435 | Tipped Finance | Barbara Sloan

25:51But yeah, there's some years where I had to set up payment plans. And that was super painful. There were years where I didn't file because I was like, oh, I'm going to owe. And then it was two years or three years later down the road where I had to figure all of that out. And it was super, super painful and scary. And so I think a big part of this is educating people in that you may want to put some money aside if you think you're going to owe some taxes. There's some ways that we can offset this. One of them is a great tool, right? We can do an IRA and that can reduce your tax liability if you're considered an employer.

26:28I get a lot of people who work in this industry who are like, oh, my employer is trying to screw me over by keeping me off the books and giving me a 1099 or keeping me a cash worker. And I'm like, great. That's awesome for you. You don't need that$2.13. Be a business. Let them screw you the whole way over. Because if you're an employer for yourself, you have access to a whole lot more accounts. You can set up a solo 401k. You can set up a SEP IRA. If you're an employer for yourself, you can write off your cell phone bill, your health insurance, poor uniforms. There's so many options if you are a business, a legit business as a service industry professional.

27:11Oh, okay. We've hit on something here. So is there an option for people then in lieu of that 213, like instead of paying it via, hey, I'm a W-2, do you have the option to say, oh, what about making me a 1099 employee? Is that, have you ever seen that? I mean, you and I are not, you know, allowed to give tax legal or financial advice. Clearly, right. I'm a CPA, but I just play one on the podcast here. So clearly this is not to anybody. We're just talking here. But yeah, I mean, especially if you are one of those people who are going to work multiple jobs and sometimes maybe you do like a side catering gig, whatever the case is, there's a case to be made that you are your own employer.

27:49If you're managing all of these gigs and you're managing all of these things and there's a strategy in there that is going to be very beneficial for you for sure. And it's not in just being a W-2 employee. Yeah, I like that. And as you're saying, clearly we're talking about legitimate business expenses, but there is a broad swath of what those include. In your case, you're saying, hey, there's a reasonable likelihood that a portion of your cell phone bill or more than a portion could be construed as a legitimate business expense. But again, this is not tax advice. We're just kind of talking here.

28:21But we all know small business owners. And even if you don't have an entity set up, that's fine. You can still report this on your Schedule C, on your 1040. Yeah, you're a sole prop. Yeah, you have your income coming in, your expenses going out. And one thing I really wanted to dial in just quickly is you're not having your taxes withheld. And I think one of the things I've realized as a business owner is you need to send in estimated payments every quarter to the federal government. And I think this is something that a lot of people overlook because, I mean, if you literally, even if you have a small liability, quote unquote, small liability of$1 ,000,$2 ,000 on your return and you've paid in zero.

29:01well come April 15th you have to pay all of that money and how many people have that lying around that's what I was talking about before of like that nightmare scenario yeah and I think that happens for a lot of people because they aren't tracking their income so there is not that strategy in place and so you'll go in and you'll say oh I'm gonna claim 40 grand oh no I can't afford that how about I claim 30 grand how about I came to you know what I mean and that's when it gets into you know sort of that short-term thinking where you think I'm gonna save on taxes but you're gonna to hurt yourself long-term in terms of social security, unemployment, not getting good rates from your lenders if you are going to...

29:38I mean, the two biggest ways that Americans build wealth, the first is through their 401k and the second is through their primary residence. And both of those are kind of off the table for SIPs unless they get creative. The first is that their employers are not providing them with a 401k, a 457, a 453b. And so a lot of people in this industry don't think that they can set up a retirement account because we associate retirement accounts as being a benefit that's provided by your employer, because that's how we talk about it a lot in the personal finance space. Get the match from your employer. We hear that all the time.

30:09And so that association of it being something that has to go with your employer is almost embedded. And so for me, a big part is like reminding people, no, first of all, the only reason these accounts are called retirement accounts is because they have preferential tax treatment. Anything can be used as a retirement account. Your sock drawer could be used as a retirement account if you build it, right? So it's really just a vessel. And in that, you can use a brokerage account. If that's your only option, an IRA and a brokerage account, that is still a great option for a retirement account. Is it the most tax advantage?

30:42No, it's not. And we can be honest about that, but it's still a great option. It still means that you can retire and it still means that you could retire early. Yeah, I love that. And yeah, Yeah, like you're saying, there are potentially these quote unquote retirement, even if we wanted to go down that road, there are these accounts that you may have access to. Certainly, if you are a sole proprietor, you should have access to different options, such as the solo 401k, the SEP IRA. Obviously, again, we're not giving advice here, but you should look into these things. You might have the option to contribute to a traditional IRA, which is pre-tax or potentially a Roth IRA, whatever you decide, of course, but you're not shut out from these things.

31:24That's really important. And just one last thing, because this is my kind of geeky CPA thing, a actionable tip that we've passed along here a couple of times on Chooseify that people just seem to love is when it comes to your tax return, and let's say you are underpaid and you made a good faith effort or you just didn't realize, and okay, you obviously owe your tax liability, no question about it. If there's interest that has accrued on it, you're going to have to pay that. But if the IRS ever sends you a letter or notice that has a penalty on it, my strong advice would be to reply with what's known as like a request for abatement.

32:01And that's just a big fancy word for please get rid of this stupid thing. So in essence, you're just sending in a nice short little letter saying, I request an abatement of the penalty. And I was wholly unaware of, you know, you come up with just some flowery language of I didn't realize this. Now I completely understand. I promise this will never happen again. I've taken care to send in estimated payments and blah, blah, blah, but something very short and sweet. I have seen anecdotally, of course, a 90 plus percent success rate with these penalty abatement letters. So again, at the time you also send in, say, of course, I understand that I owe this tax and this interest that was also on that notice.

32:42Here's the check. You find it attached. That'll anecdotally, it's a 99 % likelihood of that penalty being abated. So just a cool little tip I wanted to pass along. Yeah, that's a really good one. I have one more and then we can move on from taxes because I'm sure you and I, I'm a tax nerd too. I'm sure we could geek out all the time on this. Let's say you are a full-time W-2 worker, your restaurant, your club, it has you on a W-2 and they are doing forced tip claiming where they're going to claim all of your tips for you. One of my favorite strategies when you do have a tax preparer is to have them write a letter of the amount of money that you pay out in tip outs to deduct that from your income.

33:20So if you're tipping out every night to your bar back and your bouncer and your bus boy and any of the people that you're tipping out to, that's a deduction. And so you add up all of those tip outs and give that to your tax preparer and say, we need to reduce my income by this amount. Yes, that is so brilliant because yeah, I'm sure a lot of people just get that, whatever the form is, W-2, whatever it may be, and just plop it on. But yet they didn't receive all that. So those were their gross tips, but their net tips after, yeah, like you said, that is a standard practice, that tipping out. And if you have to immediately turn around and pay that as an expense, as part of your business, in essence, that is a legitimate business expense.

34:02So clearly, clearly, clearly that has to be netted out on your tax return. So yeah, I'm super glad you mentioned that. I wanted to ask about, so we're talking about things that people in the service industry might miss out on, but what are potential strategies? So now obviously we've talked about a little bit about retirement, a little bit about taxes. Now health insurance is a massive one. So most people or a significant number of people get their health insurance through their traditional employer. And I'll tell you as being an entrepreneur, most people have no idea just how expensive it can be, especially when you don't get ACA subsidies or things.

34:40I mean, it's extraordinary. We pay about$15 ,000 a year just in premiums to essentially get nothing. It's just like burned in a fireplace more or less. But many people who have those nine to fives, they're paying a fraction of that because the rest of it is picked up by their employer. That's part of their salary, whether they realize it or not. And now obviously many people in the service industry, the vast majority from what I've heard in your book and prior interviews, almost nobody, I think you said sub 5%, it's probably significantly less than 5 % have health insurance plans at work, right?

35:12Yeah, it's a really small percentage. It's like 5%. Okay. So right. So then you have to do something. And with the advent of the ACA, there are at least options. I'm curious about the intersection of the ACA and subsidies for potentially people who are not making all that much in the cosmic scheme of things, or even like you said, 60, 80, I mean, there are potential to get subsidies. So I wonder if it's, is it an education issue, like as the almost overriding issue? Yeah. And I'd say if you're somebody who's been in the industry for a long time, and maybe you were in the industry before the ACA came about, it's really important for you to go on and they have calculators for you to be able to kind of plug in your income and figure out what subsidies you can earn.

35:58Because oftentimes, like I do one on one coaching for people in the industry. And oftentimes, when we go on and we look at those things, it's only like 70 or 80 bucks a month for them. And it's really affordable and reasonable based on where they're living, what their income levels are, and you know, their specific situation. And so I'm so glad that the marketplace exists, because it's been a huge resource for a lot of people. But let's say, for instance, you are earning a lot of money in this industry, maybe you're in the club environment and you have a really high income and you're not eligible for those subsidies, maybe the marketplace is not a great place for you.

36:30What's cool about the marketplace is that they're not denying anything based on your pre-existing conditions. Everything on the marketplace is held to a specific standard because that's the employer market, but there's also health shares. Health shares can be an option for people to get. Obviously, there's the warning of do your own homework here because you could have some sort of health thing that's excluded from those policies. But those can be a really affordable option if, for instance, you are somebody who couldn't afford a plan on the marketplace. And so some insurance is always better than no insurance.

37:03And if you're at the point where in your financial strategy, you're layering in some of these new protection measures like an insurance policy, if the marketplace is not an option for you, I encourage people to look into some of those health share programs. Yeah, I think it's worth looking into. I know I have some personal experience with HealthShare from years ago, and I did have a positive experience with them, but it's not insurance. It's not. So at the end of the day, right, there's no legal guarantee that if you get hit by a bus or have cancer that it's going to be paid out regardless of whether you have it or not.

37:37So I think I love your thought process there, and I totally agree that some is better than none. So especially, right, if it's like extraordinarily inexpensive, there are many of these health shares have some religious aspects to them as well. So that's not going to work for a lot of people. But as always, it's worth doing your research. It is always worth doing your research. And yeah, I think those ACA subsidies, going back to that, like that can be for many people who don't make an extraordinary income and whatever the definition of that is, it's worth looking into. I think like we hear all these horror stories of like Obamacare and all this other nonsense.

38:13I'm like, it has done a great good for many, many, many millions of people. This is an extraordinary thing that exists. And you're doing yourself a disservice by not looking into it. And the health insurance portion is really important, especially when we're looking at subsidies. This is why tax planning is so important, because let's say that you make$60 ,000 and you are now ineligible for those subsidies. What if you made$58 ,000? right? Like what if that writing that letter about your tip claiming or, you know, deducting some of those expenses, if you were set up as a business pushed you below that threshold where you'd be eligible for those subsidies.

38:49One of my favorite things about this industry is that you can back into an income number. You can work as much as you'd like to back into it. This is also one of the reasons that I'm super passionate about talking to five people about this industry, because I think there's so many advantages that that's a conversation for another day, But I do love that you can back into your income number for things like subsidies. Yeah, that's cool. And talking about income is one of the most interesting aspects of the service industry is people seem actually very open, more so than in just about any other industry of actually talking about what they earn.

39:21Like, oh, I earned X amount on that Friday night. And it seems like there's actually some potential here where, okay, this is one of the few industries where people are okay talking about money, which is the last great taboo in America, which is so silly. But yet there's this lack of, I guess, planning of education and of like, what are we doing this for? Like you're saying, you're gonna wake up 10 or 15 years from now. And yeah, you might've made 60 grand every year, but if you don't have anything to show for it, what was it all for? So I know that's not exactly a question, but I'd love to hear your thoughts on that.

39:58Yeah, so I think it's really easy to get into this industry and think that you're only going to be here for a few years. But if you are somebody who has the skill sets or you believe that some of this is a craft that you enjoy, right? Like you enjoy entertaining. You enjoy bringing up the energy of establishment. You're great at these points of service. You're good at upselling. You're good at time management. You can really get in a flow state in this industry and it's really enjoyable. I belong to a couple of fire meetup groups and it's really interesting. We'll get into like talking about sequence of return risk and things like that.

40:32And people will be like, oh, well, you know, if there's a downturn in the market, I'll just go back to work the first five years. And I'm like, okay, well, what will you do? And the number one answer I hear is I'll go back to like bartending or being a barista or waiting tables. And I'll say why? And they'll say that was my favorite job ever. And I'm like, for the people who are in this industry, why are we working in it for five, 10 years, leaving it to go for something better and then going back into it? Like, why not? put the systems in place initially and have an amazing long-term career doing what we love, but maybe not doing it in such an extreme way.

41:07I love this idea of this industry with lifestyle design. And I think it's a really enjoyable career that if you put the proper systems and boundaries in place, you can create a life of your dreams. And so that's part of why I'm so passionate about showing people these systems and how you can recreate these employer-provided benefits because I think for the people who are gifted in these skill sets of entertaining and energy and being a smile to the people in their community, I think it's so important and beautiful. So those are some of my initial thoughts to that. Wow. Yeah, Barbara, that is so beautifully put.

41:43I think there's just so much here. It's astonishing. Yeah. And what's interesting about that beautiful lifestyle design is that really what we're working with is getting people who have a short-term abundance mindset and a long-term scarcity mindset to kind of learn from that short-term abundance mindset and to kind of create it into that long-term abundance mindset and have that long-term thinking in place. Because what you just said initially when you were talking about the fact that that income transparency is there, like we already do back-of-the-envelope math. We're already really comfortable with a lot of this stuff.

42:19It's just we need a little more information and a little more guidance to be able to break out of that scarcity mindset and to transition some of these skills into, you know, a long term strategy. We were talking earlier about the two ways that Americans build wealth, one with their, you know, 401k and the other with their primary residence. The reason that people are able to build wealth through their 401k is because of automation, because they have Sharon in HR who has them check a box on a form. And we give all of our nine to fivers this credit of having this long term strategy. But really, it's because it was taken out of their hands.

42:57Behaviorally, it's not on the table. It's that that automation piece provided a long term strategy for them. And what's missing is our ability to kind of create that automation for the people in this industry to develop that long term thinking. Yeah, it's critical. And I love how you brought that to a minute or two ago about people in the five community. This could really fit in beautifully for so many of us in the FI community and especially who have that long-term thinking as just kind of embedded in our mindset as it is. And just as you're going through that, you're talking about, so right, obviously these two main ways that people build wealth is, okay, buying homes.

43:37I know how hard it is as an entrepreneur without a W-2 income to qualify for a mortgage. I'm curious, how does this work for people in the service industry in terms of, is it based on your W-2? Is it based on your self-reported tips? Is it based on, okay, as we're talking about, many of these might be self-employed. And I know, and this is a very long way of saying, it's really hard without multiple years of, hey, this is what I made this year and that year. And it's showing it on paper from prior tax returns. Do people in the service industry, I guess most succinctly, do they have real issues qualifying for mortgages in general or other financial loans and things like that, cars, etc.?

44:22Is this a problem that you've encountered? Yeah, absolutely. I've had it myself. I have had no credit, terrible credit, in addition to not claiming my income in full and not being able to show income, which is a big part of the underwriting process for traditional lending, which is how most people get into real estate, it becomes almost impossible for people to get into the real estate game in this industry. And so that's why the conversation always has to start with tracking your income and understanding the value of what you're making and the importance of claiming it so that you do have access to that avenue of real estate because it's a real way to build wealth for a lot of people.

45:03Yeah. So yet another compelling reason why you need to be part of the financial system, right? You need to claim all of these tips. There's just layer upon layer upon layer of this. And if you don't, again, for that short term, oh, hey, I might get 10 or 12 cents on the dollar by doing this illegally, as we both know. It just so vastly overrides it to get these long-term benefits and really even these short-term benefits of just being part of the financial system. Yeah. And I think if you're also an industry professional, you have access to control your income in that you can work more when you need to.

45:40And I love the idea of real estate investing for people in this industry because one, you're working these strange hours and you know so many other people who also work strange hours. So like house hacking is such a great way for people in this industry to build wealth because you often have times where you're exposed and around a lot of people who have the ability to work more to make more that also likely will not be able to qualify for maybe an apartment because a lot of times you have to show your income for certain apartment complexes or for their own. So you're around all of these people who have money, but maybe not ways to get housing.

46:14And so to be a resource for that, but also to be able to make money off of it, I think it's such a great thought exercise and avenue for people to explore in this industry. Yeah. No, I love that. I love that. That concept of house hacking, That's like the one that got away for me in terms of like, man, I wish when I was 22 or 25 that I had some sense of that. It just would have been cool. So, yeah, this is really a perfect industry, especially maybe if people maybe and this might be a broad brush tend to be on the younger side or certainly I think of people in their 20s and 30s. Again, broad brush.

46:46And that's, you know, it's probably some inaccuracy there. But or people with different schedules or, hey, you're used to living with roommates like that is the perfect way to do house hacking. And you never know, like, I mean, yeah, just how beneficial that can be. And there's no excuse for them not to pay rent because they can just go pick up a few more shifts, right? Yeah. I love that flexibility. That's such a cool aspect of, of the service industry. Generally, it's like, Hey, yeah, I can pick up another shift and like, or you never know. Yeah. Find another job. And it's also one of those industries where it's really easy to get another job pretty quickly.

47:19Like there's always people hiring. You can always transition. One of the other things I like to talk about is the importance of an emergency fund in this industry because there is that power imbalance of you are serving somebody else. And so you can't be reliant on their specific tip if you want to keep yourself safe, if you want to hold yourself to certain values and boundaries. And so you need that emergency fund in place to protect yourself and to show up as yourself fully in this career path. And so oftentimes I get a lot of pushback from people in this industry. I remember the first time I had heard about an emergency fund.

47:54I was like, I'm sorry, you want me to stick how much money in an account? Not for a vacation, not for a house, not for any purpose, just sitting there doing nothing. And that was a really hard concept for me personally to get on board with. And so it's hard for this industry to recognize that too. But it's one of my favorite financial products because it really does protect you. And I think a lot of ways that you can pivot within this industry involve taking risks and opportunities, whether you move to an establishment that's opening. Like let's say somebody's opening a new bar or restaurant and you have the opportunity to move with them.

48:28You're going to need that emergency fund because initially it's going to be very slow for you to build out your customer base. It's going to be slow for you to build out your regulars and to get to see how you can create more opportunities within that. It's a learning curve. And so if you save that money, you're going to be able to say yes to a lot more opportunities that you're going to be able to build your income with. Yeah, that's the power of having financial assets, right? It's the power of saving money. It's not deprivation. It's the polar opposite, right? Like it gives you power, it gives you strength.

49:01The epitome of FU money, right? Is, hey, if someone is putting me in an unsafe environment or asking something like to be able to say, I don't need this. There's no world where I'm doing this. I mean, like we talk about these pedestrian versions of, oh, my boss asked me to do something or like my pathetic thing of like my boss asked me to the workday started 30 minutes early. And like, that was just like the straw that broke the camel's back for me. And it just seems so like just arbitrary and it just annoyed the hell out of me. But yeah, you're talking clearly like real life situations that when you have that power and you're not pulled into, oh my goodness, my life could fall apart if I don't have this money.

49:41Like you can make very different decisions from a position of power. You make totally different decisions. I can't tell you how many more situations I would have said, no, I would have said, I'm sorry, I can't accommodate that request. I'm going to need to ask you to leave. I'm going to go get my manager, but I needed that money to make rent. I needed that money in order to, you know, pay my car bill, whatever it was. But I'll tell you that you show up really differently and you really are able to stay in this career in a different way when you have that emergency fund. And I think it's really important to keep talking about that to people.

50:12And there's so many fun ways in this industry that you can save an emergency fund. Like I like to gamify everything and make it really fun. And so for people in the industry, I'm always like, let's make it fun to save your emergency fund. Like maybe if you're a waitress, you take one or two tables in your section and that's your emergency saving section. You will treat those people so much more differently. Or if you have a bar, like two or three stools, that's your emergency fund section. That's your EF section, right? Those people are going to keep you safe. And it's a fun way for you to be able to kind of segment it.

50:43Because I think when we think about employer-provided benefits, we don't know how it's bucketed, but it's given to us. But when we're setting up benefits for ourselves, we need to understand that it's just about creating separation. This money is for this. This paid time off is for that. The average American gets 20 paid days off per year. That's a working month. When you think about an industry that doesn't have access to paid days off at all, then you start to understand why there's so much burnout, why there's so much turnover, why there's some of this bad PR that this industry has. So I often encourage people to set up their own PTO.

51:20Once we analyze those trends within their income, say, let's look at the holidays time, right? The month of November, December, you're going to make an extra$1 ,000. Let's take that$1 ,000. let's put a hundred bucks into 10 different envelopes or whatever it looks like as far as a vessel there you have your next year's 10 paid days off for yourself right because i think that's one thing that people don't understand is that even in states where you're like oh i live in a state where it's mandated you have to have paid time off cash flow wise that doesn't exist for you first of all we're talking about that two dollar and 13 cents so let's say you have an eight-hour shift at$2.13.

51:59You have$17. That's your paid day off. But then you have any amount of tip claiming and that$17 is eaten away completely in taxes. So cashflow-wise, you never see a paid day off. How many days are you going to show up sick? You're not going to go to the doctors. You're not going to go to the dentist. You're not going to take care of the things that you take care of because you're not actually getting a paid day off. And so this is another one of those systems where, yeah, it's a bucket that you have to set up for yourself is you have to advocate for yourself and you have to take days off. Yeah, you think about like bizarre incentives, right?

52:30Like from an employer's standpoint, like they're basically incentivizing people to come in sick. I mean, there's no other way to look at it than, yeah, it is in the employee's best interest, right? To come in sick, which is bizarre. It's so strange. Yeah, that just shouldn't be on any level. But the practical reality, just like everything we've been talking about for an hour is these are the rules. whether we agree with them, like them, this is the reality, not the rules, but this is the reality of the situation. And okay, you have to plan accordingly, plan for the best for yourself and think long-term.

53:05And Barbara, this has been amazing. I think it's just such a wonderful explanation of why this is so important, A, but B, practical steps people can take to make their lives better for the many million. I think, what did you say? Something on the order of 5 million people? Yeah, there's over 5.5 million people working solely on a tip-based income in the U.S. And that obviously excludes a fair amount of people who aren't reported. Right. So this is critical. Thank you so much for being here. Obviously, we mentioned your book, Tipped, which can be found anywhere books are sold. Tipfinance.com I know is another one.

53:40Anywhere else you want to send people or you want to talk about? People can find me on the socials. I'm on all of them at Tip Finance. Please reach out to me if you have any questions, if you want to celebrate a win. I love to see service industry professionals setting some of this stuff up and winning. So please connect with me there. Awesome. Barbara, thanks again. Really appreciate it. So good to see you. Brad, this was a blast. Thank you for listening to today's show and for being part of the Chooseify community. If you haven't already, the best ways to get involved are first subscribe to the podcast.

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