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Welcome to episode 104 of the Food Blogger Pro podcast! This week on the podcast, Bjork talks to Cathy Derus about tax advice for bloggers.
Last week on the podcast, Bjork interviewed Lindsay and Alana who answered your questions about food videos. To go back and listen to that episode, click here.
Photographing, cooking, connecting, writing…these are typically the aspects of blogging we all love. Cathy, on the other hand, loves spreadsheets, tracking expenses, and talking to other bloggers about taxes.
Cathy started her businesses, Brightwater Financial and Brightwater Accounting, as a way to help small business owners like bloggers navigate the confusing tax side of their businesses. It’s a topic that is incredibly important for all bloggers to understand, and Cathy’s goal is to make the process a little easier. From setting up a bank account for your business to tracking expenses, this episode is a crash-course to understanding taxes and accounting.
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Bjork Ostrom: In this episode, we are talking to Cathy Derus from Brightwater Accounting about the most significant expense your business will have, the type of bank accounts that you need to set up, and bookkeeping for people that don’t like bookkeeping.
Hey, everybody. It’s Bjork Ostrom. I’m excited about this podcast today and some of you might be a little bit surprised because we’re going to be talking about things that maybe aren’t super exciting like taxes or accounting, but as we’ve gotten into the business building side of things, one of the things I’ve realized is it’s really really important to be intentional with how you keep track of the expenses within your business as well as the revenue within your business because that impacts something that isn’t super exciting to talk about but is super important. Taxes.
We’re going to be talking about how all of those things come together and as a blogger or business owner how you can put some systems in place and take some steps forward to really get a secure and healthy business. The other thing we’re going to talk about is Cathy’s role from going from a corporate job working in public accounting, and then corporate accounting, and then making the transition into running her own firm.
I know that a lot of people who listen to this podcast are really interested in the idea of making the leap to working for yourself and she’s going to talk about what that was like for her and some of the things that she implemented along the way that helped with that process. It’s going to be a great interview and I’m super excited to share it with you today, so let’s jump in. Cathy, welcome to the podcast.
Cathy Derus: Hi. It’s great to be here.
Bjork Ostrom: Yeah. So we were kind of joking around a little bit before we pressed record about talking about financing and taxes and we’re like, “The joy of financing and taxes. Talking about financials and taxes.” I am so excited to do this, not only because I’m interested in money, and personal finance, and some of the things that we’re going to talk about, but it’s critically important for people that are interested in starting and building a business and that includes bloggers as well. So an honor to have you on the podcast.
Cathy Derus: Thank you again. Yeah, I mean, it’s super important to have, you know, a strong financial foundation. You know, even if you’re just starting off with, you know, the blog is just kind of like a side project you know. You’re just kind of starting it as a business and then it starts growing. Then, you know, as you’re transitioning to full time, how are you treating all of this? Are you treating it as a business or a hobby? Then that kind of impacts how it’s going to be taxed and how it’s going to be, you know, reported on your tax return.
Bjork Ostrom: Yeah. I think, you know, we have Food Blogger Pro community of food bloggers, and we have this podcast, and we get to have a lot of interactions with people and they have a ton of questions around that. Specifically around, you know, what do I count as expenses? What do I count as revenue? We’re going to jump into some of that, but before we do, I want to hear a little bit about your story because I think it can be something that people relate to and that you have made this journey recently from or towards being self employed. You’re a little bit past the six-month mark.
Cathy Derus: Yes.
Bjork Ostrom: I’m curious to know and I would love to know a little bit about what that was like for you and to hear a little bit about your journey. I think people love to hear the story of people making the leap into being self-employed.
Cathy Derus: Sure. Sure. Well, kind of starting off just thinking about my childhood, I was always one of those kids who loved Monopoly, had the lemonade stand, was selling friendship bracelets. Like I inventoried my Halloween candy. You know, there was just always this interest in like business and numbers and like my mom’s a CPA. My dad has an entrepreneurial background as well.
So there’s definitely that kind of entrepreneurial vibe in our home. You know, but at the same time, I had other interests, you know, I think in fourth grade. I said I wanted to be an Olympic diver, and then a professional soccer player, a concert pianist, and then yes, an accountant.
Bjork Ostrom: Natural progression.
Cathy Derus: I know, I know, but I had this all happen. So like I was kind of there so, you know, I studied … Well, with my mom being a CPA I was like, “Well, I’m not going to go to school and be an accountant. I know I want to do business, so I’ll do finance.” Then I take, you know, some accounting classes and I’m like, “Well, this isn’t that bad. I kind of like it.” I like the fact that the numbers balance and it’s more or less black and white.
So I studied accounting, got my master’s of accounting. Kind of a natural progression. Got the CPA. I started off in public accounting. So I was in public accounting for about four years and it was like a great foundation learning how different businesses work, learning how to work together, time management. You know, a lot of just good skills. You know, I get kind of burnt out on that and then I moved over to corporate accounting for a little bit more predictable schedule.
Bjork Ostrom: For those that aren’t familiar, can you contrast public accounting versus corporate accounting? How are those different? What does that mean? What’s the difference between those two?
Cathy Derus: Okay. So there are kind of two different tracks with public accounting. There could be the tax side and you’re going to be doing tax work for larger companies, bigger companies, when you’re … I was at one of the big four public accounting firms. You could be an auditor. So I was auditing businesses. Making sure that the numbers tied out when they were reporting their financials so that individuals and banks and other businesses could then rely on those financials to make decisions. You know, we loan them money. That sort of thing.
Bjork Ostrom: It’s still you’re working with a corporation, but you’re on the side where you’re not necessarily in the corporation. You’re going in auditing for those that aren’t familiar, a business will set up their books, and they’ll have their accounting, but then a lot of times what will happen is an outside firm will come in and say, “Yeah, this is actually legit.”
Cathy Derus: Right.
Bjork Ostrom: So in the case of a company like Enron, were they not getting audited? How does that work with companies like that? Are the auditors in on it?
Cathy Derus: Well, like in, you know, accounting school, you know, business school and whatnot, they kind of talk about you know there’s like the fraud triangle and then there’s collusion. So there can be things that are going on in the background, you know, to kind of hide those mistakes. To, you know, mask any shady business that’s going on. You know, as an auditor, we’re not looking at every single number, so it’s not possible for us to, you know, pick everything up. You know, you do the interviews with different people. You do some tests of transactions, but you’re not going to be digging into everything.
Bjork Ostrom: Especially when it’s a huge corporation.
Cathy Derus: Yeah.
Bjork Ostrom: So the idea being the numbers maybe be lined up and they would pass an audit, but they were doing things that were shady in order to kind of cover up their tracks.
Cathy Derus: Exactly.
Bjork Ostrom: Not that we know the nitty-gritty details of the Enron situation, but when you said that, I thought of it. It’s interesting. I’m on the board of a non-profit here in the twin cities and every year we do an audit just as a non-profit we have to do that. It’s a similar thing where they come in and they say kind of, “Here’s the general overview of maybe some things you guys should be aware of,” but it’s always really nice to have that outside perspective coming in and advising on it. So you did that for a while and then you switched to corporate accounting and I’m guessing that’s being on the inside of a company and you’re working or doing the bookkeeping or accounting for a company inside.
Cathy Derus: Right. Yes, doing that kind of monthly close. You know, bank reconciliations, account reconciliations, bu then I was also doing financial reporting for a privately held company. So that’s, you know, preparing the balance sheet, preparing the income statement, doing, you know, some analysis between, you know, different time periods just to make sure that once again the numbers are kind of like lining up and, you know, the business has their own goals, and their budgets, and whatnot, and how are you kind of tracking towards that?
Bjork Ostrom: Yeah. So I would assume what that does then is that allows you to have kind of this varied background where you have experience in a lot of different things. You say, “Hey, I’m actually interested in taking this knowledge. Maybe not going deeper on the corporate track, but jumping over and launching my own freelance,” or your own business where you’re working with other business owners. When did you realize that you wanted to do that? Obviously you said you kind of had these roots as kind of entrepreneurial roots, but was there a point where you’re like, “You know what? I think I want to jump off of this track and start my own track?” What did you do to kind of start to prepare yourself in that direction?
Cathy Derus: Sure. So I guess just kind of like fill in some of the numbers of the time frame. So I graduated with my masters in 2007, so you know, that’s when I started working full time. Then actually in 2010 I started a blog of all things.
Bjork Ostrom: Great. Prefect for this podcast.
Cathy Derus: Exactly. So, you know, I always had this interested in personal finance. You know, small businesses, accounting and whatnot. So the blog was a way for me to kind of explore these topics a little bit further and to kind of share my opinions on credit cards and saving for a house. You know, it was kind of a way for me to also share our experiences.
You know, we went through and we bought a house. What did we need to do, you know, to prepare to get a mortgage? You know, the budgeting that was involved. What did we have to do to prepare for having our first child? You know, some of the financial things that we did. So I kind of like shared that little journey and then, you know, along the way being inspired by other food blogs, lifestyle blogs that I read.
You know, I shared some other things about how, you know, how we were redecorating our house and, you know, the cupcakes that I baked for my daughter for her birthday party. So that was in 2010 and then, you know, along the way, yes, I was listening to podcast episodes as well. You know, while doing the whole, you know, 9 to 5 corporate job.
Bjork Ostrom: Sure.
Cathy Derus: You know, I was like, “Can I have a blog? Can I monetize it? Can I do that?” Then kind of transitioning between jobs I was like, “I need something a little bit more steady so that’s why I switched from like public accounting to corporate accounting.” Always had that. Then I heard a podcast episode with a certified financial planner and, you know, she’s in her early 30’s.
She’s talking about doing financial planning for individuals in their 20’s and 30’s. I was like, “This is amazing. I didn’t know that was a thing.” You know, when I thought of financial planning, I thought it would be, you know, some scammy insurance salesman trying to get you to buy some sort of policy that’s too expensive that you don’t need. Jeff Rose is a great guy.
Bjork Ostrom: Yes.
Cathy Derus: I listened to his episode beforehand. He’s a good guy. He’s on the good side.
Bjork Ostrom: Yeah.
Cathy Derus: I was like, “This is a way that I can share my money skills with people and help them.” So I kind of investigated the only financial planning, so I then launched Brightwater Financial, a financial planning firm in the summer of 2015. Though, in the process got pregnant with our second child so that kind of got put on the back burner a little bit. He was born in October of 2015.
So I kind of decided I was going to slowly build that business while doing the corporate accounting and kind of see what happens. I optimistically thought that it would take off a lot faster than it did, but it just takes time. Yes, it also takes money. That’s why I kind of like stuck with the corporate job. You know, yes we had a lot of money in savings, you know, for the emergency fund, but you know, two kids and a mortgage, we just needed that security to go along with it.
Bjork Ostrom: I think that’s one of the things that people are always surprised by that I hear consistently is just how much time it takes for whatever it is that you’re doing. Whether it’s starting, you know, a consulting agency, or building a blog, or you know, developing skills, it almost always takes more time than people anticipate unless that time is super condensed into like maybe it takes two years or it could take six months if you do the equivalent of two years of work in six months.
Cathy Derus: Right.
Bjork Ostrom: It can be really sort and you can make something happen really quickly, but those days then look really really different. When you’re working a full time job and have kids, like obviously you don’t have as much time to dedicate or you make a decision not to dedicate as much time in order to be with family and dedicate to the job. So I think it’s important for people to hear that because it’s a common thing.
Cathy Derus: Yes, and then I thought I would start building that business on the side, but then in the summer of 2016, our son Alex got sick. He had this acute blood disorder and it was effecting his platelets. You know, there’s a late night trip to the emergency room. Later there was a hospital stay. He’s fine now. It was just kind of like a weird one time thing, but with that and then some changes at the corporate job, and just things that were going on at the company. You know, that they were possibly going to go public. You know, I had been there for almost five years. You know, I was just kind of getting bored with it and I didn’t really see myself taking my boss’s role.
Bjork Ostrom: Sure.
Cathy Derus: That sort of thing. So, you know, changes in personal priorities, which I’m sure you can relate to as well, you know, with the loss of your son. It all kind of came together and I was able to to land a part-time job to kind of help with that transition. So we’re just like, “This is the time. We just need to try it out. Let’s see how it works. We have plenty of savings. We have this bridge, you know, with the part-time job.” All these things going on.
So then, in the fall of 2016, I gave my notice. I also then started Brightwater Accounting because I just couldn’t get over the fact that I’m a CPA, I have this accounting background, and you know, even though I was in the audit world, people just hear CPA and they think taxes.
Bjork Ostrom: Sure. Sure.
Cathy Derus: So that was just kind of like an easy transition as well. It’s like, “You know what? I’m going to offer the accounting services and, you know, be that bookkeeping, tax prep, tax planning, and then working with self-employed individuals.” You know, financial planning and tax planning, and tax prep it’s all kind of intermingled. So I was like, “Let’s go for it,” and been fantastic.
Bjork Ostrom: So, for those that aren’t familiar, and we can link to these in the show notes so they can check it out. So you have two different sites or two different brands kind of, but obviously a lot of that overlaps so you have Brightwater Financial and then Brightwater Accounting.
Cathy Derus: It’s for compliance purposes.
Bjork Ostrom: Sure. Otherwise you’d be all one thing. Okay. That makes sense. Yeah.
Cathy Derus: Yeah. It just makes it easier.
Bjork Ostrom: That it’s a hard line between the two. So it’s interesting. To go back to what you were saying, I think we can connect with that a lot. You know, you had mentioned the loss of Afton and how that kind of … those significant life events clarify a lot of things and it sounds like that experience for you is one where, you know, for your family you were clarified and saying like, “Okay. This is the time now.” It’s not necessarily the perfect time, right, but it’s the time where we feel like this is a change that we need to make and it’s something that we need to make happen.
Cathy Derus: Exactly.
Bjork Ostrom: When was it that you officially …? So you put your leave in. When was your last day at your job?
Cathy Derus: I should know this, right? I think it was October 21st.
Bjork Ostrom: Okay. Great.
Cathy Derus: I think. I should double check this.
Bjork Ostrom: Sure. Yeah. Well, we won’t quote you on it.
Cathy Derus: Okay.
Bjork Ostrom: Do you remember what that was like? That first week transitioning out and then you’re starting with your own company.
Cathy Derus: Sure. Kind of envisioning going into it, you know, my last day at work, you know, I just had this sense of peace. I was meeting up with a friend. Actually, it was Jess Lively.
Bjork Ostrom: Sure.
Cathy Derus: That’s how I like discovered you guys.
Bjork Ostrom: Yeah. Can you talk about what Jess does real quick for those that are unfamiliar?
Cathy Derus: Yeah. Well, so we were friends. We ended up living more or less down the street in Chicago. So when we first met, you know, she was selling jewelry, and she was doing, you know, she had her blog. It was Make Under My Life at that point. You know, she was also sharing business advice. So we got to be friends kind of like from a business perspective just because we kind of had that common interest in small businesses.
So that’s kind of like one of those other things that sparks. You know, talking with her, you know, she kind of encouraged me as well. So we got started more from the business perspective. No I know she’s moreso doing living an intentional life. You know, at one point it had to do with, you know, having a business with intention. Life with intention. Now she has this great podcast, the Lively Show. I know Lindsay was on there.
Bjork Ostrom: Yeah. So I feel like one of the things as a podcaster that I try and do is like introduce people to other podcasts, so that would be a great one for people to check out. If you liked some of the topics we talk about, this is definitely not the exact same things as the Food Blogger Pro Podcast by any means. That’s what I love about it is that it’s a different focus and different, you know, interviews and for people that she talks with, and like you said, Lindsay was on it. There’s a lot of great interviews, and perspectives, and just appreciate who she is and her view on the world. So the Lively Show. Good for people to check out.
Cathy Derus: It was an episode, and an early one, she had kind of like a money theme for a month and it was Mary Beth Storjohann who was the CFP who was working with, you know, who was being a family financial planner.
Bjork Ostrom: Okay. Sure. Yeah. The connection made full circle.
Cathy Derus: Yes.
Bjork Ostrom: So, you have this sense of peace. You know that you’re going into it. It feels like the right thing.
Cathy Derus: Yes.
Bjork Ostrom: Now you’ve been at it for over half a year. What is it like being on the, you know, six plus months side of working on your own? Do you have perspective that you feel like you didn’t have when you first started in terms of what that looks like and how that feels?
Cathy Derus: Sure. Well, and I talked to you about how I felt, you know, that last day. I had this sense of peace and I was, you know, excited for what was going to happen. So then that Monday I wake up. I was exhausted. I had just had a rough night with our son and I was just like, “Oh my goodness, this is horrible,” but then I was like, “You know what? I’m going to embrace the flexibility that I have now. I’m not going to fire up the laptop right away.”
I was like, “You know what? I’m going to go get myself a celebratory pumpkin spice latte,” because it was October. I was like, “I can go to the gym. I can’t remember the last time that I did this.” So I did that. I will say, you know, at the beginning, it was kind of rough and there were times that I was like, “Oh my gosh, are we doing the right thing?”
You know, that last day of the full-time job I was happy, but then, you know, that last couple of weeks like in between giving my notice and that last day, you know, like talking with my husband, we had crunched the numbers so many times. On paper it looked good, but at the same time I was like, “Oh my gosh. What are we doing?” Are we going to make it? This is scary. You know, you’re just like looking into this void, but then being self-employed, you know, there are the ups and downs.
You know, some days that I made some great contacts like talking with Danielle Liss, who I know was a guest recently. Making good contacts with her and then, you know, having other good meetings. Then there are times that it’s like crickets. Like, “Where are the clients? What am I supposed to do? Am I doing this right? Do I have the right tech?” Just all this different self-doubt that’s kind of coming in.
Bjork Ostrom: Yeah. I have that exact same feeling. I was just thinking that the other day and it has to do with … Lindsay and I have talked about this, but this idea of how she talks about it with photography, but like you live and die every photo. The idea that you can do one photography session and you can feel like you’re on top of the world and then you can do another photography session and you can be like, “Oh my gosh, this is terrible and I feel awful about this.”
You know, the same thing can be said for a business owner, a blogger, where day to day and week to week it can be so different depending on these kind of weird metrics that we track. Whether it’s clients, or page views, or downloads, or whatever it would be. So I can totally relate to that. I think it makes a lot of sense.
Cathy Derus: Yes, but you know, it’s six months in now. I’ve had a little bit more perspective and like I’ve made it through tax season. This is fantastic. That in and of itself, that was a little bit rough, but just because there are time frames, you know, that things have to get done, and deadlines, and whatnot. You know, that was rough, but you know, coming out of it, I just feel this sense of accomplishment. You know, I look at my bank account and I was like, “This is money that I earned. This was my work. This was my blood, sweat, and toil.”
You know, it wasn’t just that paycheck that you kind of take for granted over time. You know, I’m building something. This is me. You know, when I was in school, I would kind of get down on myself. I was like, “I’m majoring in accounting. What am I doing? I’m not saving the world. I’m not a teacher. I’m not a doctor. How am I changing lives with this?” but now that I’ve had the perspective, even talking with clients they’re like so relieved that they have somebody on their team you know to answer their weird tax questions or weird accounting questions.
They’re happy to have that responsibility taken off their plate. You know, they’re not having to go through and try to figure out all the weird tax laws. They can rely on somebody else who has that background, and that knowledge, and that education, and they know that it’s going to be done right. So, you know, they just have this comfort and so I was like, “Okay. I might not be saving lives, but I’ve been saving businesses.”
Bjork Ostrom: Yeah, for sure, and it’s making a difference. I think it’s something that’s easy to forget about. Especially if you don’t have that feedback loop where, you know, people are whatever, leaving a comment or something like that. Definitely it makes a big difference and that would I think actually be a good transition into talking about some of the business side of things and there’s a lot of questions that we get that I would love to run by you and I’m sure a lot of questions that you often get as it relates to businesses in general, but also specifically to blogging.
Cathy Derus: Sure.
Bjork Ostrom: Let’s focus in on the accounting side. Well, and let’s do this. Before we jump into that, can you explain the difference between accounting and then financial. So you have Brightwater Accounting and then Brightwater Financial. What’s the difference between those two?
Cathy Derus: Okay. There is some overlap. It is a little bit gray, but in general, Brightwater Financial has to dow with the personal financial planning side. So, yeah, some of it does include tax planning where you look at, you know, where you are for the year. How can you minimize your taxes is such a way? It’s going to be moreso cash flow management, budgeting, helping manage investments. You know, student loans. Those are huge.
So, you know, I’m working with somebody right now. “How do we pay off student loans? You know, how do you kind of like minimize some of the interest that goes along with that? Should we consolidate or not? Can some of this be forgiven?” So, you know, it’s more of the personal side of things, but then the accounting side, that’s moreso for businesses in a way.
Yes, it does have the tax prep, and so there’s the individual tax prep. There’s the business tax prep, but it does also include, you know, business advising. You know, looking at some of their entities from a tax perspective. Should they be a sole proprietor? Should they be an LLC? An LLC taxed as a sole proprietor? You know, making some of those decisions together. Yeah, then there’s like the bookkeeping, and the record keeping, just to make sure you’re staying on top of your numbers so you can make good business decisions.
Bjork Ostrom: Sure. So one of the things that you have in your role that I think is so valuable, and I’m also interested in talking to people that are these connector roles. So in your role, one of the things that you do is you see a lot of businesses. You see a lot of books. You’re able to jump in and see a lot of the accounting for different businesses.
I’m curious to know, obviously you can’t talk specifics about those businesses, but as a trend, what do you see with the businesses that are healthy and well-run businesses versus ones that aren’t as healthy or well-run? What do you see that is common with those healthy businesses when you look at their books?
Cathy Derus: Well, I mean, one of the first things is you need to kind of stay on top of the numbers so you can gauge whether you’re a healthy business or a struggling business. So one of the first things I always ask clients or prospective clients is, “Do you have a separate business checking account? Do you have a separate credit card?” So that you can go through and, you know, track the income coming in, track the expenses going out. So you can actually get a good idea of how you’re performing.
Bjork Ostrom: Sure. Like if you were to work with somebody, how common is it for somebody not to have that set up? Would it be like 50/50? 25/75? I’m just curious personally.
Cathy Derus: Let’s see. You know, my first gut was just to say 50/50, so we’ll just go with the gut.
Bjork Ostrom: Okay. Yeah.
Cathy Derus: It might be moreso people having, you know, the business account set up already, but we’ll just say 50/50.
Bjork Ostrom: Okay. Yeah. It’s interesting to think about. So, big takeaway right there, if you are somebody that’s listening and you have your blog or business, online business, or a brick and mortar business even, and you haven’t separated those out yet, really important thing to do. So followup question related to that, at what point do you consider something a business? Let’s say I just started my site six weeks ago and I know that I probably won’t be creating a substantial income for the next six months to … I don’t know. A year and a half. Who knows. At what point is something a hobby, and when is it a business, and when can I start expensing things as a business as well?
Cathy Derus: Sure. Well, you kind of have to look at not just, you know, the numbers. Not just the expenses, but how are you really treating this activity? Are you going to be treating it like a business? Do you have that separate business checking account or credit card, you know, set up? Are you tracking things?
You know, be it with even, you know, just a simple spreadsheet. That’s always a great place to start, you know? Something like QuickBooks Online. Xero with an x. Do you have that going on? Yes, one of the considerations is, “Do you have positive net income?” But, you know, businesses starting up they’re going to have the startup costs.
Bjork Ostrom: Yeah.
Cathy Derus: So you kind of have to look over everything. You know, are you registered as a business? Be it having LLC or even if are you a sole proprietor, but you know, you have a different name and so you kind of have it like doing business as just different things. Are you doing things to try and make a profit over time? Are you adding some of the, you know, going through and adding ads to your blog? Are you trying to create a product? Are you changing the pricing of your product? Are you working with somebody who has the knowledge to help you have a successful business?
Bjork Ostrom: It’s interesting. It sounds like one of those things where there’s not necessarily a hard and fast rule.
Cathy Derus: Exactly.
Bjork Ostrom: At this point, now you are officially in business, but it seems like probably the kind of thing where the IRS, whoever they are, often they’re just in IRS land. The kind of things where if they were to come to you and say, “Prove to us that this is a business,” you’d be able to bring to them substantial things where you say, “Well, at this point, here’s when I opened a business account and at this point, here’s when I started to collect,” even if it was just a little bit, some money from ads or maybe doing affiliate marketing on your site and you are able to present to them the things that show them that you are intentionally trying to be a business as opposed to just trying to take tax deductions.
Cathy Derus: Yes. Yes. I will say the IRS does have … You know, they do say they presume an activity is carried on for profit. In other words, the business, if it makes a profit during at least three of the last five tax years, including the current year. So you could have a net loss having more expenses than money you actually bring in for two years.
Bjork Ostrom: Got it. So point being that, at some point, if you have losses along the way, let’s say you have five years of business losses. Then the IRS is probably going to take that and say, “We’re going to follow up with you and have a conversation around this because it doesn’t look like this is actually a business. It’s probably more of a hobby because you’re not creating a profit and you’re actually operating at a loss.” So, one of the questions I would have that I’d just be curious to know, so there are big companies like Amazon, right? They talk about how these companies always operate at a loss. Like they’re not making money. Is that different than a smaller blog or a brick and mortar business that would operate out of, you know, Saint Paul, Minnesota?
Cathy Derus: Well, I mean, Amazon and bigger corporations, they have bigger things going on that, you know, don’t necessarily impact a smaller blog.
Bjork Ostrom: Sure.
Cathy Derus: There can be sweeping changes in accounting guidance that, you know, they have to go back and restate certain years and just the way that certain things are kind of accounted for that aren’t the same as blog that’s reporting their income on a cash basis, you know? Money coming in, money going out as opposed to advertising expenses, and accruing things. Well beyond the scope of a food blog.
Bjork Ostrom: So another question that I have related to … So let’s say somebody’s just starting out. One of the first things that they can do is they can go to their bank and they can set up a bank account specifically for their business. If you use credit cards, you can set up a credit card as well, and that can be everything that you purchase then will go on that business debit card, or write a check, or it would go on that credit card. So that’s the first step. You have that really clean line between personal and your business account.
Now, probably what would have to happen, just to talk really specific here. You’ll probably have to like fund that account with some personal money, right? So let’s say that you have $2,000 saved up to start your blog. You would take that $2,000 and transfer it into your newly created business savings or checking account. Then you would use that as kind of the starting funds for your business. Is that how you’d suggest that people start out?
Cathy Derus: Yeas. Yes.
Bjork Ostrom: Okay.
Cathy Derus: If you’re not bringing in money that first day, you kind of have to have that capital infusion transferring some of that money. So, when you see that money coming in that’s not income, that’s just equity or capital in the business. So you don’t have to count it as income.
Bjork Ostrom: It’s almost like the business is being funded by you, the owner of the business, and then hopefully, and you talked about this a little bit and how great this was to look at your bank account and say, “I can see now that the work that I’m doing is tied to the growth of my business and what a great thing that is to be able to look and to see that connected.”
So what does that look like when it comes from your business account to your personal account? At some pint, that transition has to happen, so are you paying yourself just whenever you need money. You do a transfer over like, “You know, I have a $1,000 mortgage and so once a month I transfer $1,000 over.” As a business, how do you pay yourself into your personal account?
Cathy Derus: Well, there are some different ways that you can do that and let’s just say just from kind of like round numbers, you want to give yourself 5% of every affiliate income, you know, check that you receive. Any sort of, you know, sponsored post that you do. Any sort of freelance writing invoice, that gets paid.
So, you know, you could go through and kind of like transfer that over and now we’re getting into kind of the specifics of, you know, depending on how you’re taxed, it’ll kind of impact different things. It’s always good to just kind of get in that regular habit. Like give yourself kind of that regular salary. So be it the 5% or 10%, whatever, of that revenue that you’re bringing in. $250 every two weeks. Whatever it is that kind of makes sense.
Bjork Ostrom: Sure.
Cathy Derus: At the same time, obviously you need money for your own personal expenses, but then the IRS wants their cut of everything as well. So, you know, we’re talking right now that June 8th quarterly estimated taxes, you know, for Q2 are due on June 15th. You know, this airs after that. Then the next one will be due in I believe September 15th. So you want to make sure that you’re setting money aside for the IRS as well.
Bjork Ostrom: Got it. So, can you explain that idea? I’ll say this, just because I think it’d be interesting for people to hear a little bit about, for our story, what we went through in terms of how we set things up, and what it was like for us with Pinch of Yum and for Food Blogger Pro. So those are two different businesses, Food Blogger Pro and Pinch of Yum. I think I’ve talked about this at a high level on the podcast before, but when we were in the Philippines, which was 2012.
It was a while ago. We were like, “Okay. We need to set these up as businesses.” We hadn’t done that before so we hadn’t gone through the process of establishing those businesses. Like you said, it would have made a lot of sense really early on for use to do that, but it wasn’t something that we did. So in 2012, we set them up officially as businesses and we registered them as an LLC in the state of Minnesota.
At that point, what we did is we separated everything out. We had their own accounts and so all the business income, instead of going into our personal account, it went into a business account. What we’d do is we would withdraw money from that account or take distributions whenever we needed that income. That worked out fine, but at some point we met with our CPA and she said, “It might make sense for you to be an S-Corp.” You can correct me if I’m wrong on this or if I’m off on this, but it’s an LLC taxed as an S-Corp.
This is going to be kind of in the clouds a little bit for some people, but the idea is when you’re just in the LLC, everything that you have is taxed at a level where you’re also getting … What would that be?
Cathy Derus: Well, there’s the self-employment tax. So, you know, if you’re just a normal sole proprietor, you have Bjork’s Butter blog or something, you just have the blog and, you know, you’re going to be taxed at it’s roughly 15%. To include all the Social Security and Medicare and then plus normal income taxes based off of your tax bracket.
Then by default, an LLC is either taxed as a sole proprietor if it’s one person, or a partnership, or if there are multiple people and it’s still subject to those self-employment taxes. If you’re an LLC and you exceed a certain income level, there are a whole bunch of different considerations depending on if you have another job, your spouse works, what state you’re located in. It might be advantageous to be an LLC taxed as an S-Corp.
Bjork Ostrom: Sure.
Cathy Derus: So, from there, you then pay yourself a reasonable salary, and only that salary is taxed at that higher rate. You know, the payroll tax is the Medicare, Social Security, and whatnot. You can have your income taxes withheld and then anything left after that is only taxed at the quote unquote regular income tax rate, you know, based off of your tax bracket. So there are some savings on that self-employment tax. But speak your tax advisor.
Bjork Ostrom: Yeah. For sure. I wanted to point that out because it’s probably not right off the bat, but as somebody’s blog or as their business starts to grow, there’ll probably be a time where it might make sense for them to have that conversation. With all of this stuff, again, it can be really in the clouds, and it can be really, depending on who you are and your personality, overwhelming.
One of the things that I think is important to point out is this reality that with taxes, like that’s the biggest expense that you have in your life, week to week, year to year, so it’s really important that you understand those, adhere to all of the rules and the regulations, but definitely do so intentionally so you’re playing by the rules and also being intentional to not pay more than you need to.
So there’s all sorts of different ways that that happens, but probably the easiest way is to just be really intentional with how you’re doing it and to keep track of things. Keep track of your books and accounting.
Cathy Derus: Exactly.
Bjork Ostrom: One other thing that I wanted to bring up before we got too far away from it, and this relates a little bit to drawing that hard line and saying, “This is my business and this is my personal,” is this idea of an employer identification number versus a Social Security number. So can you explain the difference between those two things and why it’s important as a business to have an employer identification number or an EIN?
Cathy Derus: Sure. Well, in order… we keep going back to the… have that separate business account. You’re going to need that EIN to open a business account. Then later as you’re growing, if you are hiring an employee and having payroll, you’re going to need that EIN to then remit those payroll taxes.
So it’s something free. You can just go to the IRS website and you can just apply for that and, you know, just get your own special EIN that you can then, you know, open up your business accounts. You can have 1099’s made out to you and the business as opposed to the Social Security number. That’s your own individual number.
You know, if you’re a sole proprietor, yeah, you can still, you know, run the business under your name using your Social Security number. You know, that’s perfectly fine. That’s legitimate. In a way, there is that kind of extra level of security by not passing your Social Security number out to just anyone.
Bjork Ostrom: That’s the thing that I love about setting up the EIN. It was such a relief for us when we did that because we would send out these PDFs or W–9’s or things like that to businesses. It was really nice when I didn’t feel like I had to send over a document with my Social Security number on it.
Cathy Derus: Right.
Bjork Ostrom: It was just this EIN, which is essentially the same thing, but for the business. It’s like a Social Security number for your business. So another important takeaway if you haven’t set up an EIN for your business, it’d be really good to do that. Especially as you start sending documents to other people you don’t have to have your Social Security number floating around there as much.
Cathy Derus: Right. Then, I mean, that’s another step and it’s, you know, another item that you can prove that you’re running a legitimate business.
Bjork Ostrom: Sure, and tying into what we were talking about before, the idea that, “Is this a business or a hobby?” Part of it is “Is it making a profit?” but another part of it is, “Have you been intentional to set this up so it operates as a business as opposed to something that just looks like a hobby?” Another way I would assume that would happen is to have really intentional bookkeeping.
So, for somebody that’s starting out, how do they go about tracking all of this stuff? Let’s say they’re not familiar with something like QuickBooks and/or they just hate the idea of having to go into QuickBooks every day. What are the different options that people can look at or maybe if they’re starting out with the different paths, they can take to make sure that they’re doing what they need to do, but more than they need to do?
Cathy Derus: Well, I mean, one thing I imagine that you can do is just get a spreadsheet, get a piece of paper and, at the end of the month, you can pull up your bank statements. Be it, you know, the actual checking account, PayPal, Stripes, Square. You know, any way that you’re kind of receiving money. Any way that that money is leaving to pay for expenses. You know, to pull all the statements together and just go line by line and list out, you know, the different expenses that you have.
What’s the vendor? What’s the category? What’s the amount? Is this something that happens every month? Is this a recurring software subscription? Is this a one-time thing? So then, you can get an understanding of your different expenses. What’s kind of happening over time. You can see some trends like, “Oh, now I know every fall I go to this conference, so there’s travel involved. There’s the hotel. Maybe I should set some additional money aside every month so I’m not scrambling and paying this big credit card bill once the conference is over.”
So yeah, you can just start off with something like that. So really I do like QuickBooks Online. It just links up to your accounts and, you know, there’s a nice algorithm. They suggest the categories over time. Over time it is just kind of like, “Okay. This looks right. This looks right. Now I need to change this. Let’s just fix up these transactions.” I don’t know. Maybe that’s just because I’ve been living in that world, but I like the fact that QuickBooks is automated.
Bjork Ostrom: Yeah. For sure.
Cathy Derus: Some people like the awareness of doing it manually. I like the efficiency.
Bjork Ostrom: Yup. That’s what we use. So we have QuickBooks Online set up and I would be in the category of really valuing bookkeeping and accounting, but not being really excited about doing it myself. So one of the things that we did after we set up Pinch of Yum and Food Blogger Pro businesses was we went through a couple of different phases of this kind of trying to figure out what the best system was, but we ended up doing it where we have somebody here that’s in the Twin Cities.
Somebody local and what I did was I said that, “I know that this is something I’m not going to be able to do,” so at this point we had some money within the business that we could hire for, so it wasn’t a huge hire by any means, but we said we could pay $200 a month to have somebody that comes in and reconciles our books every month. So what we did is we actually gave, and this is somebody we had worked with for a while, so we were comfortable with him.
We gave them read-only access to our bank account. We gave them read-only access to a place where we send all of our receipts. So we use a company called Shoebox. We send in digital receipts and they scan them all in. Then we gave them obviously access to QuickBooks. That’s been a really good thing for us. So the system is, once a month they’ll email and say, “Hey. We reconciled the books. Do you want to go in and have a look?” I’ll go in and I’ll take a look and actually look at the profit and loss statement and I scan through that.
Cathy Derus: That’s usually what clients just like to look at.
Bjork Ostrom: Yup. So I scan through and I say, “Okay, maybe there’s something that was classified as affiliate income that should have been advertising income.” We’ll make little adjustments like that, but then at the end of the month we’ll say, “Okay. Yup. This looks good.” Once everything, you know, is reviewed, then we’re able to come back to the table and we can say, “We can close out this month.” So that’s been a really good thing for me.
Again, obviously it depends on your personality and if you like doing that or not and it also depends on where you’re at with your business. When you’re first starting out, you have to do everything. You’re the CPA, you’re the accountant, you’re the janitor, you’re the editor. You’re everything.
Cathy Derus: You’re not going to learn it all.
Bjork Ostrom: Yeah, but it was a really important thing for us to get somebody in to handle that right away because it’s not something that I know that we’re excited about.
Cathy Derus: Right.
Bjork Ostrom: One of the things that we changed that we started doing this year is at the end of every month, we calculate how much each business made and then what the estimated taxes are on that profit. I take that money and I put it into a tax savings account to pay for quarterly taxes.
Cathy Derus: I love it.
Bjork Ostrom: Okay. Good. For those that aren’t familiar with quarterly taxes, can you talk about what those are? It’s a little bit different because usually people think of taxes as April, you know, 15th, or whatever that date ends up being. “That’s when I pay my taxes or when I get a big refund,” but when you are running your business, it usually starts to change where you have these quarterly payments. What are those and why is that different for businesses?
Cathy Derus: Sure. You know, to start off, you know, I have people that kind of ask me. They’re like, “Do I have to pay quarterly taxes?” Well, you don’t have to, but I strongly recommend it so that you’re not scrambling to, you know, pull out those funds at the end of the year. You’re not tempted to spend the money that really should go to the IRS during the year. Then also you’re going to avoid, you know, a late payment penalty.
So the IRS, you know, they want their money throughout the year because if you are just self-employed, you’re not having money withheld from your paycheck like a normal corporate job. You know, the IRS is getting their cut every quarter, every two weeks. You know, whatever cycle the business is on. So when you’re self-employed, you need to, you know, it’s always a good policy to set that money aside.
Do it to have it in a separate bank account and then go through and kind of calculate what’s your business net income. So the revenue. The money that you brought in minus expenses. So any money that you paid for your software, purchasing food for recipe development, different things. So that leaves you with your net income.
Then, of that, a rough estimate without knowing your personal tax situation is usually multiply that by at least 25%. So that covers that, you know, 15% of self-employment taxes and then a starting point as the 10% of the federal marginal income tax rate. Then, you know, you might have to pay an additional 5 to 10% for state or city income taxes.
Bjork Ostrom: Obviously that there’s a huge … Like you said, it’s like kind of a starting point. At least 25%. Variations also depending on like are you in a state that has a high tax. Minnesota has traditionally a very high state income tax, but then there’s other states like Texas or Florida that don’t have any state income tax, so that wouldn’t have to be factored in.
Cathy Derus: Right.
Bjork Ostrom: The federal is obviously across the board, but it’s another interesting little nuance. Like you said, if you had a job before, kind of a traditional W–2 job, you know that the taxes are taken out so you don’t really feel that and sometimes they’re even putting in so much that you get that check at the end of the year or in April, which technically that means like you’re kind of giving the IRS a little loan for the year.
Cathy Derus: Right.
Bjork Ostrom: When you have a business, it changes a lot. Where suddenly you are having to keep track of that. You’re having to put those payments aside and this is the first year we’ve done it, but we’ve found it super helpful to just calculate that each month and put that aside because, like you said, it’s never a fun thing to get to the end of the year and make those calculations, and in the very worst case scenario, you would have maybe spent that money that should have been reserved for taxes. In a normal scenario maybe you just have a big payment that you go out, but it just doesn’t feel as good as if you’ve been intentional to track that.
Cathy Derus: Exactly.
Bjork Ostrom: Great. I think that’s another important takeaway that coincides with those separate accounts is like, have a separate business account and then within your business account, you can have those additional separate accounts. Maybe checking, a regular savings, and then maybe a tax savings account where you can put that stuff away.
Cathy Derus: Then there will be people in addition to just the income and then the taxes, you know, they will have a separate account set up for like profit. Just extra money set aside just for additional ways to, you know, to celebrate you being a business owner and being successful.
Bjork Ostrom: Yeah. There’s a great book that I read and I didn’t by any means implement everything that he talked about in it, but he has this book called Profit First.
Cathy Derus: Yes, I just finished reading the most recent version.
Bjork Ostrom: Oh, you did. Okay. What were your thoughts on it?
Cathy Derus: You know, maybe this is just because like I’m a saver by nature and I kind of have that self-discipline, I was a little overwhelmed and I don’t think I personally would go through the process of opening, you know, five different accounts at one bank. Two separate accounts at another bank. You know, some of those people, they need to have, you know, that framework in place so that they’re not tempted to go and spend their tax money.
You know, at least for my business, for accounting, it’s a pretty lean startup. It doesn’t take a whole lot of expenses to start an accounting firm. A virtual one, because you know, I just work from home. I don’t have an office space or anything. You know, I’m mostly paying for tech. Yeah, sure. I have my LLC as well and, you know, different continuing education requirements and licenses. There’s that and insurance that goes along with it. You know, I’m not spending a lot of money because it’s just me. So, you know, I don’t have to worry as much about like keeping my operating expenses low and having a separate bucket for that.
Bjork Ostrom: Yeah.
Cathy Derus: I don’t know. What do you think about it?
Bjork Ostrom: Yeah, kind of the same thing. Actually from that book is when I decided or had the idea, or was motivated to open up this separate tax savings account.
Cathy Derus: I like that. I like that.
Bjork Ostrom: It’s like a 2% completion of what he recommends. He has a much more in-depth recommendation for what you should do, but I think it informed how we operate and made it better, so it was a huge takeaway for me. So I really liked it and I really liked the idea of operating a business from the standpoint of taking the profit first from the business. So for those that are interested in this kind of stuff, I would encourage you to check that out. The other book that I read within the year that I really enjoyed was by an author named Greg Crabtree and it’s called Simple Numbers, Straight Talk, Big Profits or something like that.
Cathy Derus: Oh, I haven’t heard of that.
Bjork Ostrom: We can link to that in the show notes as well, but it was another really good business book relating to kind of the books in accounting and building a sustainable business. That’s a recommendation for people if they’re interested in it.
Cathy Derus: One other thing I did like about profit first was it did go through and show the stodgy old accounting method where it’s, you know, revenue minus expenses is profit. His methodology is moreso have your revenue, take out your profit first. You know, how much you’re going to set aside, and then that’s what you’re left over with to pay for expenses. So I did like that where, once again, you’re operating as a business. You’re trying to be profitable. You’re not spending money just for the sake of spending money.
Bjork Ostrom: Right. Yup. So, Cathy, we’re coming to the end here, but one of the questions I love to ask people is kind of the idea of starting out. For you I’m curious to know speaking specifically to somebody that’s starting a blog with the intention of it being a business. Let’s say they’re in the beginning stages or maybe in the first couple of years. What would your recommendations be for those people knowing that you kind of probably have an idea of the average of where people are at and can then advise them how to be above average in running their business and doing their accounting?
Cathy Derus: Sure. Well, as I was saying, you know, the first thing is having your separation of church and state. Make sure that you have your separate business accounts set up. The, you know, the next step is, you know, making sure that you have a system in place to track your revenue and track your expenses. Be that, you know, just a spreadsheet or a paper, you know, notebook. Something that you’re tracking things so that you have that awareness and that it also makes tax prep a whole lot easier.
You know, for you if you’re just doing it in Turbo Tax or if you’re outsourcing that to somebody else. It makes everybody’s life a whole lot easier. Yeah, you can step it up and use something like a QuickBooks Online, QuickBooks Self-Employed, you know, just so that you can stay on top of it. Don’t put it off until the end of the year.
Keep track of everything so, you know, if something goes missing, a bank fee blows up, you’re not scrambling on April 10th to make sure it’s done. Then, yeah, you know, kind of be intentional with your hours that you’re putting in. You know, I know for me personally there’s some experimentation over time.
You know, be it with pricing, be it with the different services that I’m offering for bloggers or, you know, online business owners that might be kind of like tweaking the different services that they’re offering. Diversifying some of the revenue sources. Not just like trying to make money however, you know? I’m going to do all the … Yes, you want to kind of like diversify, but don’t like spread yourself too thin.
Bjork Ostrom: Sure.
Cathy Derus: Does that kind of make sense?
Bjork Ostrom: Yeah.
Cathy Derus: Kind of in that quality over quantity kind of way.
Bjork Ostrom: Yup. That makes sense for sure.
Cathy Derus: Niche it down I guess even.
Bjork Ostrom: Say it again?
Cathy Derus: You know, have that niche that you’re in as well so that you can become an expert and then you can really serve those well and, you know, it does demand a higher price.
Bjork Ostrom: Yeah. We talk a lot about this idea of having a niche and there’s a podcast that I listen to by Gimlet does all of these different podcasts, but they have one called Open For Business. It’s actually like a sponsored podcast with Ebay, but the guy talks about this concept of riches and niches. One of the things I think is important though is you can start out in a niche and it’s always possible later on to niche up, right?
So you don’t have to forever sell books if you’re Amazon, but it’s always nice to be able to start small and then grow from there. So I think that’s a important and good takeaway. So I’m sure there’ll be some people that say, “This sounds awesome. I want to have a business that’s run super well. I want to have clean books. I don’t want tax time to be crazy and stressful. I don’t necessarily want to do it myself.” So how can people connect with you, Cathy, to work with you in the different services that you have?
Cathy Derus: Yeah. So, you know, obviously we’ve been talking about taxes a lot, so Brightwater Accounting, that offers the tax prep for individuals and small business owners. I also offer for those S-Corps that are a little bit more involved, I do have this S-Corp business advisory public service package where it includes the tax prep, but it also includes kind of being a CPA on demand.
You know, kind of like that outsource chief financial officer. It has started off with, you know, more that S-Corp because those are a little bit more complex, but somebody who wants to have, you know, kind of that ongoing relationship throughout the year, I’d be happy to, you know, work with them as well just to make sure that you’re working on growing a profitable business.
Bjork Ostrom: Awesome.
Cathy Derus: I also offer just like a quick start session where … a questionnaire ahead of time about an hour and a half we kind of like dig into one or two of like your big topics and then I send you some recommendations after that.
Bjork Ostrom: Cool. We’ll be sure to link to both your sites in the show notes so people can check those out if they want to. If anybody’s interested, you can just go to Food Blogger Pro.com and there’s a little blog section and that’s where we put all the show notes there so they can check those out. Yeah, Cathy, thanks so much for coming on the podcast today. Really fun to talk to you. Like I said when we were beginning, maybe nothing that most people would be excited about, but super super important, so thanks for taking the time to come on today.
Cathy Derus: Thanks again for having me.
Bjork Ostrom: That’s a wrap for this episode. Cathy, thank you for coming on and sharing all about taxes and accounting, and all of that good stuff. Like I said a few times throughout this podcast, really critically important to understand that if you’re going to run an efficient healthy business. Even if you’re somebody that doesn’t necessarily enjoy that, and I would consider myself somebody like that.
It’s not like I love jumping into QuickBooks, but even if you’re somebody that doesn’t enjoy it, it’s important that you put systems in place so you have that stuff set up so your business can thrive on its own and you don’t have to have that stress and anxiety around the bookkeeping and knowing that your expenses and your revenue, all that stuff is being tracked.
So, what does that look like moving forward? I would encourage you to take steps if you have any action items that you got from this podcast, I would encourage you to jot those down and to move forward on them. One of the things that I think is so true in this world is that we often underestimate what we can do in an hour.
So maybe that thing that you need to do is email that friend of yours that’s a CPA or search for somebody in your hometown that could help you to move forward on this and that’ll probably only take 15 minutes or half an hour, so I would encourage you to do that if you haven’t yet gone through and set up that process.
Thanks for tuning into the podcast. We really appreciate you guys and that is a wrap for this week. We will see you back here same time, same place in exactly seven days. Until then, make it a great week. Thanks, guys.
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