What do you wish you knew about paying taxes earlier in your career? What advice would you share with a new trainer?
Well, I’m a former CPA and tax accountant and have been for most of my fitness career, so I haven’t had to learn any fitness tax lessons the hard way, but here are some of the things that I’ve seen cause others trouble.
1) Know the difference between being an employee and an independent contractor, and how that affects your taxes.
a) It’s a “facts and circumstances” test, so make sure that the facts of your teaching arrangement matches the way you are classified by the agency that pays you.
b) An employee will receive a W-2 for their income. The employer will have taken out FICA, medicare, and income tax, and will have also paid FICA and medicare of the same amount. An independent contractor may or may not be paid by the agency where they teach; in some situations they pay rent and collect revenue directly. But in the case where a contractor is paid by the agency where they teach, they will not have had any employment taxes (FICA, medicare) or income taxes (federal, state) taken out of their payment.
c) The same types of expenses are deductible, but the way they reduce a person’s taxes is very different. An employee’s business expenses are miscellaneous itemized deductions that go on Schedule A, and only the amount that exceeds 2% of their adjusted gross income is deductible. This means, if you don’t itemize, or if you have an adjusted gross income that’s big enough that your business expenses are less than 2% of your adjusted gross income, even though the expenses are technically, your tax bill won’t go down because of them. A contractor who gets paid by the place where they teach will get a 1099 if their income is greater than $600. Even if they don’t get a 1099 or if the income is less than $600, the income is still taxable. The good news is, income and expenses go on schedule C, so expenses subtract directly from income instead of having to be itemized and above a certain amount.
2) Keep good records, especially if you’re an independent contractor! Even if it’s just a shoebox that you toss your receipts into, that’s better than coming to the end of the year and having to guess!
3) Free advice is worth what you pay for it (smile). Everyone’s tax picture is different, because everyone’s facts are different. Adjusted gross income, income from other sources, whether you itemize or not, whether you’re an employee or a contractor, whether you’re single or married, all of these things can affect your tax bill. So don’t accept advice on the internet that says, “My tax guy said I could….” At the end of the day, YOU have to sign your tax return, and when you sign it, that means you understand it.