Taxes feel like the bane of all small businesses. However, according to ex-criminal-tax investigator Senica Evans, the trick to mastering small business tax is in creating a solid financial team and robust tax strategy from the very beginning.
In this episode, Senica Evans, expert small business tax specialist, gives us common small business tax mistakes and straightforward strategic tax systems for SMEs. With a background in tax audits and criminal investigation, Senica gives poignant insights into small business tax compliance, state-registration, and IRS red flags.
Senica vibrantly shares her own emotional journey of switching sides—from busting tax fraudsters to aiding SMEs in avoiding tax pitfalls. Generously imparting nuggets of wisdom from her eight years as an independent tax consultant, Senica gives actionable advice on hiring contractors vs. employeeshiring family, systemizing finances, finding the right tax advisor, and reducing tax deductions.
In this episode we discuss:
- Common tax mistakes small businesses make
- Top tips for building a robust financial team
- Growth strategies for full tax compliance without overspending
Josh: 00:00-00:40 Welcome to the Work the System podcast where we help entrepreneurs make more and work less using system and I'm your host, Josh Fonger. Today we have a special guest we have Senica Evans. Senica is a tax accountant, former tax auditor and former criminal investigator for tax crimes with a knack for teaching small business owners how to stay off the IRS radar paid the least in taxes, legally, of course and make tax season a breeze see switch sides to help you. She is on our show today to tell us how we can have peace of mind and proactive planning. All right, so welcome to the show Senica.
Senica: 00:40-00:44 Thank you Josh. I'm glad to be here so we can talk taxes.
Josh: 00:44-01:00 Yes, right. Both of our favorite topics. Well, maybe yours not so much mine. I like to talk about how to spend less taxes that'll be my driver. But before we get into all the questions I have lined up for you. But see, what's the backstory? How did you get it to this line of work?
Senica: 01:01-01:50 Sure, well, without dating myself, I prepared my first return by hand when I was 16 years old when I had my first job, and something kind of sparked from there. Then I went on the normal path and got my degree and all that good stuff. And after college I knew I didn't want to be typical accountant at the desk doing bookkeeping and things like that. I knew it was all taxes. So I went to become the tax auditor then I was a criminal investigator. And then I think my heart was too big to be a criminal investigator. Western people for taxes and the tears and it was it was too traumatic for my heart. So I switch sides and I said, hey, I can help these people the best that I the best that I can. So I switch sides and I'm going on eight years of being on my own and helping people make sense of their taxes and to pay the least legally of course.
Josh: 01:51-02:12 Okay. So for those of us who are not tax pros like you and knowing that our audience is small business-owners. What, is you know, if they're doing the taxes by themselves? What is the mistakes that you most often see when you get a new client? And they've been trying to just do it themselves? And you see what they're doing? Like what do you usually say?
Senica: 02:13-02:46 Yeah, so usually its depreciation is missed when you purchase an asset and you cannot take an expense for the entire amount at once. You have to spread it out over several years, I usually see that being missed all together. The deductions being way too high, and not in compliance with the tax law. So if you if you go out to eat for yourself, I say you you're out you're meeting clients, and you stop by Panera Bread, it's a bit of something to eat. That's not a business deduction. You're just feeding yourself, but I see all of that on people's taxes are there.
Josh: 02:47-02:54 Okay, so is that why sometimes they avoid seniors that they don't really want to know the truth?
Senica: 02:55 I think so.
Josh: 02:56-03:14 Yes. I'm sure. So, most people it sounds like we were talking before and are more reactive to taxes like this comes to the end of the year or the quarterly and I just that really screws up the flow of their business. They just want to avoid thinking about it. What is it? What is going to be proactive about taxes? Are there any strategies we could follow?
Senica: 03:15-03:50 Yes. So as a business owner, one, you should have your financial team. So, your tax accountant, your accountant, your bookkeeper, and you should be in constant communication with them. So there's different laws, of course, a different type of expenses and purchases. So you should be in contact with your tax accountant, someone like me, to find out how this would affect you. Is this a good purchase? Is it not a good purchase? How would this affect your taxes? So that's the best way to be proactive, communicate over communicate.
Josh: 03:51-03:55 Good. Okay, so don't just pretend like you can write everything off and then find out later that yo, 5-10-20,000 dollars more in taxes.
Senica: 03:56-04:01 Exactly, exactly, because then I'll be the bad guy and I don't want to be the bad guy.
Josh: 04:02-04:50 Well, I want you to the details the story about when you and I met, you're the good guy because I was working with someone else. It was not a specialist in the kind of work I do. And then you saw, you're like, hey, Josh, I could save you some money. And it was it was a lot of money. So I was pretty happy about that. So I was never afraid it'd be the opposite thing like, hey, your previous tax person was screwing up because now you know more what they were screwing up and I got money back. So I was I was happy about that. I was always good to find more money. So what I'm what techniques should solopreneurs, startups new business owners take? Because you know, taxes, kind of the last things we're thinking about thinking about growing a new business, the new ideas, when do they have to start thinking about getting, you know, building their team, their financial team? Is, you know, day one or year one or what? When do they really start building that team?
Senica: 04:51-05:24 They should build it from day one. So how you work with your team will evolve as your business evolves. So when you first start your business it may just be a simple consult with me say, am I in the correct entity? Are there specific things I need to worry about on the state or the federal level with my taxes, as your business grows, and you have more income or your situation changes, you have contractors in different states and things of that nature, then you may need to start reaching out more often maybe having a retainer or maybe getting on an actual tax plan if your business is big enough that it supports that.
Josh: 05:25-05:57 Okay, so you just mentioned the idea of employees, contractors, and this is, you know, with the international workforce, and with the specialists that are available to both online companies and traditional companies, is there are there any rule of thumbs or things you should kind of be thinking through if you want to, let's say you want to bring a salesperson, but you don't want to bring in a full time salesperson, but you kind of need a salesperson, like you should use your contractor employee commission, like what kind of things would go through the mind of a tax person?
Senica: 05:58-07:10 Well, the first thing is are they truly a contractor or are they an employee? So the IRS has like a 17 point test that they look at when they do these employee classification audits. And it comes down to who controls the person's work. And if the person that's working for you controls their own work their time they provide their own tools to get the job done, then you can classify them as a contractor, speaking extremely general, so let me put that put that out there. But if you control their schedule, their time their work product, then they're an employee, then that means you have to set up payroll and you need to put them on payroll and actually pay the payroll taxes. Well, that's the first thing that goes through my mind. And if they are a contractor, we need to look at where that contractor is, because that may create nexus. Nexus means you have an attachment to the state and now you may be liable for state income taxes and have to follow retired in that state as well. And then there are states like California who passed the A-B five bill we're now some industries can't have contractors. Everyone needs to be an employee. So there's a whole litany of things that go through my mind. Like, okay, I have to ask a million questions to get to the bottom to see how it would impact you in your business.
Josh: 07:11-08:09 Yes, and I think after you know, and full disclosure, you know, Senica and I work together, she helps me out a lot. Is, if you own your own company, don't try to figure this out self on your own. There's just too many things, you're going to get wrong. And the consequences are too devastating. And it's doing taxes for your own business is not your core business. So if you're in your mind, you're thinking I'll save some money by doing this, just removed that thought you will, you're wasting time and you're gonna screw yourself up. And so just kind of start with that for those folks who, who try to do it themselves. Alright, so moving on past that with the contractor employee. Let's say that there's it's kind of in the middle, right where they do their own thing, but you kind of want to oversee it. Would it be tax advantageous for the company owner to kind of move them along towards contractor boom along towards employee in terms of saving money on taxes?
Senica: 08:10-09:13 Yeah, so that is an advantage and even from the contractors perspective, because with the change in the tax laws, the TCGA, that T-C-J-A, excuse me, that happened in 2017 employees are no longer able to write off employee business expenses. So if you employ me in a different state than you, so I still have to provide my internet access or I'm a salesperson going to different sales calls. Previously, I could put that on my return and claim it as an itemized expense. But with the TCJA, that's gone. So now for employees that don't have all those benefits, but still need to spend money to do their job, it's more advantageous for them to be a contractor. So that's a conversation that one the contractor needs to have with their tax person to see does it make sense to go ahead and be a contractor? Or should you push to be an employee? And then that's something that also the US the business owner, we need to have a conversation? Would it make more sense for you to offer those benefits to your employee or to leave them as a contractor?
Josh: 09:14-09:36 So changing gears a little bit, you mentioned right off people doing write offs wrong. What? What things can be written off? Are there certain classifications or areas that people should be thinking of? And should they plan their business strategy and their business trips and their business activities around it? Like what would be a good overarching way to think about it?
Senica: 09:37-10:40 Well, I tell people, if you're not an accountant, if you're not a tax accountant, which you're not because you're in the business of doing something else, then focus on doing that and leave that to your financial team. So if you spent it and your purpose was a business purpose, then go ahead and say okay, this is a potential right off and the electro financial team sort through an example I like to give is called client gifts. So you can spend $100 per client that you decided you want to give them $100 gift card to Amazon or something. And you can say, hey, this is a client gift. As a tax account, I'm going to come in and say, okay, that's $100 on the book for this one client as a client gift. But the tax law limits the client's gifts to $25. So I'm going to reduce that down to $25 on your tax return as a deduction. So instead of you trying to remember all the nuances of every law, it's best if you spent it for business purposes, keep great notes notated or send it to your team with notes, and then allow your team to apply the laws that need to be applied.
Josh: 10:41-11:33 Okay. Yeah, really good advice. I think and you helped me with this, just run the business the way you want to run the business. And then after that, look at the laws don't try to like, you know, try to weave in and out of doing things because I've seen people try to do that. You're like I saved $1,000 here, $5 there. But you wasted so much time and energy, thinking about saving money, but you didn't make any money and so I think that's the wrong approach. Now, because you have some expertise in this and you help people on it and I know that people listening who are in this situation what if you are behind on taxes like you had a bad year? You kind of just stopped paying for a while. It's building up maybe it's 10-20-30-40 hundred thousand dollars? What is the right way to get yourself out of that mess without making it worse? Like what should you do?
Senica: 11:34-13:20 Yes, before I answer that, I want to go back to your last question. When people are doing things specifically to save money? So you have to look at the actual cost savings once again, your team should be able to put that together for you so. You can spend $1,000 to save 50 well that does it that doesn't make good sense. So you spend the extra thousand dollars that could have been better invested in your business just to save $50 in tax. Okay, now on to your question. If you have tax problems, the first thing to do is one don't ignore the notices the government does not go away the state or the federal they don't go away. So don't ignore that notices. And as soon as you get a notice reach out to someone that can help you sort of professional a tax accountant best licensed to represent you before the IRS because all tax professionals are not licensed to represent you before the IRS or the state. And then once you hire a competent professional, you would probably get a ton of sales materials in the mail. And they some of them look really official to that'll say hey, we can help you, we can do this. Find you someone that you trust that you believe in and that is knowledgeable and license. And then from there, they can work up a plan so they know the ins and outs of the IRS or the different state, departments of revenues. And they can put together a plan of action for you but it's everything resolvable, if you owe $100,000, there are different things that you can do that we can do together to help resolve that debt, even if it's a payment plan, because that's what you qualify for. But sometimes you can qualify for a settlement or what's called an offer and compromise, which are harder to qualify for, but you never know.
Josh: 13:21-13:25 Okay? For all just for those listening, are you licensed in that? Or is that something you don't do anymore? Or do?
Senica: 13:26-13:31 I do. I am license I'm an enrolled agent, which means I am licensed to represent before the IRS.
Josh: 13:32-14:42 Alright, so everyone listening has business problems. And I'm hitting on this heart because, you know, the stats, I mean, 96% of companies don't make it 10 years. So they go out of business, which means during the roller coaster, they have problems and what I want is people to not have sleepless nights for six months, and then screw up their business and then go bankrupt, like, you know, that keeps getting worse and worse and worse. Is that to say okay, there's a plan, there's a person and everything is resolvable. And yeah, that's much better approach than trying to, ultimately, the IRS or the one you're going to use either they want their money and so they want they want to come up with a plan. So, that's kind of a for anyone listening. So let's say you're behind you catch back up that that's probably a map on that tangent. Now, what about since you worked in the IRS, and you used to help catch the bad guys or people who were evading taxes? What are some things that we should all be aware of? So we cross our T's and dot our eyes and don't get in trouble here are certain things that they're always looking for that raise red flags.
Senica: 14:43-16:06 Yes, well, I worked on that I was a state criminal investigator. I'm not with the IRS. Very similar, same thing just limited to the state. So one thing that that they're looking for is one their their badges of fraud when it comes to criminal looking for different badges. Is a fraud that if you look at it like this just doesn't, it doesn't make sense. It doesn't add up for you. But for your average non taxpayer who's not committing fraud, the IRS does have a system that kind of flags you'd like a score, or whether a flag they're retiring to say if this, this makes sense or not. So one example I gave is there are some people who will have a business will they have a schedule C because they're saying they're a sole proprietor, and they'll have $10,000 in income and 50,000 in expenses, and then they'll have like $40,000 loss, and then they'll use this loss to report to excuse me to reduce their income, so that they can get a bigger refund, maybe qualify for the earned income credit, something like that. And that's a flag, because it doesn't doesn't match up. You can look at the return and say, well, how did you live? You made 10,000 from the business you had 40,000 or 50,000 expenses, you work the job and you only made 20,000. How did you live? So things that really just don't add up. If it doesn't add up doesn't make sense, then that could be a potential flag.
Josh: 16:07-16:19 So the way they audit is it first a flag is raised, and then they go through it with a fine tooth comb, or is it they just randomly check one out of every hundred with a fine tooth comb when you just you just might get unlucky sometime.
Senica: 16:20-17:02 Well, for my understanding, it is random. But they do have the computer that goes through and that's where the notices are generated, that go through. You may get a flag, a red, yellow, whatever. And then because your score is in a certain range, then they'll start generating notices, but they have these four different areas. So another thing that I've generated notice is if you say, well, I don't want to report the income on this 1099 miscellaneous that was sent to me, I'm just gonna file it, not this year, maybe another year, the IRS, the computers will match what you filed against what they have on their file. It's a up there's a mismatch, you didn't file income, generate a letter. Hey, you forgot this off. You Here's your new tax bill.
Josh: 17:03-17:05 Okay, yeah okay there's no escape.
Senica: 17:08-17:10 No. Let's do it right the first time.
Josh: 17:11-17:21 So what if you have had tax problems? And now you are totally compliant do you stay on like their red flag list for the next five years? They're kind of always check in though because they know you're an offender or do you go off to list?
Senica: 17:22-17:57 No, so there's not a list that's being maintained like up this person had issues before. So now we're gonna keep tacking on so there's not this list per say. It's just really computer generated, versus going through the different checks. And then it's random for the businesses that are actually audited by a physical person comes out and audit your tax records that's usually spans over a few years and then that could results easily that could result in them checking up on you in certain cycles
Josh: 17:56-18:43 Okay. Yeah, the reason why I bring up different situation but I had a border crossing issue. Once I got flagged for crossing the border, I was flagged, I've been every time across the border. Now I have issues it for years and years and years later, there's no way to get out of it. Oh, my goodness, it was a paperwork. It was a paperwork issue. I wasn't smuggling drugs or anything, but it was just it was like, so now I always get the shakedown for it's just horrible. Well, that's good. That's good to know. All right. So a couple other questions before we sign out because we're running low on time here. So where to live? Okay. So some folks that work with our mobile, right, they're entrepreneurs that are working with online companies, are there certain states they should avoid or certain states they should try to file their business in or keep their company and that are most advantageous? Maybe you don't know the answer to that question?
Senica: 18:44-20:02 Well, this is a topic that comes up often especially when businesses first start or when they reached a certain level and they want to eliminate taxes, reduce taxes, the best they can. So of course, we've heard about Delaware with Wyoming and Nevada with the state that they don't have the post business income tax, or they have a more favorable tax structure. Wherever you live, you're going to have to register your business there pay taxes, because that's considered nexus. So if you register your business in Wyoming, but you are physically based in Illinois, you're going to still have to register your business in Illinois, but now as a foreign business, because you said that you are based out of Wyoming so now, you're not avoiding the Illinois taxes by registering in a different state. So it once your business gets bigger and you have this nexus and other states anyway, then it will make sense to really look at and use that as a planning strategy but as a small business, really getting going on your under, you know, you maybe you have less than a million dollars income, then it doesn't really make sense to open up all their liability in the different states.
Josh: 20:03-20:21 So what about, I want to ask you about a story about a situation where you've had maybe a disaster situation come into your work with, and you end up turning out all right. In the end, you have any stories over the years or something that you thought, wow, how are we ever going to solve this problem? And it kind of resolved?
Senica: 20:22-21:23 Yes. So I had this one person that was being audited, and they had a small business. And their books were atrocious. They tried to do the best they can, trying to DIY it. They didn't do a good job. They jumped around from tax person, the tax person, so the taxes they weren't consistent from year to year and this person winds up getting audited by physical auditor for about three of those years. And then I was brought in to handle the audit. And I really couldn't see anything it's like this is I told her that I don't know. I don't know what we can do here because you don't have things you need to have these things weren't done right. But negotiating with the IRS. And the auditor was able to come to a resolution and got his tax bill reduced in half. So still oh, but it wasn't as much as the before some went down from about 30 to about 15,000. So that was still a win when it didn't look like it would be anywhere insight.
Josh: 21:24-22:07 Okay, so that's good. So there's some hope there. And one question, this is just relevant. And then when this recording goes out to all of the podcast channels, maybe this will be solved in a bigger way. But do you have any thoughts or ideas on how the new law in California things called AP five? How because that just happened about a month ago? Do you have any idea about how that's going to be enforced and who that might affect because I know a lot of people like I have companies where they have the big hire contractors in California even though they live in a different state and vice versa. And I mean, how do you see that playing out? Do you think it's gonna happen to other states as well? Or is it just too early tell?
Senica: 22:08-22:55 It's a little too early to tell. But I do think the more aggressive states are on the sideline watching what's happening in California and then possibly use that as precedent. Once California kind of works out all the kinks, I was just reading an article maybe two weeks ago about how they're now going to exempt truckers from this AV bill. So they're, they're still working it out. But I definitely think there are some states that are on the sideline like, hey, you might need to implement this over I think it would have a similar effect as the wayfarer decision did on sales tax and economic nexus. So I think this is something definitely to watch. And if you are in a more aggressive state, then you have to start thinking of things that you can do differently having conversations with your tax person absolutely.
Josh: 22:56-23:15 Okay. Well, good. All right. Well, hopefully everyone listening to this It's really spurs my ideas on things you should be doing and why you probably should need to have a tax person who's a pro, if you don't already know, what's one question Senica that I didn't ask you, but I should have asked you during this interview?
Senica: 23:16-23:59 One question, guess what are some good strategies to start with, for being proactive with your taxes? So the one strategy we hear of all the time on social media with lots of misinformation with it is hiring your kids. Hiring your kids is a great tax planning strategy. But please reach out to your tax professional to have them work out because it's very specific on how it needs to apply. And you need to make sure there's different rules for if you're an LLC, versus if you're a corporation, though, but it's a great strategy. It does work. It is real, but just make sure you talk to a tax pro about so they can set it up right and doesn't cause issues later on.
Josh: 24:00-24:13 Okay. A great one. Yeah, that's my plan eventually, my oldest is 14. So eventually we'll get them get them done going with that. Alright, so and then where do people find you? So if they, you know, they want more information or they need some help, where should they go?
Senica: 24:14-24:26 Yes, you can go to simplified account dot com. Awesome businesses simplified accounting but simplified account dot com and I'm on social media under simplified accounting on Facebook, and Instagram.
Josh: 24:27-25:37 Okay, very good. So simplified accounting dot com. Senica, thank you for taking the time to do this. This is helpful to me hopefully helpful to a lot of you listening and watching today. And stay tuned next week and have another podcast guests like Senica an expert, a pro, maybe one of my previous clients or one of my certified coaches, sharing with you how to improve your business so you can make more work less and have that freedom. And also if you want a copy of that book right there behind me work the system. You can download it for free at work the system dot com, and if you want a copy mailed to you, then leave us a review. Leave us a review at any of the places you're watching this, seen this, and take a screenshot of that review, and send it over to info at work the system dot com. And once a week we grab a name of a hat and mail a one of those books right there to your office. And then also, if you're watching the live stream, we are launching our group coaching program. That's our flagship program. And we launch it every quarter. And so if you're interested in working with me and a team of entrepreneurs, trying to fix their business so that they can grow and scale and build freedom, systematically mechanically, then check that out and do it today. All right, thanks again. Senica.
Senica: 25:38 Thank you!