Stephen Fishman Archives - Sound Design Live

What a CPA, Bookkeeper, & Business Manager Can Do for Your Business

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In this episode of the Sound Design Live podcast I speak with certified public accountant Rick Norris on creating a strategic plan for your business (which is something you need even before a business plan) and about what players you the small business owner should recruit for your team. He also answered these burning questions:

What’s the difference between a CPA and a bookkeeper?
How do I protect myself from fraud (bogus checks!)?
How do I know when I need a bookkeeper?
What percentage of income do medical bills need to be before I can claim them as a write-off?
How do I use independent contractors without running afoul of labor laws?
How do I reduce my audit risk if I take a business loss?

Details from the Podcast:

All music in this episode by Gold Chains.
Rick’s articles and Rick Norris CPA on Facebook and Twitter.
Stephen Fishman’s book and interview.
Tips:
- Tell your bank to alert you every time someone tries cash a check.
- Never have bookkeepers in charge of both writing checks and doing bank reconciliations. It’s supposed to be a check and balance.
- Make sure you classify your staff correctly. The IRS is really coming down on small businesses who improperly classify employees as independent contractors.
Quotes:
- Once you’ve built the car, you need a map. That’s what a strategic plan is: a road map of where you are going to be 10-20 years from now.
- Most people think that if they are not going out of the black, they’re doing fine, but they really don’t have a direction for where they are going.
- Keep one eye on the step in front of you and one eye on the horizon.
- If you can’t measure it, you can’t manage it.
- Once you start going outside of your core competency you run the risk of losing your vision, and then the whole thing just falls apart.
- The more money you make, the less you can deduct.

Be Your Own Attorney: The Smart Business Guide For Freelancers

By Nathan Lively

You may be an amazing sound engineer. You probably are, since you read Sound Design Live. 😉

But: are you in line with the law? Are you handling your business in a professional manner, protecting yourself from loss and planning for the future? Are you sure?

Reading Stephen Fishman’s Working For Yourself is one of the best ways to make sure that you are. I’ve read this book twice and I use it as an ongoing resource. Fishman has talked to a lot of contractors like you and me, and he explains the game in an easy to understand way. Let’s take a look at some of the most helpful points for audio professionals.

The Pros & Cons Of Working For Yourself

Pros

The first chapter of Fishman’s book is dedicated to the question, “Why do people do it?”

It’s a good question. Why go out on your own where you have to run your business and do the work, when you could just work for someone else and leave the the first part to your boss?

In my interview with him, 10 Critical Tax Questions Answered For Sound Engineers, both Fishman and I agree that it’s all about control. As an employee you must follow policy and complete work in a manner specified by someone else. Independent contractors thrive on controlling all aspects of our working conditions. We want to choose our clients, when we work, how much we make, and maybe most importantly, how we do our jobs.

With more control and agility, you should be able to make more money as an independent contractor. By making the right choices, you can maximize your personal value better than any employer. If I were to fill my schedule with gigs, that would be true, but the most important aspect of control for me isn’t money, it’s time. Being a freelancer allows me time to work on other projects that I care about, like Sound Design Live. I might make more money as an employee in the short term, but I’d rather focus on building an audience of life-long readers.

As a contractor you also have a lot more tax deductions that are not available to employees. See my article, Save $500 On Your Taxes This Year.

My favorite part about being a freelancer is that I feel agile. Any time I have a business idea I can immediately put it into action. I don’t have to convince anyone else of my idea’s validity. Does this mean that I have tried a lot of ideas that have failed? Yes. But they aren’t stuck in my brain, making me anxious and crazy with a lack of creative expression in my business.

Cons

My least favorite part about being a freelancer is the lack of support structures. When I go into the hotels and music venues where I work part-time, I get to see friends and colleagues. My favorite jobs of all time have been defined by relationships. Same with the worst jobs I’ve had. Being a freelancer means that I get a mix of the best and the worst, instead of being a member of a reliable group.

One of the biggest problems with working for yourself in the past has been the lack of health insurance. Not any more! Since October 2013 anyone can buy health insurance on the public exchange despite any preexisting conditions. Fishman predicted that many people would leave their jobs and go independent once they weren’t tied to insurance anymore, and he was right!

“So what do you do?” Do you have trouble answering this question at parties? I think more and more people are thinking of their work as a portfolio of services instead of a single job title. Many sound engineers have clients from more than one area like film and corporate AV. Some even work in completely different areas like massage and photography. I usually say that I’m a world-famous author. 😉

Legal Form For Your Business

You can pretty much skip the second chapter since, as confirmed by Fishman in our interview, there is really no reason for any sound engineer to be anything other than a sole proprietor, unless you have a partnership with someone else.

Pricing Your Services & Getting Paid

This is the most valuable part of the book. You have to take care of these things in a professional manner or you won’t survive. Or maybe you will, but you won’t be confident that you are protecting yourself and keeping all of the money you deserve.

Fishman includes an Hourly Rate Worksheet to help you calculate your fee, but this has never worked well for me. I usually put some unrealistic numbers into the worksheet for yearly profit. It’s more useful to just ask other local sound engineers what they charge, aka “investigating the marketplace,” which he also describes.

Fishman also explains different pricing models. You may only be familiar with charging by the hour, but the truth is that is often the weakest model because it doesn’t allow for any sort of compression. I’m in favor of a fixed and hourly fee combination. That way if work is going well I can take more breaks or finish early, therefore making my time more valuable, but I’m also protected against conditions out of my control. It usually goes something like this: Day rate $350, anything over 10 hours is billed at $50/hour. Because I really don’t want to work more than 8-10 hours, but if it has to happen, I want to feel compensated for the effort. I also try to upsell by packaging other equipment or services like live event recording and my wireless mix system.

I’ve never had a retainer agreement with any clients, but one of the people I’ve interviewed on the podcast does and enjoys it. That way you still have the control of being an independent contractor, but more of the stability with guaranteed hours like an employee.

Performance billing and taking commissions are two things I’ve always been interested in, but I don’t know anyone who is using them as a sound engineer or designer. Basically you get paid according to the value of the results you produce. No one goes to an event because of the sound engineer who is working it, so it seems impractical, but there might be a way of profit sharing that would work. Let me know if you’ve seen this anywhere.

How and when you get paid should be described in your written agreement with the client. Fishman includes a simple sample you can fill out to build your own independent contractor agreement. I’ve been using it and modifying it with my own clients since reading this book. One of my clients even adopted it for their other contractors. When you are just doing work for a day this can feel like overkill, but ignoring the details will bite you in the ass so I demand that you follow these two rules:

Write it down. If you agree on your rate and arrival time over the phone, email that client ASAP to have a written record. Simply say, “Hi Nathan, just confirming these details from our phone call.” People will appreciate your reliability. Event producers have a million details to keep track of. Don’t expect them to deliver on everything you just discussed over the phone while they were driving, drinking coffee, and thinking about their next phone call.
Don’t make assumptions. Just because you have done the same event two years in a row doesn’t mean that it will pay the same or have the same responsibilities this year. You can still agree to do it over a text message, but email that client ASAP so that you know that they know that you know that they know. Otherwise, you’re going to end up working the load-out at 2am for pennies.

Fishman recommends asking for a down payment and periodic payment schedule. I typically only do this on jobs that will last for more than a week or bill for over $1,000. It’s completely reasonable to ask for ⅓ or ½ up front, especially for first-time clients.

When it comes to payment format, Fishman recommends accepting some form of electronic payment, like Paypal. I totally agree, but I’m not 100% on board with Paypal. I am still occasionally surprised by fees I wasn’t expecting and even had one client pay the wrong person. Instead, I recommend SquareCash. It’s unclear how long it will be a free service, but it’s super simple and I’ve convinced clients to use it who previously would only handle cash or checks.

Fishman’s book is also where I learned how to send invoices. You can see my process in Easy Invoicing For Sound Engineers. For example, instead of charging late fees, sometimes I will offer a discount for early payment.

Taxes & Savings

Fishman dedicates four chapters to dealing with taxes. I covered a lot of this in my last two posts: The Sound Engineer’s Pain-Free Guide To TurboTax and 10 Critical Tax Questions Answered For Sound Engineers. Fishman goes into more detail about avoiding and dealing with IRS audits in his book. He also goes into much more detail covering the deductions you can use to lower you income taxes and paying estimated taxes. I’ve never paid estimated taxes. Have you? I put 10% from all my income into a special savings account and use that to pay taxes yearly.

The chapter about retirement options for the self employed was helpful, ~~but I have to admit that I haven’t taken action on any of it yet~~ (UPDATE: I just opened a Roth IRA at Ally Bank. I already had an account so it only took five minutes. Yay!) I would guess that there are many of you who put these kinds of financial responsibilities off just like me. You probably think it’s too complicated or boring. You should watch Ramit Sethi’s guide to automating your savings.

When you watch it you are going to say, “But wait, that’s for employees who have a pay check every month. My income varies from month to month.” Ah-ha! I have an answer for you. I watched Sethi’s workshop with a bunch of freelance photographers who asked the same thing. His suggestion was to save into an account until you have six months worth of normal income, then setup the automation process to pull from that. Boom.

Read The Book

If you found any of this information helpful I encourage you to read Working For Yourself. Your situation is slightly different from mine and you should make your own business decisions. I’m sure you’ll come up with some good ideas. Let me know how it goes.

The Sound Engineer’s Pain-Free Guide To TurboTax

By Nathan Lively

Are you a sound engineer? Do you hate taxes?

As sound engineers, taxes can be really complicated. We often have

multiple sources of income,
business expenses,
and lots of paperwork.

I’m not an expert and I make mistakes every year. In fact, this year I accidentally submitted erroneous information, so now I’m waiting for my 2013 return to get kicked back to me so I can submit it again. Hooray.

Don’t do what I did. Use TurboTax to make the process easier on yourself. Follow these tips gained through many mistakes (and talking to Stephen Fishman) and save yourself some pain.

[Disclaimer: I am not an accountant or a tax lawyer; I don’t even play one on television. Please do not consider this certified legal advice.]

#1 Collect your income and expenses.

I keep track of this stuff all year long using the iExpensit iPhone app. I like it because it’s always with me and I don’t have to worry about holding on to receipts, even for cash, because the app stores a photo of each receipt for me. I used to try to enter everything into a spreadsheet at the end of each day, but I never managed to make it a habit and it was easy to forget things after the fact. Recording it at the time of transaction is best. At the end of the year I also usually go back and scan through my bank statement to see if I’ve missed anything.

#2 Prepare a spreadsheet.

In iExpensit you can export a report to Excel or a similar program. Organize your data by deleting columns you don’t need, separating expenses from income, and ordering everything by category. Some of you may be completely independent sound engineers, but I am also a part-time employee at a couple of music venues. In my case, I must separate my income out between what I earn as a freelancer and what I earn as an employee.

PRO TIP: In Excel, sort the data and then use the Subtotals command for each category or sub-category. Then collapse the data into something that’s much easier to view, like this →

#3 Choose TurboTax Home & Business.

You might ask, “Do you I really need it? It’s $50 more than the Deluxe edition. And what about the free edition?” Here’s a simple test. Go with with Home & Business if you:

Invoice clients directly; OR
Have received a 1099-MISC; OR
Plan on taking the home office deduction.

If you are a full-time employee at a theatre or venue and are only receiving W-2 forms, you should be fine with Deluxe. Still unsure? Use this handy reference.

#4 Input business income and deductions.

You’ll enter all of your 1099-MISC forms and income as a freelancer in the business section. Anyone who paid you $600 or more last year must send you a 1099 (and file a copy with the IRS) by January 31. Everything else is on you to report.

I know some people keep the money they made in cash off the books, but I report everything. I’m pretty sure the taxes I’m paying now are completely worth avoiding the headache of a messy audit down the road. I’ve never experienced one, but I’ve heard they can be terrible and drag on for months.

TurboTax does a pretty good job of guiding you on where to put what deductions. Anything they can’t categorize goes in the miscellaneous section at the bottom, including the money you paid for TurboTax last year. As you go through each section entering your deductions, make sure to mark them in your spreadsheet so that you don’t accidentally add them twice. I keep track of this by changing the background color of a row I’ve already used. At the end, as you can see in the image above, my spreadsheet looks like a pastel Christmas tree. I know this is time consuming, but if your marginal tax bracket is 25% (income from $36,250 to $87,850), you will save twenty-five cents in income taxes for every dollar you can claim as a deductible business expense.

Here is an overview of my income and expenses for 2013.

#5 Input personal income and deductions.

This is where you put in your W-2 forms if you were an employee last year, and deduct medical expenses. I usually don’t have much else for this section. One year I made less than $14,590 and could apply the Earned Income Tax Credit of $487. I hope none of you have to use that one, but it does happen.

#6 Error check.

Every year my returns create some kind of error. This year it was because I moved home offices and entered some numbers wrong. I got on the chat support and the TurboTax rep offered to call me up. He was nice and waited on the phone while I got it sorted out. Now I definitely feel like I got my money’s worth.

#5 Pay the man.

You’ll have a few different options for paying your taxes. I definitely recommend the automatic deduction from your bank account on April 15th. Don’t make yourself try to remember to send a check. Or, if you have the money now, pay it now.

One year I couldn’t afford the full amount and I requested to pay in installments. It was pretty easy. There is a service charge, but it was worth it. You can only do this once every five years, though.

The best tip I’ve heard for saving for taxes was from Darryn de la Soul. In Getting A Foot In The Door she says, “I personally found that if I saved 10% of each and every job, that equated – more or less – to the amount my tax came to after I had offset my business expenses. Start saving those little bits now.”

#6 What if I make a mistake?

Sorry, you’re fucked. Well, at least temporarily. E-filing your tax return is like dropping it in the mailbox. You can’t get it back. If the IRS rejects your return, then you can make changes and resubmit it. If they accept it, then the only way to make a change is by submitting an amended return by mail — no e-filing for you…I mean me. Yeah, I did that this year. Accidentally used a 1099 form from 2012 instead of 2013. Fail.

Fortunately, it’s not hard to create an amended return with TurboTax and fix mistakes. Then you just print it out and mail it in. Since I scheduled my original payment with bank transfer on April 15th, I assume the IRS will send me a refund after that date. I’ll update this post when I know for sure.

What are your personal TurboTax tips? Comment below.

Save $500 On Your Taxes This Year

By Nathan Lively

Are you leaving $500 on the table? You might be.

In my recent interview with Stephen Fishman, I asked him about the most common tax deductions that independent contractors get wrong. He said, “One great deduction that people don’t take or are afraid to take is the home office deduction, which if you are a renter can be worth a great deal because ordinarily you can’t deduct your rent at all. If you live in an expensive area like the bay area, that can be a lot of money.” So let’s take a look at Fishman’s article, The Home Office Tax Deduction, and discover how to use it and how much we can save.

Disclaimer: I am not a CPA (certified public accountant); I don’t even play one on television. Please do not consider this certified legal advice.

Wait a minute, am I even eligible?

Requirement #1

The home office deduction is available to renters and homeowners alike. It is available for office space and other areas you use for business in your home — such as a studio, workshop, or garage. And according to the IRS, your “home” can be a house, condo, or apartment unit — or even a mobile home or boat, as long as you can cook and sleep there. However, you must meet two tax law requirements to qualify for the home office deduction:

Requirement #1: Regular and exclusive use. You must regularly use part of your home exclusively for a trade or business.

Regular is easy. This just means that you are working from home a couple of days a week or a few hours a day.

Exclusive is a little harder. How many of us use our computer exclusively for work? Well, maybe Harry Mack. But besides him, no one! Don’t worry. The important thing is where you use your computer.

The best way to handle this is to have a room that is dedicated to business. Guess what? I don’t. As an alternative, make sure that your work area is clearly defined. Put up a room divider, for example. Fishman offers a few more tips to establish your legal right to deduct for a home office.

Document it. Photograph you home office and draw a diagram showing where it is located.
Have your business mail sent to your home. Duh.
Keep track of the time you spent working at home. This is easy. Just add these times to your calendar and keep them for…ever.

I know it feels like we’re barely squeaking by, but trust me: we’re going to make it. I’ve been taking this deduction for years and it’s worked out fine. Based on other articles that I’ve read, as long as you are faithful to the spirit of the requirements, the IRS will accept it. Basically, treat your home office like you would a corporate office. You don’t have to rush out of the room every time you get a personal phone call, but you also can’t hold jello wrestling matches there. Unless, of course, that can be considered managing your business. If so, congratulations, and are you hiring? #livingthedream #jobplease

Beware

The home office deduction is only available to you if you are running what Fishman calls “a bona fide business.” Don’t worry, if you’re charging for your services and making money, not just helping friends for fun, then you qualify. Still worried? Read How To prove Your Hobby Is A Business.

Requirement #2

Requirement #2: You must also be able to show that you use your home as your principal place of business.

Your home automatically qualifies as your principal place of business if both of the following are true:

You conduct the administrative or management activities of your business from home.
You have no other fixed location where you conduct those activities.

Both statements are true for most sound engineers. We seek out gigs, invoice clients, and generally TCOB from home, then head out to the concert venue, theatre, or hotel to make ears drums bleed. I think this requirement is mostly to keep people from claiming their office space AND their home office. So if you own an AV company and manage your work from the warehouse, tough titty.

How Much Money??

Using the simplified deduction option, which most of us will, you can deduct $5 per square foot with a maximum of 300 square feet. So if your office occupies a 10’x10’ square, you can deduct $500. Boom.

It could be less, but it could be more. If you don’t use the simplified deduction option then you will need to answer a list of questions about your home office. This year I got a home office tax deduction of about $5,000. Why? Mostly because of the high cost of living in the bay area. I was paying $1,000/month for a triangle-shaped one bedroom, and using almost half of it as a home office.

Conclusions

Many people don’t take the home office deduction because they don’t understand it. Now you do. And you should, because while it is not completely defined, most freelance sound engineers meet the eligibility requirements and you could save a bundle.

10 Critical Tax Questions Answered For Sound Engineers

By Nathan Lively

Subscribe on iTunes or SoundCloud.

Being self-employed can be both a dream and a nightmare.

In this episode of the Sound Design Live podcast I speak with Stephen Fishman, attorney and author of Working For Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants. We answer the following questions:

What are the pros and cons of being a freelance sound engineer (independent contractor)?
How do I choose a business structure (sole proprietorship, LLC)?
How do I handle equipment expenses and rentals that are reimbursed by the client?
What common tax deduction might I be missing?
How do I deal with clients who won’t pay?
What are alternative pricing models (hourly/day rate/project rate) for sound engineers?
Do I really need a business license?
How do I keep track of business expenses?
Can I save money with a Healthcare Saving Account (HSA)? Can I use it for preventative care (massage, yoga)?
Will Obamacare save me money?

Details from the podcast:

All music in this interview by Rui Faustino
Flow is a book by Mihaly Csikszentmihaly. Everyone should read it.
Tax forms:
1. Schedule C: Reports income or loss from a business you operated or a profession you practiced as a sole proprietor.
2. W-9: Used to request name, address, and taxpayer identification number.
3. 1040: Individual income tax return.
Tools: TurboTax, iExpensit.
If a client includes your expenses in their 1099, then you should list them as deductions in Schedule C.
Covered California
Nolo
Fishman’s thoughts about the new public health insurance exchanges:
1. Many self-employed people will qualify for tax credits. You can get tax credits to help pay for your health insurance if you are single and make up to $45,000/year.
2. A lot of people are in their jobs now because they can’t get healthcare anywhere else. Many people will probably leave their jobs, some will retire early, and some may become self-employed because they will be able to get health care coverage.