Episode 64: What Works Wednesday- 3 Financial Planning Misconceptions I See Self-Employed Professionals Make

Welcome to this weeks What Works Wednesday! Today, we're breaking down three common personal finance mistakes self-employed pros make—starting with the myth that you can deduct everything on your taxes. Tune in to avoid these costly mistakes!

Transcript:

Hey everyone, welcome back to another episode of What Works Wednesday. I'm your host Leland Gross and today I wanna go over three very common misconceptions that I find self -employed professionals make in their personal finances. So we're talking about business owners here, but kind of when they run their business, the way they optimize that and flow that money into their personal life, what are the misconceptions I hear people?

make or I see people make when we're working together with them that you should do your best to avoid because I would bet dimes of dollars that if you are self -employed you are making one of these mistakes. So misconception number one, I can deduct everything on my taxes or just an overall misconception of what you can deduct on your taxes. So I see this one bar none all the time with almost every self -employed professional.

where we go through and we're looking at, right, here's your revenue, here are your expenses. And it's like, all right, well, it's saying, you you made $20 ,000 last year and this is your sole source of income, but that's less than your mortgage. So how is that happening? And they're like, well, some of this is, you know, home office. You end up looking and you're like, well, you're deducting all of your income. You're deducting everything through here. And that's a huge red flag.

and a huge flag for a potential audit from the IRS. So when we look, we need to be careful to say, you know, what is a business deduction? What is not a business deduction? What can you depreciate? When do you qualify for that depreciation? What is a credit? To make sure that you are not running the mistake of saying, hey, I picked up coffee, swipe, that's a business expense, or, you know, I bought a gift for a client.

business expense or I took a client to a baseball game business expense or you know I use my car all the time so every time I get gas I'm putting that on the business but also I'm deducting mileage you can't do all that there's there's rules there's methods to this there's philosophy around what this is and what this isn't so real fast what is a business expense what is a true deduction

It's anything that is absolutely necessary to the ordinary function of your business. Now, there's lots of gray area there, especially for mixed use items like home office or cars or things like that. But you have to look into things like, okay, for your car, for you to be able to depreciate it, you have to use it more than 50 % of the time for your business. It has to be a business vehicle. For, you know,

mileage versus gas, you can only choose one. Use actual expenses or mileage expenses. And you have to be careful to calculate what makes the most sense for you. But if you choose mileage, don't be putting your gas on the business card. Because now you're doubling up on deductions and that gets really dangerous. These are just a few examples. Entertainment's a big one. I see people put, try and, at least try and put.

Things like country club memberships or gym memberships or things like that through your business because you use that as a form of marketing or networking and that doesn't count. That's not a business expense. So you have to be really careful. Lots of these are nuanced and they're also nuanced to your specific profession. But it is a huge misconception that for a lot of these things, I can just make it a business expense because...

I plan to find a client from this resource or I'm trying to care for a client or get purchases, whatever it may be. Misconception number two is I don't have an employer retirement plan. I don't have a 401k because I'm self -employed. So I just can't use a retirement plan. This often comes because you don't have a 401k and you might make too much money to get a deduction for an IRA or contribute to a Roth IRA.

It's really normal. But just because you don't have that traditional retirement structure, like a defined benefit plan, a pension, 401k, or you can't use a traditional retirement account, doesn't mean you shouldn't or you can't use a retirement savings vehicle. In fact, the IRS has specifically created three phenomenal account types for self -employed professionals where you can deduct

sometimes even more than a 401k, in order to save and prepare yourself for retirement as a self -employed professional. So this could be a SEP IRA, where you can shelter up to 25 % of your compensation, which that's a percentage, not a dollar amount. So that could end up being more than an IRA contribution or a 401k contribution, that annualized cap. It could be a simple IRA.