Listen to this episode of The Food Blogger Pro Podcast using the player above or check it out on Apple Podcasts, Google Podcasts, or Spotify.
This episode is sponsored by Clariti.
Welcome to episode 397 of The Food Blogger Pro Podcast! This week on the podcast, Bjork interviews Amy Northard from Amy Northard, CPA about accounting for food creators.
Last week on the podcast, Bjork chatted with Rosie Alyea from Sweetapolita. To go back and listen to that episode, click here.
Demystifying Finances and Taxes
Taxes and bookkeeping can be a major source of anxiety for anyone, but especially anyone who is self-employed… like many food creators! It can be difficult to know where to get started with managing your business finances, or how you might be able to improve your accounting processes.
Luckily, that’s what Bjork is chatting with Amy Northard about in today’s podcast episode! Amy is a CPA and Partner at Amy Northard, CPA (“The Accountants for Creatives”) and is an expert at setting up bookkeeping systems and navigating taxes for business owners in the creative space.
In this episode, you’ll hear more about when and how to start bookkeeping for your business, the best ways to prepare for tax season, when you might want to outsource your accounting needs, and more.
In this episode, you’ll learn:
- How and why Amy found her niche and started her accounting firm for creatives
- The importance of separating personal and business transactions
- How to reconcile your business expenses
- Whether groceries can be considered a business expense (and why it matters)
- What the IRS audit process would look like for a food blogger
- Tips for storing and organizing your business receipts
- Amy’s recommendations for bookkeeping software
- Deductions that creatives might overlook
- The differences between sole proprietor, LLC, and S Corp, and how to choose which is the right fit for you
- How to manage payroll for your business
- When you should start to do bookkeeping for your business
- When you might want to consider outsourcing your bookkeeping or taxes
- How to manage losses when you’re starting your business
- How to be intentional about taxes as a more established food creator
- Strategies for effective bookkeeping to make tax season easier
- Amy Northard, CPA
- Follow Amy on Instagram and Facebook
- Join the Food Blogger Pro Podcast Facebook Group
About This Week’s Sponsor
We’re excited to announce that this week’s episode is sponsored by our sister site, Clariti!
With Clariti, you can easily organize your blog content for maximum growth. Create campaigns to add alt text to your posts, fix broken images, remove any broken links, and more, all within the Clariti app.
Sign up for the Clariti waitlist today to receive:
- Access to their limited-time $45 Forever pricing
- 50% off your first month
- Optimization ideas for your site content
- An invitation to join their exclusive Slack community
- And more!
If you have any comments, questions, or suggestions for interviews, be sure to email them to [email protected].
Transcript (click to expand):
Bjork Ostrom: This episode is sponsored by Clariti, that’s C-L-A-R-I-T-I .com. And I’m going to give you a really specific example of how you can use Clariti if you sign up today. And that is poster page specific tracking of changes that you’re making. And you can use the notes area within Clariti to make a note anytime that you make a change. An example of when you’d want to do this, let’s say that you’re switching over some of your YouTube videos to be AdThrive or Mediavine video players. You want to make sure that you’re tracking to see when you look back three months later, the change or the impact that had.
And personally, what we’ve noticed as we’ve worked on content is like you forget. If you don’t have a system, if you’re not making a note of that somewhere, you’ll forget. And so within Clariti, there’s the ability to leave a note anytime that you’re making a change or improvement on a piece of content to allow you to go back and see how that change impacted things. There’s lots of other ways that you can use Clariti, but I thought it’d be helpful just to give a really specific example. If you want to see what those other ways are, you can go to Clariti.com/food to get 50% off your first month. Again, that’s C-L-A-R-I-T-I .com/food to get 50% off of your first month. You can start taking notes on the changes you’re making and explore all the other features. Thanks to Clariti for sponsoring this episode.
Alexa Peduzzi: Hey, hi. Hello. This is Alexa and you are listening to the Food Blogger Pro podcast. Today we have a really good episode, and I know I say that all the time, but today it’s a really good one because we’re talking about finances and it’s one of those things that is just, it’s a necessary thing for all food bloggers who have a business side of things who are making money from their sites to worry about. It’s taxes, it’s bookkeeping, it’s expenses, it’s receipts, it’s a bunch of different things. And today, Amy Northford is going to talk all about that. So some of the biggest takeaways from this episode are things like the importance of separating personal and business transactions, tips for storing and organizing your business receipts, what an audit would look like for a food blogger, deductions that creatives might overlook, and so many more. It’s a really good one. We’re really excited for you to dive into this episode. So without any further ado, Bjork, take it away.
Bjork Ostrom: Amy, welcome to the podcast.
Amy Northard: Thanks for having me.
Bjork Ostrom: Yeah, before we hit record, I said this is a topic that I love, and you might not hear that often, but taxes, finance, bookkeeping, that’s a totally fascinating area to me. Part of it is because as a business grows, and even not within business, just like if you have a W–2 job, we don’t think about this often, but one of the biggest expenses in our life is usually taxes. It’s like the money that we’re paying on the money that we’re making or in other areas, whether that be property or income or real estate, whatever it is, we’re paying taxes on those things. So it’s important that we understand it, but not a lot of people do, and especially people getting into this world, this world being creatives. And that’s your focus. You focus on working with creatives and accountant for creatives. So how did you get into that as a niche in a focus?
Amy Northard: Yeah, so it kind of all boils back to my dad in high school was like, you have to take accounting classes. And I was like, dad, I really want to be taking the jewelry making classes.
Bjork Ostrom: Totally.
Amy Northard: This is not what I want to do, but I did it. Then I went to college, had no idea what I wanted to do, so I was like, all right, let’s just do accounting. So traveled the typical path, graduated, worked at a CPA firm, and I hated it a lot.
Bjork Ostrom: What did you not like about it? Just out of curiosity?
Amy Northard: I didn’t like sitting in the cubicle and feeling like I just had to put my time in with my butt in my chair that I would get my work done pretty quickly. And so I would just feel like-
Bjork Ostrom: But you still had to be there, yeah.
Amy Northard: I would just sit there, or if I asked for work, I’d get dumped on. The clients weren’t super exciting to me. It was a lot of doctors and that was kind of their niche. And so during this time I did my CPA exam, passed it, got my license, and I was having this quarter life crisis of I can’t continue doing this for the rest of my life, but also I can’t just throw away this CPA license I worked my butt off for. So I started to look around, see if there were any other jobs that I might like, and nothing really stood out to me.
I interviewed at a few places, just didn’t click. And then I saw that there was a girl doing taxes for bloggers and in college, I had a food blog that I started as my creative outlet. I would post, it was terrible. I don’t think it’s even anywhere anymore, but it was my creative outlet for having to take a canyon classes and that kind of thing. So that opened my eyes to I could do whatever I wanted, focus on any group that I wanted to. So I wasn’t ready to niche down specifically just to bloggers, but creatives in general. I’ve always loved to knit and just do little crafty things on the side. So being able to see the backend of how these businesses are making money, in some cases, quite a bit of money with their craft, I think it was just really eye-opening to me and really awesome to see that the starving artist situation, it can be some people’s cases, but it’s definitely doesn’t have to be the norm for everybody.
Bjork Ostrom: Yeah, you have a really interesting role in that you’re able to see inside these businesses in a way that to some extent, maybe the creatives themselves don’t even realize the numbers and the specifics around it, but when you get into it and you kind of line everything up, it’s like, wow, these businesses are making a significant amount of money. Do you see any commonalities with the clients that you work with that are at a certain level of success? Do you see any patterns or, it’s one of the questions that I’m always interested in for somebody who gets an inside look is like, are you able to understand reasoning behind it or any thoughts around that?
Amy Northard: So I don’t want to take credit for success of any of our clients. However, I did notice with a few that come to mind specifically who are creative, and they came to me and they had personal mixed with business. They were the type of person and, I’m this way with certain things. I don’t want to look at it. It stresses me out. I just don’t want to deal with it. And so they came to me in that kind of a situation. We got everything separated out, cleaned up, and they’re able to get financial reports every month. And I think having that basis seems to be what allows people to say, okay, I’ve got this under control. If I make a bunch of money, I’m not going to be taken to jail by the IRS for some unknown tax thing that I didn’t fill out.
They’ve got it under control and now I can run with the fun part and typically the money making part of the business. But other than that, they’re just very driven people. They really enjoy what they’re doing. And that’s the biggest common thing. I think it’s fun for me to look at some of our clients’ social media accounts and they’re like, okay, this person has maybe 2000 followers, but they’re making six figures and then this person has 30,000 followers and they might have a loss. So it’s like social media definitely doesn’t an indicator, but it’s interesting to look at those numbers as well.
Bjork Ostrom: In those cases, is it somebody’s marketing and product that that’s driving their success or is it the traffic to their blog? What is, in those scenarios if somebody is-
Amy Northard: I think it’s their focus. So the one that comes into mind specifically happens to be a food blogger and social media isn’t her focus, it’s traffic to her blog, SEO and that type of stuff. And she’s been at it for a long time. She has a Pinterest manager. She is focusing on that end, whereas unless you have a large following on social media, you’re not going to get a ton of clicks, the same volume for the amount of work that you put into that.
Bjork Ostrom: Yeah, that makes sense. One thing that’s interesting is I’ve gotten into different worlds, communities is maybe a better way to say it, is, and this is just a good reminder for anybody listening, you don’t have to build a huge social following. In some ways you don’t even have to go about it in the way that you see other people going about it. Because I’ve seen people who are really good at the business side or maybe marketing side of things and their creativity comes from thinking about how to work with people in a certain way, to bring on writers, to bring somebody on who manages Pinterest really well. And part of what’s exciting for me to hear you talk about is the opportunity to remind people around this idea of who not how, which is the name of a business book, but essentially what you’d get out of it is the title.
There’s a lot more than that, but the main concept is you don’t have to necessarily figure out how to do everything. You just have to figure out who’s going to be able to work with you and do it really well. The example that you gave of somebody coming to you and being like, I want to do this. Well, I want to figure it out. I want to tighten up my system here, but I don’t want to be the one that does it. Can I work with you to figure that out. And one of the things that you talked about was you separated things out and you cleaned things up. What does that mean when you talk about separating things out and cleaning things up?
Amy Northard: Yeah. So separating things out. A lot of times when people start things and it feels like a hobby as they’re starting it, they will just have affiliate payments deposited to their personal checking account, or they’ll go to the grocery store and buy supplies and pay for it with their personal credit card and potentially combine it with personal groceries. So it’s things like that where it’s business combined with personal.
So that’s our first step is looking at what is coming into your personal account and then systematically going through line by line and saying, okay, update your payment information to your business account for this deposit. And then same thing with any recurring expenses and then just making it really important to the client that they need to use their business card for any random transactions that aren’t auto paid. So that’s how we separate. And then as far as cleaning things up, it’s more of a bookkeeping terminology. So when we get into the bookkeeping, we do a process called reconciliation, which basically means we’re matching up what shows up in the bookkeeping system to what is showing up on their bank statement, and we want to make sure they match exactly down to the penny. So that’s kind of like our cleanup process is to make sure all of that’s matching because that tells us we can rely on what the reports are going to be telling us.
Bjork Ostrom: So the thing that I love about that is it solves a problem forever by solving it once. It’s not a problem that needs to be re-solved. And the way that you solve it initially is you set up a business bank account and then you have two cards. You have a personal card and you have a business card. And anytime you do a business purchase, you use your business card. Anytime you do a personal purchase, you use your personal card. That has solved the system of separating it out. So all the business transactions happen in the business account, all your personal transactions happen in the personal account. How about in the scenarios where you come up against something and you’re like, is this business? And you had mentioned groceries, and for people in this space, that would be a big question mark. It’s a business expense because it’s a recipe that I’m testing, but also then my family’s going to be eating the meal tonight and we probably would have it anyways. So how do you know in those situations if something is a business expense or a personal expense?
Amy Northard: Yeah, it’s obviously tough. If you could write off everything that you posted online, everyone would become a food blogger. We’d all be taking photos of our recipes and putting the information in there. And obviously it’s a lot more complicated than that, but that kind of boils it down to the basics. The IRS says, no way do we want everyone writing off all of your food and that kind of thing. So they have said that it needs to obviously be for a business purpose.
And it’s still very much a gray area because if you’re recipe testing and your family eats it afterwards, it could be seen as that same situation where you were just cooking something and you said it was for business. So our kind of philosophy as a firm is that anything that is done for a partnership, so if you are sponsored by a certain pasta brand and they come to you and they want you to develop a recipe and they make a blog post and anything that goes along with it, then you have to buy those supplies, you have to purchase those items in order to fulfill that brand agreement.
That one’s a no-brainer, but just content for the content’s sake, that one we typically don’t deduct for our clients. And that goes,, we work with fashion bloggers who are in the same situation, home design bloggers. That’s just been kind of our overall standpoint to make it really clear this is black and white, how you absolutely know that it can be, and then the rest of it is kind of situation by situation.
Bjork Ostrom: Sure. It’s interesting, in our case, we have a office and so similar to a business card and personal card, we have a business location and a personal location. So it helps to know, okay, anytime that we’re buying food that we’re bringing to the office to develop a recipe, it provides a pretty clear kind of separation between the two. But what is even the reason why you’d be nervous about making the wrong decision? So let’s say you don’t, in the last three years, everything that you’ve bought, you’ve expensed in a really extreme scenario, it’s probably not the right way to do it, but you’ve done it. What is the risk there?
Amy Northard: So the risk is the IRS could send you a letter. They typically will not come to you in person, it’s just too expensive for them. But they’ll typically send a letter saying, we want to know the details, we want to see line by line itemization and receipts for this category of expenses. And that kind of kicks off what they call a paper audit. From there, they may have a video call or a phone call with you. Typically they do try to keep it to paper so it’s documented, but they’re basically going to examine those expenses. And so if you had $30,000 of food listed as a line item on your return, certain things like that can kick up a red flag, which is what would initiate a paper audit. And then from there they may ask you what was the business purpose? And you may have to go through each one and say, “Okay, this was for this brand partnership or this was recipe testing.”
So it kind of depends on whoever’s auditing you. If they determine that there are expenses that should not have been expensed, they will basically remove those from your tax return. The tax that they offset will be added back to your return, and then you’ll have to pay interest in penalties essentially. So if it was several years back, typically it’s like a three year audit period. If they find that you have massively been trying to evade taxes, that opens it up to a longer time period. But that’s basically the end result. The worst case scenario is they say, sure, these can’t be deducted. Now you owe all this tax and penalties
Bjork Ostrom: And in one category it’s play by the rules. That’s right. Table stakes. It’s like what you want to do. You don’t want to try and cheat the system, but if you are in a situation where you look back and you’re like, oh, shoot, I did this but I didn’t know that I was doing it wrong. Maybe food as an example or other categories that we might talk about, I think it’s helpful to have some of that context. The risk, then, what I hear you saying is that number one, it would, there’d be an audit, which just would be a pain to go through. Number two in that audit, if there were expenses that you claimed that the IRS deemed to be not actual expenses, business expenses, they would add those back in. So you’d have to pay the tax that was due on that. So you couldn’t have written it off plus interest because the IRS is saying, Hey, we should have had this money, it was, was owed to us, if we would’ve had it. It’s kind of like a loan almost in that way.
So one of the things that seems like is important as you talked about it is documentation not only to save your receipts, which I’d be interested if you have advice for recommendations on that, but also in situations where it’s not clear maybe what the recipe was or what the purpose was, to also have some notes around what that is. Because I would imagine, let’s say it’s two years down the line, three years down the line, you look back and you’re like, I have no idea what this is for. So do you have systems that you’d recommend that creators can use to make sure they’re documenting things well?
Amy Northard: Yeah. So the thing with receipts is that I think there’s an old misconception that they have to be in paper form, you have to print all your email receipts, keep them in shoe boxes. And the nice thing is the IRS says, we can accept digital copies because realistically, if you have a receipt, it sits in your car for a month, all that information on there just gets washed out. So they’d rather have you scan it and organized.
And I always tell our clients, don’t go through any extra work than you need to at this point. Save that extra work if you get called up for an audit, but save it in a manageable way. So we have, I recommend having a Dropbox folder and you have that app on your phone, so if you ever have a paper receipt, I have one on my desk that I need to scan in, I’ll take a picture of it, I’ll label it with the date and the company name or the restaurant name or whatever it is, and save it to that folder. So then if I do ever need to go back and get those receipts, I can just search by the date and just pull them all and deal with it that way. You can’t-
Bjork Ostrom: The point being don’t be super meticulous in organization because it’s probably the risk reward of that, there’s the risk that you spend a lot of time doing something you don’t need to do, but you do want to make sure that they’re all in one place where you can easily find them and access them.
Amy Northard: Yeah, I don’t know the stats for audit rates, but they’re very low. So the chance of getting audited is already low and then if you’re doing things well and by the book, then it’s even lower. So just make sure you have a system for that. And then the other thing I was going to mention is bank statements. I think a lot of people think they can just rely on bank statements and don’t have to deal with receipts at all, and you want to keep copies of those, but that can’t be your only documentation.
Bjork Ostrom: Got it. As a real quick note, one of the services we use is actually, you mentioned Shobox, it’s a service called Shoboxed.
Amy Northard: Oh yeah.
Bjork Ostrom: Yep. And so we send it to them, and one of the things that’s nice is I don’t know how they do it’s probably some version of AI machine learning kind of thing where they scan it in and then we will populate it with the date and the price. And so then we also give our accountant access to that. So if they ever need to look anything up, they can just go in and find what that is. But also I’ve also heard of people using, like you said, Dropbox or even creating an email account and they email the receipts to that email account. So those are there and then using Gmail to kind of search through it. So that’s great. This is maybe a quick one, but one of them I’m curious about, do you have a recommendation for software tool for people to use from a bookkeeping perspective?
Amy Northard: So our firm mainly uses QuickBooks, so that would probably be at the top of my list. Xero is another very popular bookkeeping software. And then a lot of people, especially if they’re just starting out, aren’t ready to invest in something that’s going to have a monthly fee. So Wave is another one. And I believe all of those have mileage tracking apps within them. I think they also all have some form of receipt tracking, so you can send an email to a certain email address and it will pull it into the program when you log in and you can match it with expenses. So they all have a lot of neat features.
Bjork Ostrom: Cool. One of the things you mentioned was mileage. We also talked about groceries, other deductions that would be worth mentioning that maybe creatives don’t think about that they can use as a business expense?
Amy Northard: I think home office is one, I think everyone probably knows about it, but how it works seems to be kind of up in the air for a lot of people. So you don’t have to have a room with four walls that is your home office in order to take it, you can have a space in your basement. But the key is it has to be regularly and exclusively used for business. So you would have to measure out the square footage of what your office is taking up if it doesn’t have the four walls. And then on the other side of that can’t, since your kitchen in your home is not exclusively used for business and probably used to make meals for yourself or family, that square footage can be written off if you had a-
Bjork Ostrom: You said?
Amy Northard: Can not. Yeah. If you have a studio kitchen or like you said, an office space, obviously that would be able to, but some people bring their laptop to the kitchen table. Those shared spaces can’t be included in that home office space. But one of the fun things that you can write off with that is if you have a housekeeper or you have those types of expenses that benefit the whole home, you don’t have to just stick to rent and utilities. You can kind of think outside of that as to what expenses are benefiting the whole home.
Bjork Ostrom: As long as you have a space that’s exclusively used as an office, a well-defined area. So your basement example, I could almost imagine if you have a spot in your basement, you could take a rug, roll that rug out, and that’s, even though there’s not walls, you use that as the defined area of like, “Hey, this is my office and we’re not going to use it as also a play area or a workout corner of the room, but it’s just going to be where I office.” What you’re saying then is you can use the home office deduction. We don’t have to dive deep on what that is. And then calculate is the basic calculation, like a square footage percentage, and then using that for the other things like utilities, rent or mortgage, home cleaning, all of those things, it’s almost like you get a “percentage off” because you’re be able to deduct that through your as a business expense. Is that right?
Amy Northard: Exactly. Yep.
Bjork Ostrom: Cool. That’s great. So let’s talk about some of the kind of mechanics from a tax perspective of different business entities. And the three that you hear a lot are sole proprietor, LLC, and then S corp. Can you talk about each one of those as it relates to taxes and how people should make a decision around what type of tax election they have?
Amy Northard: Yeah, so we’ll kind of go from the one most people start with, which would be sole proprietor. So as soon as you decide that you’re a business that is created, every state is a little bit different in terms of if you need to register for anything with the state, but for most cases, as soon as you decide that you want to be a sole proprietor, you are one.
Bjork Ostrom: Yeah. It’s snowing today in Minnesota, I could say I kind of want to start a snow removal business, and if my neighbor hires me tomorrow, I’m in business. I don’t have anything set up. I don’t have a separate bank account-
Amy Northard: Yeah you run it under your name.
Bjork Ostrom: I don’t have a name. Yeah, OK. And they pay me and now I have a business.
Amy Northard: Exactly. Yep. So very easy. No barrier to entry. You yourself are the business, so there’s no separation. And obviously the disclaimer, I’m not a lawyer, but the big difference between a sole proprietor and an LLC is that legal separation. They’re actually, if you are a sole proprietor versus a single member LLC, so just a one person LLC, you’re taxed exactly the same. A lot of people ask me, is it time to be an LLC? And I defer to the lawyer counterparts out there who work with creatives for them to touch base with them because there is no tax difference. In some states like Texas, the only tax difference is now you have to pay franchise tax or you have to file a franchise tax return. So that’s going to be kind of the difference there. You can have your own name as an LLC, so you could be Snow Removal LLC instead of your name.
And then the next level up is S corp. So that we typically recommend for clients who are making at least $50,000 in profit. So whatever’s left after your expenses, we want to say at least $50,000. And then that’s kind of the starting point for having a discussion with your accountant about whether or not it makes sense to then become an S-corp. We could have a whole hour-long conversation about S-corps themselves, but the big difference is when you’re a sole proprietor or a single-member LLC, you pay income tax and self-employment tax on your profit. When you are an S corporation, you pay income tax on your profit. You don’t pay the self-employment tax on your profit. So it sounds too good to be true. Why wouldn’t everyone just do that? And the reason is, as an S corporation, you also have to pay yourself a reasonable salary so that salary is deducted from your income.
So you’re going to have a lower profit when you’re comparing the two, and there are no tax discounts on what you pay yourself through your salary. So it was fully taxed. So you’ll hear people say, oh, become an S corp, pay yourself $5,000 a year, and the rest you get your tax discount on. But the IRS is like, no, hang on a minute. You have to be paid what we deem to be reasonable. So there’s tools out there that help you determine that, but basically it’s what could you hire someone to come in and do everything that you do? That would be deemed reasonable. So you have to make at least enough above that the tax savings outweighs the extra expenses of things like now you have an extra tax return, now you have to have payroll service, things like that which can add up. So that’s one of the things we do as we help clients compare what is your potential tax savings to the expenses just to make sure it is a good idea before moving forward.
Bjork Ostrom: That’s great. So I’m going to reflect that back. Let me know if this feels accurate. So sole proprietorship and LLC, the main difference with that is in the name limited liability company, LLC, because you’re limiting your liability. So in the snow removal example, let’s say that I did indeed go start a business tomorrow doing snow removal, and I go and I shovel my neighbor’s driveway, but I do a terrible job and it’s all icy. They go out, they slip and they fall. I don’t have any protection. So then they say, “We’re going to sue our neighbor.” Not very nice neighbors. They sue me, they can go after my house, they can go after my car, they can go after essentially anything that would be an asset because I have no protection, nothing separating me. Let’s say I decided I want to start a business and I first went through the process of setting up an LLC, and then I operate that business within the LLC.
Same thing happens. Then what they would do is they’d say, okay, you’re getting sued, but we can’t go after your stuff because it’s all within the company. And so they could go after anything within the company. In this case, it wouldn’t be really worth much because they’d have a couple shovels and limited income. So at some point though, let’s say I was really successful within that LLC and I was making $50,000 a year, then it might be worth looking at going through the process of adding an S election to that LLC. You don’t have to create a new business, right?
Amy Northard: Right.
Bjork Ostrom: You can say, I want this LLC to be taxed with an S election. And then what you’re able to do is pay yourself a salary like you’re an actual employee, that’s going to be taxed at the maximum amount that a salary would be.
But then any of the income above and beyond that reasonable salary, which that’s kind of a gray zone and probably a longer conversation that you’d have to have with your CPA, anything above that salary you can take as a distribution. And sometimes people be like, how do I do distribution? You could just say it’s a transfer from your business checking to your personal checking. That would be a distribution. But the nice thing is that that wouldn’t be taxed with the additional taxes that come with a salary. It would be taxed as a distribution from your business, which is not going to have the FICA. Is that what it would be.
Amy Northard: Yep.
Bjork Ostrom: Okay.
Amy Northard: Social security and Medicare.
Bjork Ostrom: Okay social security and Medicare taxes. So the thing that’s worth pointing out here, now people don’t have to completely understand it, but the thing that’s really important is by making a couple small changes that don’t actually require a ton of work, you can potentially save thousands of dollars without making more money or having more expenses. It’s just changing some of the ways that you’re reporting your income. Is that right?
Amy Northard: Yeah. So some people come to this situation and they’re really overwhelmed. They don’t know if it’s worth going through the hassle. And I remind them I am going through most of the hassle for you in getting it set up and helping with payroll set up and everything. It’s just kind of hard to grasp how do we get the money out of the business? And like you said, payroll and distributions are how you take the money out. It’s not trapped in the business. You will pay tax on the profit no matter whether you take $1 or all of your profit out of the business. So there’s no special calculation for figuring out how much extra you can take out, but it’s not as difficult as I think people build it up in their mind to be, especially if you work with an accountant, at least for that setup process and then definitely for the tax return.
Bjork Ostrom: Mm-hmm. That makes sense. So one of the things you had mentioned was payroll. Can you just really quickly explain that. We use a PEO called Justworks. We did an episode with somebody from Justworks a while back just talking about that, but how do you go about setting up a payroll for yourself and is that something that a CPA could handle for you as well?
Amy Northard: Yeah, so companies like Justworks, other ones out there like Gusto, they have great onboarding. So if they don’t have someone to do it for you, Gusto has step-by-step instructions. I think the hardest part of the whole process is figuring out how to answer the questions from your state to get your withholding an unemployment account set up. Even if you’re in a state like Texas or Florida that doesn’t have withholding, you still have to go through the hoops to get your unemployment account set up. And then in most states you can’t set up your unemployment account until you’ve actually ran payroll. So those are the main things that you have to complete to get payroll set up. And then most of those programs can just run on autopilot, especially if it’s just one person. You can figure out what does the payroll need to be, how often do you want it paid? And you can turn it on autopilot and it will just run for you.
Bjork Ostrom: Mm-hmm. And for me, there was something that was really nice about when we then actually had a salary and it’s like it establishes some credibility almost for myself, for the business. Like hey, I’m getting a paycheck, it’s getting deposited twice a month. And it’s not like you then can’t also do a transfer from your business account to your personal account, but there’s something really nice about that as a system. Like, okay, we’re getting these deposits and we know and when they’re going to happen.
Amy Northard: And the mortgage companies agree with you as well.
Bjork Ostrom: Yeah. Can you talk about that, why that’s important?
Amy Northard: Mortgage companies love them. Yeah, so they love to see W–2 income. Like you said, it shows some consistency, some reliability. It’s a document that’s been filed with the IRS and it’s hard to dispute. So they love W–2 income. So even if maybe you’re not going to get a ton of tax savings, we’ve had clients make that jump to S corp status because they knew in the personal side of their life they wanted to start house hunting or buy a new house. And so that would be helpful. And then the other piece when working with mortgage companies is they love to see bookkeeping records for self-employed people. So a spreadsheet that is kind of jumbled up, they’re not going be able to rely on that. So having something from a bookkeeping software that can be printed out, I don’t know how much weight it holds. I don’t know the backend of how those calculations are done, but I know that is a really commonly requested thing along with the W–2s.
Bjork Ostrom: Yeah, that’s great. At what point should somebody start to get serious about doing their bookkeeping? Let’s say in the example of me doing the snow removal company, that’s one thing, but in our space it’s a little bit different where you might for a while kind of be in the startup stage where it’s not really services based, so you might not be making money right away, but you would have expenses that you’d be having, even if it’s $100 here or there. So at what point should you start to do bookkeeping for your business or kind of side hustle?
Amy Northard: So the nice thing if you already have separate business bank accounts set up and having everything flow through there is it kind of gives you a little bit of wiggle room. You can kind of delay it a little bit if you want because you can pretty quickly hook it up to something like QuickBooks, have all those prior transactions flow in, start to mass categorize based on if you are constantly buying things from a grocery store, you can highlight all those and apply a category. So I think it’s a lot easier to learn a bookkeeping software when you only have maybe 10 to 20 transactions a month.
So as far as when it is a good time, it’s never too late, but I would always recommend starting as soon as you can, before things are crazy, before you have tons going on. Getting the basics of how to do it is awesome when you don’t have a lot of transactions that are overwhelming you. But if you are to this point in the year, it kind of just depends. Do you have time to do it yourself or does it make sense to hire someone to maybe get it caught up for you and then you take it back over? There’s just a lot of different ways that you can get caught up. But don’t wait until April 14th or April 13th to try to figure out how to learn something like QuickBooks and get a year done.
Bjork Ostrom: Yeah. When let’s say somebody goes to that, let’s say they start early on in the year, so when this episode comes out, it’ll be March. Let’s say they’re like, oh my gosh, I need to do this this year. I need to get better about it. So I’m going to as a first step, separate out personal and business. You have your business expenses and income going into one bucket and then a few months later I’m going to hook up the QuickBooks, categorize things, and then let’s say you get to the end of the year and it’s a loss. Can you talk about how in at any point, but especially in the early stages, it’s still advantageous to keep track of your expenses and do bookkeeping because you’ll have a loss and how that loss impacts, or whether it impacts your personal income like W–2 income or other areas of income.
Amy Northard: So if you have other areas of income during that year, like W–2 income, that loss can offset that other, what they call like ordinary income. So your W–2, you get taxes withheld. If you have a lost to offset that, then the amount you’re going to get back as a refund is going to be even higher because of that loss. Let’s say you don’t have anything to offset, so you just have this loss for the year, it will carry forward to the next year. Maybe you have $10,000 of profit for the next year.
So that loss will carry forward and help you offset in that year. So I hear a lot of people say, oh, I have a loss. I’m not even going to bother claiming it. It’s a loss. But it’s definitely worth tracking. And if you don’t make any money, let’s say you don’t get paid a single dollar your first year, all of those expenses, maybe you paid a web developer to design your website and have tons of expenses, you still want to track those because those can be considered startup expenses in the first year that you do actually start to make money.
And having those all compiled will make that tax process really nice. You’ll just hand over pretty package to your accountant, they’ll plug it in and they will be considered startup expenses. You can deduct $5,000 flat. Assuming you have more than 5,000. Let’s say you have $10,000 of startup expenses in your first year that you actually receive money, you get to deduct $5,000 as a startup expense and the rest gets deducted over time. So don’t be alarmed if you don’t see that full amount. It’ll still be deducted just over time.
Bjork Ostrom: And so the quick tip with that, let me know if this is accurate, would be, let’s say you have a significant amount of expenses, you haven’t had any revenue. In order to avoid those being considered startup costs, you want to figure out some way to make a dollar. Does it have to be a certain amount?
Amy Northard: Yeah. You don’t have to be profitable. You just have to receive a dollar.
Bjork Ostrom: Receive some money. And what that means is… It’s kind of like when you go into a store and they have our first dollar. When you have your first dollar, the IRS then says like, okay, you’re no longer in startup mode. You’re officially a business. And then if you have those losses, then you can count those against ordinary income. And so in the scenario that you talked about, let’s say somebody’s invested into their business, whatever that might be, it might be a blog, a website, maybe it’s brick and mortar. You’re building something, you want to make sure that you’re tracking those expenses, but then also if possible, creating revenue because then those expenses will be considered a loss within that year. And let’s say you made 50,000 in a W–2 job, then that $10,000 loss, if I’m understanding you correctly, would be used against that 50,000.
So it would be in the eyes of the IRS, you would have $40,000 of ordinary income. And so you might see a nice end of the year refund or return because you’re reporting like, Hey, actually I paid taxes on $50,000, but technically should only have paid taxes on $40,000 because they had this loss. So even for people who are in the early stages, then it wouldn’t have to be 10,000, it could be a thousand or 2000 to make sure you’re keeping track of those things. That’s great. So that’s kind of early stage, people who are in the early stages. Just getting started, being smart and diligent about keeping track of your expenses, separating that out, categorizing those within QuickBooks. How about for people who are in the more mature stages of the business? Let’s say they’re making profit of 10, 20, maybe $30,000. They have this really healthy business. What are the tax considerations that we should be making at that level and any advice around being smart about your taxes or bookkeeping or whatever it might be for people who are more established?
Amy Northard: So I think bookkeeping is the first step, whether you’re new or you’re more advanced, making sure that either you’re doing a great job with your bookkeeping or you have someone that you’ve outsourced it to. And then the second part is if you are in that mode where you’re like, I need to know where to put my money. I have this money and it’s not a factor of I don’t have the enough money now, where do I put it so that it’s not being taxed at the maximum rate? And we typically start out with things like, okay, let’s look at retirement. When you’re self employed you don’t have anybody setting you up with automatic retirement contributions or anything like that.
So looking at if you’re in the position to max out retirement contributions, looking at that. Some states have tax credits or deductions for contributing to college savings accounts. There’s also, if you have a high deductible health insurance plan, contributing to your HSA is another way that you can put money, you can’t touch it essentially once you put it there. So you have to have enough of it, but it keeps the tax money out of the hands of the government because you’ve put it into one of these tax advantaged places. So that for more advanced businesses is our next focus of where can you put your money that you don’t need to live off of?
Bjork Ostrom: Yeah, and it’s one of the great things about business is like that first step it’s understanding the mechanics, the business itself, getting things going, getting things running. Eventually it’s replacing your salary. Once you’ve done that, you’ve created something that has given you this benefit of potentially surplus. And then it’s like, okay, great. How’s this business then going to fund other things that will… It’s making money work. So even better if it’s working in a tax deferred way and like you said, HSAs or IRA investments, or you could set up, you talked about maxing out a 401k, all of those kind of, not necessarily advanced strategies, but ones that you’d want to have a conversation about with somebody like yourself who’s going to be able to talk through how to do that and strategies for that and things along those lines. So that’s awesome.
So when this comes out, we’re going to be close to tax season. I remember distinctly probably for the first five years that we were doing our business, probably some years before that, but we had W–2 jobs, so it wasn’t as complicated, but just coming to the end of the year and always being like, ah, I’m so frustrated that I didn’t do a better job of tightening this up. I’m going to do better this year. And it was like three, four or five years, every year got a little bit better. At this point, I feel like our system is pretty tight, but it’s been 12 years of us doing some version of a business, and what I’ve learned is it’s better to do it on a month by month basis so when it comes time to submit your taxes, you’re not in scramble mode. But can you talk about what that actually looks like to do that well and what goes into doing it well? How much work is that actually?
Amy Northard: With bookkeeping, yeah, monthly is ideal. The more you put it off, the more it builds up and then it’s like you keep wanting to put it off and it just kind of snowballs. The general process that I would recommend is go through and give everything a category. If you aren’t sure of things, you can put them into an uncategorized expense bucket and ask your accountant, build up your list of questions, send them over, and they can help you decide how to categorize those things. Once you have everything in for the month, then you’ll go through that reconciliation process I mentioned.
Most accounting programs will have some type of tool, so I recommend if you’re brand new to doing your own bookkeeping, like if you’re using Wave for your bookkeeping, Google Wave reconciliation tutorial, and it’ll walk you through exactly how to use it. You’ll have to have your bank statement for the month, and then you’ll have your bookkeeping software pulled up and you’re basically going to be like check marking transactions as you mark them off on your bank statement so that you can make sure there aren’t any extras left over for the month once you’ve gone through that process on either end, and when it tells you there’s zero differences, you know you’re good to go.
And that really helps with peace of mind, knowing you don’t have a bunch of extra stuff flowing in there. There’s not duplicates, you’re not missing stuff. And so once it’s reconciled and there isn’t a bunch of extra leftover transactions or missing things, you’re done with that account. But if you have things like PayPal and Stripe and a credit card, you have to go through each one and reconcile them individually every month. And once you get through the first couple of months, it can be super easy. Like QuickBooks kind of learns, okay, if I select all of these transactions, it zeros out. So you just have to look through and see were any unselected, are there any duplicates? And if not, it might take you literally two seconds to reconcile once you have gotten through the first one. Sure.
Bjork Ostrom: And so to set that up as kind of a monthly process, a monthly system that you’re doing, it’s made even easier if you are using that business card where you’re not having to track stuff separately from your personal account and whatnot. How about for people that are, that sounds great, but I don’t want to do that. That’s where you would come in with your firm. Can you talk a little bit about the services that you have, Amy, and how people work with you?
Amy Northard: So we always recommend if you know yourself and you’re never going to do it and you have the budget to outsource it, bookkeeping is a great first thing to start outsourcing because when you get to the tax side of things, it’s definitely very much like a garbage in, garbage out situation. If we receive garbage for bookkeeping, then the tax returns are not going to be very reliable. So we pair you up with a bookkeeper from the team. They will go through and give everything a category, if they’re unsure of things. Amazon’s probably our most typical asked transaction question of What is this? Because it could fall into a lot of different categories. Then the client gets sent a list every month of those transaction questions, they give us a one to two or description of what they are, we update it in the software.
We like to have a second set of eyes on everything we do because you kind of get in the groove of things and you can miss things. So we have a reviewer for our bookkeeping, look it over, and then they send off those financial reports each month. The tax side of thing is probably, if you’ve ever worked with a tax accountant, probably very similar process. We have our clients go through a questionnaire in January. We collect the documents, we prepare a return, we have a second set of eyes, review it, and then we send it off to the client to look over and answer any questions that they have. And during that process, if we see opportunities like retirement contributions that are missing or things like that that they can take advantage of, we let them know about it and see if they have the cash available and want to do that before we finish things up.
Bjork Ostrom: That’s great. Can you talk about, just as a last consideration, you talked about creatives working with creatives, and you’ve talked about working with publishers, bloggers, so we know that, but broadly speaking, what’s that look like? Who are the people that would be candidates to potentially work with you?
Amy Northard: Yeah, so small businesses that feel creative. We have such a broad variety. We have photographers, web design, developers, we even do have an HVAC company. Sure. We will let people know if there’s a trucking company that comes to us, we’ll kindly let them know we’re probably not the best fit for you or something like that. But really we love to work with small one to two owner businesses and they feel creative. I love to watch their business grow, see them on social media, see all their projects that they’re doing and that kind of thing. But we’ve created our website in a way that if you resonate with that and you reach out to us, you’ve already gone through that first kind of funnel of like who’s going to be a good fit and who’s not because it’s not the typical accounting website.
Bjork Ostrom: Yeah. That makes sense. And if people do want to reach out and connect, what’s the best way for them to do that, Amy?
Amy Northard: Just through our website, which is amynorthardcpa.com.
Bjork Ostrom: Cool. Amy, thanks so much for coming on the podcast.
Amy Northard: Thanks for having me.
Alexa Peduzzi: Hey there. Alexa here. Thanks for tuning into this episode of the Food Blogger Pro podcast. We hope you enjoyed it. And if you are sitting there thinking, man, someday I’m going to start my own food blog, or maybe you’re sitting there thinking, I just started my food blog and I have no idea what to do next. Don’t worry. We’ve all been there and we actually have a free ebook just for you, and it’s called the Food Blogger Starter Kit, and it’s full of different resources just to help you along the journey as you’re getting up and running with your very own food blog.
So you’ll get access to our free course all about setting up your food blog, some of our favorite podcast episode recommendations, some tips about plugins and photography, and then just some other ways to continuously learn and get a tiny bit better every day. If you’re interested in downloading that ebook for free, just go to foodbloggerpro.com/podcast-start, and you can download it right there for free. We’ll have a link to it in the show notes as well, so you can easily click on that there. Otherwise, you can just go to that URL foodbloggerpro.com/podcast-start to download that Food Blogger Starter kit PDF for free. So we’ll see you next time. Thanks for tuning in again, and until then, make it a great week.