Most people who start coaching are doing it because they’re interested in helping people.
Nobody starts coaching thinking about what the tax implications are, until they receive a tax form in the mail or realize that it’s April and the tax deadline is next week.
How much do I need to pay? How do I know? What can/can’t I claim as an expense? What is this 1099 thing?
Don’t worry, we worked on this guide with a professional accountant (CPA) to make tax season as easy as possible for you — without boring you to tears.
By next tax season, we hope you’ll…
- Know what a 1099 is.
- Have a reasonable understanding of your tax liability because you’ve kept track of your income and deductions.
- Have enough saved for your tax bill, so you don’t get sticker shock.
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.
So you want to start coaching...
Whether it’s part-time or full-time, you can set up your business in a couple ways:
Sole proprietor or DBA (Doing Business As) — aka. I’m just going to start coaching people under my name or choose a separate business name.
Pros: No paperwork for choosing to operate under your name and a minimal fee to file as a DBA with your local county.
Cons: If someone sues you, they can get at your personal assets.
Single member LCC (Limited Liability Company) — the state/ government recognizes my coaching as a separate entity than myself for business purposes but not for tax filing purposes (using fancy wording “Disregarded Entity)
Pros: If someone sues you, they can’t get at your personal assets.
Cons: There is a cost to file and an annual cost to keep the LLC active. Each state filing fees and requirements differ. You also could have the cost of using a professional to help set up the LLC.
There are other forms of business set up such as LLC (Multiple coaches working together as one company) or a Corporation. We’ll keep our discussion geared toward the individual coach.
When choosing between the different options, the biggest thing to think about is exposure and risk.
Rule of thumb: If I listen to my advice/coaching, and it doesn’t work out... could I possibly want to sue myself?
Now that you know how your business is going to operate, the next step is to create two separate bank accounts for your coaching business:
- Business Checking Account — for when you get paid (income) and have to write out business expenses.
- Business Savings Account — to put aside any potential tax liability (dollars).
Rule of thumb: Roughly 1/3 of your “net income” should be saved for your taxes.
Okay, now that you have your foundation set, let’s get into what you need to know and do about your taxes.
There is a basic formula of what you need to know about your business.
Gross Income - Expenses = Net Income
Here’s an example of how this works in real life:
- Charles pays you $100 for a one-hour coaching session (gross income),
- He uses his credit card which costs you $2 in processing fees (expense),
- You end up with $98 in your business checking account (net income).
Keeping track of your coaching income is usually the easy part (you can do this automatically within Practice), the more confusing part is usually business expenses.
Like, what counts as a business expense?
An expense is spent money for your business that has a business purpose.
There’s no standard way to categorize your expenses, but this is a general idea to get you started.
- Office expenses — i.e. pens, paper, printer ink.
- Fees for credit card processing — i.e. ~2% from Stripe, Square, PayPal or others
- Dues and subscriptions — i.e. your subscription to Practice, your coaching certification renewal fees.
- Capital assets — i.e. a computer that you bought to use for the business.
- Meals — i.e. professional networking conversations with other coaches.
New for 2021 and 2022: 100% is deductible if it’s at a restaurant, and you’re present at the meal. Otherwise, meals are deductible for 50%.
- Travel — i.e. traveling to a coaching conference.
If you’re driving to this conference, you can claim that expense in two ways: Standard mileage rate — $0.585 cents/mile (2022) or the actual cost of the gas for that trip.
- Accommodations — i.e. hotels, airbnb.
- Other transportation (not car) — airlines, trains, etc.
- Insurance for your coaching
- Sales Tax (if applicable)
Don’t worry, we made a basic spreadsheet template for you to use so you don't need to figure out a system from scratch.
What doesn’t count as a business expense? Anything personal.
Sales Tax (if applicable to you)
Depending on the state, you have to fill out a monthly, quarterly or yearly report. When you apply for your sales tax license, the state will dictate your filing frequency.
This is an important decision as to how you want to charge your clients.
Example if you live in California with a 7.25% sales tax:
- If you charge $100 + tax, your clients will pay you $107.25.
- It’s very clear what your net income is ($100), and what your expense is ($7.25).
- If you charge $100 taxes included, because you want to give them an easy number to remember — you will now have to do the math and subtract out the sales tax amount ($100 - $7.25 = $92.75).
- Less clear what your net income is ($92.75), but easier for your clients to know how much a session costs ($100).
Many coaches choose an easy rounded price to start, and do not realize that they’ve just signed themselves up for a lot of math at the end of the year.
Extra credit - about 1099s
If a company has paid you over $600 (that can be a company that’s a client, or a company that sends you money like Stripe or PayPal), you will get a 1099 from that company.
- 1099-NEC: Non Employee Compensation. i.e. You do work for my company as a consultant.
- 1099-MISC: Miscellaneous. i.e. Rents, other income like royalties.
- 1099-K: Charge cards. i.e. Etsy or Amazon if you have a store, Stripe or any other credit card processor you may use. If you have over $600 in sales, they will send you a 1099-K.
You made it to the end! These are the basics to get you up and running, and to make it easier on you — we worked with an accountant to create an accounting spreadsheet template for you to use.