Click Here To Listen To The Retirement Tax Services Podcast

STAY ON TOP  OF YOUR TAXES

What You'll Learn In Today's Episode
  • Why W-2 vs contractor isn't necessarily a choice
  • Why great tax planning requires a great system, especially when you're self-employed
  • Key topics you need to ask clients about when they become newly self-employed.

Summary:

In this week’s episode the Least Boring CPA is joined by Ben Lake, a financial advisor with an incredibly unique niche. Listen in as Ben shares his back story and talks with Steven about the tax intricacies of working with self-employed clients, especially ones who are becoming self-employed for the first time. This episode has great insight into the questions you should be asking and Steven and Ben both share their top recommendations on actions that have to happen the first year of self-employment.

Ideas Worth Sharing:

“The most successful business owner, self-employed mentality is really figuring out how your time is best spent and then what you can outsource and how to do that efficiently.” - Ben Lake Click To Tweet
“People tend to skip over the basics that can be really important and really painful if we get wrong.” - Steven Jarvis Click To Tweet
“I think it's really hard for people to mentally keep track of, let alone quantify the value of benefits you get as an employee.” - Ben Lake Click To Tweet

About Retirement Tax Services:

Steven and his guests share more tax-planning insights in today’s Retirement Tax Services Podcast. Feedback, unusual tax-planning stories, and suggestions for future guests can be sent to advisors@rts.tax.

Are you interested in content that provides you with action steps that you can take to deliver massive tax value to your clients? Then you are going to love our powerful training sessions online. Click on the link below to get started on your journey:

Retirementtaxservices.com/webinars

Thank you for listening.

Read The Transcript Below:

Steven (00:52):

Hello everyone and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals edition. I’m your host, Steven Jarvis, CPA, and joining me this week on the show is Ben Lake, a wealth advisor at Miracle Mile Advisors. Ben, welcome to the show.

Ben (01:06):

Thank you so much for having me. I am delighted to be here and excited to chat.

Steven (01:10):

Yeah, Ben, I’m really excited to have you on the show for a couple of reasons, not the least of which is that my 11-year-old might actually listen to this episode of the podcast. But really we’re going to talk about something that I know we haven’t covered in our closing end on 200 episodes of this show. So I’m always excited to talk about new things and where this comes from, being part of your niche is working with professional gamers and really the broader conversation we’re going to have is around working with people who are unexpectedly self-employed and maybe don’t think of themselves as self-employed, which can cause some issues. But before we dive into the tax planning side, talk about how you landed on a niche of I’m going to work with professional gamers.

Ben (01:52):

Yeah, sure. Well, it’s a really exciting area I have to say. I kind of love working in it. It’s not the only kind of client I work with. So the slightly broader background is that, as you mentioned, I’m a wealth advisor at Miracle Mile Advisors, great firm. We’re based in California. I’m out here in the New York area as part of the New York team. But basically, I would call us sort of a boutique planning focus wealth management firm that mainly focuses pretty much on what you said, people who are self-employed, business owners, founders, executives, and I have kind of my own particular niche in this sort of pro game or content creator area on top of that. So there’s a lot of overlap in the kinds of questions and plans that we bring to the table around anyone with this kind of additional layer of tax complexity in particular, but also just life complexity.

(02:42):

There’s a lot of different things going on when whether you do it intentionally or not. And I sort of got into this community essentially by growing up as a gamer myself, as kind of a product of the eighties and nineties. I was not necessarily ever going to go professional with Oregon Trail, but that’s fine. It was still a lot of fun. And so over the years, got more involved at other games and started reaching out to people that I was a fan of after I graduated and started getting into the industry, mainly from the investment side of things, I was an investment analyst and macro researcher before I became a financial advisor. I started reaching out to some of the folks who were getting these big followings, appeared to be making some money, and I reached out and said, Hey, I love what you do.

(03:26):

What you do in the game and the content you create is actually super interesting and helpful for me. I love watching you. Here’s what I do. Now that you’re making these sums of money, what are you doing to manage that? Can I help you in any way? And the first question was sort of like, what do you mean to manage? What do you mean to do with our money? We have the money, it’s in cash and now we have things and occasionally we spend it, but usually not. Isn’t that enough? It was sort of like, oh no, we have a lot to talk about. Please, let me help you. So it started to evolve into a conversation around let’s just start with the basics. Here’s what retirement accounts are, here’s how you can think about write-offs. And they’re kind of like write-offs. What are these write-offs you speak of?

(04:09):

So it evolved pretty rapidly from a very basic understanding of what they were doing to everyone realizing how much they either do or don’t know what questions they have. And now it’s been actually a 12-year journey. My first client in that space was 12 years ago. Helped a lot of people and it’s really fun. Always different, always super interesting and certainly started to get into the chat about it, but that’s my origin story, just kind of a person who is really a fan now trying to help out in real life and just got involved.

Steven (04:39):

That’s super cool. And for listeners who aren’t familiar with the Pro gaming community, it’s actually kind of fascinating how diverse and widespread it is. I recently learned that the original Tetris game, still the original version, not like an updated new version, but the original version on the original Nintendo has a massive following videos with millions and millions of views all based on the original Tetris game. That’s not even talking about new games that my kids play and all of that sort of thing. So I like that you made a reference to the Oregon Trail, lots of memories there, but really what we want to focus today’s discussion on, because most of our listeners probably aren’t looking to get into this niche that you are in, but there’s a ton of overlap between working with these gamers and content creators and W2 employees who suddenly pick up a side hustle or people nearing retirement who as part of their transition take up consulting or have some sort of bridge to retirement that they find themselves suddenly and they’ve never had to think about what a write-off is before. They’ve never had to think about how they get their taxes paid. If someone’s not withholding it for them, they’ve never thought about whether they get to decide if they’re self-employed or W2 or how that might all come together. So I want to talk about some of these things today so we can give some great context and advice for people who are working with clients who end up in this unexpectedly self-employed situation.

Ben (06:03):

Yeah, and you’re right, those are all really different angles. It does wind up becoming a different structure and a different situation for everybody depending on what their goals are, thoughts around it are. I have a lot to share, so I’m happy to start with questions, but I think from a set expectations perspective, a lot of the tax planning advice for these kinds of people with these kinds of things, it just can almost never be generic. It really has to be adapted to each person because even if I’m talking to two gamers or two people who are really just self-employed by themselves consulting, it doesn’t matter the industry, they can have completely different situations even if they’re around the same age and different goals and the tax advice will shift completely and be literally the polar opposite. I can tell one person to keep a basic, Hey, from what you just told me, it might make sense for you to really focus on putting some pre-tax money aside in these variety of accounts for the longterm. And the next person I might say, don’t do that at all. You’re actually better off doing, I don’t know, a Roth or forgetting retirement accounts doing something else with it. So I’m excited to go through these different decision trees perhaps.

Steven (07:08):

Yeah, so let’s start with an example that I came across recently and then I’ll let you share. I had a client reach out, having a transition in employment has already got their situation lined up, what they’re going to do next. And the way they initially asked the question was basically I need to choose between being W2 and 1099, which one’s better? And I said, hold on, let’s explore this a little bit because it’s not necessarily that simple. The IRS and the DOL both have some pretty strong opinions on what qualifies as an employee versus a contractor. These are things we don’t want to run afoul of. And what I find Ben would love your perspective on this is that quite often taxpayers will get really in love with this idea of, oh, I want to be, now I get all the write-offs that you mentioned, and they’ll totally skip past, oh wait, now I’m responsible for both sides of payroll taxes.

(08:00):

Now if I’m self-employed and I’ve always been a W2 employee before, I’m responsible for my own health insurance. And that’s what I see get missed a lot, especially this transition from employee to contractor is if you have a hundred thousand dollars salary and you’re not thinking about all of the other benefits you get and you go to being a contractor and you’re like, oh, well they’re going to pay me a hundred thousand dollars a year, I made a lateral move. No, you just took a massive pay cut responsible for more taxes, you’re responsible for your own benefits. There’s a totally different way to think about this. So not sure your experience with more of the gamer and content creator crowd if they’re making that transition from W2 to 1099 or just straight into 1099, but how do you help people navigate that? 

Ben (08:41):

It’s a really good point, exactly right. I think it’s really hard for people to mentally keep track of, let alone quantify the value of benefits you get as an employee. So I’ve worked with some folks who gamers aside who have gone through that transition where they used to work at maybe a big tech company and then they wanted to do more of their own thing, but they consulted back to that former employer and maybe their pay change. But you’re right, their taxes essentially went up. They didn’t really have justifiable write-offs and they had to cover both sides of payroll taxes. They no longer had access to things like health insurance or free disability insurance or the multitude of fringe benefits they had access to previously. And they didn’t have their own retirement account anymore. They didn’t have a 401k they had access to. So before they started working with me, they had just forgotten to save for retirement.

(09:33):

So just that in and of itself was sort of something that they had missed and didn’t think about. And I think when it comes to some of the gamers, interestingly, it’s a slightly different world. I mean, you’re right, obviously, the DOL and IRS have a lot to say about these things, but they sort of get treated like athletes, pro athletes to some degree from a tax perspective, meaning in some organizations they are really treated as contractors period, and that’s the entire league that they’re in. But some organizations and some leagues now have league mandates that say, no, you have to treat everyone as W2 employees. So for example, the entire Call of Duty league used to be entirely, the whole professional scene was entirely 1099 contractors in terms of how they were set up and they could easily switch teams. Now they have to all be W2 employees and everyone who was helping them out, whether it was their families or their managers or their CPAs had to sort of turn on a dime and figure out how to adjust the bookkeeping they were doing, the tracking they were doing and how to report taxes and all that kind of stuff.

(10:37):

But it actually worked out for a lot of them in that there was now an enforceable set of benefits they had to have access to, which most people were not taking advantage of or didn’t have health insurance being included as you mentioned. And the same thing with things like the payroll taxes is suddenly being covered because we’ve also worked with folks who are more intentional about being self-employed. They get multiple sources of income, especially if they’re doing content and some kind of consulting and sometimes they don’t have proper accounting help or knowledge, and so they just don’t do any estimate tax holdings during the year. And then they have this giant shock in April or October where they’re like, wait a minute, how much do I owe to the government? And what are these penalties for under withholdings? And they have this massive cash crunch all of a sudden they didn’t think about this, they didn’t plan ahead.

(11:26):

So I’ve seen people have to deal with six-figure loans to pay the IRS back plus the penalties, work it off for the next 12 months only to have it happen again 12 months later. And it’s sort of like this really significant issue you have when there’s no planning or thought process around it. So obviously this can depend a lot on the kind of situation you’re in and where you’re coming from, but even for folks who are really just kind of like the person you mentioned trying to “choose” between being a W2 employee and a contractor, self-employed, really a lot that goes into it. And if you don’t think about the different structures you really need to have in place, the penalties and the potential risks for ignoring some of those things have a pretty outsized impact.

Steven (12:07):

I really like how you’re setting this all up because it’s easy to skip ahead to what people might think of as the exciting things of, well, but wait, how do I write all of my personal things off? That’s a whole different thing that most people get wrong, but people tend to skip over the basics that can be really important and really painful if we get wrong. Even just those estimated payments, and again, whether you’re a gamer or consulting or whatever it is, these unexpectedly self-employed or self-employed for first-time taxpayers, I see this a lot where they’ve either just not had any experience with it before or their experience has always been someone else’s withholding my taxes and the cash crunch, the penalties at tax time can be debilitating. They can be life-altering if you’re really not expecting that. And so we got to make sure that we cover the basics before we skip ahead to what might be a more attention-grabbing headline material and say, do we have a plan for paying our taxes?

(13:00):

Do we understand what our tax situation really is and what it should be? Do we know what we need to be accounting for during the year? I like that you talked about similar situations potentially having or what seem like similar situations, but potentially having polar opposite recommendations because it can feel easier to just go with rules of thumb. And I’ll totally admit, I have a spreadsheet that I give to newly self-employed people of types of expenses they should be on the lookout for, but we use it as a conversation starter, not as the gospel truth because we want to leverage our experience, we want to leverage resource, we want to leverage systems, but we’ve got to then take the time to make it customized and make sure it’s applicable to that client.

Ben (13:42):

Definitely. And I think actually systematizing things like expenses is actually a great first step. That probably is something you can show everybody as like a, hey, now that you have to at least think about tracking your work-related expenses, if you don’t think about it, you’re going to look at this pile of either junk or emails a year from now and forget which ones are actually possible. But when it comes to things like we haven’t gotten to this part of this planning process yet, but I dunno, I think it’s slightly sexier. Not everybody does, but when you’re thinking about things like, oh, well, how should I structure this? Should I be an LLC? Should I stay as a sole prop? What’s an S corp? Who does C corp? What are these things That can be pretty interesting because there are plenty of times where you start out small and you don’t need to be an S-corp or a C-corp or whatever.

(14:29):

You might need to just keep things simple, but if things start to really grow in your income builds, there’s a lot of potential conversations to have around, alright, well what would be the cost benefit analysis of being taxed as an escort? And for some people that’s a great way to go. For plenty of people, that’s a great way to go. For others, they might have a different goal for their self-employment income entirely, or maybe they’re trying to create something that, I’ll give you an example here. Maybe they’re trying to create a lasting brand that can then eventually perhaps be purchased by a larger organization. So for example, I had a conversation not too long ago, actually last week with a content creator who is now thinking about developing their own beauty brand and some kind of product around that they can market using their platform and it’s entirely possible that they have that it works out great for 5, 6, 7, 8, 9, 10 years.

(15:22):

And if they want to have some kind of exit or plan ahead for an exit, it might be worth considering things like if you were to create this as a C corp, maybe you can qualify for the section 1202 exemption. So there’s some potentially fun, interesting conversations that would be different from the usual person who might say, well, if you’re earning this or over this, you should just be an S corp and call it a day. Maybe I’ve kind of thrown this into the deep end here, but this is an interesting example that happened to me literally a week ago.

Steven (15:49):

I love it. I love being able to share just the range of options because the way I look at this, especially on this podcast as I talk to advisors, is I want to make sure that we can really solidly cover the basics and then we key people into what other things are out there. Because this podcast is never going to make somewhat section 1202 expert, but if we can make more people aware of it that it’s out there that hey, there are these situations for small businesses where an exit is in the future where hey, we at least need to stop and ask the questions and it’s time to tag in an expert in that area. Those are great things to be aware of because if you’re not even aware of it, how are you ever going to make sure that clients get that opportunity? Circling back to the basics just a little bit. So you have a client brand new to being self-employed. This is 2024 is the first year they’re going to be self-employed. What are the first 1, 2, 3 things that come to mind that’s absolutely unequivocally you have to start doing these things this year as newly self-employed?

Ben (16:43):

Oh, that’s a fun question. That’s a fun question. So I would tell it depends on what they’re doing. I would tell them the unequivocal truths are perhaps number one, think about just having a system for how you’re going to both handle and track your income and expenses. It’s really two things in one there, but I would tell basically everybody, you need to at least probably have a business bank account, right? Something that can receive the income you’re going to get from this employment that is not commingled or not exactly the same as your regular personal bank accounts. And then number two, at least try to think about getting a system, whether you pay for it or do it yourself for tracking all of your expenses and anything that could be related to expenses, whether may be travel easy stuff might be things like internet bills and if you have to subscribe to something or if you need a license for it, obviously you have to do that kind of stuff.

(17:38):

If you need to get new equipment, a new camera, a new computer, I don’t know, a new awesome gaming chair, whatever, then you obviously want to track some of that stuff, but have a system to track it. Those are probably one and two right there. And then maybe three is probably slightly more of a next step. Not necessarily quite as immediate, but kind of figure out what professionals you need. I’ll be honest, I tell almost everybody that they probably need to, once they hit a certain at least threshold of income and threshold of complexity, you need to at least think about engaging with an accountant probably first you might need a lawyer, you might not, and then maybe a financial planner third. I don’t put myself first on this list because I don’t think it’s quite as mandatory as someone like having an accountant to at least talk to and bounce ideas off of. So that might be number three. And that I think in that order is probably how I would start talking to folks who are brand new into the space.

Steven (18:39):

Totally agree. I thought about going first, but I love that I let you go first because we have a lot of similarities here because number one for me, I’m spot on with you. You’ve got to have a separate way to track these things. Really, if I was going to put it really simply, just open a business account, open a business credit card, whatever it’s going to be, get the lines of separation in there. So it’s not all just going through your personal bank account because I’ve seen so many people, you mentioned it earlier, trying to dig back through emails, whatever that looks like of figuring out what you spent money on, just have a separate account that’s going to give you a huge leg up. Number two for me, and you spoke to it earlier so I’m sure we would’ve been in your top 10 somewhere, is to start setting money aside for taxes.

(19:19):

I usually tell people to be super aggressive with it, especially if they have state taxes to pay as well. Shoot, start setting aside 30, 40, 50% for taxes because worst case you’re going to get later in the year and realize you don’t need to pay all that in taxes. But to your point earlier, geez, you’re going to put a real damper on especially your first year of self-employment if that year wraps up with huge checks due to the IRS. So those would’ve been my first two of, Hey, have a separate account, have a separate tracking system, make sure you’re setting aside money for taxes. And then I love that addition of, Hey, let’s start thinking about the professionals you need in your corner to set you up for success. I know lots of people like this idea of DIYing things, especially when you’re in a very particular area, whether that’s consulting or gaming or content creation. Your time is best spent, your client’s time is best spent on whatever it is they do that makes them money, that gets them followers, that gets them clicks, that leads to consulting, whatever that is. Bookkeeping is not what makes you more money unless you’re a bookkeeper, we can have a separate discussion, but you want to have professionals in your corner. You want to have systems in place so you can focus on what’s most important.

Ben (20:26):

That’s exactly right. The most successful business owner, self-employed mentality is really figuring out how your time is best spent and then what you can outsource and how to do that efficiently. Because like you’re saying, bookkeeping is not going to be a great use of someone’s time if they’re making six or seven figures a year creating podcast content or YouTube videos or whatever it might be. But if they want to do everything themselves, they could spend just as much time editing their content instead of hiring an editor and just wasting massive amounts of time that could have increased their income. Who knows how much, 2 x 5 x, 10 x. So the same thing goes with, I just don’t encourage people to learn the entire tax code by themselves and then try to hope they do it right. It doesn’t seem like an efficient use of every person’s time. It’s why CPAs exist. Same thing with financial planners and with lawyers, it’s just a little bit more, you just get a lot more efficiency if you can find the right people. And it doesn’t have to be crazy expensive. Obviously, it can be as simple or as complex as people actually need it to be. People want to be part of the team.

Steven (21:29):

Absolutely. The other thing that’s coming to mind as we’re having this conversation is just a reminder that with tax planning and financial planning in general, usually the best work is done over time. So even as you and I kind of bounce around and talk about all these different things, we covered a lot of the basics. You had already mentioned retirement plans and entity structures and planning for future exits, and those things will come with time. We want to look at this as a relationship, as a process of consistently pulling the right levers over years potentially. So don’t feel like this episode or any other episode of this show is meant to be, here’s all the things you need to rush out and do tomorrow with every client, or you’re a terrible person and you should just quit your job. These are things we need to build into the process over time.

(22:11):

And if in year one of being self-employed, all we get done is that you have a system for tracking income and expenses separately from your personal stuff, and you’re setting aside money for taxes, and we get through the year without any huge surprises come tax time. Geez, I’m going to count that as a win for the first year. We are going to build from there. That’s not going to be the end of the road, but to me, that’d be a win. And so if we’re coming into a relationship where somebody’s already four or five years into being self-employed, maybe then we’re jumping at a different point in the process. But look at this as a process over time.

Ben (22:42):

A hundred percent agreed, and a hundred percent agreed. And you’re absolutely right. There are some basics that kind of need to be covered as steps one through 10, call it, or one through three or one through five. And then you can get to the more kind of second-order questions, the more advanced type planning stuff over time when some of that might not even matter in the first year because some of these things are only impactful if income is really growing and hitting a certain threshold. We don’t need to get crazy with the different kinds of retirement accounts we’re going to use if someone’s not making maybe more than $50,000 or a hundred thousand dollars or in some cases $500,000 or more or a million or more. There’s just some ideas that don’t need to be executed at certain levels and aren’t nearly as efficient or cost-effective.

(23:22):

So I think you’re exactly right. The process is the name of the game. I think that’s the key for any kind of relationship. And obviously, it helps, I think for the audience here to know it’s also not on one person to do all this for each client. It actually works a lot better. I find that my clients who are the happiest are the ones where I’m communicating all the time directly with their accountant and with their attorney or with their agent or whoever it is. And then we’re having this kind of team conversations and then bringing the ideas to the client to say, Hey, here’s what we’re going to do. Here are the reasons why. What do you think? Are you ready for this? And they’re kind of like, oh, you guys have already taken care of me. This is great. Thank you. I love you all. It’s way better. It’s way better to do it that way. Yeah, absolutely. As opposed to trying to be the smartest person in the room and not know necessarily if anybody else agrees with you what you’re suggesting.

Steven (24:09):

That’s a great reminder there. Another thing that comes to mind for our listeners to this podcast, I mean, I know a lot of financial advisors have 1099 income or self-employment income or running their own businesses, and so this is good stuff to look at for yourself. Last year, the RTS Summit, we did a whole session on advisors doing tax planning for themselves at the summit this year, September 25th through 27th in Phoenix we will definitely cover that topic again, so make sure that’s blocked on your calendar. You can go to retirementtaxservices.com/summit to get signed up. It’s going to be great time and a chance for advisors to learn some about what they can be applying in their own situation. So Ben, we always like to make sure we take the information we’re sharing and make it valuable, which for me means that we can take action on it. So as you’re thinking about the things we’ve talked about today for advisors, what are action steps that you would recommend they take?

Ben (24:58):

That’s a good question. I think for advisors who are in the audience listening to this and looking for kind of like, alright, how am I going to apply this to the clients or the prospective clients that I might work with? I hope that this sort of helps build really a thought process and kind of a workflow around, alright, if someone’s going to be in this either intentionally self-employed scenario or maybe they find themselves self-employed, here are the key topics that the advisor needs to at least know to ask about. Here is sort of the mentality that you’re going to have behind the why and that I’m sure everyone probably agrees is really going to be based around each client’s goals situation and all that kind of good stuff. But just being able to then take those goals and apply it through the lens of, alright, what’s this going to mean for this person from a tax perspective, what does it mean that they’re going to need to think about for keeping their benefits going?

(25:49):

We already touched on health insurance, but you don’t want to let someone who’s the main breadwinner of a family of four suddenly lose their health insurance or his health insurance and then the family is kind of caught off guard. So things like that might be slightly ancillary to today’s conversation, but just going through those key topics of, alright, what do we need to at least discuss? And then taking some of the ideas we kind of mentioned and saying, all right, now here’s some more maybe advanced techniques or strategies for us to have a conversation around, do you think this fits with your goals and your life versus this? And then make sure, again, as part of the process you’re bringing into the conversation, the CPA, whoever else might be on the team with that client with you to make sure that everyone’s kind of sharing ideas together. I think that’s the goal, right? Is to have that thought process, that kind of, I call it a decision tree, but basically that kind of list of questions that figure out, alright, if we’re trying to achieve X, what are the questions we need to ask? And what are those answers that direct us to in terms of strategies and techniques to apply here?

Steven (26:50):

I love that. That’s a really great recommendation as I always do. I’m also going to strongly recommend that advisors get tax returns for their clients every year, for every client, especially as we’re making transitions. We want to make sure that the things we talk about during the year, this planning that we do actually gets reported to the IRS correctly. I’ve definitely seen issues where we’ve got estimated payments during the year, but the form 2210, not that we have a lot of tax preparers listening to this, but there’s an IRS form where we can tell the IRS, Hey, our income wasn’t earned evenly during the year. And this becomes even more critical when people have started a new business and maybe most of their income is in the third and fourth quarter, and we didn’t make estimated payments until the third or fourth quarter. We can help avoid underpayment penalties. It’s a small example, but you need to be getting tax returns every single year. And then the other thing, listening to this podcast is a good first step, but you need to commit to continuing to learn and continuing to level up. Come to the RTS Summit, find other resources that you can follow along with. There are plenty of great resources out there in the industry, but make sure you’re committing time to learning and leveling up. Ben, thank you so much for coming on the show. Really appreciate your time and sharing your expertise.

Ben (28:02):

This was great. Thanks so much for having me, Steven. This was an absolute pleasure. Thank you so much!

Steven (28:05):

To everyone listening. Until next time, good luck out there and remember to tip your server, not the IRS!

The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.

Contact Us