009 Taxes for American digital nomads with Adam Nubern
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resources & links mentioned:
Paige: Hey friends! Welcome to episode #009 today! We are chatting with Adam from nuventurecpa.com. Adam does accounting work and tax work for digital nomads, full-time RVers, and location independent businesses!
He is American, so he specializes in digital nomad tax for those from the USA. If you're from another country, some of this will still apply to you, but do know that I am looking in the future to get some other tax advisors who are a bit more familiar with the tax laws for digital nomads from countries other than the US!
Now, if your business moves around a lot, then you definitely know the struggle of trying to keep up with tax laws and do your best to be compliant, even though the tax laws haven't really kept up with what we're actually doing these days with working online and traveling the world! So we mentioned quite a few links and resources in this episode that will be fabulous for you to check out so definitely go to the show notes! You can find them at paigebrunton.com/9!
Paige: All right, Adam, welcome to the show! I’m so excited to have you here!
Adam: Absolutely. Thanks for having me page. It really is an honor. Thank you for all you're doing for for folks helping them figure it out all this business stuff. And yeah, thanks for having me on!
Paige: Absolutely! I'm so stoked to have you because I got so many questions from our audience about taxes and moving around and digital nomading and you're the perfect person to ask! So can you explain a little bit about how did you actually get into this? Like, how did you become the digital Nomad Taxman what led to that?
Adam: Great question! So, me and my wife wanted to set out just to travel the world. (This was back in 2014.) So in order to do that, we saved up $30,000 U.S. over a two-year period to be able to actually just travel. Wee did not want to work or anything. We just wanted to travel before we started having kids and stuff! And as we were telling family and friends about that, I had a buddy that said “Well crap! I wanted you to be my accountant for this new business I started!” and I said “Well, I mean I can work and travel…I mean, why not?”and that's kind of how it started! Not by seeking out and looking for it. It just kind of came to me, which I'm so thankful for. It grew out of our minivan in New Zealand when we lived there for five months and met a lot of folks at co-working spots and that co-living places that needed some help with all things, like tax and accounting for digital nomads. I was doing it myself because I needed to figure out how to pay my own taxes and do my own accounting as a digital Nomad!
+ full transcript
Paige: Hmm. Awesome! Do you have a degree or a background in this or is this something you just figured out yourself?
Adam: There really does need to be a degree in digital Nomad accounting and taxes! But there's not one just yet. I have just a plain degree in accounting from the University of Georgia in America. My first job out of college was I was an auditor for Rural Telephone companies out in the western part of us and then I was a finance director for a non-profit in the Colorado Rockies. I had to do some accounting stuff, but all the tax stuff I had to just figure out as I as I went and I'm still figuring out as I go.
Paige: Totally makes sense!
Adam: Yeah, that degree would be great one day! A Digital Nomad Tax Degree! I think something to that effect is going to have to be had in the coming years as there's more and more people folks like us traveling and doing our work. There's gonna have to be some type of specialization, or some type of organization, or just some kind of body of thought to be able to wrap our minds around this new world that we're all diving into.
Paige: Yeah, absolutely! Okay good. So the questions which I have for you today, I actually crowdsource these for my audience!
So I looked back to find all the questions which we typically get asked then I also sent an email to my email list and said, like, “Hey! I got someone on the podcast who knows about digital nomading and taxes! If you have questions, send them on over!
So first one is to “To which country do we pay taxes if we travel constantly?”
For example, do we pay to our home country, the country were living in, or the country where the bank account is based?
Adam: So, the answer is going to depend on who your citizen of. I'm an American so I'll try to speak to some other nationalities as well based off of what I've learned throughout the years working for various folks. America is one of the few countries that expect all of its citizens to pay taxes to America. So when I say pay taxes… let me adjust that by saying we have to file a tax return in America. There's all these caveats, foreign earned income exclusion, and foreign tax credits that will ultimately reduce like the amount of tax. You actually pay to America depending on your situation. But ultimately, we as Americans have to file a tax return.
Western countries kind of have a big pot of similar rules that you can wrap your mind around. This is the big rule of thumb I want to leave everybody with: it depends on where you're sourcing your money. So that's a keyword that's always thrown around in Tax Court cases and in other countries’ rules and laws.
It's like if you're doing work in my country and making money in my borders, then that is a good trigger to start down a wormhole of research to determine any compliance that you have. So that's the main thing in this whole world of tax compliance. Every country has their own rules. If you're making money in a country, you'll want to do the research to see your compliance.
It’s less about the bank account. That's the distinction distinction that I want to make because – speaking specifically for Americans – just because you have an American bank account as a foreign citizen does not automatically trigger a tax compliance or tax filing (or anything like that). It can also be said that if you're an American getting paid in your American bank account, you’re still going to have to file a tax return because of the things I said previously, but that doesn't automatically say you're going to pay all your tax in America just because you're getting paid through American bank account. Try not to filter your decisions solely through having a bank account. Yes, that can be one factor that triggers something, but it's not the end-all.
Instead I advise to always tunnel your thought process through wearing my sourcing my money from. And sourcing can have different definitions, but a lot of the time it means physically sourcing…where am I physically doing my work to make the money?
Paige: So that leads me to another question: Say for example – in my business – I live in Germany, but I sell digital products. So I'm creating them in Germany, but I'm selling them all over the world. So if someone was in that sort of situation where they're creating it one country, but it's being sold to different places is sourcing the creating of it or is sourcing where it's going?
Adam: First of all, everybody needs to set their expectations with this chat. I'm kind of answering things through an American lens because that's what I'm an expert in. I’ll answer that question through an example: There’s this word called ‘Nexus’ in America that we use that tries to answer this riddle. Nexus can be thought of as “Where am I tied to, where do I have relations to? Where am I? Where do I create like a compliance piece to?” That's kind of what the word nexus means…ish.
So there's income tax Nexus, there’s sales tax Nexus…I bring all that up to say a lot of the American states in your specific example, where you're selling a digital product, haven't really figured out how they want to tax it! That's the reality.
What they have figured out is tangible physical products. For example, it’s June 2019 right now, and my latest understanding is that in the state of Georgia – because I was just talking about this last week is I have a client who's online seller of various things – and because her product that she's selling is not a physical product (people can print this product this PDF out so they can make it a tangible physical thing but that's not her doing it) it doesn't trigger Nexus in the realm of sales tax.
Each country is going to have their own rules about your specific situation. And the reality is those rules are changing daily because countries are trying to catch up, and states are trying to catch up with taxing all these digital products.
The same can be said for like phone apps. There's a lot of new rules that states are making in America to try to start taxing software as a service. Whereas, previously as a blanket statement, they weren't taxing that as much because it's not a physical, tangible thing. So, now there's a lot of states are creating a lot of rules to try to catch up!
Paige: Mmm Yeah, I've always found same thing! People always ask me questions about taxes, and I was, like, “Honestly, from my understanding, I've talked to quite a few different tax people over the years and they haven't caught up with what's actually happening on the internet. So the rules kind of don't really exist fully for what were actually doing is what I've generally figured out.
Adam: I mean, absolutely, that is the general statement. It's the Wild Wild West – I always say – of income or it's the wild wild west of taxing all of us Nomads. Ultimately my biggest piece of advice is to create a document that proves, and can bolster that you were not negligent in avoiding any type of tax situation or tax compliance. Create a document that shows the amount of time that you spent researching staying in compliance with your specific product, at the specific websites. You made this specific phone call, and you talk to this specific person.
Who knows if that would stand up in a tax court case, but ultimately…
Paige: It shows you tried!
Adam: Yeah! It shows you tried, and you'll be able sleep a little better at night.
Paige: Yeah, that's a good idea! I've never heard of that before!
Adam: All these things are judgment calls if you ever get taken to Tax Court, or it can get to be a lot of judgment calls on behalf of the tax court itself based on what you present like your specific facts and circumstances – your specific document. If you were to present something like that, potentially the court can it shows that they tried to do their best. But definitely don't depend on that!
Paige: Okay! Got it. Good! And then how do we know which sales tax to add to our products if we are moving around a lot? Is it the sales tax from where our business is located or is it the sales tax of the place where the customer is purchasing the thing?
Adam: So speaking for sales tax in America, we go back to that definition of sales tax Nexus. So each state has their own definition of sales tax Nexus when you when you have sales tax Nexus when you have sales tax ties, or you did a certain amount of stuff for that state to say, “All right, you need to pay us some sales tax when you have that Nexus that has been created.” That's when you have to file and collect sales tax.
So how do you know when that happens? Right now, I feel the ultimate up-to-date source on that is taxjar.com for America. They do a great job of breaking down all these ever-changing rules out by state. So that's where I would head to to start solving that riddle. Ultimately, the answer of “How do I know?” or, “What sales tax rate do I use?”…before last summer tt was less easier to answer.
Last summer the Supreme Court made a new ruling in this tax court case called Wayfair vs. South Dakota. South Dakota essentially took Wayfair…
Paige: The online retailer of hosts decor and stuff! I love it. Super nice stuff!
Adam: Yeah, so South Dakota took them to court. It went all the way up to the Supreme Court and they ruled in South Dakota's favor. So ultimately South Dakota over created a rule after this court case that if you – a person or company – out of our state sell over $100,000 of stuff or do over 200 transactions…I think that's the numbers…
Paige: Mmm. Somebody somebody Google it!
Adam: Yeah, Google it. There you go! So if you meet that threshold then, “Hey, you need to pay us some sales tax!” So that is an example. If you’re from Georgia or you're from Colorado, but you're selling to your product to that person in South Dakota – if it’s just that one person that you sold to in South Dakota, you don't have a South Dakota compliance piece if it's under those thresholds, whereas if you're from Georgia or Colorado and you're selling to a Colorado or Georgia resident wherever your actually located, you're automatically in general have sales tax Nexus because you're you're organized in that state, and you're selling to someone in that state. That generally automatically triggers sales tax Nexus. So to answer your question of “What rate what I collect? (because in a given state, there's all these different counties and all these different cities) you generally have to collect the rate that you're selling to, which also kind of applies to that example that I just said. You would have to collect the sales tax rate of that customer in that other state.
Paige: Got it! That makes sense!
Adam: Yeah, so it's generally about who you're selling to and then there's these thresholds. Tax jar is the go-to source, I suggest for Americans that have these questions.
Paige: Okay. All right, that's really good to know! We will put that link in the show notes!
Are there any rules are just, like, general tips that we should know? Or information that you want to give us about what to do when you run an online business and sell to other countries? Say you sell a digital product like a PDF, workbook, or a website template or some sort of digital something to someone who lives in another county. Is there anything we should know about that?
Adam: Yeah. Get a glass of wine and prepared to bang your head against the wall! It just goes back to what we said: It's the Wild Wild West in each state. Each country can have their own rule generally speaking in 2019. Because it's a a digital item, you're more safe than unsafe but from a compliance standpoint, not having to fret yourself when you a PDF book in New Zealand. One PDF book and bam! We have to file go through all these hoops to follow New Zealand tax return… generally not!
Maybe it depends on the amount. If it was a $1,000,000 PDF, then I'm sure New Zealand (if they find out about it) is going to use you as the example to create a law! That's how these laws are created. You know, they found out an example, they take people to court and then press it in a set at the end of the tax court case to apply to future situations and to also update rules. Yeah, heaven forbid you become the example! But you know, a $10 PDF sold to New Zealand as an American, I would generally say no tax compliance in New Zealand. A $1,000,000 PDF? You might want to take some of that million and hire a New Zealand CPA to give you an opinion.
Paige: Yeah! Once your business starts making real money then yeah, I agree. I've hired an international Tax Advisor and that was a lot of peace of mind. When I was first starting, I was just making a couple hundred dollars here and there, but once it started going to be large numbers in terms of revenue, I started really focusing on that. So I had the money at that point to be able to spend on that, which was really nice!
Adam: Exactly! I mean, it's an ever-changing game unfortunately in that realm. It’s a cost-benefit analysis. Ultimately, you’ve got to be able to sleep at night and you spend the money (if you have it) to get that peace.
Paige: Hmm. Absolutely. Absolutely. Okay, so I want to ask you some questions related to the people you should have to help you out with your taxes. So who is necessary to have on your team tax-wise? Do you need a bookkeeper, or a tax Advisor, or an accountant? Who are the people that we should generally have to help us out with these things?
Adam: That's a really great question. Bookkeepers are still very needed and necessary for certain businesses. It just depends on what type of person you are, how organized you are, how busy your business is.
There's a whole life cycle of businesses and stages of businesses. I'm saying that because some of my clients, I suggest you use bench.co as a bookkeeper and that it works great for them. Some of my clients. I would never suggest bench.co because they have too much going on, or they're too big, or they just need more reporting, or a bookkeeper would be better. It’s like, at what point is it worth hiring a bookkeeper in house? If you grow to be a bigger company, having your own bookkeeper instead of a contracted bookkeeper where they're not devoting all their time to think about your stuff.
To answer the bookkeeping thing, there are solutions out there where you don't have to have one. Someone just starting off that has only make, like, $20,000 dollars USD should try to do the stuff yourself. You created your own business, and that tells everyone (and should tell yourself) that you're a very confident individual and you can figure out Excel, or QuickBooks, Xero, or Freshbooks. So try it out, but on that same breath if you've been trying it out and you just really hate it, and you suck at it, and you're spending hours and hours getting mad and you're still making maybe $20,000 USD – maybe then get something like bench.co, or pilot.com which an automated bookkeeping solution, because it maybe it doesn't make sense to pay a bookkeeper anywhere from $30-$75/hour when I think pilot and bench can do it much cheaper. If you're very small business. You can basically do it yourself.
Paige: If you’re getting up there, and it’s really overwhelming, you can consider bench or something. And then if you get massive, get an actual proper bookkeeper, or in house bookkeeper.
Adam: Man! Great summary! I can tell you’ved talk with people that like to ramble before.
Paige: And then do we need someone like an accountant or a Tax Advisor? When do you need those people?
Adam: I'm a certified public accountant in America. You would want someone like me if you've done your own little cost-benefit analysis and all your time is stacking up, and you're not feeling comfortable about making your own decisions with accounting or taxes. Then you essentially are just outsourcing that time to me so you can actually you can do more to grow your business. That's kind of my, you know, sales pitch. You can figure out all the stuff that I do for sure by spending time to research. It's just a matter of: do you want to spend that time researching? Or do you want to go hiking? (Or grow your business?) So that's essentially when you kind of get some someone like me – a tax accountant or tax lawyer. Maybe you take this opinion about not paying taxes because you don't feel that the rules apply to you and this situation, and that's when you want to enlist a tax lawyer and draw up a document that I discussed beforehand, documenting your intentions and that you didn't want to skirt your responsibilities, but you interpreted the rules of different way. You felt you did not have to do this thing to be in compliance. So that's kind of how I feel about enlisting those folks.
Paige: Okay, cool! Alright, that's really good! So how would you find a good accountant and what should you expect to pay them?
Adam: So a good bookkeeper and how to find them…QuickBooks has a list of pro advisors. Anybody on that list done a certain amount of QuickBooks hours of learning so they know how to go through the program. Xero has their own list of advisers as well. A good start is to go to whatever software solution you ultimately have settled on and see their own brand of advisors are, because in getting one of those, you know, that person knows the software pretty well and is not going to spend time researching how to do stuff.
I've found pretty good success success googling “Digital Nomad bookkeeper” and “Digital Nomads TPA” because then you'll be able to get someone that kind of lives that lifestyle and knows those intricacies that you live, because there are some intricacies. For example, at what point can you deduct this travel expense? I'm going from here to here. Is that a legit business travel expense? So if you can find someone that speaks a little more the digital Nomad language, that will be less money out of your pocket in the form of less hourly rate spent researching.
Paige: Speaking of hourly rate, what's the normal hourly rate for an accountant?
Adam: For bookkeepers + accountant hourly rates, I've seen anywhere from $35-75. I wouldn't pay too much higher than $75 (and they’ve got to be a really dang good bookkeeper for $75!) because there's other places to do it much cheaper, whether it's automating it through bench or Pilot, or finding a bookkeeper that maybe does it a little slower but ultimately will cost you less – around the $50-$60 range. I don't advertise that. I don’t do a ton of book keeping because it doesn't make any sense to pay me a hundred seventy five dollars an hour where there are so many other options: Bench, pilot or someone else like a bookkeeper that can do it much cheaper.
I more so specialize in the consulting piece of this niche in the digital Nomad realm. I started out at $40 an hour in 2014 and then we lived in Chiang Mai for three months, surrounded by digital nomads. We met a Canadian guy whose father was a CPA and he was like, “You’re ridiculous charging $40 an hour. You needed to be at least a hundred.” So that's when I raised it in the fall of 2015 to $100 and then tax season 2018 I raised it to $175. But I've seen I've seen CPA hourly rates, owning their own firm like I do (so just their own one-man show) rates up to like $250, but if you're hiring out a partner in a CPA firm that's bigger, I've seen rates up $400 and $500.
So it runs the gamut. But if you're running your own business looking for a bookkeeper sweet spot, I'd shoot for – just because I'm cheap – $40s, but realistically $50 to $60 USD. If you’re looking for a CPA? I Charge $175, so that gives a rough idea.
Paige: Yeah, that's really good! Okay, awesome! Can you talk about some pros and cons – specifically America corporate structures – What are the benefits of these different corporate structures like LLC or S Corp or whatever else there is! I don't even know!
Adam: Hey, you got some good listeners asking these sorts of questions!
So there's all kinds of different tax structures in America that will potentially have their own tax return that is treated their own specific way. If you're a company that is a start-up and is potentially going to reach out and get investor money. and are going to hire employees, and give them options or shares and stuff like that… if you're in that realm, you really want to research becoming a c-corporation.
If you're like we are, you know, and you do something really well and are starting up your own business as a consultant or selling a digital product or whatnot, you're going to automatically be considered a sole proprietor in America. So sole proprietor Taxation. So that's your automatic situation at the point that you make around $50,000. It's a moving Target, but around $50,000 dollars net income in that scheme, you want to consider making an election to be taxed as an S corporation because you may get more favorable tax in results. There's a lot of things that you’ve got to do to do it properly.
If you are a starting something with your buddy, then you're going to be automatically classified as a partnership scheme, or partnership structure, and the same kind of story tends to play out like what I just said with the sole proprietor. Once you make around $50,000, you want to start thinking if an S corporation election would be more beneficial. There is my off the cuff, without making you want to stick your head in the sand, generalization of different tax structures.
One distinction I want to make is notice how I never said the word LLC or limited liability company in this whole discussion because that is not a tax structure. I get that question a lot and LLC itself – A limited liability itself – is not a tax structure. It is a state specific organization option.
Think of it as an umbrella. We will call the umbrella form your LLC (the actual Fabric) and then the little holder will be your tax structure. You can have different type of “holders.” It could be a sole proprietor LLC, a sole proprietor LLC as a partnership. LLC as an S corporation. They come in different varieties.
Paige: Oh, I didn’t know that!
Adam: Yeah, I get that question a lot.
Paige: That's really interesting. Alright, cool! Good to know! So once you hit $50,000, get in touch with a CPA to help you decide what structure you should be.
Adam: Basically, yeah, because you're gonna default to it. If is one person, you’d default to sole proprietor; two people, you’d default to partnership. A c-corporation kind of has its own set of unique things that I discussed. Yeah. Once you reach around $50,000, you want to look into “Can the election to be an S corporation make sense for you?” It may not make sense for you. Depends on what you got going on.
Paige: Yeah! Okay, cool! Really good!
When it comes to write offs, what part of travel can you write off?
Adam: Yeah. This one's…I mean, this is where I make all my money! This is the reason I have a business. From an American IRS standpoint, the words you want to Google are tax home, abode, and itinerant. These are vocabulary words that the IRS has thrown out there to help wrap our mind around this. I have a I have an article on my website in the resources tab that duck dives into this. Essentially, to sum it all up, there's a test that the IRS uses. It’s called a three-factor test to help you determine at any point where your tax home is, because the reason the IRS wants to determine that is if you never leave and come back to your tax home – if you're constantly moving your tax home with you – that generally is telling you that you don't get travel business deductions.
You're moving your tax home along with you and never leaving and returning to it. An example: folks that are full-time Rv’ers (which I work a lot for)… generally you're living in an RV full time and you're doing your work from your RV and you're driving spot to spot. You're not going to be able to deduct that mileage. The IRS most likely going to say “No, that's some personal stuff.” You're choosing to drive around and you never left a place and returned back to it. You abandoned that previous place that you're at. So an example of when it may make sense to deduct those expenses: You got a six-month lease in Thailand, and and you fly for a business conference and you're making contacts and your maybe even meeting some of your clients, so you incur that flight expense, and lodging expense. That is duplicating your lodging expense. You go to the conference and you come back to Thailand so your tax home was in Thailand that whole time. It didn't move to that conference location. Therefore, that is an example of l a legit deductible travel business expense.
Ultimately, there's a three-factor test (Google IRS 3 factor test travel expense deduction itinerant). We use that test as a lens to riddle each specific type of traval.
Paige: Okay. Alright, that's really interesting! We're also going to link to that article that is on your website. I think that could be useful!
Someone asked: “Are there any little no write-offs that people are missing taking advantage of?”
Adam: A lot of folks in America that have this sole proprietor taxation scheme don't realize that you can get a self-employed Health deduction. A lot of folks that run out of an airstream in their backyard or out a house don't understand depreciation expense and how pivotal that expense is to reduce your taxable income. It comes into play when you go to sell that asset.
A lot of folks don't realize in America, if you give a client a gift over $25, you can only deduct $25. Meals now are only 50% deductible. So you spend $100 on a meal with a client or with an employee, you only get to deduct fifty dollars of that. And with the new tax law for entertainment, if you’re buying a client Braves ticket to go watch the baseball game, that is no longer deductible.
Paige: Interesting! It’s no longer deductible in terms of taxes, but it can still come out of your business account, right?
Adam: Yes. Exactly good clarification. You still want to report that stuff on your accounting records so that you and your CPA can help make those distinctions at tax time. You never want to do that calculation yourself because for your accounting records, you still want to be able to see how to help your company. Even though it's not deductible, you want to see that you spend $100 on a gift so you can plan in the future.
Paige: Yes, it’s definitely got to be in your bookkeeping, anyway. It's going in and out of your business bank account! You want it to be in your bookkeeping but maybe don't get the tax benefit of it.
Paige: Okay cool! In terms of work throughout the year, I got this question, which was really funny…
“How does a newbie start accounting so that said newbie doesn't get raded by the IRS.”
I guess the question is: What do they need to be doing so that the IRS doesn't come after them?
Adam: (Laughs) That person's pretty cool. What you need to be doing so the IRS doesn’t come after you...
Paige: File Taxes!
Adam: Yeah! File taxes.
Essentially, you have a tax compliance even if you don't file a single thing. Even if you don't file an LLC, you don't even open a business bank account, and you don't get accounting software. Yeah. I mean, you still have tax compliance.
I think once you're going to owe self-employment taxes – once you're above the $400 on the schedule SE it’s called…when you're actually doing an action that is getting you money and you're spending money on that business, you need to file your taxes. So yeah, that's a good way to make sure that you're doing things right is file your taxes.
The other thing is documentation. Hammer documentation to death to where it's painful. If you're traveling around a lot, create a document – a travel log that shows you made this money, in this state, in this country. You can pinpoint it down like that, if you if you get paid a stat amount over a year because your an employee and you're constantly traveling and you can use some ratios that kind of average it out to where you earned your money, or figure out a way to do that to have a travel log as a documentation piece to prove why you made a decision on your tax return.
Reach out to someone like me to kind of go through something, to essentially like walk you back off that cliff. The IRS does a good job with Scare Tactics and everybody thinks that they're always going to after them, but the reality, is I think, less than 1% of people get audited.
Paige: Plus the people at the IRS are pretty nice! When I had to call them one time, they were super friendly! They're really helpful!
Adam: If you can get ahold of them…
Don't call them during tax season. That’s when you'll be online for hours. And yeah, they are very helpful! I call them all the time. I mean, there's so many things I don't know that I just call them and ask. They can’t give a legal opinion but they can steer me down a path so that I can make some more light bulbs go off, you know.
Paige: Yeah, that's really good. They're not they're not as scary as you’d think they might be.
Adam: Yeah. For that said “newbie,” they have a small business administration. They do a pretty good job with a website of PDFs and documents that help you. You just have to take the time to go through to make you feel better that you’re doing things right. The IRS is getting constantly better with YouTube videos about running your own business – good little digestible two-minute videos about self-employment taxes. Dive into some of those resources and get some clarity. Clarity is what it boils down to.
Paige: There's some things in different municipalities where their whole job is to help you start a small business because whatever location you're in, they want your tax money! They want you to start a business, and they'll often have advisors who can help you on these sorts of things.
Adam: Small Business Administration, I think, is the federal one. Maybe that Federal one divvies out money across all the states so they can create their own State specific one.
Paige: Totally! Another question was: “How do you calculate your quarterly taxes, or how do you know what you should be paying for your quarterly taxes?”
Adam: So… another wormhole. I’ve got an article on the website on that one too. Ultimately, I think we can all agree, we want to avoid penalties and interest. One way to avoid penalties and interest is what called The Safe Harbor rule.
So if throughout 2019 you paid estimated taxes that equal your 2018 tax return (I think it's line 15 that says total tax), if you pay in quarterly payments or installments the amount that equals that amount on the prior year's tax return, that's what's called meeting the Safe Harbor rule so you avoid any penalties and interest. What you don't do though, is if you made a whole buttload more money in 2019 than you did in 2018, and you go down that route, you don't get an accurate presentation. So you need to be ready to pay some more come tax time. But you're going to avoid interest and penalties. That’s what a lot of people want to do that I work for because they don't want to pay me to do more finite penny-pinching calculations.
They are responsible enough to set aside some money in anticipation to pay some extra taxes come tax time. So I do have a handful of folks that want a more accurate number.
The next way to accomplish the estimated tax goal is a very rough estimate rule of thumb: A general, conservative number of 30% that you may see floating around the interwebs. That is definitely not down to the penny. That just saying “alright, you're going to pay taxes to the Federal Government – Federal ordinary taxes. You're going to pay taxes to your state government – state ordinary income taxes. You're going to pay self-employment taxes.”
Add all those rates up and you'll get typically around 30%. It depends, because maybe you're in a high tax state like New York and you made a buttload of money! So maybe in a low tax state like Colorado (Colorado is so generally the 30%) if you want to get down to the penny, then you Google IRS form schedule SE. SE stands for self employment. That is where you can work through a worksheet that provides us a better down to the penny rate. So lots of ways to skin the cat!
I mean, ultimately, I think we all want to avoid interest and penalties. Option A is the quickest easiest. Option B – a little more work. Option C… lot more work.
Paige: Hmm. Got it! Then what happens if someone did not save as much for their taxes as they need?Their tax bill comes in and then they can't pay the thing. I guess it just adds interest on to whatever you owe?
Adam: There's a thing called an installment method payment. (I think is what it's called… Google IRS installment method and you'll get there). Essentially, it’s a quick application process and depending on how much you owe, you may or may not have to pay some money for that application.
You propose an installment: "Over the next year, I want to pay this amount each month to tick away at that amount that I owe ya’ll IRS,” and they would approve or disapprove it. Usually they just approve what you say. So that's one way to do that. That's going to be the cheapest way because the interest that they do tag on is going to be much cheaper than you putting it on a credit card and getting 18 percent or something.
So the installment method rate is going to be much cheaper than any kind of a lot of credit or something that you get. I would assume that the rate that IRS levies is tagged to the federal prime rate, but I've never had to do that.
When some of my clients need to do that, I have them do it themselves because it's just more or less money out of their pocket for them to go through that process. So I just get them to it. I don't know. I've never actually done it.
Paige: Okay. All right. That’s good to know. So if you don’t have enough for your taxes, don't have a heart attack! You can split it over time.
Adam: Yeah, you can split it over time and please don't use a credit card@
Paige: Yeah, good call! Good, good advice on that one. Okay good!
So a lot of these things that we've talked about definitely are very specific to certain people and situations, and where they are, and what they're selling, and who they're selling to, and where those people are! So an accountant is sometimes a good idea!
So, can you tell us what are some options that people have to work with you? How do people normally work with you?
Adam: So most of the folks I work with, we’re all…like, we can figure it out for ourselves!
So like I said earlier, I usually get folks who are like, “Okay, I'm done doing this research and I want to pay somebody!” So that's kind of the typical situation. Every now and again I get someone that totally offloads things at the very beginning.
I’m at nuventurecpa.com and I have a button that says “make an appointment with me” and we have a 20-minute chat that's for free just to make sure we kind of clicked together because it ultimately boils down to communicating very well.
For example, I work really hard during tax season so I don't have to work that much outside tax season, and if you need someone on their email every day, I'm not that dude! I try to check email Tuesdays and Thursdays and then I just have a to-do list that I address their other days of the week. But ultimately we kind of talked about those things in the first 20 minutes and then I kind of unpack your situation and tell you how I would approach solving your riddles. But yeah, that's how folks reach out to me!
Paige: Perfect! We are going to link your website then. If you want to call you can go chat Adam. I’m sure he will be very helpful! Thank you so much! I really appreciate it. I know people are gonna super appreciate this episode. So I thank you so much for coming on!
Adam: Yeah Paige, thank you for putting some trust in me and being willing to reach out. Your listeners have some great questions! I mean, jeez! They're on the right track if they're asking these types of questions!
Thanks so much for hanging out with us for this episode of the online business besties podcast. If you love the show, be sure to leave a rating and review wherever you listen to podcasts and of course check out the show notes for this episode and all past episodes at paigebrunton.com!
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