Welcome to episode 161 of the Food Blogger Pro podcast! This week on the podcast, Bjork chats with Ben Sutton from Mazuma about bookkeeping and taxes for bloggers.
Last week on the podcast, we shared a recording from our most recent Live Q&A on Food Blogger Pro. To go back and listen to that episode, click here.
Blog Business 101: Understanding Your Accounting
I know. Accounting, bookkeeping, and taxes aren’t the most exciting topics.
That said, they’re necessary to understand if you’re running your own business. And Ben is here to make it all way more approachable.
By tracking your expenses, profits, and losses, you can understand more about what’s working for your business and alleviate stress come tax season. You’ll learn why having a separate bank account for your business is helpful, how to start separating your expenses, and more!
In this episode, Ben shares:
- Why he started his business
- When you should think about opening a separate bank account for your blog
- How specific should you be when categorizing your expenses
- How you should start tracking your expenses
- How you can use your profit and losses to help you understand your business
- How to start separating your expenses
- When you should start looking into forming an S-Corp
- What the new tax law means for you
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Resources:
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Thanks to our Reviewer of the Week, Alicia from Daily Ration! If you’d like to be featured, leave a review for us on iTunes and include your name and blog name in the review.
We’d like to thank our sponsors, WP Tasty! Check out wptasty.com to learn more about their handcrafted WordPress plugins specifically made for food bloggers.
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Transcript:
Bjork Ostrom: In this episode, I share an email quick tip, and then we talk about some really important things around bookkeeping, and accounting, and taxes, which might sound boring, but there’s going to be some tips and advice that we share that might just save you money, especially some of the things that we talk about at the end.
Hey, everybody, this is Bjork Ostrom broadcasting from St. Paul, Minnesota, and you are listening to the Food Blogger Pro Podcast. Excited to have you here. We have a community of thousands of people that tune in every week to this podcast, and it is one of the great joys that we have producing, publishing, and connecting with the people that listen to this podcast, many of which are members of Food Blogger Pro.
Some of you aren’t. Some of you are just bloggers that tune into the podcast every week to learn insights and a little piece of advice that you can pick up and apply to building your online business, your blog, or your website and one of those little tips that I want to share for you today is about email.
This is the Tasty Tip for this week. For those of you who have listened to the podcast for a long time, the Tasty Tip is kind of the weekly sponsored portion of the podcast, but it’s actually a business that we run, so the team behind Food Blogger Pro, and WP Tasty, we operate as one, even though those are two different businesses.
We wanted to make sure that you understood it was two different businesses. It’s not under Food Blogger Pro because it’s a very unique niche business. It is a business where we create plugins, a lot of which we use on Pinch of Yum, all of which we use on Pinch of Yum.
We create these plugins that we wanted to use for our food blog, for our blog, and we wanted to offer those to other people, so people that listen to this podcast can go to WP Tasty and download those plugins. There’s three different plugins that we have right now, Tasty Pins, Tasty Links, and Tasty Recipes. Those all have really specific uses that help you either grow traffic and build your social media following on Pinterest, or leverage SEO, or help create additional income, that would be Tasty Links, by linking strategically with affiliate links.
All of those are plugins that we use, and we recommend to other bloggers. We talk about those within the Tasty Tip. But the Tasty Tip itself isn’t always about those plugins, it’s just a chance for us to say, “Hey, this is sponsored by WP Tasty, and the Tasty Tip for this week is all about email,” and specifically, it’s about a program that I love to use called Mixmax.
Now, I want to tell you not specifically about the program. There’s a couple different pieces of software that do this. Mixmax is one. Another one is called the Boomerang. What I want to tell you about isn’t specifically the software. Check out both of those. See which one works for you. I’ve used both, and our team has decided to use Mixmax, and we like it, enjoy it. It’s a really good fit for us. But What it does is what’s really important.
The hard thing with email is that it can totally take over what you do day in and day out. It can take up that really critically important space in your brain. If you’re always thinking about, “Hey, did that person follow up to that email that I sent,” or especially if you leave emails in your inbox, as a reminder to follow up on them.
Then what happens is you maybe open them multiple times, you read them, but you don’t take action on them. Mixmax is a program that can help you manage your email. There’s really a few different ways that I use it, and I really like it. One way that I use it is if I send an email to somebody, that I know that is really important and I need to hear back from them, I’ll use Mixmax to say, “In two days,” I usually use two days, “In two days, if I don’t hear back from this person, remind me.”
What that does is if the person doesn’t reply to an email, that email shows back up in my inbox, and I’m reminded to follow up with that person. It’s a really great feature that I love using because it makes me not have to be responsible to remember to follow up on emails if somebody doesn’t reply.
The other thing that I really like is sometimes there’s an email in my inbox, and it’s something that somebody sent to me, and I know that, at that moment, I can’t reply to it. Maybe I have to wait a couple days until I have more information, or for some reason, there is just not a reason for me to reply to it.
What I do is, I say, “Remind me about this email,” in a specific time period. Sometimes it’s just two hours, and I say, “Okay, remove this from my inbox,” I want to work through my inbox, and I know this afternoon I’m going to have more time to process through that. I remind myself about the email, but I get it out of my inbox.
The other thing that’s really nice, that I use a lot, is a feature for sending later. Let’s say you are working really late, you couldn’t sleep, and you’re up at 1:00 AM. You want to send an email to somebody that you have a connection with, or maybe it’s a client that you’re working with, but you don’t want to send them a 1:00 AM, 2:00 AM, 3:00 AM email, or maybe you don’t want to send an email on a weekend because you don’t want them to feel like they need to reply on a weekend.
What you can do with Mixmax is you can say, “Hey, I want to send this a little bit later.” So, instead of sending it right at that moment, you can say, “I want to send this at a certain time when I know that it’s going to be more convenient for the other person, or make more sense.”
Those are just a couple examples. There’s lots of other ways that you can use Mixmax, but it’s some of the features that I really, really like about that program. And that Mixmax, isn’t a sponsor of Food Blogger Pro. It just happened to be something that I want to share as a tip because it’s been a really helpful program.
Hopefully Mixmax or Boomerang, which is the competitor of Mixmax, is something that you can integrate into your workflow for email, and it will have a positive impact, and help you get to that sometimes seemingly unachievable inbox zero because it’s a huge part of the process for me as I work through my email. That is the Tasty Tip brought to you by WP Tasty. I hope that you’re able to take that and implement on it because that’s the important thing; is implementing on the things, not just learning about them.
All right, so what is today’s podcast all about? It is about accounting, bookkeeping, and taxes, which doesn’t sound very fun, but what I’ve come to learn is that understanding accounting, bookkeeping, and taxes is a critically important piece of the puzzle for having a strong foundation for your business.
As your business grows, it will also be one of the ways that you will be able to “make”, it’s actually saving, but make money within your business is to understand how the tax rules work, and the tax laws, and it’s regardless of if you live in the US, or Canada, or Europe, wherever you are. It’s important to understand how taxes work in order to fully leverage those, so your business is running as lean as possible.
This is needless, maybe needless to say, you want to really strictly follow the rules that are there, but what I’ve found is I’ve had conversations with business owners, is that oftentimes people don’t know what those rules are. They don’t know that, “Hey, I can be expensing miles if I drive somewhere,” and that can be deducted against the income so I’m not paying taxes on that, or some of the things that we talk about at the end, with them, things like the 20% pass through deduction for business owners, those are gonna be ways that you can save a lot of money within your business by understanding how taxes work and keeping really good books, and having strong accounting.
So, Ben is going to talk about his company, what they do, why they’re a great fit for bloggers and small business owners, and he’s gonna talk about some of the really important things to understand as it relates to accounting, bookkeeping and taxes. Let’s give a warm welcome to Ben Sutton. Ben, welcome to the podcast.
Ben Sutton: Thanks Bjork, good to be here.
Bjork Ostrom: Yeah, excited to chat with you today about, believe it or not, it is one of my favorite topics, accounting and bookkeeping, which I know is maybe abnormal. I don’t know if that’s a normal thing, but I’m really excited to talk about it and to clarify some of the really important questions that I’m sure a lot of people have, but before we do that, I want to hear a little bit about your story, Ben, because not only are you an expert in this area of accounting and bookkeeping and understanding numbers, but you’ve also been working on building this business. So, can I hear a little bit about your story and what brought you to where you are today?
Ben Sutton: Absolutely, and I’d say you are a little abnormal. It’d be like this topic, but it’s definitely relevant and it impacts our lives on a day to day basis if not just an annual basis when we return. So, it’s definitely worth spending a little time to understand.
Thank you for having me on, giving me the opportunity to share some things with people.
Bjork Ostrom: Absolutely, yap.
Ben Sutton: In school, accounting made sense to me. I got better grades than my peers in that class, and so I guess that’s what made me go down that route, of doing this for a career, for a living. I went to school, graduated, got a master’s degree in accounting, got the CPA license, the whole accountant track but the education departments feed you down, went to work for public accounting firms in Washington State and then in Utah State and was doing work for larger businesses. These public accounting firms, they are searching for the large business because that’s where a lot of the billable hours go and that’s where they can make a lot of fees, right? Collect a lot of fees.
I was a staff accountant, large projects for large businesses and I worked my way up over the years to be a manager over teams of auditors, other than these big businesses. And then I, kind of … those are some long hours, you work hard and work a lot of overtime during busy season and all that. It clicked for me one day that no one here likes to see the auditor walking down the hall. No one likes to see me.
Bjork Ostrom: I can imagine this moment where like, you’re literally walking down the hall and you’re looking around and you’re like, “Wait a minute, there’s something that I don’t like about not being liked.”
Ben Sutton: All right. Yeah. I started self reflecting, well, why would that be the case? It’s my job to come in here and find things that they are doing wrong. Who likes that? Coming and just criticize their work all day long.
Bjork Ostrom: And that’s you doing your job well. If you are excelling, you are finding the things that are wrong.
Ben Sutton: Yeah. And so that it’s kind of a quandary, right? So, as the scales fell from my eyes, and I realized the reality of my career and what I was setting out to do, it just put a bad taste in my mental. I decided, you know what? I want to get on the other side of the table. I want to be on the business owner’s side and help them in some way, provide a service to them that they really need and appreciate and want and make sure that my interest is the same as theirs. And so that did two things.
One, that meant small business was the way to go because these big businesses, there’s a CEO, and there’s owners, and no one really gets to talk to them. They’re all distant, but the small business owner, with a blog, or he’s a photographer, or any other real small business owner, when you’re serving them, you’re talking to them, and you’re delivering the service right to their doorstep, and they feel the impact, and they appreciate what you’re doing, and so the relationship is more with the owner directly, and you can help people. And so that element of serving people and individuals and making a positive impact on their lives and saving them taxes, drew me to this field of small business bookkeeping, payroll, and tax services.
Bjork Ostrom: Got It. And talk to us a little bit about what it was like to make that transition and to make that switch, because everybody that listens to this podcast in some way is building their thing, and it might be in a different industry, right? There’s probably not a lot of people who are building a bookkeeping and accounting services business. But I think we can all relate to each other in the sense that we are building something.
So really quickly, what was it like, in the building stages and how things progressed, just from a business owner perspective?
Ben Sutton: Well, you’re right. I’m sure as I explain this, a lot of people will relate. I had a vision, right? I had an idea, a concept of something that I thought was needed in the market place and that I thought would be received well and would be successful and would help me earn a living along the way. But to my professional buddies, my auditor peers, I was going to do the bottom, the groundwork. The bookkeeping and payroll is like the groundwork of the professional accounting world really.
And so they’re like, “What do you think, why would you go do that? You’re telling me you’re going to leave this higher profile audit job to go do bookkeeping?” And so there was some, not rejection, but just dealing with people not understanding the vision that I had and the idea that I had and wanted to pursue. So going out on a limb, is what I was doing against my peers. They weren’t advising me not to do it, but they just didn’t get it and they were getting on board with me.
Bjork Ostrom: Yeah, and I think a lot of people can relate to that, especially, one of the things that we’ve had to do just because it’s what we do is people ask, “What is it that you do?” We tell them, “Well, we have a food and recipe blog that we run,” It’s like it’s such a weird thing and people don’t fully understand it and it’s so abnormal and Lindsey and I joke about that most of the time people will respond empathetically, like, “Uh,” almost as if we’re communicating in a sense we’re between jobs.
I think other people that listen to the podcast can relate in like, hey, expressing their dream, whatever that might be, and that dream is probably a little bit different than the normal career path that people are familiar with or even know how to have conversations about. I think that’s really relatable when you talk about expressing this vision that you have and that vision isn’t something that other people can totally understand or relate to. But you’ve executed on it, you’ve built this thing, and here you are on the other side of it where you’re building this business. So, can you talk about, just a little bit about what it is that you do? And we can have some time at the end and then we’ll jump into some specific questions because it’s such an important topic.
Ben Sutton: Okay. Yeah. So, yeah, you’re right, it’s the vision. I’ll say I had a vision and then there was a series of a thousand mistakes and a willingness to keep trying that allowed me to be alive today and still love doing it. Fortunately it is providing for me and my family and I have no complaints about that. So, sticking with it has been the key.
Bjork Ostrom: Oh, isn’t that so true? There was a presentation I did, in addition to a couple different places, but one of the slides I said was, “I’m going to tell you the secret of success when it comes to blogging. It’s blood, sweat, tears and mistakes.” That’s the secret formula, and it sounds similar to what you’re saying. So, anyways, I interrupted, but keep going.
Ben Sutton: It’s such a wonderful process, right? You grow, you learn, and you grow so much independent of the social norms that often teach us things passively. You’re out there paving the way yourself and learning things on your own and there’s a tremendous amount of character that’s developed through that process. So, it’s been good; very difficult, but very good when traded for anything.
Bjork Ostrom: Yeah. Great. And the name of your company you’ve been holding it back? Mazuma?
Ben Sutton: Mazuma USA. We are a subscription based accounting service that provides bookkeeping, payroll, and tax return services to the very small businesses of America. Right? I’m not talking small business, 50 employees, it’s small business, primarily zero to 10 employees, is who we serve and it’s all across America. So, we’ve got clients in 45 states, and provide those services all from Utah hub here in Utah or in Utah. It’s a monthly cycle, so we reconcile bank and credit card accounts every month, deliver financial statements every month, and then are available to discuss taxes and tax planning and minimizing taxes all through the year, and then we prepare the personal and business tax return at the end of the year-
Bjork Ostrom: Got It.
Ben Sutton: … and that’s all included in our subscription.
Bjork Ostrom: Got It. And you have the really unique perspective of, you talked about your hub in Utah. You are also the hub, or you are the central point of contact for a lot of different people that look very similar to the people that listen to this podcast. I love having on guests like you where you can have this broad peek into the inner workings of lots of businesses, and you also are able to see some patterns and are also able to say like, “Okay, really consistently, I see this as being an issue.”, and I would love to spend some time talking about those different things that you see as consistent areas for improvement, consistent things that come up as issues, but also I would love to talk about some of the basics, and I think it’d be really good to start from that area, is to talk about the ground level foundational things.
So, first let’s start really up high. We’re talking about accounting, we’re talking about bookkeeping. What’s the difference between the two of those things? Accounting and bookkeeping?
Ben Sutton: Bookkeeping, well, let’s start with accounting. Accounting would be the overarching umbrella that covers a broader range of topics. I throw tax underneath the accounting umbrella, bookkeeping underneath the accounting umbrella, and payroll to go into the accounting umbrella. So, accounting is a very broad term that encompasses a lot of different specialties.
Bookkeeping is the specific practice of aggregating transactions that occur during a time timeframe, and summarizing them into financial statements. So, getting the information, each transaction off of a bank or credit card statement, that’s the ground level of what we’re talking about. You look at your bank or credit card statement and there’s a list of transactions there, and the process of bookkeeping is taking those transactions, entering them into or importing them into an accounting software that allows you to categorize or tag all of those transactions and then summarize them by category or summarize them by tag.
So, during this month, if I have 10 different transactions that were at various restaurants, I’d tag all of those as Nils, as they go into the accounting software, and then when I look at my report, it’s going to show all 10 of those transactions, summarized, added up into my Nil’s category.
Bjork Ostrom: Got It.
Ben Sutton: Nil’s expense, right? Bookkeeping is that process, getting the information off of the source document, bank and credit card statement, into an accounting software that can then provide information to you, can summarize those transactions so that you as a business owner can see what’s happening.
Bjork Ostrom: Got it. Yup. A couple of things actually that you had said within there that I’d love to drill down into a little bit more. One of the things that you talked about was … Before I ask this question, let me back up a little bit. When should we start bookkeeping? We have a blog, maybe it’s creating a little bit of income, but not a lot. We’re putting some money into it, and investing our time. We’re working on it. It’s probably business, but when should you actually start doing this? At what stage does it make sense?
Ben Sutton: Yeah, so I would suggest that as soon as you can … that if you can open a bank account for this … for free, without having to pay for an extra bank account, I would say you start running all of your transactions through that bank account from day one, just as early as you can. As early as you finally realize, ‘Oh, this is something that’s happening, and I’m going to be putting my time into.’ Really, the IRS will say as soon as you make your first dollar, as soon as you collect your first commission check, or ad revenue, you’ve got a business.
Bjork Ostrom: Yeah, and why would you not just do that in your personal account? Everybody probably has a … or most people probably have a personal checking account, and a personal credit card. Why wouldn’t you just say, ‘Okay, I’m going to, when I buy something for my business, I’m going to keep the receipt and just write business on it?’ Why is it important to have a separate account?
Ben Sutton: That’s a great question, because I’ll tell you, a lot of people don’t have a separate account; but there’s a lot of benefit to having that separate account. You’ve now isolated this business activity, this blog business activity into one bucket of this one stream of activity that you can go to know and know, ‘Okay, everything in this list of transactions is related to my business.’ When you’re going about doing the bookkeeping as I described of taking transactions off of a bank statement, putting it into accounting software, you have to differentiate between things that pertain to your business and things that don’t. Because at the end of the year, when the tax return has to be filed, the IRS is expecting you to strip out all of your business activity.
Keeping receipts, if you’ve got maybe one or two transactions a month, and you’re ending up the year with say, maybe 20, 30 receipts that are pretty quick to add up, then yeah, that might work just fine. But very quickly, it can get pretty hairy with trying to differentiate, ‘Oh, well was that Amazon purchase for my house, or was that for the blog, or … what was that for?’ If you set up that separate business account, you eliminate half of the decisions that, half of the things that you have to remember. Like, ‘Okay, I know all of these are business. Now all I have to do is identify what they were for.’ You know, supplies, was it for rent, or utilities, or internet, whatever.
Bjork Ostrom: Yup, and that … was actually my second question. There’s to have that line in between your personal and business so nice, because then you can say, ‘Okay, all of the income that I’m earning will go into the … Let’s just keep it super simple. Let’s say you only have a checking account … will go into the checking account for my business; and all of the expenses that I have for the business will come out of that business checking account.’ Then, you can see, ‘Okay, am I making money? Am I losing money? How much?’ Related to my business, and having a lot of clarity around that.
Then, you can also, if you are doing the bookkeeping, which again, is taking those expenses, and taking that income, and then bringing it into a tool where you can categorize it. If you are categorizing it, you can also see, ‘Okay, here’s where I am spending the most in a certain category,’ or ‘Here’s where I’m earning the most in a certain category,’ and really getting to understand your business, and how it works, kind of the engine of your business, based on those categorizations.
The follow-up question that I had, you’re talking about categorizing things, and taking things within an accounting software. How do you know what to take things as, and categorize things as? How specific do you get? Would you categorize different types of software like, ‘Okay, this is design software,’ and have a category for that, or just one big bucket for software? What does that look like in terms of how specific you should be in organizing the types of income and expenses you have.
Ben Sutton: That’s a great question. There’s two perspectives to it. One is what does the IRS expect you to do, as far as breaking it down. Two, what do you need as a business owner to analyze and manage your business the way you want? The IRS does not expect a great amount of detail. You can group things together. In the tax returns, they have like maybe ten pre-determined categories of expenses, which is not very many. Then, if you go beyond those ten, you list them out, and you just write in what the names are.
They have like supplies, rent, advertising, payroll, and those big categories that are kind of … for businesses that, they most often have. If you have things … You can call it whatever you want, but you can say, ‘Food blog, photography.’ You can have that be one of your expense categories, and write that in on the tax return. The IRS doesn’t expect that. You can be more summarized, higher level categorizations for the IRS.
Bjork Ostrom: Got it, that makes sense. So idea being the IRS has some things where they say, ’Hey, if you’re going to have advertising, we want to know what that is on the forms that we fill out when you say, ‘Hey, this is how much money my business earned,’ when you’re doing those tax forms. Beyond that, you don’t have to get more specific; unless it would be helpful for you within your business. Maybe you want to know, ‘Okay, I feel like I have an addiction to buying camera lenses. Let’s see exactly how much I’m actually spending. I’m going to create a category, in a category for camera gear.’ That would be going above and beyond, but it’s for your personal use, not for the IRS.
Ben Sutton: Right, exactly; and it works for the IRS because they have a place for you to write that in. It’s just their ‘other’ category.
Bjork Ostrom: Got it.
Ben Sutton: You’re not losing anything or creating extra work by having special categories, but that’s exactly right. You as a business owner, you want to be keyed into what numbers matter to you, and which ones you want to track so that you can inform your decision making as you go along. Now, I will caution against too much detail in your categories. I see it occasionally where there’s a sub-category for everything. There’s supplies, expense for food, supplies expense for utensils, supplies expense for tapestries. There ends up being so much detail in your categories that when you look at the report, you don’t get anything out of it. You’re just as overwhelmed as you were if you were looking at your bank statement.
I always say start more summarized, start by aggregating at the higher level; and then break it out further if you need to. If there’s some information that’s buried within a category, and you want that broken out, okay, do that next…
Bjork Ostrom: Yeah, it’s interesting. The question actually came from that exact issue that I noticed with some of the ways that we have our own books set up; where for Pinch of Yum, which is the food blog that we run, for some reason, at one point, I got really specific with tracking the software that we use. There’s like a sub-category for each specific line item, or piece of software. It’d be like, ‘Adobe, back-ups, domain and hosting, drop-box, e-Junkie.’ Those are way too specific, because essentially it’s just listing the service. That’s something that we need to go and unwind because it’s not very helpful. We can drill down into software to see like, ‘Okay, where are we spending that additional money in software?’ To have it essentially just list the actual item that is under software doesn’t make any sense.
Ben Sutton: Yeah, right. Yeah, exactly. It’s interesting at the beginning. It’s interesting at the beginning. It’s usually people at the beginning of the business, we’re interested in that detail, or detail oriented people are. They like to see that, but then after a while you realize, ‘Oh, this is not helpful. It’s distracting me from looking at things at a higher level.’
Bjork Ostrom: Yup. We’ve talked about categorizing. We’ve talked about tagging things, but we haven’t really defined where we’re doing that yet. If somebody hasn’t gone through the process of setting up a tool or an app, or somewhere where they’re actually tracking this, where would you direct them? Where’s the first place that they should go? Obviously, you probably have some preferred tools, and maybe even some internal tools that you use; which you can talk about. But for somebody who’s just getting started, what should they look at? What would your recommendation be?
Ben Sutton: At the very, very beginning where the transaction volume is not very high, maybe you’ve got a dozen transactions per month going on, I think a spreadsheet is probably the best place to start where you are outlining your transactions, and just typing them into a spreadsheet. Now, because there’s so much transparency, no software doing things behind the scenes that you don’t know about. You can see exactly what’s going on. If you create a column for each category, so you got your transactions maybe listed off the left, and then you’ve got a column where you put each amount in, and then you’ve got a total at the bottom where you’re adding up each column, category; it’s rudimentary. It’s basic, but when you don’t have a lot of transactions, it’s cleaner. It’s easier to understand.
Then, when transaction volume does go up, then really if you’re going to do it yourself, QuickBooks is probably the place to go. It’s just straight software, so you’re not getting much help with it; but it’s a great tool for getting transactions into an accounting software that allows you to categorize them, and then generate a legitimate profit and loss report that a spreadsheet doesn’t do automatically for you.
Bjork Ostrom: Yeah, I love that. I think one of the big revelations for me as I was starting to learn more about taxes, and accounting, and bookkeeping, was it’s like there’s not this official government rule, at least for small businesses that are just getting started. It’s not like you have to use this tool, and it has to work in this specific way. Essentially, you are responsible for keeping track of your business expenses, and your business income. You are responsible then for submitting that information to the IRS, or for people that are listening that aren’t in the US, whatever government agency would overlook the taxes and finances of businesses.
There’s not some like magic thing that you have to be doing that is tracking and fits into the rules and stipulations with the government you have. Now, obviously as businesses grow and become more official, that changes. When you’re first starting out, it’s you can be scrappy. You can have a spreadsheet. If you only have six transactions, you can keep track of those in a spreadsheet; how much you’re making, what the expenses are, and calculate the total profit from the business from that.
One of the things that it doesn’t do that you had mentioned is this idea of a profit and loss report. That was one of the questions I wanted to ask you. For those that have started to use some type of bookkeeping software, they’re kind of getting to the point where it’s like, ‘Okay, we’re getting the hang of entering in expenses, entering in the income.’ Then what does that do for you? How can you use that to understand your business a little bit better? There’s a profit and loss. Are there other places that we should be looking as business owners to understand our businesses better?
Ben Sutton: The profit and loss is going to be the one that really helps you understand your business and drives, and is an inside into your business to … realize what your profitability is, and how to manipulate that, how to change that profitability so that it comes out maybe to more how you want it. Really, the profit and loss is kind of step one; the main tool that you’re going to use. It’s listing out that income, and those expenses that are happening during a monthly … on a monthly basis. Then, allowing you to compare those from month to month.
That’s kind of where the power comes in to a profit and loss is when you start lining up January through July of how much income did I generate? How much did I spend on this software, or payroll, or supplies? Am I spending what I want to spend, or do I think I can … spend less and get the same quality result? Or, are my sales where I want them to be? How do I increase sales and decrease expenses without sacrificing quality of service, or quality of product?
As you start to look at trends, when you start comparing January through … and look at your monthly, or even your yearly comparable P&Ls, and set those up side-by-side, you see the trends. You see your history and what’s happened in the past. It allows you to look into the future, because you’ve got this evidence that says, if you spend this money, this is probably what’s going to happen. Or, if you spend this money on marketing, this is probably what your sales is going to look like. Being able to project out into the future is one of the key elements, and budget out into the future, and then predict the future is one of the great, powerful tools of understanding a profit and loss statement.
Bjork Ostrom: Yeah, I remember distinctly, it was not that long ago. We’ve been doing … We’ve had Pinch of Yum, our food blog, for eight years. This was maybe like a year, or a year and a half, or two years ago, where I was in QuickBooks and discovered this ability to compare to the previous year. I was like, ‘This is the best thing ever.’ I can see what last year looked like, and what growth has been.
Previously, I had this routine of going in, reviewing the profit and loss, and saying, ‘Okay, are there any areas where it’s like, weird. We spent a bunch of money this month in that area. Why is that?’ Investigate a little bit. I had never compared year over year, or month to month. That’s such a cool thing to be able to do, because like you said, it gives you a little bit of a insight into how things are changing, or any areas that might be a red flag, or any areas of concern; so really valuable, and interesting thing to look at.
If nothing else, just get into the routine, maybe schedule a one hour time period every month to say, ‘Okay, I’m just going to spend a little bit of time in this, and kind of poke around, and say, what has changed, and see if I can discover why that has changed, and see if any of those things,’ and this is what you were talking about with marketing, ‘See if any of those things are a lever.’ Where it’s like, ‘Okay, I can see that if I,’ … I’m trying to think of an example for, that’s relevant for what we do.
How about this: ‘If I spend more on video, like if I invest more on video, then I can see a result from that with more income from maybe sponsored content.’ You’d have to spend time understanding that, like if I … maybe the money is spent in January, and you get the income from that in March from a payment, or something like that. You start to understand the numbers of your business, and the different levers that exist with that; which is so incredibly valuable.
Ben Sutton: Exactly.
Bjork Ostrom: So profit and loss is important. Would there be any other kind of reports or areas that you would recommend people look at, or be aware of?
Ben Sutton: Well, the balance sheet is kind of the other main one that is relevant. It’s less informative, and less relevant; especially to the small business. What that kind of represents is the overall health of the company, and kind of the cumulative … profitability over the years. It lists out the assets. It starts with cash in your cash balance, and then any other assets that you own, like maybe expensive equipment, or even a building, or cars, or any other assets that you have in your business that you’ve paid for.
Then, it lists out the liabilities, the credit card balances, or the loans that are outstanding that you owe. Then, there’s this section called the equities section, which keeps displays the cumulative, or the total activity between the owner and the business. Any time the owner puts money into the business, it goes into the equity section. When the owner pulls money out of the business, as an owner’s distribution, it comes out of the equity section.
The balance sheet is important, and it’s meant to ensure that everything is done right. On a month-by-month basis, it’s less relevant. It’s mostly useful, like if you’re trying to sell your business, it becomes very relevant. In special cases like that, it is very key and important. But on a month-to-month basis, the profit and loss is really where to spend your time.
Bjork Ostrom: Got it, great. A couple questions that I had that are related to you having this understanding of small businesses, bloggers in a lot of cases, working with these people in the zero to ten employee range where it’s maybe just somebody as a solo entrepreneur, a solopreneur, so to speak; and some of the things that you’ve learned along the way. First question related to that, what are some common issues that you see when you start working with somebody? What are the things that you need to clean up right away that people that are listening can say, ‘Oh, that actually applies to me. It’s something that I should do as well.’
Ben Sutton: Yeah. We’ve already kind of touched on it, but cleaning up your account so that you’re isolating your business transactions into business dedicated accounts. That just does a lot to organize a business. It doesn’t mean you can only have one account. You can have a couple checking, and a savings, and two credit cards. The goal is to get only business transactions flowing through these accounts. That’s a big immediate clean-up thing.
Bjork Ostrom: Do you have recommendations for the easiest way to do that? Just kind of the drop dead easy approach to separating your expenses?
Ben Sutton: From your personal?
Bjork Ostrom: Yeah.
Ben Sutton: Yeah, so the goal is to make it so you accumulate your profit in your business account, and then you get paid from that business account to use that money for your personal expenses. So, ideally, the end goal should be to make a transfer to yourself once a week, twice a month, once a month, however often you need to, and use that money to pay for personal bills.
Bjork Ostrom: Got it.
Ben Sutton: Right.
It’s a challenge, but really you gotta get all of your automatic payments, right? Your Adobe software, and all the other types of software that are automatically coming out of your accounts. You gotta get those switched over to a business account, which is, unfortunately, there’s no simple way to do that, but attacking each one by themselves.
I’ve seen people go the other direction where they’ve got personal and business expenses mixed, and they decide instead of moving all this business over to another account, I’m gonna just move my personal over to another account.
Bjork Ostrom: Because they have more business transactions coming into their personal account, sure.
Ben Sutton: Right, or more automated transactions, right, coming for business.
The first step that we have clients do to kind of begin this process is to go through their account and highlight each of the business, all the business transactions.
Bjork Ostrom: Got it. So this is printing out a piece of paper, going through and saying, like for the last, whatever, six months, go through and highlight every single transaction that was related to your business.
Ben Sutton: Exactly.
That’s what has to be done at some point, so that we can extract the business activity out of all those transactions and report it to the IRS. We as their outsource accountants, it’s hard for us to differentiate the two, so we have to ask them to go through and highlight those. That gives you insight, whether you’re outsourcing it to an accountant or not. It gives you insight into what … How many business transactions are there, and what type of transactions are they? If I’m gonna divide these, you know, how do I do it?
It’s like, “Oh, here’s the Amazon one, here’s the Adobe one. I gotta go talk to them and get this switched.”
Bjork Ostrom: Yep.
Ben Sutton: That’s step one to getting that divided.
Bjork Ostrom: Got it.
And I think that in and of itself will be a huge accomplishment for people, if they are able to say, “Okay, from this podcast, I’m gonna learn that I need to separate things out. I need to take my business expenses, set up a business bank account for that, have that be a separate thing. Get a business debit card or credit card, and all of my transactions that are related to business go through that, and all of the income related to business go into that.”
Ideally, it would be set up in a way, like you were saying, where it’s connected to your personal account, so then you can pay yourself when you need to from that account. Now, I’ll just mention this because I think that it will be important for a handful of people, that there’s a point when it makes sense for some business owners, when they become profitable enough, to change the type of structure that they have, where they’re actually paying themselves a legitimate salary from their business. They’re not just doing transfers, they’re actually on payroll for their own business. It’s called, and again this if the US, so it’s a US specific podcast, but … This episode is at least because I wish, and I am sure that you do too, wish could that I could know international accounting and bookkeeping taxes, but the US is complicated enough.
The idea being that there’s this point where it makes sense to set up your business where it’s paying yourself. Can you talk about what that is, and the idea of and of an S Corp, and when people should research it more, without kind of going into the details of exactly how that works?
Ben Sutton: Absolutely, yeah.
In summary, we’re talking about this idea of being taxed as an S corporation. Without the S corporation, all of your profit, all of the money that the business generates is subject to self-employment taxes, and income taxes. So self-employment taxes, it’s Social Security and Medicare, it’s about 15%, and income tax is usually between ten and 25% depending on how much money you’re making.
When you’re not an S corp, you’re paying self-employment tax and income tax on everything. With an S corp, you are made an employee of the company, and you’re taking a wage, a regular salary out of that company, but you’re also taking an owner’s distribution out of the company. In that structure, you don’t have to pay self-employment taxes on what you take as an owner’s distribution. So you’re still paying the Social Security and Medicare, or self-employment tax, on the wage, the salary that you’re pulling out as an employee, but you don’t have to pay that self-employment or Social Security, Medicare on what you pull out as an owner’s distribution.
Once you’re making, I don’t know, I usually say 30–40 grand … If you’re taking home that much money or more, then the S corp becomes something to look at because the cost associated with having that S corp is payroll. You gotta pay someone or do payroll yourself, which I’ve never really advised because it’s so cheap to have someone else do it for you now. There is a little bit of a cost, maybe let’s just say an extra thousand dollars a year that it would take you to have an S corp, but if you’re making 50 grand, 30, 40, or 50 grand plus, you can quickly save $3,000 to $5,000 in taxes by doing this. So it’s a good move.
Bjork Ostrom: That was something that was really hard for me to wrap my head around when we started, when the CPA that I work with started to explain that, but I wanted to, more than anything, just give people that kind of little tipping point. Once your business or your blog gets to the point where you’re kind of in that 30, 40, 50 range, then you can say, “Okay, mental note, I need to learn about S corp and paying myself a salary.”
If that’s the only takeaway that you get, great, because you can learn about that. You can go and research that a little bit more. The basic idea being it’s a really, really common tax strategy to avoid paying yourself, or to avoid being taxed the self-employment tax at a really high rate as your business grows. So, wanted to mention that and make sure that people at least just kind of make a mental note of that as you think about growing your business and your blog and the income that you’re earning from it.
Ben Sutton: Good.
Bjork Ostrom: The other thing that I would like to talk about is this new, and again this is like, hard stuff to explain over a podcast, but as much as possible want to make people aware of it, so they can either understand it on their own, or make a note of it to follow up with somebody like you then, to have a conversation around how they can implement it.
There’s this new tax law that was passed and has gone into effect for 2018. One of the things that exists is for small business owners like the people that listen to this podcast. There’s this idea of a 20% pass-through deduction, the Tax Cuts and Jobs Act, that’s a part of that.
At a really high level, can you explain what that is and what we need to know about it in order to be intentional with tax savings?
Ben Sutton: Yeah, so this new tax law, from my perspective, appears to be really good for the small business. When I look at it year over year, I’m just seeing savings. I’m not seeing really anybody paying more. I mean there’s a few cases where people will pay more for various reasons, but overwhelming majority of people are just gonna be saving taxes this year.
A couple things triggered this. That tax law lowered the corporation tax rate to 21%. It used to go up to like 35%. They lowered the tax rate for corporations, C corporations.
Bjork Ostrom: And corporations would mean, essentially it’s like the really big businesses, there might be some small businesses that are corporations, but most small businesses, most bloggers, all the businesses that we’ve set up, those are all … They’re called limited liability corporations, LLCs, which is a little bit confusing, but they’re not a C corporation, like you said, a really big company like Apple or something like that.
Ben Sutton: That’s right, yeah.
They lowered the tax rate on all those big corporations, or on C corporations, which anybody can form, but mostly they only make sense for big companies. In order to prevent everyone saying, “Ooh, I wanna go be a C corp,” and have all the LLCs, say, “Oh, I’m gonna go save taxes by being a C corp.”
They said we gotta do something for the LLCs, and the S corps, and the sole proprietors.
Bjork Ostrom: Yep, we gotta do something for the little guys.
Ben Sutton: Right.
Bjork Ostrom: Not all LLCs are little guys, but it’s more of the Main Street versus the Wall Street.
Ben Sutton: Yeah, that’s right.
They said in order to avoid this wave of people moving to C corporations, let’s give the small businesses this tax break where we make up a deduction, it’s called the QBI deduction, Qualified Business Income Deduction. It’s just a new made up deduction, you don’t have to spend any money to get it, where the IRS says, “Okay, if you,” for simplicity’s sake, with math, “If you make a $ as a sole proprietor, we’re gonna give you a $20,000 deduction.”
And it’s just kind of no questions asked. So they just created this 20% cut for the small business owners pass-through income.
Bjork Ostrom: Got it.
In that scenario, let’s say you made $100,000, this 20% pass-through deduction essentially is saying, “Hey, you made $100,000, but because this is a tax cut that we have passed, we’re gonna cut your taxes, and the way that we’re gonna do that if you are an LLC, or a sole proprietor, the way that we’re gonna do that is we are going to pretend as if, even though you made a 100, that you actually only made $80,000.”
Is that essentially how it works from a tax perspective?
Ben Sutton: That’s exactly right.
You would see $20,000 knocked off on the tax return. You’ll see the 100,000, and then you’re gonna see a $20,000 deduction and it brings it down to 80,000. Then they’re gonna compute the tax on the 80,000 instead of the 100.
Bjork Ostrom: How do you make sure that you take advantage of that? What does that look like? I’m guessing, working with the CPA is a really important piece of that, and the other piece is, does it apply to everybody, or are there exceptions like, “Hey, only these types of people can use it?”
Ben Sutton: There are exceptions. It’s gonna be interesting to see how it plays out. TurboTax and all these other self-prepare software I’m sure will build it in. It’s just gonna be one more series of questions they’re gonna ask you probably. But a CPA, or accounting firm like ours, will know how to get it, and to make sure that you get it.
Now there is a qualification. They’ve identified certain professional services, like medical professionals, doctors, and consultants, and accountants actually, and other … They’ve kind of been a little bit vague, but they say, “Professional services, where the service that’s being offered depends on the reputation of the individual providing it, are considered special or excluded from this.”
They don’t wipe it out completely, but they do limit the benefit. For most, and I don’t see bloggers falling into that category, photographers might.
Bjork Ostrom: Sure.
Ben Sutton: We’re still in front of this thing. We haven’t actually gone through year end yet, and there’s still IRS kind of publishing information on the details. For the most part, everybody gets it. Even if you are excluded, like I said, they still give you some, but it phases out. If you make a certain level of money, and I think it’s like $300,000. You have to make over $300,000 before you start losing the benefit.
Bjork Ostrom: Got it.
Ben Sutton: It’s gonna be pretty good for most everybody.
Bjork Ostrom: Yeah, that’s awesome. And, again, one of those things where if you are listening, and you feel like, “Oh, this is so confusing. I don’t get it.”
That’s okay. The point of this isn’t to totally understand how it works. The point is for you to say, “Okay, I’m gonna make a little note here, just like I did make a note with the pass-through deduction, just like I did making a note with some of the other things,” that you might not fully understand, but you know you need to implement. Then do that additional research, understand a little bit better, get connected with a CPA, get connected up with Ben and his company to get a better understanding of that.
Speaking of that, I feel like that will be, that’s a good transition here, Ben, as we’re coming to the end, for you to talk about if people are interested in working with you, or people that are on your team, how can they connect up with you? What are the services that you offer that will help people get up and running and implement some of these really important things that we talked about?
Ben Sutton: The best, quickest way is probably to go the website, MazumeUSA.com, and fill out the web form. You know, just submitting your name and email address for us to get in contact with you. We’ll reach to you within day, if not within the hour and ask you about your situation and inform you, answer any questions you have, and get you signed up. Our main services are kind of everything we’ve been discussing, the bookkeeping. When you’ve got a few transactions, it’s not a big deal, but if you’ve got enough to where it’s taking you more than a couple hours a month to do this part of your business, then you’re better off paying us 75 bucks a month to do it for you, and to include your tax return.
We will do all the data entry for you, all the categorization for you, send you the reports. Then, we are also tax professionals here that you can call or set an appointment with, and ask tax planning questions. You have specific situations that you need to discuss with somebody, we are here to help you with those questions. It’s all included in your monthly fee. At the end of the year, we’re doing tax returns. We’re actually preparing and filing your tax returns for you. Those are the three main pieces, the bookkeeping, the tax advice, and the tax returns that were doing as part of the monthly subscription. Payroll, payroll is on top of that, but our base subscription’s $75 if you’ve got one account, or $125 a month if you’ve got up to four accounts, and all of that is included in that $125, tax returns, tax advice, you’re never paying anything more than that monthly fee.
Bjork Ostrom: Awesome, that’s great. And we’ll link to that in the show notes as well.
One of the things that I love about a relationship like this, is it’s a great way for a small business owner, solopreneur, or somebody with a small team, to start to think about building a team where you’re not necessarily hiring somebody full-time. You don’t have to worry about the legalities of an employee or contractor relationship. You’re able to start to do that outsourcing, that’s so important with business building, in a sustainable way. Where you know exactly what the costs will be, and you know exactly what the exchange will be, the service will be. It allows you to kind of build that team in those initial stages. It was one of the first things that we did was, “Hey, how do we make sure that we’re doing bookkeeping and accounting really well, and that we’re not the ones doing it?”
Because it’s so important to have that, but also, if you are somebody, even like myself, that likes it and enjoys it, the reality is that people who are professionals and do this day in and day out, are gonna have a better understanding of what it is. So you can focus on the things that you’re good at, and not have to worry about this.
Ben, thanks so much for coming on the podcast, for sharing your insight, for sharing the advice. I know that for some people this might not be the most exciting stuff to talk about, for me it is. I know for everybody that it’s really important, so really appreciate your time and insight.
Ben Sutton: Think you, Bjork. Good to be here, I’m glad to help.
Alexa Peduzzi: Hey wonderful listeners, Alexa here. Thank you so much for tuning in this week. I had to laugh when Ben said that he was sick and tired of being the hated person in office, when people saw the big bad auditor walk through the halls, because I was actually an auditor in a past life, meaning like three years ago, before I came here to Food Blogger Pro, and started my crazy wonderful amazing food blogging journey. Had to give him credit for stepping out and doing something that made him a little more happy and liked in the industry.
I’m also here to bring you the Review of the Week, and this one comes from Alicia from DailyRation.net. It says, “I’m fairly new to Food Blogger Pro, and wish I hadn’t taken so long to get here. The podcasts are perfect for me because they are full of truly valuable information concentrated into very focused nuggets, and spaced perfectly, to help avoid the overwhelm I often feel when I’m trying to learn something new. Thanks for providing useful chunks of material that I can apply immediately. It has never been a waste of time to listen to one of these podcasts.”
Thanks so much, Alicia. We appreciate you tuning in and for leaving that review on iTunes for us.
Before signing off today, I wanted to remind you that we are hiring a Member Success Agent. You have until August 5th, which is this Sunday, depending on when you’re listening to this episode, to apply. You can learn more and apply at FoodBloggerPro.com/apply.
Thank you so much, everyone, for listening today. We appreciate you so much, and this is such a fun part of our jobs. So from all of us here at FBPHQ, make it a great week.