Episode 030: Q&A 14

On this episode, I answer the questions "What's the difference between freelancers and small business owners? If I have multiple income streams, do I need to separate the incomes for taxes?"

The short answer: Is you can deduct “ordinary & necessary business expenses.”

Listen to the episode and read the transcript below for all the details.

If you really want to dig into write-offs, I’d also love for you to join the Tax Challenge happening next month to help you get all your docs ready for tax season. It’s totally free! And you’ll get my free small biz tax deduction guide.

Episode Transcript

Braden: (02:11)

So really they're like an independent contractor and not an employee. So I find a lot of people will, will look at employee and then an independent contractor slash, freelancer, and then a business owner is kind, kinda like a progression in a really in legal and tax context or legal and tax land. That's not really how it works. From my perspective, freelancers are business owners. They're more or less the same thing. Okay. Especially under, um, like especially under new California contractor laws and in many other States, you want to be very careful of who you're hiring and you typically want to be hiring business owners. So you want to have a B2B contract for independent contractor scenarios. So I don't really like the language freelancer, to be perfectly honest. I would like for people to realize that if you're working on your own, if you're using your own materials, collecting your own money, sending your own invoices, you are a business owner.

Braden: (03:18)

So to give some context to this, I'm going to read you some examples from a blog that I wrote a little while ago on the difference between running a hobby and a business. But I think these examples will, will kind of help us out here. So let's start, we have three different hypothetical business owners and we're going to start with Anne. So Anne is who I call the hobbyist. So Ann loves weddings and events. She's a full time mom and does not have a primary stream of income. All of Ann's friends know that she loves Pinterest and is always looking at venues, invitations and other fun stuff. She's hyper organized and good at planning. A friend of Anne's ask her to help pull together for wedding and does this as a thank you aunt's friend gives Anna $500 gift card and she is super grateful.

Braden: (04:12)

Sorry I lost my train of thought thought there. So Ann doesn't really have a business. Um, but her friend knows the Ann would crush it at helping her plan her wedding so she does and gives her a gift card as a thank you. So we're going to call Ann's wedding planning. In this example, a hobby. She does not intend to market herself. She's not really trying to have a business. If another friend asked her to help out with their wedding, she would probably be happy to do it, but not really expect much or any compensation under the tax law. Uh, the $500 gift is technically income for services and it would need to go on her tax return as hobby or other income. This is what surprises a lot of people. You would just assume it's not taxable. A lot of people probably just want to report the money, but I'm telling you what the technical rule is.

Braden: (05:02)

If however Anne had expenses, she would not be able to deduct those expenses, um, from her $500 in income because it is a hobby and less and wants to say that she had a business, in which case she could and deduct those expenses on a schedule C. so I'm not going to get really into the nuances there. Um, but Ann could make a mindset shift, call herself a business owner, and then once she does that, she needs to actually go out and start marketing herself as a business and then she could start taking parts that says, so the next, uh, next hypothetical taxpayer we have is Dave the freelancer. So let's look at Dave. Dave is a nurse. He's been getting into photography. He does some family shoots for close friends, and then he decides to shoot a few weddings with people that he knows who have established buddy photography businesses.

Braden: (06:03)

Dave makes about $4,000 doing photography in his first year. And he's also a bit of an equipment enthusiast, so he spent more than half of that on new camera equipment. This, to be perfectly honest, probably is not very realistic because if you're a new equipment, enthusiasts are probably spending more than $2,000 on camera equipment, but we'll keep the numbers easy. So Dave does not have a business name. He's not started marketing himself. A lot of us would probably call Dave a freelancer because he's contracting with other photographers to help them out. Some people might even say the Dave's a hobbyist like an because he's only really shot for friends and family for tax purposes. However, we would treat Dave as a business owner despite him calling himself a freelancer. He's performing services for compensation. Even if he's not putting forth a ton of marketing effort, he's still acting like a photographer who is providing services for income, which makes him a business owner.

Braden: (07:05)

Although he might have in that loss, if he goes out and spends more money on camera equipment, he will likely break even an income in the next couple of years and that is perfectly a okay. All right, so that is Dave. Our next hypothetical tax payer is Tamika and to Mika is who we're going to call the new business owner. So her story looks a lot like Dave's, but she just branded herself and launched a website. Her business is to Mika's fine photos. She still has a full time gig, a full time job, but hopes to turn our side hustle into her main business when ever she is April. So to make it definitely has a business for tax purposes, for legal purposes. She's a business owner as well and should start considering herself one by looking into business licenses, DA's, LA LLCs and all of that other jazz. So these are kind of our breakdowns, the different cities, not hobbyists, someone who might consider themselves a freelancer, but I typically still call a business owner and then someone who definitely is a business owner. So that is our breakdown and hopefully hopefully that helped to answer the first part of our question here on what was the major difference between freelancers and business owners. Now let's move onto the second question, which asks whether they need to separate their income between art, stationary design and calligraphy work. Now what?

Braden: (08:46)

This is where this one also, this also gets a little bit tricky because it depends on a few different things. The short answer either way is probably fine. You can separate them, you cannot separate them, but the question is do you have multiple businesses or are you offering multiple services within one business? So for example, a photographer, a photographer can shoot wedding photos and they can also shoot portraits. They're going to be serving maybe different audiences. It's going to be a different service, but that's all going to be the, it's all going to be under the same umbrella as photography, right? Let's say you also go into like a cute little retail store. So here in San Diego we have one called Pigman. It's super popular. It's kind of like, I don't really know how to describe it. It's kind of like anthropology. It needs like a maker's arcade kind of a thing.

Braden: (09:43)

They have lots of cool products, right? But they sell all different types of stuff. Multiple things. One business that probably was not a great analogy, but you get where I'm going here. If you run an art based business where you're doing commissioned artwork, you are also using your skills to do some stationary design and you're doing calligraphy, that's all I, you know, creative type of work. You gotta have an umbrella name that fits all of that underneath of it. That's one business. And you know, you just have multiple streams of income and your business model. So for example, in my law firm I offer, you know I do contracts, I do consultations, I do business formations and that's one business. But when I do my bookkeeping, I keep track of how much income I making from each of those streams of income. So for this, this individual, I think the question is do you have multiple streams of income in one business or do you have multiple businesses? And you're asking whether you can just combine their incomes onto your tax return to make it easier. So if you're doing art, stay sharing design and calligraphy work, do you have, you know, Stacy's fine art as a website. And then you're doing stationary design under a different business name, a different website,

Braden: (11:01)

and you're totally marketing it to a different audience. That's really two businesses and where we could get into the weeds here and I teach all of this like in my signature program unfuck your biz. But uh, and we could get, you know, really into detail there on how this works with LLCs and owning it all inside of one company. But what you really need to think about is

Braden: (11:28)

how you want to do this from a business perspective and then what makes the most tax sense. So if you are marketing them all separately, then you could consider them all to be separate businesses if you have a sole proprietorship, in which case they should each have their own set of books and they're each going to go on two separate schedule CS. Or you could consider yourself to have one business with multiple marketing channels. So for example, it's possible to have an LLC or the LLC owns a few different business or income streams. Technically an LLC can own different businesses and if you're a sole proprietor ship, it can work the same way. So the total income and expenses from all of those different income streams could go onto one schedule C if you eventually are going to want to form different LLCs for each of them, then I would consider them separate businesses.

Braden: (12:27)

I don't feel like I'm doing a great job explaining this, but I've got a lot of wheels turning in my head about different ways that we could kind of tackle this question. But I hope that we got the basics of the point across. If you do have multiple income streams in your business, really the crux of the question is are they different businesses or are they different income streams? And I just really started making this differentiation, um, a couple months ago because I had someone in my course who thought they had six businesses and needed to open six bank accounts and do six sets of bookkeeping. But really they had two businesses or they had four income streams and one and two income streams and the other one. So think about that. Noodle on it. If you have questions about this episode, feel free to post them in the Facebook group.

Braden: (13:18)

I would love to chat about it. And also quick note before we wrap up, you have just a couple more days to register for the free tax challenge. Sign up for the tax challenge closes on Friday. I chatted all about this and last week's epi

Braden: (02:11)

So really they're like an independent contractor and not an employee. So I find a lot of people will, will look at employee and then an independent contractor slash, freelancer, and then a business owner is kind, kinda like a progression in a really in legal and tax context or legal and tax land. That's not really how it works. From my perspective, freelancers are business owners. They're more or less the same thing. Okay. Especially under, um, like especially under new California contractor laws and in many other States, you want to be very careful of who you're hiring and you typically want to be hiring business owners. So you want to have a B2B contract for independent contractor scenarios. So I don't really like the language freelancer, to be perfectly honest. I would like for people to realize that if you're working on your own, if you're using your own materials, collecting your own money, sending your own invoices, you are a business owner.

Braden: (03:18)

So to give some context to this, I'm going to read you some examples from a blog that I wrote a little while ago on the difference between running a hobby and a business. But I think these examples will, will kind of help us out here. So let's start, we have three different hypothetical business owners and we're going to start with Anne. So Anne is who I call the hobbyist. So Ann loves weddings and events. She's a full time mom and does not have a primary stream of income. All of Ann's friends know that she loves Pinterest and is always looking at venues, invitations and other fun stuff. She's hyper organized and good at planning. A friend of Anne's ask her to help pull together for wedding and does this as a thank you aunt's friend gives Anna $500 gift card and she is super grateful.

Braden: (04:12)

Sorry I lost my train of thought thought there. So Ann doesn't really have a business. Um, but her friend knows the Ann would crush it at helping her plan her wedding so she does and gives her a gift card as a thank you. So we're going to call Ann's wedding planning. In this example, a hobby. She does not intend to market herself. She's not really trying to have a business. If another friend asked her to help out with their wedding, she would probably be happy to do it, but not really expect much or any compensation under the tax law. Uh, the $500 gift is technically income for services and it would need to go on her tax return as hobby or other income. This is what surprises a lot of people. You would just assume it's not taxable. A lot of people probably just want to report the money, but I'm telling you what the technical rule is.

Braden: (05:02)

If however Anne had expenses, she would not be able to deduct those expenses, um, from her $500 in income because it is a hobby and less and wants to say that she had a business, in which case she could and deduct those expenses on a schedule C. so I'm not going to get really into the nuances there. Um, but Ann could make a mindset shift, call herself a business owner, and then once she does that, she needs to actually go out and start marketing herself as a business and then she could start taking parts that says, so the next, uh, next hypothetical taxpayer we have is Dave the freelancer. So let's look at Dave. Dave is a nurse. He's been getting into photography. He does some family shoots for close friends, and then he decides to shoot a few weddings with people that he knows who have established buddy photography businesses.

Braden: (06:03)

Dave makes about $4,000 doing photography in his first year. And he's also a bit of an equipment enthusiast, so he spent more than half of that on new camera equipment. This, to be perfectly honest, probably is not very realistic because if you're a new equipment, enthusiasts are probably spending more than $2,000 on camera equipment, but we'll keep the numbers easy. So Dave does not have a business name. He's not started marketing himself. A lot of us would probably call Dave a freelancer because he's contracting with other photographers to help them out. Some people might even say the Dave's a hobbyist like an because he's only really shot for friends and family for tax purposes. However, we would treat Dave as a business owner despite him calling himself a freelancer. He's performing services for compensation. Even if he's not putting forth a ton of marketing effort, he's still acting like a photographer who is providing services for income, which makes him a business owner.

Braden: (07:05)

Although he might have in that loss, if he goes out and spends more money on camera equipment, he will likely break even an income in the next couple of years and that is perfectly a okay. All right, so that is Dave. Our next hypothetical tax payer is Tamika and to Mika is who we're going to call the new business owner. So her story looks a lot like Dave's, but she just branded herself and launched a website. Her business is to Mika's fine photos. She still has a full time gig, a full time job, but hopes to turn our side hustle into her main business when ever she is April. So to make it definitely has a business for tax purposes, for legal purposes. She's a business owner as well and should start considering herself one by looking into business licenses, DA's, LA LLCs and all of that other jazz. So these are kind of our breakdowns, the different cities, not hobbyists, someone who might consider themselves a freelancer, but I typically still call a business owner and then someone who definitely is a business owner. So that is our breakdown and hopefully hopefully that helped to answer the first part of our question here on what was the major difference between freelancers and business owners. Now let's move onto the second question, which asks whether they need to separate their income between art, stationary design and calligraphy work. Now what?

Braden: (08:46)

This is where this one also, this also gets a little bit tricky because it depends on a few different things. The short answer either way is probably fine. You can separate them, you cannot separate them, but the question is do you have multiple businesses or are you offering multiple services within one business? So for example, a photographer, a photographer can shoot wedding photos and they can also shoot portraits. They're going to be serving maybe different audiences. It's going to be a different service, but that's all going to be the, it's all going to be under the same umbrella as photography, right? Let's say you also go into like a cute little retail store. So here in San Diego we have one called Pigman. It's super popular. It's kind of like, I don't really know how to describe it. It's kind of like anthropology. It needs like a maker's arcade kind of a thing.

Braden: (09:43)

They have lots of cool products, right? But they sell all different types of stuff. Multiple things. One business that probably was not a great analogy, but you get where I'm going here. If you run an art based business where you're doing commissioned artwork, you are also using your skills to do some stationary design and you're doing calligraphy, that's all I, you know, creative type of work. You gotta have an umbrella name that fits all of that underneath of it. That's one business. And you know, you just have multiple streams of income and your business model. So for example, in my law firm I offer, you know I do contracts, I do consultations, I do business formations and that's one business. But when I do my bookkeeping, I keep track of how much income I making from each of those streams of income. So for this, this individual, I think the question is do you have multiple streams of income in one business or do you have multiple businesses? And you're asking whether you can just combine their incomes onto your tax return to make it easier. So if you're doing art, stay sharing design and calligraphy work, do you have, you know, Stacy's fine art as a website. And then you're doing stationary design under a different business name, a different website,

Braden: (11:01)

and you're totally marketing it to a different audience. That's really two businesses and where we could get into the weeds here and I teach all of this like in my signature program unfuck your biz. But uh, and we could get, you know, really into detail there on how this works with LLCs and owning it all inside of one company. But what you really need to think about is

Braden: (11:28)

how you want to do this from a business perspective and then what makes the most tax sense. So if you are marketing them all separately, then you could consider them all to be separate businesses if you have a sole proprietorship, in which case they should each have their own set of books and they're each going to go on two separate schedule CS. Or you could consider yourself to have one business with multiple marketing channels. So for example, it's possible to have an LLC or the LLC owns a few different business or income streams. Technically an LLC can own different businesses and if you're a sole proprietor ship, it can work the same way. So the total income and expenses from all of those different income streams could go onto one schedule C if you eventually are going to want to form different LLCs for each of them, then I would consider them separate businesses.

Braden: (12:27)

I don't feel like I'm doing a great job explaining this, but I've got a lot of wheels turning in my head about different ways that we could kind of tackle this question. But I hope that we got the basics of the point across. If you do have multiple income streams in your business, really the crux of the question is are they different businesses or are they different income streams? And I just really started making this differentiation, um, a couple months ago because I had someone in my course who thought they had six businesses and needed to open six bank accounts and do six sets of bookkeeping. But really they had two businesses or they had four income streams and one and two income streams and the other one. So think about that. Noodle on it. If you have questions about this episode, feel free to post them in the Facebook group.

Braden: (13:18)

I would love to chat about it. And also quick note before we wrap up, you have just a couple more days to register for the free tax challenge. Sign up for the tax challenge closes on Friday. I chatted all about this and last week's episode so you can go listen to that. If you want to learn more or go to unfuck your biz.com to get all of the details on the challenge. We will be starting on Monday and the goal is for you in one week to get fully prepared to finish your bookkeeping, gather all your documents and be ready to either hand that all off to a professional or to then file your own tax return. So hope this helps. If you enjoy the episode, don't forget to like subscribe, share, tell a friend and I cannot wait to be back in your earbuds on Thursday for our episode all about 10 99 I hope you have a good one.

sode so you can go listen to that. If you want to learn more or go to unfuck your biz.com to get all of the details on the challenge. We will be starting on Monday and the goal is for you in one week to get fully prepared to finish your bookkeeping, gather all your documents and be ready to either hand that all off to a professional or to then file your own tax return. So hope this helps. If you enjoy the episode, don't forget to like subscribe, share, tell a friend and I cannot wait to be back in your earbuds on Thursday for our episode all about 10 99 I hope you have a good one.