Why Creators Overpay Taxes

Speaker A00:00:00

Hey, if last year was one of your best years as a creator, but tax season still felt like a punch in the stomach. This episode's for you today. Because for a lot of us based content creators, the problem is not just that taxes are high. Maybe they are.It's that the business grew, but your setup never did. So now you're earning like a business owner while filing taxes like a freelancer. And that gap right there can. Can cost you real money.So let me kill one myth right away. I hear this one all the time. Just because you have an LLC doesn't automatically mean you're saving money on taxes.Now, sure, an LLC can be useful, but by itself, it's not a tax strategy. That's what we're gonna dig in into on today's show.Hey, I'm Ralph Estep Jr. I'm a licensed accountant with 30 years of experience, and I work with content creators just like you and other small business owners.I'm known as the content creators accountant. And here's what I see every year.I see smart, hardworking creators building real businesses, but they're still using a tax setup that made sense when they were smaller. And that's where a lot of leaks happen. And it's not because you're lazy. It's not because you're irresponsible.It's because no one ever told you that the old setup stopped working. So in this episode today, I want to help you answer three very important questions. Question number one. Why do creators overpay taxes?We're going to spend some time talking about overpaying taxes. Question number two. How do you know it might be happening to you? Yes, you might be the one overpaying taxes.And the third question, what does a smarter setup actually look like? I am going to give you the answers now. Today is not about loopholes. It's not about being aggressive.Trust me, I'm not going to have you going to jail for tax evasion. It's about structure, it's about planning, and it's about understanding how your business is taxed. Because the goal isn't just to make more money.Yeah, that's a great thing. It's also to keep more of what you've already earned. Well, let's make this practical right away.Here are three signs there's a good chance you're leaving Money on the table. Here's the first sign. If you only think about taxes when deadlines show up, yeah, that's a problem.Second thing, you've got that llc, but you've got no year round tax strategy. Here's the third one. You know your revenue, but if I asked you your actual profit number today, you'd have to guess. You got no idea.So if right now, as you're thinking about those things, what are the three things? How do they impact you?If two of those sound familiar, I want you to keep listening because that usually means the issue isn't effort, it's your setup. Well, let's get into what I've seen. I work with a creator making about $150,000 a year in profit. Hey, on paper that looked great.He had consistent income, a solid business, he was building real momentum. But every tax season he was frustrated because the money coming in never seemed to match the money they were actually keeping.And see, there's the disconnect. It's one thing to bring money in, it's another thing to keep it. And that's the feeling that a lot of people realize.You can be growing, you could be landing deals, you can be doing everything right creatively, but you still feel like the business is somehow squeezing you. So what do we do? We looked under the hood and here's what we found. We found that there was no meaningful entity strategy.They had no idea what entity they should be in, how they should be structured. And honestly, they were still being taxed like a sole proprietor. Here's a dead giveaway. Paying a lot too much tax.There was zero proactive tax planning during the year and bookkeeping that showed up what happened? But never told them what to do next. Ready for the result. Listen to this one. You're never going to believe this.They were paying more than $40,000 in in taxes. What did I say? $150,000 Of net revenue. They were paying 40 grand in taxes. Not a great situation.But once we cleaned up the structure, we put a compensation approach where it was appropriate, and we built a year round tax planning strategy. The picture improved almost overnight.Now, I didn't use any gimmicks, no loopholes to get you in trouble, but the business was finally set up correctly. The same creator, the same business. Just a better system and a different outcome. Here's a truth I want to share with you right now.Creators usually don't overpay taxes because they don't make enough money. I hear that all the time. Well, I don't have to worry about overpaying taxes because I'm not making that much money. Ralph that's not the answer.They overpay because the business changed and the tax setup didn't change. That's the real issue. So many content creators, you might be one of these.You're still operating under an early stage structure for a business that's already outgrown it. And when that happens, I've seen this so many times. The tax bill reflects the old setup, not your current reality. So let's get right into it.Here are the three biggest reasons creators overpay. This is. This is why you came to this particular episode.Here's the top three Number one thing Missing deductions A lot of creators are not bad at business. They actually understand most business stuff. They're just bad at tracking this stuff.And if you're not tracking it clearly, it usually doesn't get used. Well. That means missed deductions. Here's some big ones. People missed a home office deduction. They missed software equipment, education, traveling.That qualifies. Mileage when it works. Contractor costs, subscriptions. Hey, how many subscriptions do we have? And a bunch of other ordinary business expenses.So they're missing those. Or worse. I see this one all the time. They wait until tax time and try to reconstruct everything from memory.I don't know about you, but I can't remember what I did last week, much less six months ago. And that's stressful and it's inaccurate. And it usually leaves money behind.It leaves money on the table and if it's not captured properly during the year, it becomes so much harder to use confidently later. So that's the first thing. Second thing, and I've alluded to this a couple times already, a lot of content creators have poor entity structure.This is what I call the big one in many cases.I'm going to say in a lot of cases, creators pay more self employment tax than they need to because no one ever revisited the structure and explained to them how this can work. They just stay sole proprietors by default because they didn't know that.And it's not because it's their best option, but it's the one they're familiar with. But the problem with that is once the profit grows, that default setting can get really expensive. Now let me be clear here.I've talked about this on the show before. I'm going to throw out a term called an S corporation. Now, that's not some magic button and it's not right for everybody.Sometimes the smartest first move is simply better bookkeeping. We talked about that already. Better visibility into what's actually going on. And yes, better planning.But for some creators, once the numbers actually support it, if you continue to ignore your entity strategy, that can mean you're paying more taxes than necessary. I'm talking about thousands of dollars and more. That's the second thing. Here's the third thing. I promised you three. No year round planning.And this is where a lot of real damage happens. Taxes get treated like an event instead of a strategy. I deal with this every day. I work with tax almost every day in the calendar year.A lot of people put off taxes till April or late March. But when you do that, if you're not looking at that as you go, you're not doing those quarterly reviews. You've got no idea of your tax liability.There's no timing strategy for expenses. Hey, listen, if you're not thinking about taxes in October and November, it's too late.Once we get to January and February, I can do a great job of putting the numbers on the tax return. That's great, but that's not very impactful. If you're not making adjustments as profit changes, there's no plan for those cash reserves.That's what gets so many people in trouble. And by the time the return is prepared, here's the biggest issue. Most of those useful moves already behind you.You can't wind the clock back and go spend money in December for last year. And that's why so many creators feel blindsided. It's not that the tax bill is wrong. It's that nobody was steering during the year.And that's what I see. Those are the big three things.But let's talk about now what better looks like the reason you've tuned in today is you want to know how to do this better. What does a smarter system actually look like in my view? If you listen to any of my content, you know I'm all about clarity. We got to start there.Step one, you've got to know your real profit. So many people, when I ask the questions, I do a lot of calls with content creators.The first thing I ask them, how much profit did you make last month? Almost always they say to me, hey, I brought in $10,000. That's not what I'm talking about. That's what we call your top line revenue.It's not about just what hit the bank. It's your actual profit. What's left over after you got the money in the door.You paid Your contractors, you paid your subscriptions, you paid for your gear. Because you can never build a smart tax strategy on fuzzy numbers.You've got to know what the business is truly keeping because that's how you define the tax structure. So that's the first step. Second step, you've got to match the entity to the business you're operating in now.Now, for many creators, that might mean an LLC paired with an S Corp election. I'm not going to talk about all the nuances to that.I'm going to talk about that in a couple episodes coming up, but only when the numbers support it. The point here is not about complexity. The point is alignment. Your business structure should reflect the stage your business is in.Now, when I meet with content creators, a lot of times they're still operating in what the business was two years ago and that's why they're paying too much tax. And here's step three. You gotta be intentional about how money moves. If you listen to me, you know, I talk about this on the show frequently.What are those moves you make once a week in that weekly money check in? Because when the structure is right, you can be much more intentional about owner pay, about tax estimates.We talked about building that tax vault and how profit flows through the business. And that's where strategy starts to replace guesswork.If you continue to live in guesswork, you're going to continue to have those April 15th surprises. But when you build a strategy, that's when surprises go down. Here's the fourth step. You got to plan throughout the year.I don't know how many people I work with to just say, you know what, Ralph, I don't even think about taxes till tax time. That doesn't work. And then you will be blindsided every single year, year.This means you got to do those regular check ins, at the very minimum quarterly reviews. Look at those estimated taxes you might need to make.And looking ahead before year end, I'm going to tell you right now in my accounting practice, my small business clients, we're meeting in September, October, November and even into December to see what is it going to look like at tax time. Are there some moves we can make before we get to the end of the year? Can we buy some equipment? Can we, can we prepay some bills?Hey, can we fund some retirement planning? And that's when you start to time expenses intentionally. And you can adjust that when income changes. Friends, listen.Taxes should not be a once a year panic. They should be managed as part of the business on an ongoing basis. But in order to do that, you've got to connect the strategy to your systems.A lot of people don't have a system, but this is where your bookkeeping, your tax vault that we talked about, and your four account system actually matters. So if you missed any of those, go back and check out those episodes. Because what I've been doing is I've been building a structure for you.Once you've got that structure built, then the execution has to match that. But if you don't have that structure built, I don't care if you go set up an S corporation or an llc.It's not going to work if the two things don't match. A smart setup still needs a working system behind it.That's how you protect your cash, that's how you stay ready, and that's how you stop letting tax season control the emotional tone of your business. But I want to say one more thing here, because I imagine some people are already shouting at me right now. But, Ralph, I always do this myself.That's not always the problem here. Doing your own tax return is not always the issue. Doing your taxes without a strategy is the issue. See, that's the difference.A lot of creators think that they're saving money by keeping things simple. Well, I don't want to set up an S corp, Ralph. That's going to cost me extra money. I'm going to have to pay to set that up.I'm going to have to do a separate tax return. I'm going to have to do payroll. But that's not always the best tax strategy.What they don't always see is the hidden cost of missed planning, those missed elections, the missed timing opportunities we talked about, and those missed structured decisions. And as profit grows, those small misses stop being small.Hey, maybe at $30,000 in profit, it feels manageable, but when that thing gets up to $150,000 in profit, it gets expensive. Look at how much we said that content creator was paying on $150,000 of net income, $40,000 in tax. Well, just imagine if we grow that to $300,000.How much are you going to pay?Now, if you don't have a system set up, if you don't have a structure developed, and if you don't have that, it's going to affect hiring, it's going to affect investing, it's going to affect how, how you handle equipment upgrades, your cash reserves. And bigger than all of those things, it's going to affect your peace of mind. And that's why this Matters not because of the tax bill.Yeah, that's a big part of it.But think about what that money could be doing for your business and more importantly, for your life if you were able to keep more of what you're earning. So when you fix that structure and you start to think about the planning, usually don't just get a cleaner tax return.You actually get a better business. You get to keep more of what you earn. You can pay quarterly taxes without panic. You can hire an editor or a contractor sooner.And yes, you can upgrade the equipment without wondering whether you're accidentally spending tax money. You can even build an emergency fund or an operating reserve. And you can make decisions from confidence. That's what I'm really talking about today.I'm talking about how to be confident in your business instead of always being in this state of surprise. And that's the real win, isn't it? It's not about beating the system.I hear these clowns all the time talking about, well, I've got a tax structure to beat the system. That's not what I'm talking about.It's about building a business that is actually set up to support you and, and your life and your dreams and your aspirations. So maybe right now you're listening, you're thinking, ralph, dude, I honestly don't know where my business is set up correctly or not.Now it's time to have a conversation. I want to encourage you to reach out to me. You can go to content creators, accountant.com help me.I'll put a link to that in the show notes, but I'm going to give it to you again. It's content creators Accountant. We'll sit down, we'll do a Zoom call, and we'll look up. We'll look at your setup together.I'll look at your current structure. I'll look at your profit. I'll look at the systems that you have and whether you might be missing opportunities.Because in the end, the goal is not gimmicks. The goal is clarity. And once you have clarity, you can make good decisions and you can make them fast. Don't ever ask, how do I pay less in taxes?Don't ask that. Ask. This is my business, structured correctly for the money it already makes. That is so much the better question to ask.Because the goal is not to be aggressive. Aggressive will get you in trouble. The goal is to be intentional. And before you end this episode, I want you to ask yourself three questions.Just think about these as we close out today. Do I know my real profit number. If Ralph and I got on a call, would I be able to say to Ralph, yes, I know that number. Second question.Is my current entity still the best fit for how I earn, or did you set something up two years ago and you got to. You know, I gotta revisit this. And what tax move should happen before year end, not after year end.And if you don't know those answers, that's the gap. But here's the best part. Those gaps can be fixed. I'm Ralph Estep Jr.I am the content creators accountant, and I help creators protect, keep and grow what they work so hard to earn. And I hope to do that with you. I hope to see you again next week.