JAIME: Before we get started, we want to announce that we’re the featured educators in a virtual learning event. A Slice of Pro Beauty scheduled for Sunday, October 11th and Monday, October 12th is open to all license types.
ASHLEY: And if you’re a cosmetologist or nail technician in Illinois, you’ll be able to satisfy eight hours of your CE requirement. Bonus! Visit outgrowthpodcast.com/slice for more info and to register. Seats are limited. Now on with the show. Welcome to Outgrowth: A Slice of Pro Beauty with your host Ashley Gregory.
JAIME: And Jaime Schrabeck. Anyone can talk about making money in our industry. What we need to address is how we manage it and report it.
ASHLEY: We’re pleased to welcome CPA Desarie Anderson who knows her way around the beauty industry and accounting. Let’s grow together.
JAIME: Welcome to Outgrowth, Desarie.
DESARIE: Thank you. Thanks for having me. I appreciate it.
JAIME: Assume that we know nothing about your titles, what do the CPA and EA designations mean?
DESARIE: Okay. So a CPA that means a certified public accountant and an EA is an enrolled agent. Now let me just explain to you what the EA actually means. Most people understand and know what a CPA is in terms of an accountant, but a lot of people don’t really know what it entails to be an enrolled agent. So basically, as an enrolled agent, I have been certified by the IRS to represent taxpayers before the IRS. So you have three designations that are legally allowed to represent taxpayers before the IRS if they’re having any sorts of tax issues, that would be an enrolled agent, which is what I am. I’m a CPA as well, and also, an attorney. So what we do is we sort of help people who are having an audit issue. You’re being audited by the IRS, or if you owe back taxes, or just any sort of IRS issue that you’re having, you would want to hire either an enrolled agent, a CPA or a tax attorney, depending upon your specific situation.
ASHLEY: That is an impressive resume. Wow. As a CPA with beauty industry experience, what range of services do you provide to salon owners and individual beauty pros?
DESARIE: Okay. So I provide accounting services. I provide bookkeeping services and of course, I provide tax services. I also consult with clients. For example, I have some clients that are looking to either grow their business, or they’re trying to create budgets for their business, or they’re just on a different level where they want more than just compliance because compliance work consists of preparing financial statements, and preparing tax returns, and all of that. That’s compliance work. But I also do a lot of consulting work and profit growth work with beauty industry professionals. So in addition to them using certain tools that are out there to help them keep track of their business, a lot of salon owners now like to use financial statements to try to make decisions in their business. So in other words, it’s not just about saying, okay, I need my profit and loss statement prepared because I need to prepare my tax return. It’s a little bit more than that. I try to encourage my clients to look at their numbers because I always say whenever you want to make a decision for your business, you have to make your decision based on data, and making your decision based upon feelings, or how you feel about something, or making a decision based upon what so and so told you, or what you read on social media, that’s not necessarily the best and most effective way to make decisions. I always say the numbers don’t lie. So if you want to make decisions for your business, regardless of what those decisions are, you have to have data in order to make those decisions, and the data usually comes from your financials, and that would be your profit and loss statement, and your cash flow statements, and also your balance sheets.
ASHLEY: Well, you are hitting all of the greatest hits and some of our favorite words like compliance. That is a very big sticking point for both Jaime and I. So ideally, how much interaction would you have with your clients throughout the year?
DESARIE: Well, I’ll say it depends. It varies. I have some clients who only want to see me during tax time. Okay. So usually they come to me when it’s time to prepare their taxes. Now I try to discourage those types of interactions only because by the time you get to me, if you’ve had any issues through the year, like I can’t fix anything, nor can I guide you or redirect you in a different direction because everything that has happened has already happened. So we just have to, now, so now the only thing we can do is, okay, deal with what we have on the table and hopefully, moving forward, we can make some changes. So my preference really is to check in with my clients at least once a month or so. I love for my clients to contact me, ask me questions. And I always say before you make any money moves, speak to me first because everything you do in business has a tax consequence, everything. And not necessarily just in business, just anything that you do. For example, I have a few clients that went and pulled money from their retirement accounts and they didn’t realize that in doing so, they would have to pay tax. And in addition to paying tax on that, they also have to pay a 10% penalty because they withdrew the money earlier than they were supposed to and that can get pretty expensive. I had one client, for example, who withdrew, I would say about $75,000, had an early withdrawal from their retirement. And they had no idea that they were going to be required to pay tax on the money that they took out. So at the end of the year, when it was time for me to do their taxes, I questioned the amount. I said, well, what happened? And then they said, oh, I took the money out to buy a house. And they had heard that if you take money out of your retirement account to buy a house that you wouldn’t have to pay taxes on it, which is not necessarily true. There is something out there that does allow you to withdraw money where you won’t be penalized if you’re purchasing a house, but it has a cap. So they had a pretty ugly tax bill that year because they did not contact me before they made that move. So I like to check in with my clients, like one to two months just to make sure everything is going okay. Just ask questions, and so they can also ask me any questions that they may have.
JAIME: That’s an expensive lesson to learn.
DESARIE: Oh, yeah, real expensive, but you know who we got through it, and she actually had a pretty hefty tax bill. But one good thing about the IRS is that they will allow you to set up a payment plan. So even though her tax bill was quite high, she wasn’t forced to pay the entire amount immediately. She was able to set up a plan and just paid over time with both the IRS and with the state as well.
JAIME: Desarie, let’s talk about the hustle in the beauty industry. How do you define a side hustle and contrast with a legitimate business?
DESARIE: Okay. How do I describe a side hustle? Well, you have different levels of hustling when it comes to the beauty industry. The way that I describe it, and everybody probably has their own definition, but I describe it as a person who has decided to just say, okay, you know, there’s nothing else that I can do, or there’s nothing else that I want to do, and then they decide one day, I think I’m going to become a hairstylist, okay? And in doing so, they’re not really thinking about it from a business perspective. They just wake up one morning and decide, okay, I’m going to go ahead and start to do hair. Now there’s nothing wrong with doing that because person can wake up one morning and decide to do hair, but at the same time, they may do some research to find out what they need to do to make sure that they stay in compliance and also what they need to do to make sure that they have their pulse on their business. And when I say their pulse that means that they are actually tracking exactly what they are doing so that they can make decisions if they decide to grow. But a person who treats it like a hustle or hobby slash hustle, is they just, for example, when I used to be a hairstylist, even when I owned a hair salon, as you’re doing hair in the salon every day, you have people that come in to try to sell you the world, okay. They want to sell you Gucci bags. They want to sell just everything. So you had some stylists who just whenever they made money, whenever they were paid, they just took the money and threw it in the pocket of their apron. They had no idea how much they made that entire day because they just take the money and throw it in their apron. And then every time they want to buy something, they’ll dip their hand in their apron and just pay for it, whether it be someone coming in trying to sell them something, whether it be them running out to go buy something. So they had no accountability. They had no idea how much money they were making. Some of them don’t even have a bank account. You have the ones that say I don’t accept credit cards. All I accept is cash, nor do I accept checks because number one, I don’t have a bank account because I don’t want anyone to know how much money I’m making. I don’t want to have to pay tax, so therefore you have to pay me in cash. I mean, that’s a bit of an interesting way to do business, especially nowadays where most people don’t pay for items in cash, but these people usually don’t have bank accounts. They don’t necessarily have any sort of system. In other words, they have no CRM systems, no customer relation management systems. It’s a matter of just call me on the phone, or just text me and let me know when you want to come in, or you know what? Just stop by the salon, and if I’m not busy, I’ll take you. So there is absolutely no system. Everything they do is just, I would say, on an impulse basis. So at the end of the day, when you sit down and you shut down, those people like that can’t really tell you, number one, how many clients they served that day. Number two, they can’t tell you how much money that they made that day. Number three, they couldn’t tell you what their most profitable service is. Number four, they couldn’t tell you how much they actually spent, what were their expenses for a certain month. They couldn’t tell you what the cost of their service was. Like in other words, I have clients that come in. They pay me money. What does it actually cost me to put on a service, which has nothing to do with actual expenses in and of itself? So that’s how I will describe the person who was sort of treating it like a hustle where they’re not looking at it like a business. In addition to that, if I ask the question, oh, well, what kind of business do you have? Oh, well, I don’t have a business. I just made some money last year and this is what I think I made. But they don’t even know they have a business because they feel like, oh, well, I haven’t done anything to like actually legitimize myself. So the assumption is I don’t have a business, but that’s not the case. Anytime you exchange a service for money, automatically you have a business. All that means is that you are a sole proprietor. So you have not necessarily registered your business with the state. However, you are a business. And I always say, if the IRS and the state view you as a business or treat you like a business, then you are a business. And therefore you should treat yourself like a business. And don’t think just because you are sort of hustling through everything that you are then not a business cause that’s not true.
JAIME: In those situations where the cash is flowing and it’s not being accounted for, the taxes aren’t being filed and reported, and that person isn’t paying into their social security, and the other taxes that are due, correct?
DESARIE: Absolutely. Absolutely. And that’s one big issue that I find with a lot of stylists. Because our business is a cash business, we can pretty much report how much we feel like reporting other than the fact that if you accept credit cards, well, that’s a third party so that it’s being tracked that way. So the IRS, they can find out about your Square, like all your Stripe payments from a third party. But if the money that’s coming in, for example, if you get paid through PayPal, or you get paid through Venmo, or you get paid through cash app, or you get a check, or you’re receiving cash, well, there’s really no way for the IRS to determine or to know that you’re getting money through these places because they’re not being reported to the IRS. So in that instance, when you file your tax return, you can say you made however much you made. Now when you’re doing it, it feels great because you’re keeping most of your money. So you’re thinking short term. However, how it affects you in the long term, it affects you in several different ways. One, as you mentioned, you’re not paying into social security. And normally a person with that mentality does not have a retirement savings account either. So then the question now becomes when you get older and when it’s time for you to retire, how are you going to take care of yourself? Because number one, you have no retirement account. Number two, the social security, which we all pay into and hope that it’s there when we retire, you have not paid into it. So now when you retire, you maybe paid in just a little bit because you’re only reporting a little bit of money. So now you only have a hundred dollars coming every month from social security. So then now how do you sustain your life? How do you pay your expenses when you get older? And when I owned my salon, I dealt with two women who had this situation. One of them was 75 years old and she was behind the chair still doing hair. And I asked her one day, I said, what’s making you decide to continue to do hair at such an age? I said, you must really love it. And she said, no. She said, really, she would love to retire, but she doesn’t have any retirement. She says she has no retirement and what she’s making in social security is not enough to even pay the light bill. So therefore, that’s the reason why she’s continuing to work. And she always talked to the younger stylists in the salon and tell them, file your taxes. Be honest. Pay into social security because if you don’t, you are going to be me in about 30 to 40 years, 75 years old, behind the chair, still doing hair. So that is definitely, definitely a problem. And then also, when you don’t file your taxes honestly, when it’s time for you to purchase a home, now you’re not able to do that because what they want to look at is your tax return. How much money have you made over the last two years? And then you have only made a little bit of money. So now you can’t purchase the home that you want to buy. And what I find is I have stylists coming to me saying, okay, I have two years of tax return. My loan officer is asking for it. However, I don’t make enough money. What can you do to show that I made money so I can buy this house? And I tell them, really, there’s nothing I can do to show. I’ve had people to say to me, okay, can you amend the last two years of my tax return to show that I made more money than I did, and then after I get my house, can you then go back and re-amend it to bring it down? Well, yeah, you can do that, but that’s considered fraud. If you do that, it can get you into trouble. So when we are preparing our return and not wanting to report all of our income, we don’t really think about the consequences of what we’re doing further down the road. I can’t get a loan for my house. I can’t get a loan for my vehicle. I’m not going to receive enough money when I retire to cover social security. If I want to get a loan for my business, I can’t do that because I can’t prove that I’m actually making any money. So there are so many different consequences. When we think we’re cheating the government, but in all actuality, in the long run, we are cheating ourselves.
ASHLEY: I’m so glad that you touched on all of those things, because the home loan argument, I guess, is something that we hear quite a bit when someone is saying that they’re not claiming their tips or reporting their income correctly. But the social security aspect of it, I think is something that many haven’t yet considered and I really appreciate your perspective on that because it’s just so important. When advising beauty pros to legitimize their businesses, what advantages does that bring and how does it impact state and federal taxes?
DESARIE: Okay, so, legitimizing your business, and the definition of legitimizing a business, depending upon who you ask, you’re going to get different variations of answers. So as a sole proprietor, okay, that means that your business has not been registered with the state. Now you are legitimate as a business because there is a designation. The IRS recognizes sole proprietors. So it is a legitimate business. You are legitimate, okay? However, if you want to take it a step further, you would want to register as a limited liability company, an LLC. Well, why would you do that? Well, there are a couple of reasons why. One, as you mentioned, legitimizing your business, you may have somebody who decides to try to research you. So you say you’re a business. You own, for example, name of my business is Hair Designs, and you’re located in Atlanta, Georgia, and you are trying to do something, whether it is get a loan or in other words, you’re dealing with a third party for whatever reason, and that third party wants to see if you are truly a business. Do you really have a business in the state of Georgia? Well, if you have registered with the state as an LLC or any other form of registration, they can actually go to the secretary of state website and see that, oh yeah. So Hair Designs does exist and it is located at 2000 Main Street. Okay, and, oh, who is the owner? Oh, okay, and it was formed by Desarie Anderson. So your name is going to be connected to that. So that’s one advantage. That’s not to say that if you do not become an LLC, that your business is not legitimate. It is still legitimate as long as you do everything that you are supposed to do as a business owner. Now, I advise my clients to at the very least form an LLC. And the reason why I say that is because you want to make sure that your personal assets are protected. So, what does that mean? Now keep in mind, I’m not an attorney. I don’t play one on the radio. So I’m just sort of giving you advice brought from an accounting perspective. But if you want more legal advice, then you definitely want to speak to a business attorney. That said, as a limitation liability company, an LLC, you are protecting your personal assets. And just to simplify things, for example, let’s say something happens in the salon, and somebody sues you, and they’re suing you for whatever they say you did. Well, as an LLC, your personal assets are somewhat off limits. In other words, they can’t get a hold of your home, your car, your kids, you know, whatever it is that you consider an asset. They can’t go after you for those things. There is a caveat to that. All they can go after are the assets of your business. So they come into your business and they say, okay, I’m walking into Hair Designs and I see all of these assets. Okay, I see that you have a bank account under Hair Designs. That’s one asset. So all the money in there is free game. Walk into your salon and you have a bunch of equipment that is worth quite a bit of money. That’s all fair game. On the other hand, you walk into your home. That’s not necessarily fair game. I look at your vehicle. That’s not necessarily fair game because you have structured yourself as an LLC. Now the problem with that is, and this is what I find with a lot of my clients and not just my beauty professional clients, this also includes just other clients, is that they form an LLC for this very reason thinking that, oh, I have an LLC so therefore my personal assets are protected. It’s not necessarily true because there is something that’s called piercing the corporate veil, and piercing the corporate veil applies to LLCs, applies to S corporations. It applies to C corporations. And what that is is if you don’t abide by the compliance requirements of an LLC, then you are exposing your personal assets to a suit. And the main thing that I find that LLC owners do is they commingle funds. So they have a bank account. They’ll start out with one bank account and they’ll use it for both personal and business. That right there, you just shattered any sort of protection you would have had otherwise. So then I tell them, okay, you need to open up a separate bank account. So they’ll open up a separate bank account and it will be a business account, but then they find themselves dipping into the business account and using it for personal as well. They can’t seem to keep things separate. And if you don’t keep things separate, the assumption now is that your personal and your business assets have pretty much commingled the two. So that means that if somebody should sue you just because you’re an LLC won’t mean at that point that you, your personal assets protected because you have pierced the corporate veil by commingling funds. Now I say this as an accountant, but as I said earlier, you definitely want to consult with an attorney if you want further information on how this works, because this is just a general, simplified explanation of how it works, but there are other caveats to it, other variables to it, that I’m not qualified to speak on, so therefore I won’t.
JAIME: You’ve certainly said enough to reinforce the idea that we need to have separate bank accounts for our personal and business transactions, for sure.
JAIME: Let me ask this because this has come up repeatedly since the pandemic started, when a beauty pro sells gift cards or retail products while collecting unemployment, some want to avoid claiming those funds. Would you clarify what counts as income, and if we do receive unemployment, how do we account for that in our taxes?
DESARIE: Before I answer that question, let me just, backtrack to the LLC question again cause I get this question a lot. People will always ask me, okay, I have a business. I’m an LLC. And they assume because they’re an LLC that they have to file a separate tax return. So that’s not true, and in addition to that, single-member LLCs, which means you’re an LLC and there’s only one member. That’s you. That particular type of business is not recognized by the IRS for tax purposes. So the IRS recognizes you as a sole proprietor. In other words, there is no separate tax return. You’re going to file your 1040 tax return. And then you’re going to report your income and expenses on your 1040 schedule C. So there is no distinction between being a single-member LLC and a sole proprietor. Therefore, there are no tax breaks for being an LLC. If you’re an LLC doesn’t mean that you’re taxed differently. It doesn’t mean there are any tax breaks. None of that occurs to you if you are a single-member LLC. So just keep that in mind cause I get that question all the time. You are looked at as the exact same way they will look at it as a sole proprietor for tax purposes. But LLC designation for single-member LLCs only makes a difference on a state level. It’s a state registration thing. So therefore really, what it’s doing once again is you’re trying to protect your personal assets and that is pretty much the reason for that. On the other hand, if you are a partnership, let’s say two of you own a hair salon. You are now a multi-member LLC, which means that for tax purposes, your business is a partnership and therefore, you will have a separate tax return to file. You will file the 1065. So you’re going to have two returns. You’re going to have your business return which is the 1065. And then you still have to turn around and file your personal return which is a 1040. Whereas for the single-member LLC, you’re only filing the 1040. You’re not filing anything else. And of course, as an S corporation, if you’ve been elected to be treated as a corporation, you have a separate return there because it’s recognized by the IRS. And also if you’re a C corporation, there’s a separate return there because that entity type is recognized by the IRS. I just wanted to mention that cause there’s some confusion where that’s concerned when I speak to business owners. Now, as for collecting unemployment while you’re selling retail and also selling gift cards. Well, in terms of reporting, so however the reporting is in your particular state, they may want to know, well, how much money did you make last, last year or last week? Yeah, you’re going to include retail sales and you’re going to include gift card sales because you made the money. The cash came in. So then they will use that information to determine whether or not you still qualify for unemployment and that’s the purpose. Now you have people that won’t be honest because they want to keep collecting unemployment. So they’re not going to be honest about how much money they made, but it is considered revenue. It’s considered income. Therefore it should be reported part of what you received when the state is asking you how much you made in a prior period.
ASHLEY: Many business owners may be accessing funds and participating in programs for the first time, like working with the SBA. What kinds of records should we be keeping in order to really make tax time next year much less painful?
DESARIE: Well, it’s definitely very important. If you have received loans from the SBA, whether it be the PPP loan, whether it be the EIDL, that you keep proper records. And that is where your balance sheet and your profit and loss statement come into play. First of all, the PPP loan, it may be forgiven, right? However, until we know the total amount is forgiven or that a portion is forgiven, that money needs to sit on your balance sheet as a liability to you. So if you receive $20,000 on your balance sheet, you should see a liability of $20,000 because you owe that money. Now it’s going to sit there until of course you apply for forgiveness. When you apply for forgiveness, if you are forgiven the entire 20,000, then your accountant will then remove it from your balance sheet and therefore it doesn’t show as a debt to you. Now, let’s assume that you got the 20,000, but you were only forgiven 15,000. That means that your accountant now has to remove 15,000 from the balance sheet and keep 5,000 on there. As you start to pay back that 5,000, you want to make sure that as you pay it back, your accountant would need to determine how much of the payment goes to principal and how much goes to interest. Because let’s say you’re paying back a hundred dollars a month, and $90 goes back to the principal, and $10 goes to interest, you want to make sure that you’re taking the interest expense as an expense on your profit and loss statement, because of course that’s gonna reduce your tax liability. And then you also want to make sure that you’re taking that $90 and reducing your liability on your balance sheet because the less you owe, if you ever have to get a loan, you have to show your balance sheet to anyone. The more you owe, the more of a risk you are. The less you owe, the more willing people are to loan you money, the less of a risk you are. So you want to make sure that every time you make a payment that the principal on the balance sheet is being reduced. And the only way you can do either one, and when I say either one, I’m talking about making sure that you are properly reducing your liability on your balance sheet, and you are properly taking the expense, the interest expense, on your profit and loss statement is if you track your income, your expenses, your activities, all the activities. Most people are going to be like, oh, okay, well. They won’t keep any records. Start paying stuff back. They, they will have no idea how much they currently owe. They have no idea how much of that money they paid back should have gone to interest and therefore should be part of their expenses for that year. They won’t know cause they will have no record of it. So it’s important that you start keeping records immediately so that way you have everything laid out and there are no questions. So if anything should come up in the future, you can answer the question by pulling out your profit and loss statement, pulling out your financial statements, and say, okay, well, here it is. Cause those items tell a story. Your PNL, your balance sheet, your cash flow, they tell the story of your business. And if you don’t have them, there is no story to tell. Okay? So that’s how you handle those loans that a lot of people have received during pandemic.
JAIME: Here’s hoping that those PPP loans in smaller amounts get forgiven completely.
DESARIE: Well, yeah. I’m hoping to, for my clients that, it gets forgiven, but once again, in order for it to get forgiven completely, you have to make sure that you are tracking where that money is going. So that way when you’re filling out the form for forgiveness, you know exactly where every single dime went. That way that your loan officer can say, okay, yeah, based upon where you spent the money, employees, utilities, whatever the case may be, that yes, the entire portion is forgiven. But if you just show up and say, oh yeah, I spent it on employees. I spent it on rent and I spent it on utilities and you have nothing to show for it, I mean nothing, then you know, you’re risking the chance of it not being forgiven.
JAIME: About the tracking, Desarie, I’ve been using Quicken for 25 plus years for my business. And I am one of those who visits my tax preparer once a year and has my taxes done, and I do my own bookkeeping. Could you explain what a bookkeeper does that’s different from what an accountant does?
DESARIE: Okay, so a bookkeeper enters transactions on a ongoing basis. So whether it be daily, whether it be monthly, whether it be quarterly, they take all the information, all of your transactions, and they enter it into a system. Now I use QuickBooks online for my clients. So I’m taking all of their data. So you’ve gone, let’s say for a whole month. You have all this income come in. You’ve spent money on expenses. Now it’s time to take that information from the raw data, which would be your bank statements or your, your bank accounts and your credit card accounts, and you want to take that information, and you want to organize it in a way that makes sense. You want to be able to find out how much money did I make in September and how much money did I spend in September? So that is pretty much what the bookkeeper does. They take that information and they put it in a system. And also when you, if you have loans and other things that happen, say you bought equipment and stuff like that, depending upon how, cause you have different levels of bookkeepers. So depending on how knowledgeable or how experienced your bookkeeper is, they may also take care of balance sheet items, which include loans, which include purchasing of equipment and other things. Okay, now, an accountant takes that information and analyzes it. So I will take your profit and loss statement, take your balance sheet, take your cash flow statement, and I analyze this information together with my client based upon what their needs are, what their desire is. Like we, I have to first of all understand number one, what are you trying to track and what are your goals? What is your goal with your business? What are your short term goals? What are your long term goals? Where do you see yourself in five to 10 years? So, because I need to know all this information, because I’m going to look at your financials and I’m going to help you map whatever your goal is. So I will create a GPS for you to take you from where you are to where you’re trying to get to based upon the information on your financial statements. And that’s why it’s important that things are recorded properly because if things are not recorded properly the way they should be, then that means that data is no good and the advice I just gave you, it’s probably not going to help you one bit because the data took me into a totally different direction, and it’s not giving me the information that I need to properly advise you in terms of your long or your short term goals. You may have people that want to buy equipment in three to four years. I want to buy a building in three to four years, okay? A franchise in three to four years. Well, in order to do that, we gotta come up with a plan to do that. So in order for us to come up with a plan to do that, we have to start digging into your financials and say, okay, here is where you are. Here’s what you’re doing. Here’s what you have to change. This is what you have to do. You’ve got to reduce expenses here. You’ve got to increase sales here. We’re trying to get certain ratios cause you may want to be getting a loan to do all of what you’re trying to do. And loan officers, sometimes, they look at ratios. That’s the way that they benchmark things based upon ratios. Okay, so what do your ratios need to be for you to be able to get this loan? Or for you to be able to do this, that, or the other? Well, as an accountant, we’re going to sit down and work together and say, okay, well here’s what your ratios are now. Here’s where they need to be. How do we get to where they need to be? So that is the main difference between a bookkeeper and an accountant. A bookkeeper just enters the information, whereas an accountant analyzes information and helps you to make decisions for you and your business. Or another thing is you might be trying to retire. You might say, okay, I want to retire, not me. I’m not 35. I wish I were but. Let’s just say you’re 35 and you say, you know what? I want to retire at 50. If that’s the case, we need to start digging into your money, your financials, to figure out how we can make that happen. And I don’t mean in terms of you investing in stocks and all that cause that’s totally out of my wheelhouse. I don’t handle anything when it comes to those types of financial investments. What I can do is to help you come up with the money to invest in those things because we can look at your information, look at your financials and come up with a plan to say, okay, here is how much money you make. This is the percent. Based on the fact that you want to retire at age 40, at age 50, you’re going to need this amount of money to do so. Here’s what you currently have in your bank account. So how do we get from what you currently have in your bank account to what you need to retire and live comfortably in about 10 years? Keeping in mind the time value of money because whatever you’re making now, today, is not going to be worth what it is worth in 10 years. So as we are doing those types of calculations, considering time value of money, considering the fact that, okay, you need to start saving up 45% of your income or a certain dollar amount in order for you to get to that goal of retirement in 10 years. So these are the kind of things that accountants can do with their clients versus a bookkeeper.
ASHLEY: In addition to being both an accountant, and a bookkeeper, and all of the other amazing things that you do, you also have previous experience as an auditor. The threat of an audit may not seem realistic for some in our industry, but in the beauty industry, what red flags most often trigger an audit?
DESARIE: The number one red flag is the fact that we’re cash-based business. That’s number one, because cash-based businesses it’s so easy for us to hide money. So the fact that we’re a cash-based business puts us on that line of, okay, well this is a type of business that we like to audit. We like to audit beauty salons. We like to audit restaurants because they’re all cash-based businesses. That being said, are you going to get audited? What is the likelihood of you getting audited? Well, the likelihood of you getting audited is very, very low. However, do you want to play Russian roulette? You want to play audit Russian roulette where because it’s low, you’re thinking, well, I’ll never get busted so I’m going to keep doing what I’m doing. I don’t run my practice that way. In other words, I do what I’m supposed to do because I don’t want to take a chance cause I used to be, like you said, an auditor. I used to be the one doing the audits and as a CPA, an enrolled agent, now I represent clients who are being audited. So I’ve seen both sides and man, it’s really ugly. Because number one, they are digging into your personal life, especially as cash-based businesses. Because we don’t keep track of income and expenses, then the type of audit that a beauty professional might have to go through would be a little bit different than a regular business, okay. And the reason is because we are hiding our cash. So then what did they do? They do a lifestyle audit. They’ll say, okay. We don’t really know where your money is. We have no idea how much money you made because clearly you’re not keeping track of it. So we’re going to do a lifestyle audit on you to determine, based upon your lifestyle. how much money we think you’re making, and we want to know where the money’s coming from. So they’ll dig into your personal accounts. They want to know how much money you have or what kind of vehicle you have, how much your house is worth. They want to start pulling very personal data so they can see, okay. It looks like in 2019, you spent, let’s just say $75,000, based upon what we can see. However, you don’t show any income or you show less than that. They’re not going to start asking you questions, well, where did the money come from? Where did you make the money? They’re not going to do that. They don’t have time for that. What they’re going to do is they’re just going to assess you based upon what they think you made. So you want to try to avoid being audited, even though, like I said, the chances are very, very low, but if it does happen, you don’t want to have to go through that.
ASHLEY: That’s all for part one. Stay tuned next week for part two with Desarie Anderson. All of her contact information can be found in the show notes for both episodes.
JAIME: If you learned anything on today’s episode of Outgrowth, please head to Apple podcasts and leave us a review. We may read your review on our next episode.
ASHLEY: As always, you can follow us and comment on recent episodes on Instagram at @outgrowthpodcast. Until next week.
JAIME: Be smart.
ASHLEY: Be safe.