Julie Herres Chats Side Hustle Finances

Starting a side hustle can be SO exciting.

So many of you have reached out to me asking about business entities, setting up separate businesses, and how to prepare for tax time.

I know this information is so valuable, especially when you’re starting your side hustle!

I decided to bring Julie Herres of Green Oak Accounting onto my podcast so she could break it all down for us.

She shared such amazing information and tips on how you can run your business better on the back end.

If you want to get ahead of the game and be prepared come tax time, listen to the episode now.

CLICK BELOW TO LISTEN!

Full Show Notes (Transcript)…

Marissa: Hey, risers. Welcome back to Empathy Rising. Today I'm here with a super fun guest named Julie Harris, and she is going to shine a light on one of the areas that I know that you guys have so many questions about. And while my undergrad is in finance, that was a very long time ago, and I have not stayed up to date on a lot of things.

So I have a base knowledge of accounting and a base knowledge of finances, but Julie is going to just shed light on all of that stuff for us to include: how do we handle this extra revenue as it comes in? What do we need to think about with tax time? And even one of your most burning questions, which is business entities and setting up separate businesses.

Julie, if you could introduce yourself for us and tell us a little bit about what you do and how you've come to work with clinicians. 

Julie: Yeah. Hi Marissa. I'm Julie Herres. I am the owner of Green Oak accounting. And I'm also the host of the Therapy For Your Money podcast. So in my accounting firm, we specialize in working with therapists in private practice.

I have a team now, so every single one of us works with therapists. And how we are a little bit different is that we are uniquely positioned because all we do is work within the mental health industry. And so we've got this really unique under-the-hood perspective. 

We've seen what financially successful practice owners do, like their financial habits, how they save, how they think through their expenses, but we've also seen people who are struggling too so we can help bridge that gap and put in place some good financial habits and give some perspective sometimes when it's not easy to get that information. 

You can go on a Facebook group and ask someone like, how much do you pay your clinician? Or how much are you paying for rent? And you're going to get a lot of different answers. And that can be helpful, but that doesn't answer the question. Are you making any profit in your business? And that's the piece that's often missing, but it's a really important piece. Yeah. That's what we do in a nutshell.

M: Yeah. I love that you bring that up because the thing that popped into my head is my husband calls these barracks lawyers. So in the army, you have a lot of people who think they know how it works, or think they know something. And so they're passing around a lot of probably well-intentioned, but often false information.

And so that's almost what I'm hearing from you is like these other clinicians are well-intentioned by sharing their numbers. But even if it's not necessarily false information, it just might not be accurate because they might be in a different state or even a different city. And just, they have a different financial picture.

So going to someone like you, that is a source. And then understand actually how accounting works across multiple different types of practices and multiple different locations. That's going to be much more legitimate information. 

J: Yeah. I always tell people to take either accounting or legal advice on Facebook or anywhere on the internet with a grain of salt.

You can definitely aggregate the data and then say okay, I'm going to check this out. But a lot of this is, in accounting, a lot of the information depends on your specific situation, right? Like just as a small example, S corps, everyone says oh, I heard I should have an S corp. Maybe it really depends on your specific situation.

There are some states where that doesn't make sense. There's some financial situations where that doesn't make sense. And there's other times where it does make a lot of sense. And so it, there's not really a blanket answer to some of these questions. It's not black and white. It's often very much gray.

M: Yeah, for sure. Okay. Let's dive in right there because you brought up S corps. Can you give us a brief rundown of different business structures? There's sole prop, there's partnership, there's LLC, all of these. And can you just briefly describe some of the pros and cons of them?

J: Sure. So as far as the IRS is concerned, a sole proprietorship where you're doing business as yourself, just you and your name, a single and a single-member LLC, or single-member PLLC. Those are all the same, right? Those are disregarded entities. You file that on a schedule C. So from a legal perspective, they're different.

From an IRS tax perspective, they're all the same. Then there's a partnership. So that would be typically a multi-member LLC. So that's if you have more than one owner, that's often going to be a partnership. Then there's an S corp. And an S corp is federal entities, sometimes it is or is not recognized at the state level.

So that's where there's going to be some differences - sometimes in some states S corps are not recognized, so their tax is a C corporation. So that's something that you just want to know that happens. That gets taxed on a form 1120 S and then there's a C corporation. That gets tax on form 1120, and a secret operation is rare in mental health.

It's pretty unusual to see that it does happen once in a while, but all the big public corporations, right? The Apples, the Best Buys, like those are all C corporations. So those are the main entities you're going to see. 

M: And then we have a 503 C, which is basically a nonprofit, correct.

J: Correct. On profit and you are not the owner of a nonprofit, you run a nonprofit, right? So there's no profit there. There's no... it's a completely different tax form as well. That would be the form 990. So those are the main forms. 

As far as advantages or disadvantages, anything that gets filed on a schedule C tends to be smaller companies and tend to be just a little bit simpler from a startup and management perspective. I always recommend having separate records for your business sync, like separate bank account, separate records, however that is done, whether that's in Excel or some kind of accounting software.

Always separate records would be good but generally speaking schedule C's are going to be a little bit simpler. There's less compliance. And sometimes from depending on the income level, that's why a lot of times the schedule C might make sense for a side hustle. 

M: Yeah. So that's where I was going to ask you to go with this as well. Typically, when we're talking about our side hustles, we're not looking at S corps right away if maybe ever, we're probably not looking at some of these other bigger entities, especially like definitely not a C Corp.

But the two that usually come up the most often for people who are adding on an additional income stream is a sole prop or perhaps an LLC. Can you go a little bit deeper into those? 

J: Sure. And really, whether you go with a sole proper LLC, to me, it almost depends more on your risk tolerance and what your side hustle is going to be.

So this is at the edge of like accounting and law, right? Where we're from a tax perspective, they're exactly the same, but you want to look at your risk tolerance and what you're doing to see if you are comfortable with a sole prop because then you're legally, you're personally liable for anything that happens in the business. You can get sued. 

Not that you can't get sued in any other legal entity, but there's just that layer of protection in an LLC where you and the business are not one. So you, depending on risk tolerance, depending on your personal situation, depending on your net worth, right? Personal net worth.

If you have a significant personal net worth, lots of assets, like you probably want to talk to your attorney too, to see if it makes sense to separate that out. There are ways for lawyers to pierce the corporate veil, and one of the really easy ones is if you're commingling your business and personal.

You might as well not have an LLC because it's not helpful at all. If you're really using the business as your piggy bank, that erodes your legal protection. So yeah, I think I'm an accountant. I'm not a lawyer. I would just want to caveat that, but those are some of the important pieces.

So if in your state, it's not particularly expensive to have an LLC, it usually will make sense. To do that often for a side hustle, it can also make sense to just have a DBA initially. And you and I have talked about that before, but my DBA can make sense, like where you already have, for example, a practice, you already have a legal entity for your business to add that DBA and add a separate bank account.

So you can track things separately. You can see if this business is profitable or not. Because you don't want things to just get lost together and not actually see, like if the side hustle is working or not. 

M: Yeah. Let me ask you a little bit of clarification around that. Okay, so in a lot of states,  most clinicians that I work with choose to do two completely separate businesses because they want to protect their license.

According to the codes of ethics and certain boards, if you market yourself in any way as a clinician, then you are beholden to the rules of being a clinician, mainly confidentiality, state boundaries, things like documentation, things like testimonials, personal relationships, those types of things.

Most clinicians who are working with me want the side hustle because they want to get away from that. They're okay with the regulation and some of the red tape in their practice, but they don't want any of that in their side hustle. And I say go ahead and start a completely separate business.

If they have an umbrella LLC, that's their practice, and then they add a DBA, a doing business as under that, is that technically two separate businesses or not? 

J: It is not for multiple, from a tax perspective. And I believe also from a legal perspective, it is the same business. So that can make more sense when you're doing something, maybe like putting together an online course or something that might not be as much coaching. 

But I see where you're going with coaching. It often does and can make sense to have a completely separate legal entity and everything to be completely separate. That does make a lot of sense. Yeah. 

M: And so what I suggested this, and I'm happy to have feedback from you, what I suggest for this is often (and like you said, if your state is not expensive to get an LLC, you can carry two separate LLC), you can have Tree of Life counseling LLC, and you can have Dog Walkers Are Us LLC, right?

Like they can, you can have two LLCs. However, there are some states, California is one I know of off the top of my head and others where an LLC is expensive. It's 800 bucks to get an LLC in California. So what I suggested in these cases is just go out and get a separate sole prop.

It's usually a license, a business license that you file with your county. Sometimes you have to do it with your state. You have to do a little investigating with that, but it's often just a business license in your county. And it is a total separate business entity. 

The revenue figure that I always heard, and again happy to have your feedback is 50K. Once your business is making 50K that's when you want to start thinking about possibly incorporating, because that's when you're at that risk level that you mentioned before, when you're a sole prop, if somebody sues you, they come after not only what the business makes, but maybe what your spouse makes your partner makes like.

All of that is free game. Once you've incorporated it, they can really, in the very basics of this explanation, they can go after what the business makes and then it stops. So that 50K revenue was the mark that I always heard once you're making that kind of money think about incorporating. What are your thoughts on that? 

J: Yeah, I haven't heard actually of the 50K rule. I think it's it, there's a couple of different factors, obviously like risk tolerance is certainly one, right? If you're adding an employee of any kind, that probably is going to be another risk factor, that might be a milestone that makes you think about it twice.

M: Does it matter if it's a contract employee or a W2 employee?  

J: W2 employees certainly would be a marker for me, a contractor you're going to have less risk because typically they're going to have their own, like worker's comp, they're going to have their own liability insurance. But if you're adding someone with it, like to your... as an employee where you're responsible for them, that might be a reason to get a separate legal entity.

Certainly when from a tax perspective it can start to make sense. If you can't You can't make an S election to a sole proprietorship. There has to be an LLC. You can often do an LLC taxed as an S corp. So if you're getting close to that place where you think an S corp might be in your future, it makes sense to get that LLC in place sooner than later, so that you have at least the option because you can't go back retroactively.

Like for example, we're recording this in June, if you just decided oh, actually it does make sense now for me to be an LLC, I'm going to open start an LLC now and then make an S election to be taxed as an only the revenue that you have, like from this day forward goes under that S corp.Everything else is still under your sole prop. So the beginning of the year can be a good time for that. 

M: I was just going to say, if you're going to make any of these shifts, is it best to do it at the, in like December or in January so that it doesn't get messy? 

J: You can do it any time of year, but from a tax perspective doing it around the end or the beginning of the year is helpful certainly.

M: Yeah. Awesome. So I think that this question comes up a lot and I know we're spending a lot of time here, but for clinicians, they're all, they're often apprehensive. This is some of the biggest, one of the biggest hurdles that keeps them from starting their side hustle is how do I do it ethically and how do I protect my license?

And so we've talked about a few different ways to do that. Starting a completely separate business entity is probably smart. Unless you are offering something like an ebook or a course where you have zero contact with your customers. But if you're doing something like a course with coaching or a membership site, a group program, consultation, consulting coaching, any of those it's best to probably just go ahead and have a separate business entity.

You can do that by going and filling out a form in your county and usually like a 50 bucks fee for a sole prop. And then maybe evolving that over time. Or if an LLC is less expensive in your state or where you live, you can go straight to the LLC. 

J: Yeah. I would say if the LLC is around 50 to a hundred dollars I don't think that's a big enough expense to not do it 

M: Right. For sure. For sure. Okay. So we talked a little bit about that hurdle, the next thing that comes up, and I'm sure you see this all the time in your business is clinicians tell themselves they're bad with money, or they tell themselves they don't know how to do money. 

So let's say, let's run through a few different scenarios here. Let's say there's somebody who made their first thousand dollars from a side hustle, right. In Summer Slowdown, we're teaching workshop number three is the workshop, and my goal with it for everybody is to go out and make a thousand dollars from their first workshop. 

So let's say there's somebody like that first couple bucks coming in, and then there's also somebody who's like at this $30,000, $40,000 revenue kind of threshold, right? What should they be thinking as far as this money coming in? You mentioned separate bank accounts. So that's probably something wise to do. And then we need to, of course, set aside taxes from that. We don't just pocket that thousand dollars.

Like we want to take a little bit and put it in the account. And then if something has revenue at the $40,000 range from their side hustle, we need to be thinking about expenses and taxes and revenue as well. So can you paint us a picture of what that looks like when money starts coming in from a second revenue stream or an additional revenue stream?

J: Sure. So as soon as you've got either you're a sole prop, or you've got that legal entity, go straight to the bank, open up a bank account for the business, for the side hustle. My preference would be one checking and one savings. That's what I... that's my preference. And then you can put in an initial investment of money, that's an investment.

That's not considered income right to your business. So whether that's $500 or $5,000 that you can put that money in, and then that's what you use. Those are your startup funds, right? So you use that to start the business. And then all of the business expenses should come out of that account as well.

So if you're signing up for a Kajabi or some kind of email marketing, like you should have a debit card in that checking account. Use the debit card signed up on that, even though you might get more points somewhere else. Just have everything run through the business. Then you can let that money build up the business. 

For a business, cash is like oxygen. It needs cash to survive. So while the goal is definitely for you to be able to pay yourself, you do want to keep some money in the business, so it can continue to grow and survive. So you want to decide, like at some point you've got your income and then your expenses.

And you get taxed on the profit, not on the gross income, right? So if we're looking at accounting terms, gross income is the amount coming in, minus your expenses. That's the profit, that's the piece that gets taxed. So when you're ready to take some money home, if you're taking, for example, a thousand dollars home and you need to save about 30. 30% for taxes, you can either gross that up and put like 330 or so dollars in your tax savings account and just leave it there. 

Hide it from yourself, hide it from your spouse, just hide it from everyone over there because that money doesn't belong to you. You haven't paid taxes on it yet. And then you can take the rest home and not worry about it, but you've got to keep some money in the business to survive. 

Cause someone's might be leaner depending on what you're doing. And you still have to pay those flat fees, right? Those subscriptions, those still have to get paid. And so you want to leave enough money in there that there's a little bit of a buffer. 

M: Yeah. Like your retained earnings or whatever cash you're keeping in the business. Do you have percentages that you suggest? I know that there's lots of people who throw out different percentages.

The ones that I use - so before I had employees, I took a lot more home, obviously. So if we're using a thousand dollars, I would do 30 to taxes gross, and I know I could have done my expenses out but it was just too much math for me. And so I just did 30 off the top. And then that always meant that I was actually overpaying.

So there was a better chance of me getting a refund at the end or whatever because I wasn't doing it off my expenses. So a thousand came in. I put 300 straight in that tax savings that you're talking about. And so I had 700 and then I would take 150 for the month. Cause literally I have an episode you guys can listen back, it's from 2019, but it was my "how I run my business on $130 a month". That was my whole overhead before I had employees.

J: That is impressive. 

M: That's what you can do with online business because you don't have rent, you don't have these electric bills or overhead that other brick and mortar businesses do. Take another 150 off of that. 550 would go straight to me. Like I profited so much more. 

However, now that I have employees. I'm doing still the 30% taxes. I'm doing 40% of my employees, which I know is high. And then I'm taking the other 30% for myself. So it's like significantly changed. Do you have percentages that you think are smart to shoot for?

J: So with a Side Hustle, I think 25% is usually a good place to start. Somewhere between 25 and 30% is usually going to be reasonable. If you're in a high-income household, that might be different. So that's the caveat in a high tax state. Some states don't have state tax. Some states have very high state tax.

So it can even go to 35% in those states or I've, we've done about as high as 40% because in some states, like if you're over 600,000, your household, which is not common, but it does happen like that. You're going to be in a high tax bracket. So somewhere along those lines, it is usually going to be at least enough.

So especially when the first year of a business, the goal is to really soften the blow. So where there might be a little bit more owed, right? You might not be quite enough, but you're really darn close. And that's going to feel good. 

One of the tricks I also like though is, especially for a side hustle, like if there's other income coming into the household, like at either where a clinician is still working for someone else, or there's a spouse that's working for someone else, you can really easily just change your W-4 with your employer and increase how much is coming out of the paycheck at the source. 

So your paycheck might be going down a little bit, the net paycheck, but that those taxes are just getting paid automatically. And that way you're going to have a lot more paid in. Cause as far as the IRS is concerned, it doesn't matter where the cash came from. Did it come from your W2 job? Did it come from your side hustle? It just matters did the household pay in enough? That's all that really matters. So that's smart. 

M: Maybe we could just jack Josh's taxes up a little bit, take a little bit, and then I can keep a little bit more of my cash. 

J: Exactly - he's keeping a little bit less because when you fill out, you just go to HR asks for, to fill out a new w four and they'll only let you do that a couple of times a year, but usually there's going to be a spot where it says like additional deduction you can say, yeah, I want to take an extra 150 every paycheck.

M: This is blowing my mind. So if you're partnered with somebody who's not an entrepreneur and you share finances and you filed jointly and you want to keep more cash on hand from your business, your partner may be able to adjust their withholdings from their job. 

J: Absolutely. 

M: Oh, my wheels are spinning right now. This is cool. 

J: If you have a practice, and then you're starting a side hustle for coaching. If you have a practice and you're, and it's an S corp and you are already on payroll, you can also adjust that. 

We have some practice owners that get almost $0 in their net paycheck because most of their money is coming out of distributions, but they just don't want them to deal with estimated taxes or they just want to be paying in more because they know they're going to owe at the end of the year.

So you can, there's a lot of different ways that you can do it, but that's a really easy way to like, if that feels overwhelming, like how do I pay my estimated taxes? Like, where's it going? That's a way to just get more money into the system, basically. 

M: So someone's goal is only to have cash injections.  Like one of the things that I think is really powerful about a side hustle is if you blow a tire on your car or something like that, and you need to make a thousand dollars to cover that, right? You could host a workshop or whatever, generate this thousand bucks to cover this blown tire, cover this medical bill, cover this.

All of a sudden your kid has a school trip that you really want to send them on or something like that. That just being able to sporadically generate a couple hundred or a couple thousand dollars versus somebody who wants this to be more of like a legit business. That's making money on a regular basis.

That's bringing revenue in like regularly. Are there differences to consider for that? For somebody who may have starts and stops with money, that just comes in once in a while versus like somebody with that's like a business. 

J: Either way, I would say you've got to really track your income and your expenses. I think it probably is even more important in a start-stop business because it would be easy to lose track or forget like what you did three months ago. Whereas if it's a consistent business and you're seeing clients each month, you're probably looking at the income and the expenses each month. 

You really want to track all of your income. You've got to report all the income and then you don't want to miss out on any of the deductions with your expenses. So I would say so from a tax perspective, you're still going to get taxed on the profit at the end of the year. 

But I would say in the record keeping, you probably want to be even more thorough, like when you're in it so that you don't forget something later on. 

M: Yeah, I think that makes a lot of sense. This might put you on the spot a little bit. Do you have ideas or suggestions of where someone's practice should be before they start thinking about adding on a side hustle maybe from a revenue standpoint, or maybe just from an organization standpoint? What should you have in place from your practice finances before you start thinking about having additional revenue streams?

J: That's a really interesting question. So I would say, I would say there has to be profit in the practice. If the practice is not profitable and adding a side hustle is just the way to get additional cash, I would really hone in on what's going on in the practice to make it not profitable.

I think it's important to get that right first because adding the side hustle, isn't going to fix the practice, like digging in deep, figuring out what's going on there. And how to get it profitable would be important to do before the side hustle. 

M: Yeah. And I want to make a distinction there too because profitable doesn't necessarily have to mean making more money. Like you don't have to take on five more clients just to be profitable. 

You might need to cut your expenses or you might need to look at something else to be profitable. So it doesn't mean work more in your practice necessarily. It might mean that, but it doesn't have to mean that. 

J: Absolutely. And so sometimes like when we look at holistically a practice, and we work more with group practices than solo practices. But before for solo practice, for example, that comes in and like maybe is just really not scraping by really not making the amount of money they want to, maybe the rent is too high and they need to either break that lease, get a subtenant. 

There's a lot of ways without you necessarily just adding more sessions or working harder to work that in. Maybe there's a really large coaching expense. Sometimes that happens where you get really excited about a program. But maybe it doesn't make sense, like at this particular point in your business. 

Maybe there's some software that you're not actually using. So all those little things can make a difference sometimes like in this, in the context of a group practice, sometimes there's just the splits aren't working and it's making the business lose money.

So there's a lot of different things that can happen. But I think focusing on the main business, the main source of revenue for yourself is probably a better idea at first. But once that is set and you're making money, you know how much you're going to be able to take home plus or minus, there's always changes made, then you can focus your attention somewhere else. 

M: Yeah. And sometimes those changes come because we have cancellations or no shows. So having a side hustle that is not dependent on time for money can make up for those ups and downs for the practice.

But having, I think I like what you're saying about having profit in the first business before you start a second business. Cause if you can't get your first one profitable, why are you starting a second? That's kind of the thing. But also I think as well as organization, right? 

If you're talking about adding on a second checking and savings account or a second, accounting software or whatever. Do you even have that in place for the first one? Do you feel organized over here? We talk a lot about time on this podcast. Do you have enough time to start your side hustle? But sometimes it's: are you organized enough to start your side hustle? 

J: Yeah, that's a good point. If you've got a solid financial system for one business, then you can replicate that and do exactly the same thing in the second business.

But again you don't want to co-mingle with personal and business, you don't want to commingle between the businesses. So really like having a system. Yeah. You're absolutely right. That does make a lot of sense for sure. 

M: Do you have any kind of last tips for anybody who is thinking about maybe adding on other revenue streams. Or if they're just about to start their side hustle, do you have tips from either the accounting standpoint or from the organization standpoint?

J: So get a separate bank account, I think I've said that. I've said that enough and don't hesitate to like, take a sharpie to that bad boy on your debit card. Like sharpie, which business it is. So like, what is going on, right? Set yourself up for success in that way.

Other than that, I would say you have to save for taxes. That is that it just happens all the time. Like you don't want to get to tax season and then you are paying for last year in addition to trying to save for this year and you're just playing catch up. So if you set yourself up for success from the very beginning, you are going to thank yourself later.

And I am a huge fan of profit first. We do a lot of profit first implementations. I know it's a complex system. There's five bank accounts. You can go check out the book profit first by Mike Michalowicz. But if at the very least you're opening that separate tax account from the very beginning and just sliding some cash over there on a regular basis.

Anytime you pay yourself, pay your tax account, you're going to be set up for success. Starting those good financial habits from the very beginning from your side hustle can make a huge difference in the long run. 

M: Yeah and I think that's what my philosophy on all of this is to start simple and start in a way that is manageable for you that you can stay on top of. And you can always evolve just like you can evolve into different business entities and different business structures. 

You can evolve into more bank accounts or setting aside different percentages or things like that. But keeping it easy and simple in the beginning knowing that there's always room for growth.

J: Yeah. And later on, you can add another bank account for expansion or for hiring future employees. Like all of that can come in time. But if you're set up for success from the very beginning, that just makes such a big difference. 

M: Awesome. So Julie for therapists who are listening who are thinking, ooh, I really want to talk to an accountant before I set up my side hustle or ooh, maybe I need to talk to an accountant about my practice because I'm realizing it's not as organized or efficient as it possibly could be. Where should people go to learn more about you and your business? 

J: Sure. So we'd love for you to go to greenoakaccounting.com. Green, like the color, oak like the tree, accounting. And we do offer a free consultation just to see if our services might be a good fit for you. We really specialize in monthly accounting services.

So if you're looking for that ongoing help, whether it's with your side hustle, with your main practice, like we are there for you. And I also invite your listeners to check out Therapy for Your Money. Cause we talk about all things finance and accounting, all the financial side of private practice on my podcast.

M: Yeah. And I was recently a guest on there too. So you can go and seek out my episode and listen to more of this kind of talk and then find out what other guests and other topics that Julia has shared on her show. So thanks for being here, Julie, this has been a pleasure and I love geeking out about the numbers.

I love geeking out about the organization and the system stuff behind the scenes. So it's been fun. 

J: I do too. Thanks for having me, Marissa. 

M: Yeah. Awesome. Thanks. 

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