ARTICLE TABLE OF CONTENTS
What do life coaches do?
A life coach’s primary purpose is to help clients live their best lives. Depending on the client’s needs and current situation, life coaches may spend their days teaching clients to overcome obstacles, working with clients to set and achieve goals and/or helping clients develop better coping skills. Life coaches don’t give their clients orders or instructions. Instead, they work alongside clients as a partner, guiding the client as they work to build the life they desire.
What are the different types of life coaches?
Not all life coaches offer the same services. While some life coaches offer generalized coaching, others have a niche on which they focus.
For example, life coaches may focus on:
• Personal finances – Life coaches who specialize in personal finance may help clients get out of debt, build wealth or accomplish other personalized financial goals.
• Relationships – Relationship life coaches may help clients improve interpersonal relationships with family, friends, spouses or significant others. They may also help clients develop better relationship skills in general.
• Small business – Small business life coaches may help owners of small businesses to balance work and home life, improve leadership skills or achieve other business-related goals.
• Health – Life coaches who focus on health may help their clients achieve fitness goals, improve their lifestyle or eliminate bad health habits.
• Life balance – A life coach who specializes in life balance will help clients build a healthier life with an appropriate balance between work, family, recreation and other pastimes.
Some life coaches may also focus their business on working with a specific type of client, such as executives or athletes.
How much do life coaches make?
Every life coach has a unique business with a different set of clients. In addition, life coaches vary according to their location, experience, specialized skills and the demand for their services. For this reason, the amount of money earned by life coaches varies widely. According to Payscale.com, the annual salary of a life coach ranges anywhere from $28,000 to $264,000. This translates to an approximate hourly rate of $12 to $147 per hour.
In general, life coaches can expect to make more money when they bill a greater number of hours. In addition, life coaches who have more experience and/or certain specialized skills may be able to charge more per hour than those who are less experienced or lack special skills.
What are some of the tax considerations life coaches should be aware of?
Unless a life coach is working for a professional firm as an employee, most life coaches are considered business owners. For life coaches who are self-employed, any income earned through life coaching will be considered business income. The specific tax requirements and obligations that will apply to an individual life coach depends on several factors, including the business structure, the amount of money earned through life coaching and whether the life coach qualifies for tax deductions and credits.
About Business Structures
Many life coaches working on their own will choose to earn income as sole proprietors. However, other business structures are available as well. The most common structures utilized by life coaches include:
• Sole proprietorships – Sole proprietorships allow life coaches to file taxes as an individual in the same way they would if you were earning employment income. From the IRS perspective, the life coaching business and the individual are essentially the same.
• Partnerships – Life coaches working together may form a partnership. For tax purposes, partnerships are much like sole proprietorships. Income will pass through to the partners, who will be taxed as individuals.
• Limited liability corporation – Limited liability corporations are designed to protect their members from the liability that comes with business activities. Most LLCs pass their income to members, who will then be taxed as individuals.
• Corporation – A corporation is a larger legal entity that is subject to separate taxes. If a life coach structures their business as a corporation, income will be subject to corporate taxation. Any dividends paid to the members of the corporation will also be taxable, with the taxes paid by each individual member.
Taxes are not the only consideration taken into account when choosing a business structure. However, the structure chosen will always have an impact on tax obligations. Keep in mind that most business structures, aside from sole proprietorships, must be registered with the state in which the business operates.
Paying Taxes as a Life Coach
Most life coaches will report their business income as individuals. Unlike employment income, which is reported directly on Form 1040, business income is reported on Schedule C. This schedule also gives life coaches an opportunity to claim deductions that will reduce their taxable business income.
In addition to federal income taxes, life coaches will also be subject to self-employment taxes, which cover Social Security and Medicare. For people who are employed, half of these taxes are paid by the employer. However, self-employed life coaches will be responsible for paying the full amount.
Life coaches will also be required to pay state income taxes to the state in which they receive their income. The laws that apply to state taxes vary according to the state in question. However, many states have rules and regulations similar to those of the federal government.
Life coaches working under a corporation will need to file corporate taxes. They will also need to pay individual taxes on the income they receive from the corporation.
Reducing Tax Liability
Most taxpayers, including life coaches, want to pay as little to the government as possible so they can retain more of their hard-earned money. There are several strategies life coaches can use to make sure they pay no more than their legal obligation. Some of these strategies are listed below.
1. Keep careful track of business expenses.
The majority of expenses incurred while running a life coaching business will be tax-deductible. This means that the expenses life coaches incur can be listed on Schedule C and subtracted from business income before taxes are calculated. Examples of expenses that can be deducted include:
• The cost of driving and maintaining business vehicles
• Office supplies
• Internet service
• Home office expenses
• Phone bills
• Business-related meals
• Business travel
• Business insurance
• Business-related subscriptions and publications
For life coaches who operate their business from a separate building, utilities, rent and other such expenses may be deductible. All of these expenses will reduce taxable business income.
2. Take advantage of other deductions available to business owners.
In addition to writing off expenses, life coaches can also reduce their taxable income by taking advantage of some of the other deductions that may be available. For example, life coaches who pay for their own health insurance and are not eligible to receive group health insurance through an employer or a spouse’s employer can claim the self-employed health insurance deduction on Form 1040. Self-employed taxpayers can also deduct half of their self-employment tax.
3. Make the most of basic credits and deductions.
Most life coaches will have access to other deductions and credits that have nothing to do with their business. For example, life coaches who have dependent children may be able to claim the child tax credit, which directly reduces income tax liability dollar for dollar. Life coaches can also choose to claim the standard deduction or itemize their deductions, depending on which approach is most beneficial.
4. Pay estimated taxes.
Life coaches who expect to owe a balance to the IRS and/or their state should make estimated tax payments throughout the year. The purpose of these payments, which are due on a quarterly basis, is to ensure that these taxes are paid in a timely manner. These payments are similar to the taxes typically withheld from employee paychecks. Life coaches who fail to make required estimated tax payments may owe a penalty.
5. Work with a tax professional.
Keeping track of all of the requirements for filing and paying federal and state taxes can be daunting, especially for life coaches who already have a busy schedule. life coaches can simplify the process of dealing with tax requirements by working with a professional accountant or tax preparer. The right professional will be able to make sure life coaches are in compliance with regulations at all times. A professional accountant or tax preparer will also be able to answer any questions the life coach may have
Accounting Tips for Life Coaches
Accurate accounting is essential for tax purposes, as well as for other reasons. For example, accurate accounting helps life coaches to keep better track of their income and expenses so they can optimize profits.However, accounting can be a challenge, especially for life coaches who are new to the business world. To simplify business accounting, follow these tips.
1. Keep a separate account for business.
Keeping a separate bank account for the life coaching business makes it easier to determine the source of income, as well as to track expenses that come directly out of the bank account. Life coaches should be careful to use this account only for business in order to make accounting easier.
2. Keep a separate credit card.
Life coaches who need to use a credit card to make business-related purchases should obtain a separate business credit card for this purpose. Intermingling of personal and business expenses on the same credit card can be confusing, especially when preparing taxes.
3. Use accounting software.
Life coaches who want to handle their own accounting needs can make this process much easier by investing in accounting software. Accounting software simplifies every aspect of accounting, from inputting expenses to preparing financial reports. Plenty of affordable accounting software options are available to meet the needs of any life coach.
4. Work with a professional.
Life coaches who don’t have the time or resources necessary to handle their own accounting needs may benefit from working with an accounting professional. An accounting professional will be able to keep track of income and expenses, prepare any needed financial statements, provide advice and answer questions.
Working as a life coach is the ideal career for people who want to help others build a better life while also earning a substantial income. Like any business owner, a life coach will have tax and accounting responsibilities that must be met. Fortunately, with some background knowledge and preparation, life coaches can take control of their finances, meet all legal obligations and build a profitable business.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.