Most people who become a coach go into this field because they want to help people. It’s a chance to help others realize their dreams, their potential, and set them up for success. But before you start taking on clients and promoting your coaching services, have you given any thought to your taxes?
We know tax season is the least exciting season of the year, but it’s one small business owners can’t forget or ignore. Unlike employees who work at a traditional job where they receive a W-2 from their employer, coaches and freelancers are responsible for handling their taxes on their own. April 15th is the tax return deadline, but did you know you may also be required to pay quarterly estimated tax payments throughout the year? There are also new forms for you to familiarize yourself with, such as 1099, W-9, and 1040.
What do those numbers mean? How much do I need to pay? When do I file my tax return? What can I claim as expenses toward a tax deduction?
Don’t worry, we’ve worked on this guide with the assistance of a professional accountant to make your next tax season as easy as possible for you—without boring you to tears.
In this guide you’ll learn about self employment tax forms and deadlines, how to track expenses and organize your accounting reports, what counts as a tax deduction, and how to save for your tax payments to avoid sticker shock come April. Grab a calculator, open a spreadsheet, and let’s dive in.
Disclaimer: The information is for educational purposes only. This is not tax advice, if you need tax or other legal advice, please contact your tax or legal professional.
How to Set Up Your Coaching Business
Whether you plan to work part-time or full-time, there are a few options for how you can set up your coaching business. There isn’t a hard-and-fast rule regarding which path to take, but keep in mind some options will provide you with legal protection while others may not.
Sole Proprietor or DBA (Doing Business As)
Most people starting a small business will choose to operate under a sole proprietorship. This is the easiest and fastest method to get your business up and running without an excessive amount of paperwork. Typically you’ll own an unincorporated business by yourself and use your social security number if you ever need to submit identification. Eventually, you’ll want to register for an Employer Identification Number (EIN), also known as a Federal Tax Identification Number—this will help identify your business as its own entity and separate it from you and your personal assets.
- Pros: Limited paperwork and fees when you choose to operate under your own name.
- Cons: If you’re sued, your personal assets are at risk since there is no separation between your personal entity and your business.
Single Member LLC (Limited Liability Company)
Starting an LLC provides individuals with a bit more protection, as this business structure separates the individual business owner from the business. It’s important to note that you’ll still file your taxes under your social security number or employer identification number even if you set up your coaching business as an LLC. A single-member LLC is known as a “disregarded entity.” You can still run your business on your own, but it will separate your individual entity from the business.
- Pros: If you’re sued, your personal assets are protected since your entity is separated from your business’s entity.
- Cons: A fee is required to file and register an LLC, plus annual costs to keep the LLC active.
Partnerships
Although coaching is often done on an individual basis, some coaches may want to start a business together under one company. This might require a different type of LLC that allows multiple individuals to work together, or you may find that setting up a partnership or corporation is the best option, depending on the circumstances.
- Pros: Owners will share both benefits and losses equally.
- Cons: There may be fees involved depending on your state regulations and you’ll need to file taxes separately.
Accounting Foundations
We know doing your taxes can be a confusing and often daunting task to tackle on your own. You can always work with a CPA if you feel more comfortable having a professional go over your finances. However, there are a few fundamental things to know about running a small business and what to expect when you start looking at your bookkeeping and preparing your income tax return.
What Are Gross Income and Net Income?
This is a simple way to remember the difference between your gross income and net income.
Total profit = Gross income
Gross income - Expenses = Net income
Most accounting or business management software will keep track of your profit (Practice does this for you automatically). You’ll need to stay up to date on your expenses and remember to log them somewhere (an Excel spreadsheet or Google sheet are common ways to track this) so you’ll have the necessary information when you start filing your taxes.
What Taxes Are You Expected to Pay?
The specific taxes you’ll pay depend on where you live and any state regulations for self employed workers your local government has put in place. Tax rates are also set to vary and change from year to year, which can influence the amount you’ll need to deduct from your net income. Here are a few common taxes most small business owners pay:
- Self employed tax
- Medicare tax
- State income tax
- State business tax
- Social security tax
- Federal tax
Do You Need to Pay Sales Tax?
In most situations, products and goods sold are taxable while services are non-taxable. Since coaching is considered a professional service, you most likely won’t be faced with sales tax as you sell and charge for your services. Of course, this all depends on the state you live and work in, as some may require you to pay a sales tax regardless. When you file for your sales tax license your state will also determine how often you file a report—monthly, quarterly, or annually.
If you speak to an accountant they’ll have information on whether or not your state requires sales tax. You can also inquire about conducting a nexus study, which is a review of your business activity and sales conducted in a state (or multiple states) to determine if these activities warrant a sales tax nexus. It’s good practice to perform a nexus study whenever you start operating in a new state or when you begin selling a new product or service.
1099s and Other Tax Forms
Being self employed comes with a range of new tax forms to be aware of. Before tax season rolls around, make a list in a Google sheet to keep track of the different forms you’ll need to fill out and submit so you don’t miss anything at the last minute. Here’s a breakdown of the forms that you may be required to submit as a self employed business owner:
- 1099-NEC: NEC stands for Non Employee Compensation. If a company or client has paid you more than $600 as a consultant or contractor, that company should send you a 1099 form to fill out and submit back to them.
- 1099-MISC: Miscellaneous can include rent, prize money, or at least $5000 for consumer products that were sold somewhere other than a permanent retail establishment.
- 1099-K: This form comes from companies that have sent you money, such as Stripe or Paypal, and other credit card processing companies. If you’ve made over $600 in sales, that company will send you a 1099-K form.
- W-9: As an independent contractor, the IRS needs to acquire your business and taxpayer identification information, and they do so by collecting a W-9 form. Most freelancers and independent contractors will submit a W-9 to companies they’ve worked with who can then file that form with the IRS.
- 1040: This form will help calculate what self employment tax is due on your net earnings as a self employed individual. This tax payment is part of the social security tax and Medicare tax that an employer will typically deduct from your paycheck.
- 8829: As more small business owners are working from home, the IRS has created this form to help calculate your home office deduction.
Don’t Forget to Budget Out For Insurance and Savings
One thing small business owners might forget to take into account is money needed for insurance and other savings. Normally, your employer will do the calculations and take out the cost of health insurance (if you decided to participate in their employer-sponsored insurance). Now, you’ll need to enroll in a health insurance plan on your own.
You also want to plan ahead and create an emergency fund. If you prepare and have money set aside to use in case of an emergency situation, this can greatly reduce any stress or concern about using money that would otherwise go to other things. A retirement plan is another savings account to consider. Opening an IRA (individual retirement account) can help you save money that’ll go towards your retirement, and in most cases, an IRA is considered a tax-advantage investment. This means the contributions you make into the IRA have the possibility of being tax deductible—a win-win situation.
Self Employed Tax Tips
As a small business owner, you’ll be shouldering all your tax filing and payment responsibilities, so you want to ensure you’re setting yourself up for success early in the process. Here are our best tips (and some tricks) to help create a smooth and seamless transition into your business:
1. Create a Business Bank Account
Before you take on any coaching clients, be sure to open a business bank account—separate from your personal bank account. Why? It’s easier to track money coming in and going out this way which will be helpful come tax time. If possible, open a checking and savings account. Or if your bank allows you to create multiple checking accounts, open one specifically to put aside money to pay your tax bill.
2. Set Aside Money For Taxes
When you’re self employed, your taxes aren’t being taken out of every paycheck as it normally would be done when you work for an employer. You need to remember to budget a portion of your income to put aside for tax payments, otherwise, you may be hit with a large payment when you file your taxes. A good rule of thumb is to save one-third of your net income to go toward your taxes. Keep this money in a separate checking or savings account within your business bank account so it’s already set aside when you need it.
3. Simplify Your Expenses Into Categories
Any money spent on behalf of your business counts as a business expense and could be used as a tax deduction. There are two main categories of deductions you should be aware of. First, a regular tax deduction. A standard deduction is any amount of money that can be deducted from your total taxable income. The second type is an itemized deduction, which refers to amounts you paid toward your state or local sales or income tax.
Expense tracking doesn’t need to be complicated. In most cases, an expense will fall into one of two categories—ordinary and necessary expenses. Some business expenses may be partially tax deductible while others may be fully deductible, depending on the type of expense it is. It’s important to keep your records and receipts so you can file them properly in your accounting software or provide them to your CPA.
To make expense tracking as simple as possible, organize them into categories. Use these categories and examples to get started on ways to break down each expense into groups:
- Office expenses: pens, paper, printer, printer ink.
- Business travel: traveling to a coaching conference.
- Subscription fees: your subscription to Practice or website hosting.
- Dues and renewals: coaching certification or courses for further education.
- Meals: Networking events with other coaches and organizations.
- Accommodations: hotels, rental cars, Airbnb.
- Mileage rate: if you’re driving to and from networking or business events.
- Professional fees: accountant fees.
A note about your home office deduction: With many coaches working from home, you can claim certain expenses on your taxes to lower your taxable income. This could include equipment and supplies, any insurance or repairs, utility bills, even mortgage or rent. However, your home office needs to be a designated space used strictly for your business in order to count toward your home office deduction.
4. Quarterly Estimated Tax Payments
You probably know that you file your tax return on April 15th—give or take a few days if it falls over the weekend. But did you know that self employed business owners also have to pay quarterly estimated tax payments? Since an employer isn’t taking out your tax payments from your paychecks, you’ll have to submit payment yourself, and a good way to do that is by making quarterly payments.
If you’re filing your taxes and handling your quarterly payments on your own, you can use a tax calculator to help determine the amount of your estimated tax payments. Keep in mind you’ll need to stay up to date on things like the current tax rate for federal tax, state income tax, Medicare tax, and social security tax. The quarterly deadline dates may change depending on the year, but you should expect to make your estimated tax payments by these dates:
- 1st quarterly estimated tax payment: April 15
- 2nd quarterly estimated tax payment: June 15
- 3rd quarterly estimated tax payment: September 15
- 4th quarterly estimated tax payment; January 15
5. Use a Spreadsheet
Whether you make your own Excel spreadsheet, Google sheet, or use a free template, you want to keep clean accurate records of your profit, loss, and estimated taxes. You can also make a chart of specific tax deductible expenses to track throughout the year. We know it can be overwhelming to sit down and look at all the numbers, but having a simple and straightforward worksheet to fill out every year during tax season will make the long-term process much easier.
It’s important, whether you’re using an Excel spreadsheet or Google sheet, that you set up an Excel formula when inputting your information. This will streamline the work and save you time on having to calculate and manually input the numbers. And if you’re unsure how to create Excel formulas, take advantage of an Excel template that comes with pre-set formulas.
Enjoy a Free Accounting Spreadsheet Template
To get you up and running with your coaching or freelancing business, we’ve worked with an accountant to create a free spreadsheet template for you to use. This spreadsheet is a great starting point for anyone with a small business who wants to get a head start on their accounting. And if you’re a coach, consultant, or small business owner, take this quiz to see if Practice can help you and your business.
