to follow these guidelines depending upon what I'm selling, even though I don't ever physically go to Pennsylvania, I don't have a retail shop in Pennsylvania. If I do any kind of online commerce, the state of Pennsylvania can require, 'cause that's where the customer is for me to collect and remit sales taxes.
And this gets super complicated because here's the bottom line. You might be in a position where you've gotta collect sales taxes in states where you have a certain amount of volume, a number of sales, or a number of transactions. So I'm not gonna get into the details of that because you can go state to state and it varies.

See, this is so very important if you're doing any kind of online sales. So here's what I want to talk about. I want to talk about what triggers these sales tax situations, even when you don't have that " physical presence." So there are different types of Nexus. Let's talk about what those look like.

The first one is what they call Economic Nexus. This is triggered when an online sale exceeds a certain dollar amount or number of transactions in a state. Many states have a dollar amount or maybe 200 transactions. Like I said, I'm not gonna get into the details of that today. There are some great websites out there that you can go check out, but they may have a trigger point, like if you do more than a hundred sales, or you do more than $5,000 in sales.

That's what we call economic nexus. So there's been an economic impact to that state. You know, in other words, if you're doing one transaction in North Dakota or you're doing one transaction in Arizona. Generally speaking, that's not gonna trigger a sales tax event for an online sale because you don't have a lot of volume.

Now, some states, if you do one sale, you've gotta do it, so you gotta pay attention to that. There's also what we call Physical Presence Nexus, and that's what I was talking about when I first started talking about Nexus. That's that traditional form of Nexus.

That's where you've got a presence, you've got a store, you've got an office, you've got a warehouse in their state. That's where you physically have a presence. Now, you could be headquartered in state A and you might have another, what we call like a satellite branch in state B. Well, if you've got that satellite branch, or maybe you've got a warehouse in that state. Then a state can argue that you've got that Physical Presence Nexus.

Now this is one that's gotten real complicated and also happens all the time now. And that is what they call Marketplace Facilitator Nexus. And this applies to online marketplaces like Amazon and like you talked about Daniel today, Etsy. And that's because there's this online marketplace and these people are considered what they call marketplace facilitators.
In other words, you make a contract with Etsy or you make an agreement or contract with Amazon, and then they present your products, they present your services to other states.

Now, this can trigger that nexus and which basically means this, that may require you to collect and pay sales taxes on those sales. And a lot of times what happens now, and this is the thing I'm gonna talk about in a few minutes, is these marketplaces will actually handle that for you. And that is a great thing. You do not wanna be in a position where you're trying to handle taxes for multiple states. You would need a whole tax team to do that.

Now there's also something called Click-Through Nexus, and this is could be a situation where you have an agreement with another business that refers customers to your website in exchange for a commission. So basically what I'm talking about here is you might have a business that will say, Hey, you know, I got this.

I got this person that sell such and such and I'm gonna refer you to them, and they get a commission for that. Well, that may very well mean that state where they're doing that click through. Could be subject to sales tax. And finally, the other big one I wanna talk about is what's called Affiliate Nexus.

And this is similar to that Click-Through Nexus, but it involves a more formal relationship with another business that promotes your products or services. I'm not gonna get into the details of that, but those are really the core pieces of Nexus. So we've moved beyond that physical presence. You know, everybody, it was obvious when there was a McDonald's in Pennsylvania or a McDonald's in Maryland, or a McDonald's in New York, clearly those businesses had physical presence, but now we do so much online. There's software as a service, there's on demand sales. And look at Amazon. I mean, you can get Amazon all over the place. And the big key takeaway you've got to understand, and we spend a lot of time on sales tax because this is an area where states are really looking to build revenue.

And if you're an online seller, hey, they're gonna go find you and they're gonna figure out what your volume looks like. So you gotta understand. These state and local rates can vary significantly. You gotta determine the correct sales tax for each transaction, and it really depends on the customer shipping address.

Now, some states will give you an exemption from sales tax, such as on groceries or on clothing. So you've got to understand those exemptions and avoid overcharging your customers. Now, if you're required to collect sales tax, you gotta register with each of these states, and then you've gotta file these regular sales tax returns.

And here's the problem. This is what Amber's worried about. Daniel, I think you're worried about this too. If you fail to comply with sales tax laws, you can get in trouble. There are serious consequences. They can give you penalties. They can wail you with interest on outstanding liability, and they can even put legal issues against you.

I don't think they're gonna lock you up for it, but they can cause you all kinds of pain. So here's my first pro tip of the day, and listen to me on this one. If you are selling online, here's what you gotta do. You got to find one of those marketplace facilitators and have them handle the sales taxes for you.

Because truth be told, you are not gonna have the ability to manage this in all the states and those local jurisdictions. You just can't do it. It's a huge burden. So finally, you know, for example, Shopify does this. Amazon will do that. They'll take care of that whole process. Obviously they're gonna collect a sales tax, they're gonna remit the sales tax, and they're probably gonna charge you a fee for doing it.

But trust me, that is money well spent because you don't want to be at the end of each month trying to figure out, okay, well we did work in 15 states this month, and so I've gotta register for 15 states. I gotta make sure the correct amount of sales tax was paid. I gotta make sure the reports are filed.

I mean, it is a mess. So hear me on this one. Listen to what I'm saying to you, Daniel. Everyone else that's tuning into this, if you are doing online sales and you're doing them in multiple states, use a marketplace facilitator and pay them the fee. It is money well spent. Now, let's talk about. A little bit more
getting back to income tax. I think we nailed sales taxes. At least I feel like we did. So let's talk about estimated taxes. Now, estimated taxes is another one of these surprise, surprise moments when people come in to see me. But it's crucial for people who are self-employed because here's the thing you gotta understand.

As a self-employed person, you're gonna likely need to make estimated tax payments throughout the year because you're not having it come out of a paycheck 'cause you're not getting a paycheck per se. When you're working for somebody else, you get that paycheck and you feel like you lost weight when you get that check. 'Cause you look at this thing like, wait a minute, I made $500 this week, but my net paycheck is $325. That's right. Because they're collecting federal tax, they're collecting social security, they're collecting Medicare. If you work in a state that has state income taxes, they're collecting that too. And trust me, I've been doing this for a long time.

This isn't my first rodeo as they say. This is something that is routinely missed. And what happens is somebody started a new business, they're all excited just like Amber was, and she's selling clothes, vintage clothes online. Everything's going great. And then she says, you know what? It's tax time. I gotta go see somebody to get my taxes done.

They come down, they sit with me, I do their taxes, and I say, okay, Amber, guess what? You owe $14,000 in it. What I owe what? And I see this with so many new clients, and that's not the biggest problem. Most of them will say, okay, I figured I was gonna owe some tax. I figured I made a lot of money. I don't have a traditional job, but what kills them is the next thing I say to them.

And guess what? In addition to owing $14,000 in tax, the IRS is going to get in your pocket again with what they call an underpayment penalty, because here's the deal, the IRS wants to get paid as you're earning the money, just like when you were working for somebody else. If you were paid weekly or biweekly, your employer has an obligation to send those monies to the IRS rather quickly at the most once a month.

But now more and more the IRS is getting those payments right away. You might be saying, Ralph, okay, I get it. That's a big problem. So tell me about how this works. It's not that complicated. This is not rocket science. So let me walk you through this. The first thing you gotta understand is you've got to calculate what your tax liability is going to be at the end of the year.

You're gonna need to estimate that. You're gonna have to look at it and say, okay, where we are. Like, I had a client in yesterday, he's an electrical contractor now we're just in February at this point as I record this, and we did his taxes for last year, and he owed a little bit of money, but it was manageable.

And he said to me, he says, okay, Ralph, I'm really having a good year. I had a great January. When do I need to start thinking about paying estimated taxes? Now, I'm not gonna get into the actual details of this, but I said to him, okay, well let's think about it like this. We looked at his income statement for January and he made, let's just say he made $20,000 in profit.

Well, the way I would look at that is though, okay, are you gonna make that same 20,000 every month? Well, if you do, then you've got $240,000 of income at the end of the year. So that's what could be, that could trigger a tax issue. Now, the IRS provides some worksheets, there's some guidelines to help you with this.

But let me just give you a real simple example. Let's say for example, you estimate your side gig's gonna generate a $50,000 profit. Now understand what I mean by profit. That's not the amount of money that you collected. The amount of money that you collected is what we, accountants and people in the trade call revenue.

I'm talking about that revenue minus your expenses. You know, what you paid for products, what you paid for fees, what you paid for, dues and subscriptions, all those expenses that went into running your business. But that profit is what the tax is based on. So think about that. Let's get back to our example.

We had that $50,000 profit, and based on your filing status and deductions, you know, you do a simple calculation. You think you're gonna owe about $10,000 at the end of the year. Well, what that basically means is that between now and the end of the year, you should be making $2,500 quarterly tax deposits, because that's what you're gonna owe at the end of the year.

Now the IRS gives you what they call an estimated tax schedule, and everybody says, well, it's quarterly. Well, it's kind of weird. It's not really quarterly. The first quarter, which is January through the end of March, that payment is due April 15th. But then you've got another payment to due June 15th. You got another one due September 15th, and then the final payment is due January 15th of the following year.

Because again, the IRS is trying to match up when you're making the money and when you pay them. Now, this is easy if your business is pretty flat, there's not a lot of peaks and valleys in this. But if you've got a business that depends, you know, it could be a seasonal business, it could be something that you had a great month, but then you had a like I said to this client yesterday, I said.

Dude, I said, what do you think the rest of the year looks like? He goes, Ralph, I don't think I'm gonna have a month like I had this month. I said, great. So here's what we're gonna do. And he's one of my monthly clients, so we manage his payroll for him, we do all that sort of thing, which I'm gonna highly encourage you to do that.

Anyway, I said to him, I said, okay, well let's get together, you know, once every other month or once a quarter and let's look at where you are and then we can make a determination. And like I said to him, I'm gonna be more conservative in that first quarter. You may have a little bit bigger profit, but I might say, okay, well let's see what the rest of the year is gonna look like.

That's really what it comes down to is estimating that tax, because if you don't pay enough in throughout the year, the IRS would charge you an underpayment penalty and you might be saying, Ralph, okay, great. How do I do this? Again, this is not complicated. The IRS really makes it pretty easy. The best thing you can do, and I've said this time and time on the show, is go to irs.gov, create an account and make payments electronically.

Now, you can also mail, you can mail them in. I understand you can make them by phone. I don't know anybody that does it anymore, but there are direct ways to do that. There's the IRS called direct pay. There's EFTs, there's a IRS2Go mobile app. Bottom line is this. The IRS wants to get their money. Now, if you live in a state with state income taxes, guess what my experience has been, the states are even more aggressive than the IRS, so make sure that not only that, we have this in Delaware.

Delaware is very aggressive with collecting estimated taxes. If you owe more than about $500 at the end of the year, you're probably gonna get a notice that says, Hey, you still owe us X. Now we've got tax software to kind of figure that out. But pay attention to not only the federal piece. A lot of people say, okay, good, I got the estimated done.
I did the Federal. Well, it could be a little deeper than that. You might need to do state as well.

You don't have to pay them if you meet these three exceptions. So these are the exceptions to where you don't have to pay them and you need to understand this. So what I tell clients a lot of times is that first year of operation, you generally probably won't have to make estimated taxes, but here are the exceptions.

If you had no tax liability in the prior year, you don't have to worry about making estimated taxes. If you were a US citizen, a resident alien for the whole year, and your tax period covered, excuse me, your prior tax year, covered as well period. So basically what they're seeing, let me bullet it down out of the IRS, and not to confuse you since I went down a tangent that I shouldn't have went down anyway, bottom line is this, if you had no tax liability the prior year.

There's basically no, you don't have to make estimated taxes in the current year. Now, there are some additional nuances to that. There are what they call safe harbor rules, but this is where we've gotten to the point. And if you've got a business, listen to me on this one. Get a professional to help you, even if you're only meeting with them a couple times a year, because this stuff gets complicated and you do not wanna get hit with penalties if you can avoid it.

And you also, there are other things we can do, like I said to this client yesterday. When we get closer to the end of the year, then we're gonna start having discussions about how do we make the taxes minimized. How do we minimize those taxes? What are some things we can do? What are some spending things we can do?

What are some things you might wanna consider doing or buying? Maybe prepaying for some expenses, maybe buying some things you know you're gonna use in the next year before we get to that tax time so that we can make a positive impact on the taxes, what I call tax planning. And if you listen to me, if you hear any of the shows.

Tax preparation is great, but tax planning is where it's at because that's where I can help you handle that stuff. Now, all of that, all the things we've talked about is making a huge assumption, and that's the assumption is that you are managing the financial side of your business because if you're not like, like Amber, that shoebox of receipts and statements and all that kind of stuff, that's not effective financial management.

Because what you don't wanna have is you don't wanna get in this bind to tax time. So I'm gonna give you some recommendation. These come from my experience working with people of all size businesses. I've dealt with people who were mom and pop stores to one person stores, to companies that did 10, $20 million a year in sales.

The major thing, and I'm gonna go through these one by one, the key. If you hear nothing else I say today. The key is keeping accurate records. I don't care what kind of business you're doing, I don't care what you're selling, whether it's online, offline, side gig, side hustle, deliver, whatever that is, you've got to keep accurate records because it's crucial if you're earning extra income.

'Cause you don't have that employer that's keeping track of your hours, they're not paying you that W2, you've gotta keep track of the income. You gotta keep track of the expenses because at the end of the year, when you come see somebody like me, I ask you a real simple question. What was the amount of dollars that came in the door and what was the amount of dollars that went out the door by category?

Well, the only way you're going to know that is if you are keeping accurate records as you go. This isn't the time that at the end of the year say, let me go figure out what I did in February. That's a bad plan. I have clients that do that. It's not a good way to handle it because the whole goal is to minimize your tax, the taxes that you owe.

That's the bottom line and the best way to do that is to keep accurate records. And let me tell you about the why of that, because there's a why to this. You know, there's more than just the tax side. Here's the thing. If you have organized books, it ensures that your financial records are always up to date.

So if you have a situation like a client that I'm working with right now, he's moving into a new space, it's costing more than he expected. So he wants to go to the bank and get a loan. Well, in order for the bank to give him a loan, they want to know what his business is doing. Well, if he's waiting till the end of the year and as that shoebox, he can't take the shoebox to the bank and say, Hey, I got a business.

Here's my shoebox. They're gonna let him right out of the bank. He wants to borrow money, he's gotta present them with some kind of financial report. Now, it doesn't have to be elaborate, it doesn't have to be complicated, but they're gonna ask him really simple question, what is your business doing? How much money are you making?

What does your cash flow look like? Which leads me to the second thing. The main reason to keep accurate records is to improve your cash flow. You've got to understand where your money's going, and that way you can manage it. You can find areas for improvement. And let me just tell you, this is the biggest challenge I see for new businesses and small businesses.

Client I had in yesterday, the electrical contractor, exact same situation. He does contract. He does electrical contracting work. Well, he's got some people that he's doing work for that are slow to pay him. And he says to me, actually, he says, Ralph, he said, you know, this is becoming an issue. And I said, okay, well then you're gonna have to have a conversation with them and say, look, dude, I'm running a small business.

I don't have this huge capital account where I can go let you float. Sixty, ninety, a hundred twenty days. But see if you're not keeping track of your records, if you don't know who owes you what, how in the world can you possibly manage it? So that is the other component to that. That is huge. Another thing, tax savings, another main reason for having accurate records, because then you can track those deductible expenses and maximize your tax savings when you come to somebody like me.

And you don't have any records, but the only thing you've got is a 1099 that somebody sent you that said, Hey, uh, what I'm talking about there is a 1099-K. Like, let's say you do online sales and let's say Shopify or one of the other places send you a 1099 and says, Hey, guess what, Ralph, according to our records, you collected $150,000.

Well, guess what the IRS gets? The IRS gets a copy of that, and they're going to make a huge assumption that Ralph had $150,000 in income, better be on the taxes. They don't know about your expenses. Well, if you're not keeping track of your expenses, guess what? You've got $150,000 of income. You are going to owe a ton.

But if you're keeping track of your records, if you're keeping track of those expenses, what you spend on purchases, your mileage, all those type of things, you are going to be in a better position when you get to the end of the year to make that tax not be so taxing. It's a funny play on words, but it's true, and that is one of the biggest challenge I see people do, and a lot of times it's not their fault.

Maybe they started off with this little online store when Amber first started hers. I don't think she really thought it was gonna be this like big business and she was kind of shocked, like I was, how it took off. So she didn't have that intentionality at the front end to make sure she was keeping track of everything.

But hear me on this, it is so important. The other reason that you wanna keep accurate records is it's better for financial planning. If you listen to me, anytime that I talk about it, I talk about budgets, I talk about intentional spending. Well, if you're keeping track of your business income and expenses, it's going to give you a clear picture of what's going on.

You're gonna understand, like I said, when people come in to meet with me midyear, I ask them the same question. Hey, what does your income and expenses look like for this year? Well, I don't know, Ralph. Well, if you don't know, I don't know. I can't help you. That's why it is so important to keep those accurate records and do it weekly.

Do it daily if you can, but at the very minimum, do it monthly and have an idea of what went on this past month. Because here's the problem, and I deal with this with my clients, even clients that we work with on a monthly basis that we don't see so often. We try to keep track of their stuff, but sometimes we don't know how to categorize something.
So now if you figure it's the beginning, almost the beginning of March. We're starting to get in the need to do And listen, here's a little aside. If you have a business. It's an entity like an LLC or an S corp. Your taxes are actually due March 15th, so that's like a little public service announcement by Ralph.

A lot of people don't know this. It's not the personal tax filing deadline, it's the business anyway. Long story short. So people are coming to see me and I'll say to them, Hey, Joe,I see you had these transactions and these are people we're keeping track of stuff. We're doing reconciliations, but sometimes we don't know exactly where to put something in a category.

And I'll say to 'em, I say, Hey, last, last February on the 15th, Joe, you spent $27 at X. Can you tell me what that is? And Joe's like, wow, dude. That was a year ago. A year ago. Plus. That's why it's so important to keep track of that because how do you make good financial decisions if you don't know what the details are?

When I work with new clients, the first thing I do, and if you listen to me, you hear, I've said this, where are you now? We gotta measure what that looks like. Well, you've gotta keep that same thing going in the business, and here's what a lot of people don't think about, and unfortunately I've seen clients stung by this.

One of the huge benefits and hear me on this one as well. I know I've been saying that a lot today, but hear me on this one. This is an impactful episode. If you keep accurate records, it will help you with fraud detection. You might be saying, Ralph, that doesn't make any sense. Well, listen to me for a second.

If you're not taking a look at that bank statement, if you're not taking a look at that credit card statement, if you're not paying attention to the detail, you might not see it when somebody is hitting your account with fraudulent activity. I see this almost once or twice a week with clients. They come in, maybe they haven't had a relationship with us and they're like, Ralph, man, I'm really struggling to, to make ends meet.

Like it seems like my business is floundering can you help me? I'm sure I can help you. Let me get a copy of all your bank statements from last year. Let me get a copy of your credit card statements and let's start to do what I call forensic accounting. Put this together. Well, oftentimes I'll find stuff on there.

I'll be like, I'll be like, Sarah, what was this? Oh, I don't know that. That seems like that's fraud. Yeah, right. It happened last March. And if she calls the credit card company, they're gonna be like, well, why didn't you report it? That's why it's so important to keep track of your financials on a day-to-day basis because you don't wanna be trying to figure out what happened a year ago and you might lose out on those fraud things.

So that is the key. Now, I'm gonna give you some tips because now I've told you how important keeping good records is. Let me give you some key recommendations on how to do it. And these are just some simple things. They don't take a lot of effort. Again, I'm gonna tell you my bias is to hire somebody to handle this for you.

But these are things that you can do right away. First thing, number one thing, hear me on this. Create separate bank accounts. Open up a separate bank account for each of your side big businesses. So for example, maybe you have a personal account, maybe you have a rental property. I'm having a separate bank account for that.

Maybe you sell stuff online. I'm having a separate bank account for that. Maybe you do something else that's a side business. I would have separate banking accounts for each one. And you think out, like it's kind of like a bucket approach, right? So you've got bucket A, that's where all of your regular earnings go.

Bucket B, that's your rental property. All the income and expenses go through that. Bucket C, that's your online sales because it's going to make it easier to keep track of that stuff. Now the problem with that, and a lot of people end up fouling this up, is they don't do a good job of making sure they're using the right monies.

You know, they grab that debit card or they grab that credit card from the rental property and they use it for this one. That is so important to keep those things separate. Second thing, so once you get the separate bank accounts, the second thing I'm gonna tell you to do is to track every single expense, every single transaction.

Keep detailed records of it, the date, what you bought, the sales price, and again, this is for both income and expenses. So if you're doing online sales, not only do you need to keep track of your expenses. You gotta keep track of your sales as well, because maybe you're gonna have that situation where you run over that number of transactions in that state, you didn't even realize you were gonna do it.

But then all of a sudden, if you're keeping track of it before it becomes a burden at the end of the year, you can say, oh, I wasn't expecting I was gonna do 200 sales and you know, North Carolina. And then you're keeping track of, it's like, oh, well I got a problem here. I've gotta go register with North Carolina.

I've gotta go find that marketplace facilitator that can help me. This is especially important if you've got sales in multiple states. Which leads me to the next thing, categorize your expenses. Don't wait to bring in that shoebox a year later and say, okay, let's see what we got here. Because if you come into me and you say, okay, Ralph, here's the deal.

I made a hundred thousand dollars in revenue and my expenses were 82,500. I'm gonna say to you, okay, great. Tell me about those expenses. What were the categories? I don't know, Ralph. that's just what it was. Most accountants, most reputable accountants are gonna say, no, wait a second. I need this broken down.

What was your advertising expenses? What were your shipping expenses? What were your office supplies? Because here's the deal, I do not wanna send a tax return to the IRS. It says, sales-150,000 expenses-125,000. They're gonna be like, whoa, wait a second. I think that has audit me all over it, which is a show, I'm gonna talk about that in a couple weeks.
Maybe talk about what are some audit red flags. I've done other shows about it, but stay tuned for that. So this leads me to the big takeaway in this section of how to categorize your expenses, use some sort of accounting software. Listen, they are not expensive. You can get QuickBooks online. There's a bunch of different ones.

I'm a biased person. Our whole shop uses QuickBooks Online. I think it's an easy product. They have various levels that you can use based on the sophistication of your business. It will even help you with sales taxes. If you've got payroll, it'll help you with payroll, but it does that, you can connect your bank, so it's called a bank feed.

It's gonna help you stay organized throughout the year so that when you get to the end of the year, you're not struggling. And again, you can also hire an accountant, and guess what we're gonna do? We're gonna use software as well. Now, before I close today, I wanna give you some other tax deduction ideas, because now we've talked about the taxes, we've talked about the why, we've talked about keeping track of your expenses.

But now let me give you some low hanging fruit as we'll call it. These are some things that a lot of people who earn extra, what I'll call side gig or online sales, don't think about, not gonna spend a lot of time on these, but I just want to throw some of these out there. The first one's the home office deduction.

If you use a portion of your home exclusively for side gigs, you might be able to deduct those expenses. Now, be careful with that, but keep track of your rent. Keep track of your utilities. Keep track of your insurance. Keep track of the amount of space that you're using in your house and talk to somebody like me that helps you with this.

Another thing a lot of people don't think about is inventory storage. So let's say you're selling widgets and you've got products. Well, if you've gotta store those somewhere, you might be able to use that as square footage of that home office space. Like let's say you have a garage and in that garage, you know, let's say you sell a thermos.

I don't if people use these anymore, but water bottles, let's use that as a better example. They use water bottles and you sell these water bottles, they have nice, pretty stamps on them or you decorate them up. Well, you gotta have a place to store those so that you can ship them out to people. Well, that space that used for storage, you can add that as a percentage of your home office space.

Another thing, and a lot of people that do online sales, don't think about this one. You might have shipping costs. It costs something to get the product from your house or your place to their place. You can deduct the cost of shipping. You can deduct the postage. You can deduct the packaging materials, the shipping labels, all of that stuff.

Another big one, people don't think about, and again, my goal as your financial advocate, your financial evangelist, is to try to get that tax number down as low as possible. Another thing people don't think about is office supplies. Paper, ink, packaging tape, ink costs for, I mean, you can get a printer for free now, but the ink is outrageously expensive.
Another thing, advertising, marketing, all of those expenses, maybe you're doing social media, maybe you're doing email marketing. Whatever you're spending for that, maybe you're paying insurance. You can deduct the cost of business insurance and listen to me. Another pro tip, if you've got a business, get insurance, it's not expensive.

You can get a general liability policy for up to a million dollars in coverage generally. For less than a thousand dollars a year, and it just gives you peace of mind. And the final one I wanna bring up is auto expenses. If you're using your vehicle for business purposes, such as driving to the post office, maybe you're taking stuff to the shipping place, you're meeting with clients, you might be able to deduct a portion of your auto expenses, but that is something you need to understand.

Now one of the other things I wanna mention while I'm here. That is what's called drop shipment plans. So let's say that you use a company like Amazon who store and ship your products for you. It's really important that you understand the tax implications because using, and this, we're getting back to that, a little bit of that discussion about the Nexus of sales taxes.

You may need to collect taxes. So again, talk to the people you're doingbecause think about this, Amazon's got warehouses everywhere. Those warehouses are located in states. So if you're one of these people that's using what they call, Amazon FBA or whatever, those drop shipment places, you don't even touch the products.

You're like, they go from the seller, or excuse me, they go from the the producer,the wholesaler to an Amazon place, and an Amazon sends them out for you. Well, guess what? that place where that warehouse is located could charge sales taxes. The place where you're taking the sale could charge sales taxes, so understand that.

Now, there's also a bunch of stuff about international selling. I'll put that in the blog today. Again, you can get to our blog post by going to askralphpodcast.com/blog. I wanna really get into that because that gets really into the weeds. But let me sum it up for you, Daniel. I hope this story, and I hope these detailed explanations help you understand how important this is.

It's important because you don't wanna pay the IRS more than you have to. You're working hard for this extra income. Why do you wanna lose it? By paying more in tax or paying penalties or paying underpayment penalties or paying interest. And as I said at the beginning, and it's come full circle, by taking these right steps, the things I talk about today, you can stay organized and you can avoid those penalties and you can ensure your compliance.

You can have rock solid books that will help you throughout the year. And remember, you don't have to navigate this on your own. I'm here to help you every step of the way. So let's take action today. You don't put this off if you're selling stuff. If you've got this side hustle going, today is the day that gets started.

So let me just give you the breakdown of the things that we talked about today. The things I think you need to remember, these are my top tier things takeaways, track your income and expenses. Understand sales taxes. If you're making money, make estimated tax payments. What we talk about, keep accurate records and seek professional advice because remember this, the Bible verse nailed this.

Being a good steward includes being a responsible taxpayer. Yes. You heard me right? You as a Christian. As part of your stewardship as being a Christian, you have a responsibility to pay what is your fair share of taxes, which means you've got to invest in this. You've gotta stay informed about tax laws.

You gotta stay informed about regulations, especially those if you're doing online sales about online sales and Nexus. When in doubt, reach out and make a relationship with somebody. Find that qualified accountant, that qualified tax advisor, and make sure you're meeting all your obligations and maximizing your deductions.

And as I said, if you want to go deeper into what I talked about today, you can go right to askralphpodcast.com/blog, and you can see all the things that we talked about today. There's a bunch of references out there and all of that sort of thing.

Well, let's get to our reflection questions.
You know, I always like to end the show with some reflection questions. Question number one, what specific steps will you take today to ensure you're tracking your income and expenses accurately? Don't wait till tomorrow. Don't wait till next week. Certainly don't wait till the end of the year at tax time and burden somebody with your shoebox.

What are you gonna do today? Second thing, how are you gonna prepare for estimated tax payments to avoid those penalties? Start thinking along those lines. Do you set aside a certain amount and then at the end of each quarter, do you send it in? And number three, what resources or tools are you going to use to stay informed about sales tax laws and regulations in your state?

There is a bunch of great resources you can tune into my show every day. All of these things will help you

So before we close today, I just want to ask you for a favor. If you find value in the show and you wanna help me reach more people with this message of hope, this message of education, I would really appreciate if you consider supporting the show.

Your support allows us to extend our reach and impact more lives. We can be on more platforms, we can really bring more information to people, and you can support us by going to askralphpodcast.com/support because by partnering with us, by supporting the show, you're gonna help grow the show and you're gonna help others navigate these financial challenges.

And at the same time, if you find value in the show, do me a huge favor and share it with somebody else who could be impacted by this. Because listen to me, I say this just about every day now, and it is so true. It's our obligation as Christians to reach out and help others. We are obligated to do that, so I'm gonna encourage you to do that.

Now, if you're one of these people that's feeling overwhelmed by these tax implications of earning extra income. You don't have to walk this path alone. I can help you. I've talked about this a few times. You can go right to askralph.com and book a call with me and we'll create an in an individualized plan to help you find success.

I'll help you find that peace of mind. I'll keep you out of trouble with the IRS and with the states and with the sales taxes, but you've gotta take that first step. You've gotta reach out. And book that call because I can help you achieve financial freedom. You're working so hard in your business. Let me help you keep more of it.

So let's work together to ensure you're prepared for the IRS and that you find that financial security

I just wanna share a couple items that we got from our listeners. This one comes to us from Megan and she says, ''Ralph, your show has been a lifesaver. I was completely lost when it came to taxes, but your guidance has given me the confidence to manage my online business successfully.'

Well, Megan, thank you. I appreciate the feedback and I'm telling you, stay in touch with us. Keep listening to this show because I am going to help you. I'm going to guide you. That's the whole key to this show, and Guy wrote this, guy wrote, said he's, which he said, 'Thank you for the practical steps and biblical wisdom.

Your show has helped me see the importance of financial stewardship.' Guy. I appreciate that because that's the reason I do what I do. That's my passion. And listen, if you're listening right now, Daniel, anybody else tuning in, I truly want to hear from you because your feedback, your listener comments, your letters, they help keep me going.

They help me have the incentive to produce this daily content. So here's something I don't always share. I wanna give you my email address. I'm really trying to hear from listeners right now. I wanna know how the show's impacting you. I wanna know what I can offer to you to help you get to that next level, just send me an email.

It's real simple. It's ralph@askralph.com, share your stories, share your questions, and I will share it with the audience. If you say, Ralph, look, I don't wanna share this with anybody but you, that's fine too. Just let me know. Now, tomorrow we're gonna be discussing a hotly debated topic. I mean, this one is one that I'm gonna tell you like three or four times a week I hear about this.

Are you sacrificing your future by taking Social Security too soon? So you don't wanna miss out on that episode because let me just tell you, there are all kinds of opinions on that, but tomorrow is going to be a game changer. If you're in your fifties or sixties and you're thinking about, when do I take that Social Security?

Or maybe you've got parents that are thinking about it and you want to help them, tomorrow's gonna be the show for you. So thank you for joining me today. I know we got into it today. I'm excited about this because I know what a huge benefit these small businesses that people have, but they got to stay compliant.

So again, thanks for joining me. Remember, my passion is to help you achieve financial success. I wanna see you live out your dreams and I wanna see you grow in your faith and I know together we can master your finances from that Christian perspective. So as I always end this show, let me send you off with this.

Stay financially savvy out there and may God truly bless you,

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