Being in the midst of a coaching session can bring an immense sense of fulfillment. However, handling the administrative aspects of your business afterward, such as accounting and taxes, can become soul-draining.
Whether you work for yourself or another organization, you are required to pay taxes just like everyone else, but how to do this isn’t so straightforward. For example, what counts as a tax deduction? How do you apply them? And how do you know you are maximizing your tax savings?
These questions can cause a total headache for someone who just wants to focus on their coaching sessions.
As a coach, you have the unique opportunity to help others reach their full potential. But while you focus on helping others reach their goals, it's important not to forget about your own.
One of the most important aspects of running your own coaching business that is often overlooked is ensuring that you maximize your tax returns.
In this article, we are going to discuss the different tax classifications for coaches, how to stay organized with your money, how self-employment taxes differ, how to stay compliant, and some tips to maximize your tax return.
Understanding Tax Classifications for Coaches
In order to navigate taxes as a coach, it's crucial to have a basic understanding of the different types of business structures and how they are taxed by the government.
The type of structure you choose for your coaching business can have a significant impact on your tax obligations and liabilities.
Each structure has its own advantages and disadvantages, and the tax implications of each structure can vary greatly. It's essential to consider the long-term goals of your coaching business and choose the structure that best fits your needs.
The four main types of business structures include sole proprietorship, partnership, limited liability company (LLC), and corporation.
Understanding the specific tax regulations of each structure can help you make informed decisions about your business, ensure that you stay compliant with tax laws, and maximize your tax returns.
A sole proprietorship is the simplest business structure, and it is a business that is owned and operated by one person.
The business and owner are considered one and the same for tax purposes, which means that the owner is personally responsible for all business debts and obligations. The sole proprietor reports their business income and expenses on their personal tax return.
- Easy to set up and manage
- No formal documentation required
- Low start-up costs
- The owner is personally responsible for all business debts and obligations
- The owner must pay self-employment tax on all business income
- The business is not separate from the owner for tax purposes, which can limit the owner's personal liability protection
A partnership is a business structure that is owned and operated by two or more individuals. The partners report their share of the business income and expenses on their personal tax returns.
- Easy to set up and manage
- Low start-up costs
- The partners can split the workload and profits
- The partners are personally responsible for all business debts and obligations
- The partners must pay self-employment tax on their share of the business income
- The partners must agree on major decisions, which can be difficult if there is a disagreement
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is often referred to as a hybrid business structure because it combines the benefits of a partnership and a corporation. An LLC offers the liability protection of a corporation and the tax flexibility of a partnership.
From a liability perspective, an LLC provides its members with limited liability protection, just like a corporation. This means that the members are not personally responsible for the company's debts or liabilities. Instead, the company itself is held responsible for any obligations or liabilities.
From a tax perspective, an LLC is similar to a partnership. The income and losses of an LLC are passed through to its members, who report this information on their individual tax returns. This is known as pass-through taxation and is one of the main benefits of an LLC structure.
- Members have limited personal liability for business debts and obligations
- Members only pay taxes on their share of the business income
- Members avoid the double taxation that can occur with a corporation structure.
- The formation and maintenance of an LLC can be more complicated and expensive than a sole proprietorship or partnership
- The members must agree on major decisions, which can be difficult if there is a disagreement
A corporation is often considered the most formal business structure and is the most complicated to set up. A corporation is recognized as a separate entity under the law, meaning that it can sue or be sued, own assets, and enter into contracts in its own name.
The owners of a corporation are referred to as shareholders and do not report business income and expenses on their personal tax returns. Instead, the corporation itself is taxed as a separate entity.
- The shareholders have limited personal liability for business debts and obligations
- The corporation can raise capital by issuing stock
- The corporation can offer employee benefits, such as health insurance and retirement plans
- The formation and maintenance of a corporation can be more complicated and expensive than a sole proprietorship or partnership
- The corporation is taxed at a higher rate than other business structures
- The shareholders must pay taxes on any dividends received from the corporation
Each business structure has its own unique tax implications and benefits. It's important to understand the different structures and choose the one that best suits your needs.
Keeping Track of Income and Expenses
Accurate record-keeping is essential for calculating your tax liability and can also help you identify opportunities to reduce your tax burden through deductions.
To accurately record your income, you should keep detailed records of all payments received, including the date, amount, and purpose of each payment. This information should be recorded in a ledger or accounting software, which will help you categorize your expenses and make it easier to prepare your tax returns.
It is also important to keep track of all business expenses, as many of these expenses can be deductible on your tax returns. Common deductible expenses for life coaches include office expenses, travel expenses, and above-the-line deductions.
When it comes to reporting your income, you must also be aware of the different tax forms that may be required.
- Form 1099: Form 1099 is used for reporting non-employee compensation. The IRS defines non-employee compensation as any payment made to an individual – who’s not on payroll – to undertake a specific project.
This could include commissions, fees, benefits, and rewards for services performed by individuals who aren’t employees.
- Schedule C: This is used to report a business’s profit or loss. Self-employed coaches should fill out the form and attach it with Form 1040.
You would use this to report any revenue your business generated as well as the expenses you incurred when running your business.
- Schedule SE: Schedule SE (Form 1040) is a tax form used by self-employed individuals to report their self-employment income and calculate their self-employment tax liability.
The self-employment tax includes both the employee and employer portion of Social Security and Medicare taxes, which are typically withheld from an employee's pay by an employer. As a self-employed individual, you are responsible for paying both portions of these taxes on your own.
Accurate record-keeping and reporting of income and expenses is critical for tax compliance and to take advantage of deductions that can help reduce your tax liability.
Tax Cheat Sheet for Coaches
Let’s face it, no matter how much you read up on taxes and learn the vocabulary, it doesn’t make it any less dull. So, in order to make your life easier, we’ve compiled an easy tax cheat sheet that has the biggest tax tips for you to maximize your returns!
- Office Expenses: If you have a dedicated space in your home that you use exclusively for your coaching business, you may be able to claim a portion of your home office expenses as a tax deduction. This includes expenses such as rent or mortgage interest, utilities, insurance, and depreciation.
- Advertising and Marketing Costs: You can deduct any costs associated with advertising and marketing your coaching business. This includes expenses for business cards, flyers, websites, and social media advertising.
- Travel Expenses: If you need to travel for your coaching business, you can deduct your travel expenses, such as airfare, lodging, meals, and transportation costs.
- Continuing Education Expenses: As a coach, it's important to stay up-to-date with the latest coaching techniques and best practices. You can deduct the cost of attending workshops, conferences, and other training sessions that are directly related to your coaching business.
- Business Start-Up Costs: If you've recently started your coaching business, you may be eligible for a tax deduction on some of your startup costs. This applies to businesses that have $55,000 or less in startup costs, which is typically achievable for most online coaches.
In your first year of business, you can claim a deduction of up to $5,000 in startup costs and an additional $5,000 for organizational costs. However, if your startup costs exceed $50,000, your deductions will be reduced accordingly.
- Tax Software: By using top-of-the-line tax software, coaches can save a lot of money on their taxes by maximizing their returns. For example, coaches on average save $5,600 by using Bonsai Taxes.
As a coach, it's crucial to stay informed about self-employment taxes and ensure that you are making the necessary payments on time to avoid any penalties or interest charges.
To make things more complicated, there are different tax forms and regulations that a self-employed individual must undergo compared to an employee. As a self-employed individual, you are responsible for paying both the employee and employer portion of Social Security and Medicare taxes. This is known as self-employment tax.
Unlike regular taxes, self-employment taxes encompass a larger portion of your income, and it's important to understand the calculation and payment process.
Self-employment tax is calculated based on your net income from your coaching business. This means that you'll need to subtract your business deductions from your gross income to determine your net income.
It's important to note that self-employment tax only applies to income up to a certain amount, which is subject to change each year. Any income above this amount is not subject to self-employment tax.
There are important deadlines and forms that you need to be aware of in order to maintain compliance with your coaching taxes. One such important deadline is the payment of estimated quarterly taxes.
Estimated quarterly taxes are used to pay your self-employment taxes and income taxes throughout the year, instead of paying everything at once during tax season. It's important to estimate your income and expenses for the year ahead, so you can make accurate quarterly tax payments. This will also help you avoid underpayment penalties, which can be quite hefty.
Another important form for coaches is the Schedule SE form, which is used to report self-employment income and calculate self-employment taxes. It's important to keep accurate records of all income and expenses throughout the year so that you can fill out this form accurately.
When it comes to taxes, it's easy to make mistakes. Some common mistakes include not keeping accurate records, not keeping track of deductible expenses, and missing deadlines for payment or filing. To avoid these mistakes, it's important to stay organized and seek help from a tax professional if needed.
You can also use software or apps to keep track of your expenses and income, and set reminders for important deadlines.
In conclusion, being a coach involves not only helping others reach their full potential but also ensuring the financial success of your own business.
Understanding the different business structures and their tax implications is crucial for making informed decisions and staying compliant with tax laws. Keeping track of income and expenses, knowing self-employment taxes, and being aware of tax deductions are important for maximizing your tax returns.
If you want to successfully navigate your taxes this year and you want to maximize your return, utilizing specialized software can make a big difference.
Bonsai is an all-in-one business management software that specializes in streamlining services for coaches, consultants, and freelancers.
Bonsai Tax is built exclusively for self-employed workers to track expenses, maximize tax write-offs, and estimate quarterly taxes. And the best part is you can try it for free!
Start your free trial today, and make the most of your tax return this year.