UPDATE: Jake recently did a webcast where he explained things in further detail, which you can watch here.
My name is Jake Bassett. I am the owner of JB Accounting & Tax. We are the fastest growing tax firm in Utah with locations across the state in Logan and in Utah County! The reason we’ve been growing so fast is because we specialize in the small business owner that’s paid via a 1099 instead of via a W2. Just like you LuLaRoe’ers. And we also specialize in using technology to service clients all across the globe.
I’ll address this blog post as though I was meeting with a LuLaRoe consultant for the first time. (These are all questions that I am asked on a regular basis from LuLaRoe Consultants.)
By the end of the post, you’ll understand your legal obligations related to your LuLaRoe income, as well as some “small-business basics” that could save you thousands of dollars every year.
1) Do I need to set up an LLC or corporation?
Most consultants make the HUGE mistake of continuing business as a Sole Proprietorship rather than establishing a business entity. You are a Sole Proprietorship if you operate the business in your own personal name and social security number. The reason this is a bad thing for the consultant, is because sole proprietorships must pay self employment taxes PLUS pay income taxes on their income. This results in you potentially paying thousands of dollars extra in taxes. Not to mention, you also don’t get the same liability coverage that an LLC would provide to you.
Let me give you an example. Let’s say your SOLE PROPRIETORSHIP business makes $60,000 on a 1099. You have $10,000 in expenses. So your net profit is $50,000. Because you are a sole prop, all 50K is subject to self employment taxes. Which is 15.3%. That’s $7,650. Then, on top of that, you will pay income taxes as well on that 50K. (Note that income taxes are the same whether or not you have an LLC, so it’s not relevant to why you should or shouldn’t get one. I’m just trying to paint a complete picture of your tax situation.)
Now, let’s say we set up an LLC in the state where you are located. I don’t want to get too technical here, but this is technically an LLC TAXED as an S-Corporation. (The IRS does not recognize LLC, only states do. So you have to decide if you want that LLC to be an S-corp or a Partnership.) Again, let’s say you make $60,000 from LuLaRoe. You have $10,000 in expenses, so the net profit is $50,000. Well, because this is now income from an S-corp, the income is NOT subject to self employment taxes. The reason is that self employment taxes only apply to individuals. The 15.3% self employment tax consists of social security tax plus medicare tax. Well, an S-corp will never collect social security or medicare, so why would it pay that tax? It doesn’t.
However, the IRS rules state that the owner of an S-corp must pay SOME self employment taxes if the owner is the one generating the income for the S-corp. Which you consultants would fit this description. So, you must pay yourself a “reasonable wage.” The reasonable wage is to be figured out by your accountant.
But let’s say we decided that $20,000 was a good wage for you. Now this doesn’t mean that you have to cut yourself a check or even move money around. It just means that on a form called the quarterly form 941 we would report that your S-corp paid you, the owner and employee of this business, $20,000 as a wage. And you would pay self employment taxes of 15.3% or $3,060 in self employment taxes.
The net savings is $4,590 to have an LLC vs. not having one!!!
2) At what point is it worth setting up an LLC? I didn’t make that much.
It does cost money to have an S-corp. Every accountant charges differently so their fees must be considered. My fees are the following:
$200 to set up the LLC. There is usually a state fee to be paid as well. These range from $50 to $400 depending on which state you are in. Most are between $50 and $125. Only TX and NV are $400.
$55 each quarter to file quarterlies. This is where we report your wages to the IRS and you pay in some taxes.
$275 annually to file your S-corp tax return. This is where we report the income for the year to the IRS. This must be filed before you file your personal taxes.
$115 annually to file your personal tax return ON AVERAGE. My firm charges based on difficulty. My national average last year was $115. But some will pay less and some will pay more, it just depends on whether or not you have a bunch of other tax forms to file.
So, the total charge for the S-corp, for the first year, is $495 plus the business setup fee of say $275. That’s $770. So, the break even point for setting up an LLC is $5,032.68 dollars of net income. (15.3% of $5,032.68 is $770. So you break even if you have $5,032.68 of net income from an S-corp.) This means that if you make more than $5,032.68 after expenses, then setting up an LLC is the right thing to do.
Just be aware that my fees are more generous than most accountants. I know CPA’s next door that will charge 1800 to do the same thing. But that’s because they are pricing you based on small businesses in general. Remember, my business specializes in helping people like you. 1099 paid people that are a small shop.
3) Do I need to set up a separate bank account? And how should I keep track of my expenses?
Absolutely! Any business, big or large should have a separate bank account. You should never mix business expenses with your personal expenses. If you were audited by the IRS, this could cause the IRS to determine that you aren’t a business at all. So separation is key.
I tell my clients to keep things cheap in the beginning. So I wouldn’t jump right into buying Quickbooks, or Quicken, or any of the other software that’s out there for businesses to track expenses. Instead, in the beginning, when you aren’t making that much money, I say just get Excel or some spreadsheet software and tally up your expenses from your bank account each month or every 3 months.
If you are using a separate bank account for your expenses, this will be easy. Just grab your bank statement for business, and then enter in each transaction listed on the bank account. Income is money coming into the account, and expenses are items coming out of the account.
Once your company is keeping you so busy that doing your own books is a pain, (trust me, you’ll know when this happens.), you could invest in Quickbooks and start tracking it there. Once that’s a pain, you call my firm and we can do your bookkeeping for you each month. We charge roughly $125 each month to do this for you. We reconcile your bank accounts and credit cards for you, then turn around and give you a profit and loss report for the month each month.
4) What qualifies as a deductible expense?
I am asked this question every single day! The reason I’m asked is because the IRS gives very little guidance. The guidance they do give is the following: “You can deduct anything and everything that is ordinary and necessary for your business.”
It’s extremely vague, but at the same time it’s really not. Whenever you buy something, anything, just ask yourself, “Is this item ordinary for a LuLaRoe Consultant? Is it necessary for a LuLaRoe Consultant?” If the answer is yes to both, then it’s deductible.
Good judgement must be used here. You will find that you want to say yes, even though you shouldn’t. Was it really necessary and ordinary for you to buy that 4K 60 inch TV? “But I use it as a monitor for my laptop!”……Nice try! Try saying that to an IRS agent in an audit and they will laugh! Trust me, I’ve seen it.
You could justify your expenses all day long. Like a trip to Europe to go look at fashion for inspiration. That’s sounds like something you MIGHT be able to deduct……If you told yourself that enough times. But in reality, it’s very likely not going to be deductible since that’s not an ordinary or even necessary thing for other people in your same business. (Sometimes it would be, but that’s for another conversation.)
5) So I can just use my bank statements for tracking my expenses? What about receipts?
You MUST keep all receipts and back up. Every single item on your bank statement needs to be backed up by some piece of physical proof. With the IRS, you are guilty until proven innocent. So when they look at your business account and see that you’ve deducted your office supplies purchase at Walmart for 100 bucks, all they see is: Walmart $100 on 09/15/2016. Well, that could have been groceries for all they know. So they throw it out, unless you have the back up to prove it.
So, keep every single receipt, be organized, and be diligent in keeping up on it more often than once a year. Because I promise you won’t know what you spent at Walmart for 100 dollars on 09/15/2016 when you are looking at it on March 15th trying to get your taxes done.
Advice for high volume consultants: The biggest mistake that I see high income/high volume consultants make is when they don’t properly utilize their accountant’s advice or even their lawyer’s for that matter because they cost so much to use. Accountants will save you money, lawyers will save you lawsuits and therefore money. There are so many rules and regulations that businesses must follow, and you can’t expect yourself to know them all. So once you are generating enough income to really say that you are a serious business, start using accountants more and start using lawyers more often. Protect that which you have built. This is a dog eat dog world, the competition is waiting to steal what income you have. So protect it!
An example of what’s missed is the rule that businesses who pay other SOLE PROPRIETORSHIPS must collect a form W-9 from that business and then remit a 1099 to that company and then to the IRS. This is why LuLaRoe sends you one! They paid you, a sole prop, and so they collect a form W-9 which you filled out when you started with them, and then they send you a 1099 at the end of the year. The IRS also gets one so they know everyone who should be paying self employment taxes on their income!
- If you’re making more than $5,032.68 dollars of net income from your LuLaRoe business, you can save some money (and protect yourself) by setting up an LLC.
- Keep a separate bank account for business expenses.
- Hold on to all of your physical receipts for business expenses.
- When deciding if something counts as a business expense, remember to ask yourself “Is this item ordinary for a LuLaRoe Consultant? Is it necessary for a LuLaRoe Consultant?”. If you answer “yes” to both questions, then it counts. Use good judgement.
- Consider using an accountant for bookkeeping if you’re doing a lot of volume.
I hope this post has been helpful. JB would love to have your business. We can help you with everything described in this post, including:
- Setting up an LLC
- Tax returns (personal as well as business)
If you want to set up a meeting with me, please call my office at 435-752-2043 between the hours of 10 AM and 5 PM Mountain Standard Time. The first meeting is always free. You can also email me at the email listed below.
435-752-2043 – OFFICE