If you work for yourself, does it matter what hours you work? What if you’re more productive in the evening than you are from 9-5? Next we delve into the home office tax deduction on this week’s episode of the Small Biz Ahead podcast with Elizabeth Larkin and Gene Marks.
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Elizabeth: Welcome back to the Small Biz Ahead podcast. Gene and I are again here to answer all of your, what is it, burning questions.
Gene: Questions about life, business. You know, your marriage, child rearing.
Elizabeth: Talk about dogs.
Gene: Correct, anything you want to throw out here we’re happy to talk about.
Elizabeth: Anything you want to ask us, you can, we can be your Oprah Winfrey.
Elizabeth: We do have a form where you can submit a question. You can also email us at email@example.com. You could just send us an email or a message on social media, and those get to us too. Today we have two great questions. The first one is about your work schedule if you’re a business of one. We’ll be right back with that after we hear from our sponsor.
QUESTION #1: 9-5 Work Schedule
Elizabeth: Okay we’re back with a question from Justin from Abilene, Texas. Justin writes:
“I’m a business of one. Does it matter if I stick to a normal Monday-Friday schedule, or am I free to work when I want?”
I think a business of one, as long as you’re responding to your customers when they need to be responded to, you should just set up a schedule that follows your most productive times. That’s something that we’ve talked about before.
Gene: Sure, first of all, I guess it depends on your business. If you’re like a one person business but you’re running a shop, so yes you have to stick to a … That reminds me, I went to rent a car from a place, you know this was like a couple of weeks ago, from a rental car agency in Philly. I scheduled the car at 7:30 in the morning when the rental agency opened. They didn’t get there until 7:45. I mean the employee got there and of course, I’m in a bad mood, and I’m like, “Uh, you know, where were you?” She goes, “Oh you know traffic is really bad this morning.” That’s why she was late. I’m like, “That’s not, you’re running like a, this is like a retail shop.” Right? Like, there’s a line of people waiting around the corner. She’s like … If you think traffic is going to be bad, leave early. You know. You don’t get there for 7:30 you get there … It gets back to this person’s question, is that if you’re running a business that’s sensitive to time hours, then you stick to that, you don’t monkey around with that.
Elizabeth: I’m going to assume that since he wrote this question in that he’s not. Let’s say he’s like a, he’s a tech guy, or he is a writer. I mean who knows?
Gene: If that’s the case Elizabeth, then you know, whatever floats your boat, is the way I … By the way I’m with that with my employees. We don’t have set work hours even at our company. Again, for people that are listening to the show, I mean I run like a tech firm, so my people are out there doing projects all over the place. I don’t know when they, my expectation is between the hours of like 8:30 and 5:30 if I need to get a hold of them, like on the phone or whatever they’re going to be around. For the most part, I’m like, “Hey man, do whatever you want to do, whenever you want to do it, it’s completely up to you.” Listen, half the workforce today are millennials, and survey after survey say’s that millennials favor you know, mobility, independence and flexibility over compensation even. This is what people want. If you’re running your own business, that’s one of the greatest things about running your own business is, you have more control over your time.
Elizabeth: You can set your own hours which is awesome.
Gene: Go for it.
Elizabeth: All right, we’ll be back with question number two which is about an online t-shirt business after we hear from our sponsor.
QUESTION #2: Tax Season for Solopreneurs
Elizabeth: We’re back with a question from Carl from Hawaii, nice. Carl writes, “Gene and Elizabeth, I run an online t-shirt business. My t-shirts are printed on demand by another company.”
Gene: Oh, one of those Hawaiian shirts, is that what he’s … There’s too many of those.
Elizabeth: Hawaiian t-shirts. I don’t know. Usually they’re like button down.
Gene: Yes, they’re like button down. Which is actually kind of a cool concept like if you have a t-shirt, but it’s got all those goofy like dad like Hawaiian designs on it. I would love one of those. That’d be awesome.
Elizabeth: … So bad. It’s terrible. We’re going to get Gene one and then we’ll put a picture up. Okay, he writes:
“My t-shirts are printed on demand by another company, and that company handles the transactions and takes out for sales tax based on state. I just design the shirts and then direct traffic to their sales pages. What do I have to pay taxes on this tax season? Also what can I write off? Can I write off stuff like heating I use for my office when I design my t-shirts? This is not my primary source of income.”
I love this question because it’s super specific and Gene is actually a CPA.
Gene: There’s a few things on taxes that you can … Let’s first of all talk about writing off on your office. There’s a couple different things you can do when it comes to a home office. You can take direct expenses for a home office and do that calculation. If you’re keeping the right amount of books. Now the I.R.S. has created a very easy calculation for you. They just let you take, I think it’s $5.00 a square foot times a maximum of like 300 square feet that you can take that, and then that’s just your standard home office deduction and then you have to worry about any other expenses.
Elizabeth: It does have to be a real office.
Gene: It does.
Elizabeth: You can’t have it be like a guest room.
Gene: Right, and it can’t be like a desk in your bedroom or something like that. It literally has to be a sectioned off area of your home that you are using for work purposes and that is your office. By all means you should be taking those home office deductions. As far as taxing, the way tax works if you’re selling stuff online and you’re selling them to other states, which only the sales you make within your own state, like Hawaii has a state sales tax that you’ll be taxed on.
When it comes to running a business out of your house, you should absolutely be taking advantage of any kind of home office deductions. You know Elizabeth, the I.R.S. will allow you to take specific expenses related to your home office. If you’re good with your record keeping and your bookkeeping, and you’ve got utilities, you’ve got your computer, you’ve got any insurance in your home, if you’ve got furniture and supplies and that kind of stuff, you can absolutely add these up and take this as an expense for your home office. Now if you don’t have a business that’s already incorporated or an S-Corporation, you would take that expense on your Schedule C, which is what a lot of people file on their individual tax returns for like sort of like other proprietary businesses that you’re doing.
That’s good. The I.R.S. also has a very easy calculation you can do if you don’t want to keep track of all those expenses. It’s just a rate per square foot. I believe it’s $5.00 a square foot and I think your maximum square foot, I believe, is 300 maximum square feet.
Elizabeth: That works out for most people, right?
Gene: Yes, you just take a flat, you just take it and it’s good. Now, you know, we had talked about this like at another time, but the home office has got to be legit. It can’t just be like a desk in your bedroom or something like that or an area in the kitchen.
Elizabeth: A guest room.
Elizabeth: Your laptop sitting on the bed.
Gene: Right, it’s got to be like, literally like, a full room that’s dedicated to work. That’s what you’re using it for.
Elizabeth: The I.R.S. can audit you and look at that office, and then you’re-.
Gene: They can. They chances of that happening are so minuscule, but at the same time, if it does happen, you could really be busted for it. It’s not a good … That’s a whole other conversation.
Elizabeth: Probably not worth it.
Gene: It’s not worth it. You want to make sure you have a dedicated area for your home office. Now when it comes to selling your products, whatever income that you make from your business, that’s going to be taxed. Wherever you’re selling your products all around the world, you’re recording revenue and you’ve got your expenses.
Elizabeth: He’s selling them through another company. They’re doing the transactions.
Gene: Sure but he’s getting paid from that other company.
Elizabeth: From that company.
Gene: He’s getting revenue from that company.
Elizabeth: They’re probably giving him like a disbursement via PayPal or something.
Gene: Correct. That is revenues that is coming in and that’s what he needs to report as other income. Again, if he’s got a corporation or an S-Corp he reports it there, otherwise he reports it on his Schedule C and it’s other income and that is definitely income. Now you can take deductions against that for business expenses, like a home office expense. A car expense, although I don’t know what he’d be using a car for, but Internet expense. Those kinds of things.
Gene: Mileage. It’s possible. The income coming in is definitely … Now if he’s using another company, a third party, they’re selling this stuff. They’re dealing with sales taxes, they’re dealing with all of that, then he doesn’t have to worry about any of that, because he’s really outsourced it to that company who’s doing all of that. If he was doing it on his own, then he would have sales taxes to worry about.
Elizabeth: I know that you always say, “Business owners who do their own taxes are crazy.”
Gene: They are.
Elizabeth: What about this guy? I’m assuming he’s got like a typical 9-5 job, and then he does this on the side. Would you suggest to him to go to an accountant?
Gene: You know, what I would suggest to a guy like this is this, I would have him use a good popular tax software package, because it’s not that complex. TurboTax is very good, H&R Block has got a very good tax package as well. You can do that, but you know, just in his first year of doing this if he expects to continue on, I would ask him to cough up a few bucks and take his completed tax return before he files it, have a CPA Review it and bless it for him.
Elizabeth: I know in Connecticut that’s maybe $200-$300 to have a CPA do it and you just have the piece of mind.
Gene: You do, and if you want to do it on your own long-term or whatever, I mean what I would do is I would at least show it to a CPA and say, “Did I do this right? Do you have any comments on it?” Pay them for that advisory service, and then assuming nothing else changes in the future, then you carry on doing it on your own. You don’t have to have a CPA do it for you every year.
Elizabeth: I think with the new “sharing economy” and people being more mobile, as we always talk about millennials want to be more mobile, there are going to be a lot of business owners like this in the future. They have their 9-5 job or their 8-4 or 7-3.
Gene: There already are.
Elizabeth: Then they have their, what we call, side gigs.
Gene: Sure, freelance economy is booming.
Elizabeth: Freelance economy.
Gene: Whereas there was some talk in Washington of coming down harder and like having more rules for freelancers, my expectation of the next few years is regulations are not going to be looked at very much. There will be a lot of opportunity for freelancers to go and do their thing. Except in New York City, or because New York City for businesses with freelancers, there are more rules as to, the rules are more onerous on the business owners that hire freelancers in New York.
Elizabeth: Now what about, let’s say you have a 9-5 job and then you drove Uber on the weekends or at night. What about your taxes for that?
Gene: Same thing, so if you are driving for Uber, you’re considered to be a subcontractor of Uber, it depends on the state that you’re operating in. They’re going to send you a 1099.
Elizabeth: With no taxes being taken out of it.
Gene: No taxes taken out.
Elizabeth: You have to pay those taxes.
Gene: Correct. Depending on how significant it is, and this is why you want to, you’ll have a good tax software with an advice from an accountant, if you continue to drive for an Uber, and you’re making some money doing it, a few thousands dollars a year, you should be paying some estimated taxes throughout the year.
Elizabeth: They can make $35.00 an hour. I think they’ve proven that’s not actually true, but.
Gene: Stay tuned because my word of the day is going to be Uber, so we’re going to talk a little bit about Uber, because it impacts small businesses.
Elizabeth: Where’s the suspense then? You’ve told us.
Gene: Hopefully that will keep people listening on because we have some interesting news about Uber.
Elizabeth: We’ll be right back with Gene’s word of brilliance which is Uber.
WORD OF BRILLIANCE: Uber
Elizabeth: Okay and we’re back with Gene’s word of brilliance which is.
Gene: The word of brilliance is Billy Joel. No, I’m just kidding it’s not Billy Joel, it’s Uber. We were just talking about Uber before. Elizabeth, interesting information about, news about Uber that I wanted to talk about if you’re a business owner or you’re driving for Uber. Uber is a private company so whatever numbers that you see about them, just bear in mind that they’re, it’s not like it’s publicly disclosed. They have a lot of credence to them and reliability. Uber, in 2016, is projected to lose approximately $3 billion dollars.
Elizabeth: On what?
Gene: In 2016.
Elizabeth: What are their expenses?
Gene: Lose of $3 billion dollars. People ask what their expenses are and I want to be clear that Uber is giving away the greater parts, almost two-thirds to 75% of the fares go to the drivers.
Elizabeth: I know I didn’t realize that. I just took an Uber.
Gene: It’s called subsidies.
Elizabeth: I think it was $5.00 because I was taking it from my apartment which is in Hartford to another part of Hartford.
Gene: God you’re lazy. No I’m sorry. $5.00. You could have walked there.
Elizabeth: You know what, they just dropped the rates. They keep dropping the rates in the Hartford area because they want more people to take it to the airport I think.
Gene: They do. Right.
Elizabeth: Anyway, I was talking to the driver and I said, “So what do you get like 50% of the fare?” He’s like, “No, we get like 80%.”
Gene: 80%. Depending on the area that you’re in, depending on the time of day, it’s anywhere from two-thirds to 80% is what the drivers get which means that Uber, for the most part, they’re losing money on just about every one of their rides. They are not making money on it. They’re doing this for a couple of reasons. Number one is they’ve got to keep their taxi rates low because they’re trying to build ridership and popularity and look, if you’re taxi cab rate was $10.00 or $15.00 you might not have used them. That’s the one thing. The other thing is they’re subsidizing their drivers a lot because they want their drivers to get paid. They don’t want to lose people, they certainly don’t want the bad PR. They also want to subsidize the drivers.
If you’re a driver for Uber, that’s what’s going on right now. You need to be aware though that this is not a business, not a long term business model. I hope if you’re driving for Uber and you’re making a few extra bucks, good for you. Hopefully that goes on for another couple of years but, this is not something I think you’re going to be doing five or ten years from now, and the big reason why is because Uber has no plans to continue this model five or ten years from now. They are building autonomous vehicles. They’re testing them out in Pittsburgh right now and other places around the world.
Elizabeth: Driverless cars.
Gene: Driverless cars. You know because their model is to replace you, the Uber driver, with auto-, and they are serious about this, with autonomous vehicles. That is the only way they can make their financial model work is if they have more autonomous models on the road, can still keep the cab fares down to where it is, which means if you’re an Uber driver there’s going to be a lot less of you, because you’re going to be replaced by automated cars. If that model doesn’t work and they can’t get it, they’re going to have to raise their fares. If they raise their fares, they’re going to lose customers because now they’re going to be that much less competitive against even taxi and other services, and if they lose their customers, if you’re an Uber driver, you might lose your work because of that.
Elizabeth: You know the rates are so low that I took that, the reason I took it, is because it was on a really cold night. I was going to a restaurant in Hartford.
Gene: You’re lazy.
Elizabeth: I was going to like a cocktail party type thing.
Gene: Fair enough.
Elizabeth: I thought, “You know what? If I drive there I’m going to have to drive around looking for a parking space. Then I’m going to have like two drinks and saying should I drive home, should I not drive home?”
Gene: I’m glad you did that.
Elizabeth: It’s so convenient to just pay, I think it was like $5.00 on the way there, $4.55 on the way home. It’s completely, like that’s worth it to me.
Gene: We use it all the time. We live in downtown Philadelphia and so we Uber around a lot. We like to go out and drink on the weekends and all that. I’m terrified of driving if I have one drink, so it’s really, it’s a great service and I love it. I get very defensive when people attack Uber. I know a lot of taxi drivers have issues against it or whatever. I think it’s wonderful. I think it’s provided so much opportunities and income for so many entrepreneurs around the world, but I do have to tell you if you are an entrepreneur and you’re starting to rely on this income, or you think this is a long term thing, I’m warning you, I don’t think it is.
Elizabeth: It’s just great for people that want to make a little bit extra and I, when I was down in Florida on vacation a couple years ago, I took two Ubers from the airport and both times it was just retirees. One was a retired woman, the other was a retired man. They’re like, “You know I was kind of bored so I just thought, I’ve got a new car, I might as well drive people around.”
Gene: I always talk to the Uber drivers as well and the Uber pool is also really good if you’ve got a little bit of extra time, really inexpensive and you know you’re sharing the car with somebody else, or one or two other people, but the affordability of it is great. Uber’s great. It really is great.
Elizabeth: What about Lyft? Have you used Lyft?
Gene: I have. We use Lyft. I carry on both Uber and Lyft for two reasons. One is sometimes Uber is busy, so Lyft is a great alternative. Sometimes the Uber gets greedy. Their surge pricing can be, and that’s another, that’s going to be another word of the day. We’re going to talk about a word of brilliance. I want to talk about surge pricing, but surge pricing with Uber is crazy sometimes. Good for them. This is what the market will bear. Lyft doesn’t do that. The other thing with Lyft is also that it doesn’t incorporate tips, you tip the driver extra. Some people like that. Which with Uber some people just like leave the tip, you built it in, it’s just whatever. With Lyft you tip it, so there’s a little bit differences in the services.
Elizabeth: The other issue with Uber is that a lot of women, like a lot of my female friends that don’t live in cities, refuse to take it because they’re scared to be in a car with an Uber driver by themselves. I’ve heard of a new company that’s started that only has female drivers.
Gene: I think Uber is also considering and has been testing out that service in different markets. You can request like a female driver.
Elizabeth: Saying if you want a female driver?
Gene: Yes, that’s correct. Yes, that’s an issue … Same thing as Uber, they’re so cool. I mean they’re also testing out services for transporting kids around.
Gene: I mean like after school type of thing.
Elizabeth: What about pets?
Gene: Certified drivers. That’s another, that’s a good conversation to have too. They’re a very innovative company. They really are. I am telling you most of our rides are going to be on driverless vehicles in the next decade.
Elizabeth: Yes, I’m excited for that because, god driving is so boring.
Gene: I’m terrified about it. My son goes to school in Pittsburgh so he sees those driverless cars all over, they’re not completely driverless by the way, there’s a person in the car behind the wheel so if anything does go wrong the person can take control of the wheel.
Elizabeth: It’s not going to be like that forever.
Gene: No. It’s not. I said to him, “Have you ever taken?” I forget if they’re free or if they’re like really reduced. They ask you in the app if it’s a driverless car do you accept that. He says, “No way am I doing that not until they get the technology right.” I’d be like, if the car gets on the highway and it’s going 55 miles an hour somewhere.
Elizabeth: When they’re all driverless cars, they’re all going to draft together. It’s going to make, oh my god, less traffic jams.
Gene: It’s not just the cars that will be the real impact for businesses because this is a business conversation. It will be … Driverless trucks will be a huge difference. Now Uber just bought a company last year called Auto. What Auto does it can retrofit existing trucks and make them into autonomous vehicles. They’ve got technology and the hardware to do that. Uber’s, just think about freight and trucking companies, I mean, it costs so much to transport goods and that’s because of the costs, I hate to tell you, it’s the cost of people. You know, what you’re paying them per hour, they’ve got to take certain times off. They get into accidents. They don’t show up on time, whatever. You have driverless trucks, it takes away a lot of those problems and that’s a huge opportunity.
Elizabeth: Basically we just don’t need people anymore.
Gene: Yes, the people get on my nerves at this point. They can be on TV shows, but who needs to see them out and about during the day?
Elizabeth: All right, thanks for joining us for another episode of the Small Biz Ahead podcast. We’ll be back with you next week.
Gene: See you soon.