Why Network Marketing (& Direct Sales) Works!
By Glen E. Polcyn, CFP
If you did not know already that you could save on taxes thanks to your home-based business, then perhaps your first new habit should be learning about them so that you’re in a better position to explain and emphasize these tax savings benefits to each of your existing and new business builders.
How many of your business builders have quit after only six months (or less!) because they didn’t think they were making enough money? In all probability they were not aware of the fact that they were also earning tax savings, which goes right to the bottom line.
Remember, the bottom line in business is not how much money you make; it’s how much money you make and keep! Doesn’t it make sense that part of your permanent business strategy should be to make and keep as much money as possible with your home-based business?
Make this article an opportunity to learn and apply the many tax advantages that the industry affords you. I’m confident they will make a difference. Imagine how much more you’ll enjoy working your business once you allow your business to work for you. Learn to work smarter, not harder. It’s what all successful entrepreneurs learn early in their careers.
Glen E. Polcyn, CFP has been a Certified Financial Planner for over 25 years. In 1989, the Boreyko family hired him to be their Certified Financial Planner. He specializes in tax, estate and retirement planning. Be sure to read about how he can help you plan your future; click on his virtual business card tour at the end of this article.
Glen’s wife, Becki, is also in financial services. For over 20 years, she has been specializing in 401K retirement benefits. The Polcyns, along with their grown children, currently reside in Sedona, Arizona.
Glen and Becki are currently successful networkers themselves. They are million dollar earners with several companies—so they understand the industry inside out! If you have any questions that you would like to have Glen address, email him at email@example.com
GIVING BACK MADE EASY THROUGH TAXATION
After 25 years of tax planning, I’ve been able to personally develop many useful systems and habits which make it easier to maximize tax savings for your home-based business.
Be sure to look at the section, Common Business Expenses for your Network Marketing Business. Study the list of 40 different business expenses that are deductions against your business income. NOTE: If your expenses exceed your business income, your net loss can be deducted against your W-2 earnings if you are employed with a job.
A lot of deductions listed on this handout are actual expenses that must be categorized on your Schedule C, Profit or Loss from Business-Sole Proprietorship, which is the “magic” schedule that makes all these deductions possible. To obtain a copy of Schedule C, you can call the IRS at 1-800-TAX-FORM, or visit their website at www.irs.gov. This is one of the greatest benefits for the self-employed.
There are basically two tax systems in this country; one for the self-employed, Schedule C, and one for the employed, Schedule A. There are only a few deductions left on Schedule A, but on Schedule C there are over 100 deductions! And remember, everything is cheaper if you get a deduction! To simplify your record keeping, I have taken most of the categories listed on Schedule C and re-categorized them in to 28 categories. Just about every business expense you incur will fit under one of those categories. To assist in our year-end record keeping, we use the bookkeeping software, Quicken. To facilitate data entry, I ALWAYS write in the upper left-hand corner of every business related receipt, a code (abbreviation) referencing which of the 28 expense categories pertains to that particular expense. Therefore, following is a list that we use for our record keeping. The items in parenthesis are a few examples of what could comprise that expense.
As you’ll see, just about everything you spend for your business can fit into one of these categories; items such as auto, gas, education, entertainment, health insurance, travel, office expenses, internet, postage, rent, subscriptions, even supplies like pencils, paper and toner. Lastly, look over the Schedule C expenses (example) handout. On this handout I illustrate how easy it is to save $4,000 in taxes. This is a great example to show to your prospects! And now, just imagine how much more you can save in taxes, thanks to your Home-Based Business!
(classifieds, card decks, cd’s, internet marketing)
(gas, oil, depreciation)
(on your own purchases)
(seminars, books, tapes)
|ENT||ENTERTAINMENT MEALS (50%)
(prospects, referrals, clients)
(fax, copy machine, calculator, computer)
(yourself and employees)
(health, home, liability)
(business charge card)
|L&P||LEGAL & PROFESSIONAL
(tax preparation, attorney, CFP)
(gifts, handouts, brochures, client snacks)
(office equipment, office space)
|R&P||REPAIRS & MAINTENANCE
(copy machine, office cleaning)
(newspapers, magazines, newsletters)
(pencils, paper, toner)
(long distance, cell)
(cab, parking, airfare, car rental, hotel)
(quarterlies, payroll, home)
(electric, water, gas)
(independent contractor, children)
ARE YOU THROWING MONEY AWAY?
Regardless of whether or not you have either filed your tax return or requested an extension, it is best if we remember the basics. Saving money by saving taxes is really quite easy. Too many people throw a lot of money away each year because they have not taken the time to learn this important business principal. Perhaps they are afraid to learn the basics for fear it will just become too complicated.
I can assure you it’s not the case. Understanding TAX SAVINGS is not difficult. A couple of my favorite sayings are “You can save more by saving on taxes than you can by saving more!” AND, “Remember…everything is cheaper if you get a deduction! (Thank you Sandy Botkin, CPA, JD of the Tax Reduction Institute for that one!) So here we go.
After Tax Dollars
It is merely a case of needing to learn and understand the difference in certain phrases, such as: “before tax dollars” and “after tax dollars.” Thanks to your home-based business, you are able to spend more money with your “before tax dollars.”
Let’s begin by understanding what “after tax dollars” are. “After tax dollars” are those dollars that you have left to spend AFTER you pay your taxes. For example, if you are employed, and your weekly gross earnings are $1,000, your total taxes withheld are $300. Your net “after tax” earnings are $700. When you spend this $700 you are spending “after tax dollars”; money that you have left over “after” you paid your taxes. This is how over 90% of North Americans spend their money. What a shame!
Before Tax Dollars
Now let’s understand the wonderful tax planning strategy of spending money with “before tax dollars”. “Before tax dollars” really should be classified as one of the Eight Wonders of the World! “Before tax dollars” are those dollars you spend that you can classify as “tax deductible expenses,” or money you spend and do not have to pay taxes on, or money you spend “before” you pay your taxes.
The previous table lists over 50 examples of legitimate home-based business expenses or deductions. When you spend money classified as one of these expenses, you are spending money with “before tax dollars.” Why? Because these dollars are classified as deductions that reduce your taxable income and thus you do not have to pay taxes on these dollars. Therefore, you are spending money with “before tax dollars,” ” which saves you a lot of money
Here are a couple of examples:
Look at the “Schedule C Expenses example” handout. This handout illustrates how easy it is to save $4000 or more in taxes each and every year with your home-based business. The $12,000 in deductions illustrated is dollars spent with “before tax dollars.”
Now here is a recruiting tip I have used effectively many times. Take this handout and reproduce it, but don’t put any numbers next to each expense example. Ask your prospect to tell you how much they spend in each category. Add it up, multiply it by 33% (28% federal + 5% state) and that is how much money they will save in taxes, this and every year, if they join you and have their own home-based business! Those expenses are money spent with “before tax dollars.”
(Note that these two pages are also available as pdf files in your resource center as separate documents from this article to aid you in your tax planning and helping prospective and team members.)
To help understand how tax brackets and deductions work, here is a simple example. If your joint taxable income (earnings) at the end of the year is $100,000 and on the last day of the year you received a bonus of $10,000 (your taxable income is now $110,000) and your combined tax bracket is 33%, you would have to PAY AN EXTRA $3,300 in taxes on the $10,000 bonus!
Conversely, if your joint taxable income (earnings) at the end of the year is $100,000 and on the last day of the year you started a home-based business with Company XYZ and spent $10,000 on legitimate business expenses with “before tax dollars”, which created a $10,000 deduction on Schedule C, your taxable income is decreased to $90,000. You are still in a combined 33% tax bracket and you SAVED $3,300 in taxes! Thus the saying, “everything is cheaper if you get a deduction”!
SAVE A BUNDLE, HIRE THE KIDS!
One of my favorite working home-based business tax planning reduction strategies is hiring your dependent children to work in your business. So why is this such a significant tax planning reduction strategy? Because you can pay your children wages up to $6100 each (for tax year 2013), which is a 100% deduction from the parents’ gross Schedule C Business Income, and 100% tax-free to the children! That means no Federal Tax, State Tax, FICA Tax, Medicare Tax, Workmen’s Compensation, or Unemployment Insurance!
DOCUMENTATION IS THE KEY
Of course, as with any tax planning reduction strategy, there are rules, which must be followed exactly for the deduction to be valid. Remember…documentation is the key! Here is how this works:
- You must file a Schedule C Sole Proprietorship. Corporations and Partnerships do not work (Sub Chapter S or LLCs are exceptions).
- Your child or children must be over age 6 and under age 18. Therefore, children ages 7-17 qualify.
- You, the parent, must have an employer ID number by completing and submitting IRS Form SS-4. Call 800-TAX-FORM or visit www.irs.gov.
- You must complete the necessary payroll paperwork. If you have never had an employee, your qualified working home-based business tax preparer can help you with this.
- You must complete timesheets showing child’s name, date, description of work completed, hours worked, hourly rate and total paid. (You must pay a reasonable or comparable wage.)
- You must have a signed and dated employment contract between the parent (employer) and the child (employee). This contract must stipulate duration, types of work to be performed, hourly wage, etc.
- You must pay your child from your business checkbook.
- You should establish a checking account for your children where you are the custodian. All paychecks should be deposited in their checking account. This is their checking account but you as custodian for your minor children have the final decision on whatever the money is used for (i.e. private schooling, etc.).
SOUNDS LIKE WORK!
Remember, as with most things in life, nothing is so hard as THE THOUGHT of actually doing it! If you take each step, one at a time, the financial results are definitely worth it, as the following example illustrates:
Let’s say you have two children. You follow all of the necessary steps. You pay them $7.00 an hour and they each work a total of 629.5 hours for the year, or $4,400 in wages. You deduct on your Schedule C, $8,800 and save a whopping $4,250 in taxes! That’s 28% Federal Tax, 5% State Tax, plus 15.3% Self-Employment Tax (FICA plus Medicare). Your children pay zero tax!
PAYMENTS REQUIRE SCRUTINY
Payments by a parent require careful scrutiny. There must be both a bona-fide employer-employee relationship and a performance of services for the business. Hiring your children is not a red flag increasing your chances for an audit. But, if you are ever audited (which is less than a 1% chance), and you have followed the steps exactly and use common sense, proof will be easy! “The more you think about taxes today, the less you’ll have to pay come April 15th!”
The Best Time to Recruit
THE END OF THE YEAR IS THE BEST TIME TO RECRUIT
You may be thinking to yourself, “How can that be with all of the holiday distractions?” But it is precisely the abundance of additional interaction with people that normally occurs this time of year that makes it an ideal reason for recruiting!
Here’s a great tip! The absolute BEST way to prospect is to remind people about some of the many advantages of the tax savings they could receive as a result of your home-based business.
When the year is almost over, there is not much time left for finding or creating TAX DEDUCTIONS! So the next question should be obvious, “What can I do to take advantage of this year-end opportunity?”
Here’s the answer. Use the Schedule C Handout and ‘What Can $500 a Month Do for You’ Handout. Remember, they are available in your Resource Center. Take these with you everywhere! Show them to as many people as possible and see if the handouts create a response for you like they have for me.
When your prospect asks how, give them a copy of the handouts and tell them about the incredible home-based business and tax advantages they can receive by being self-employed.
When they ask you what business you are in, ask them, “Are you making money on the Internet yet?” When they say “no”, ask, “Would you like to?” When the answer is “YES!,” then follow “The System”:
- Send them to your opt-in page (website) and have them review the preliminary information—be sure to tell them to ‘Request More Info.’
- Schedule them for a Business Briefing webinar or conference call
- Place their order
- 3-way your upline for questions and answers, if need to close, otherwise do this as part of the new member process
You now own your own home-based international Business that you can market utilizing the power of the Internet. Plus, you now benefit from all of the tremendous tax advantages that only your own home-based business can provide!
HELP STAMP OUT RED CHRISTMAS
Put an end to paying for Christmas in July!
You Can Sleep Through the Year if You Can Financially Turn Your Life Around In the Next 60 Days!
BELIEVE IT OR NOT, November, December, and the Holidays are the best times of the year to recruit!
- Last Chance for tax write-offs!
- Time awareness…another year has gone by.
- Financial awareness…Cash or Credit?
- Property taxes are due in December.
- Events such as family gatherings, church and school activities, parties and shopping excursions offer lots of opportunities to recruit.
- You can bless people you care about with a personal note and tax-deductible life changing health, business, or tax saving information tapes.
- Make a tax-deductible gift of health products to those you care about.
- Make a tax-deductible gift of a family or small business website.
- Traveling for the Holidays? Skiing with the family? Why not make it a tax-deductible recruiting trip?
- Make Holiday expenses and gift giving tax-deductible.
- Convert your credit card interest to tax-deductible business interest expense.
- New car expenses? New Computer? Another tax-deduction!
The Holidays are best for sponsoring:
- Great people exposure.
- Tax advantages.
- People are over-extended.
- Cash in on Tax Advantages
Cash in on these tax advantages before the year is over. If you wait until the 1st of the year, it could cost you a fortune!
- Phone Calls
- Cellular Phone
- New Business Car
- Ski Trips
- Gift Purchases
- Fax Machine
- The Internet (ISP)
- Video Camera
- Camera Equipment
- Books & Tapes
- CD Player/Duplicator
- Answering Machine
Start a network marketing or direct sales
Home-Based Business prior to year-end
And all of these deductions can be yours!
“Remember…EVERYTHING is cheaper
If you get a deduction!”
GET A GRIP
Finding the Right Accountant
Before you know it, tax time, that dreaded April 15th, will be upon us once again. Any credible accountant or tax prepare would advise you of the same thing: be prudent all year long and remain ON TOP of all tax breaks your home-based business is entitled to.
Over the years, I’ve learned a significant number of tax strategies from Sandy Botkin, CPA, JD and author of The Tax Reduction Institute Seminars (TRI) and Tax Reduction Workshop CD series.
One of the most frequently asked questions I receive, the same one asked at the TRI Seminar is “How do I find a good accountant/tax preparer?” Unfortunately, finding the right accountant for you; one who is knowledgeable, may not be as easy as you think. In the first place, not all accountants specialize in taxes. Secondly, many accountants are just too timid.
Following are questions taken from the appendix of a TRI Seminar I attended. These are questions that you can ask to determine if your tax preparer is best for you. Despite not being all-inclusive, they certainly will provide you with the opportunity to make an intelligent, informed decision about the right tax preparer for you.
Not sure where to look for an accredited accountant? Check with the American Institute of Certified Public Accountants; The American Accounting Association; or the Affiliated Conference of Practicing Accountants International.
Questions and Answers
What Designations or Credentials do you have?
Look for Enrolled Agents, Certified Public Accountants, ex-IRS Agents, Attorneys, etc. Preparers with legal backgrounds tend to be more aggressive.
Are you in practice full-time?
Hopefully, the answer is yes!
How much experience do you have in tax practice?
You don’t want a “rookie” experimenting on you, do you?
Do you prepare all returns by computer?
Handwritten returns ended with the 1980s.
What are your fees, and do you have a schedule that can be seen?
Surprisingly, cheaper is not necessarily better. Buyer beware! You may get what you pay for.
Can you provide references from other businesses similar to my own?
Many accountants, rightly, do not reveal the names of their clients. However, ALL firms should be able to refer happy, satisfied clients to you.
Is a checklist used to maximize my deductions?
Test your accountant.
Tell a prospective accountant that in a seminar you were told to “hire a spouse and make them the primary insured so that you can deduct medical insurance premiums and setup a “Self-Insured Medical Plan”. Ask the accountant what he/she thinks of this strategy. A good accountant will agree with it, or at the very least, want to see the materials. If the prospective accountant feels this is too aggressive, don’t use them. There should be no timidity on your money.
Do you teach tax courses or have you written any tax publications?
The more, the better!
Are you conservative or aggressive, or somewhere in the middle?
What review process do you use in order to ensure a quality product?
May I look at your tax library?
Accountants need to “look things up.” The more sources, the better. They should have at least two separate tax research sources.
Do you specialize in taxes for Home-Based businesses?
They should say yes!
What percentage of your practice relates to taxes? What other accounting services do you personally perform?
What is your attitude toward audits?
Unfortunately, many tax preparers recommend not taking a legitimate tax break, which could possibly trigger an audit. These accountants are a “HAZARD TO YOUR WEALTH.”
How do you treat “gray areas”?
The best advisors will advise you what areas are “gray” and list your options.
What do you do after tax season?
Ideally, you want to hear that he/she does other accounting work and also markets for new clients.
How often do you take tax courses?
Have you ever been disciplined by the IRS or by any accounting society?
If they refuse to answer this question or act insulted, forget the accountant.
How many other clients like myself do you have?
It is not necessary that they have hundreds, but certainly more than ten would be helpful.
Do you offer pre-year-end tax planning as part of your tax service? And if so, is there an extra fee for this?
Extra fees for this service are not bad, and could save you a bundle.
Do you offer any tax planning throughout the year?
Are you prompt in returning phone calls?
Can you provide a recent tax-planning tip, or tax change that may be of benefit to me?
Glen’s Short List of Accountant Interview Questions
How Many Schedule Cs do you prepare each year?
If they say more than 12, there’s a possibility you have someone that knows what they are doing. If they say 20 or more, it’s very likely this is a specialty for them.
What do you do to keep up on home-based business tax-deductions?
Do subscribe to a regular learning series on this topic? Do they take continuing education courses specializing in this subject?
Ask for references.
Additional Questions & Answers
Can the product ordered for personal use be considered a business expense?
No! Products for PERSONAL CONSUMPTION ONLY are not recognized tax deductions. But, samples and gifts are deductible. (keep a list of who you give products to).
Why are gifts under office expense?
All expenses under Schedule C have to be categorized appropriately. “Office Expense” covers many different expenses. It is a kind of “catch all” category, i.e. gifts, etc.
What about product gifts?
The purpose of a product gift is to attract the recipient as an eventual consumer. Therefore, product gifts could be expensed as Advertising or Promotions.
“Remembe… The more you know, The less you’ll owe!”
Double Click on the card below for information on Glen and his practice.
You may also visit his website at: www.bgfinancial.com