What line item takes the biggest chunk out of your business’ cash flow? Most consulting or coaching businesses focus on controlling costs when it comes to salaries, technology, travel, or 3rd party services, but few apply the same principles to a potentially bigger cash-drain: taxes. As John Strohmeyer of Strohmeyer Law puts it, “the IRS is the silent business partner who must always get paid.” You may not be able to avoid the tax authorities - but just like any cost, it can be reduced with careful planning and good decisions.
We interviewed dozens of tax experts who understand coaching and consulting businesses intimately, much of their advice boiled down to 4 key tips. The best thing about these is that they’re not all that difficult to do - and usually are significantly easier than reducing cash outflow from operating expenses.
Tax Tip For Coaches #1
Get the Legal Structure Right
In the United States, most coaching businesses are structured as C-Corps, S-Corps, or LLCs, with others functioning as sole proprietorships or partnerships. While your company’s choice of structure may not affect much in your day-to-day operations, “choosing the correct business structure could really make a huge difference when it comes to your tax bill”, as per tax expert Robyn Jefferson.
While the optimal structure will vary from business to business - and here it’s really worth getting personalized advice from an experienced accountant or attorney - for solo coaches in particular, an S-Corporation holds a number of advantages. As growth expert Stacy Caprio explains:
One mistake many coaches making over $100K often make is not incorporating as an S-Corp to get the benefit of pass-through taxation saving 15% on FICA tax on their non-W2 wages. If they don't incorporate, or incorporate and are taxed as an LLC, they have to pay an additional 15% tax on 100% of their earnings, which adds up to a lot of extra unnecessary taxes.
That said, an S-Corp is never an automatic decision, even for solo coaches. Allie Petrova or Petrova Law explains that she “always runs a cost-benefit analysis based on the consultant’s current or anticipated profitability before recommending an S corporation due the transaction costs — initially to set up and over time in terms of tax advice and tax reporting.”
Tax Tip For Coaches #2
Don’t Forget Your ByLaws
Depending on the legal structure and jurisdiction of your business, it can be very important to ensure that your operating documents support your tax strategy. As Michael Alexis, CEO of TeamBuilding puts it:
Make sure your operating documents specifically state that members may expense meals for client meetings and entertainment. Meals and entertainment is a category that is relatively easily abused, and so can have close scrutiny. You can protect your business and finances against future adjustments by providing for this allowance in your operating documents.
Tax Tip For Coaches #3
Use What the Law Allows
The tax authorities are going to enforce rules that are to their advantage and don’t leave money on the table. So why should your business? An experienced accountant or lawyer can help you find legal and appropriate tax mitigation strategies for your specific situation, though we’ve summarized some of the easier and valuable opportunities here:
“Pay your children for office work or other services. You can utilize the standard deduction allotted each filer to the sum of $12,000. This means that if your children work for you you can reduce income by $12,000 per child. This is perfectly legal provided the children actually perform the services and a reasonable wage is paid to them.” - George Birrell CPA
“If you're employed by an organization such as a school, you may apply for an Educator Expense Deduction so you can avail of up to $250 of supply expenses that you use in your class. Take note that you should have worked for at least 900 hours during the academic school year.
If you're doing volunteer work through coaching, remember to be very specific with your tax deductions so you can apply them as charitable contributions. Take note that the organization where you volunteered your services must also be qualified for 501(c)(3) nonprofit tax exemption.” - Michael Hammelburger, The Expense Reduction Group.
Tax Tip For Coaches #4
Don’t Cram the Night Before the Test
Nicholas Benedict, Managing Director of King, Edward, a digital marketing partner for coaching and consulting organizations, recalls that “my high school gym teacher used to remind us that you can’t cram for the end-of-year PE exam the way you could for a math test. Tax mitigation works the same way - you have to be addressing it as you go through your year, not right before taxes are due.”
Allie Petrova specifically cites quarterly estimated income tax withholding as an area where many businesses get themselves in trouble, while Michael Eckstein of Eckstein Tax Services emphasizes’ business owners’ need to “take business's accounting seriously. Accurate accounting leads to an accurate tax return. Inaccurate accounting with commingled funds and lazy mistakes leads to a tax nightmare.” Similarly, Gary Massey CPA advises companies to “keep electronic copies of your receipts. This will help audit-proof your business.”
You don’t need to be a CPA or a tax attorney to understand the importance of taxes to your cash flow (though you will often need specialized help to make and implement the specific processes to mitigate your tax liability). Tax mitigation starts with the legal structure of your business, but continues as a regular, constant part of your business operations. You’ve worked hard to make your business successful - why give away a bigger chunk of what you’ve earned than you have to?