Top 5 Questions to Ask Your Small Business Accountant

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5 Questions to Ask Your Small Business Accountant

It can be a tough task finding the perfect accountant for your creative small business.  Once you’ve narrowed down your list of providers,  I recommend hopping on a quick 15 minute call to learn more about your accountant.  During this call you’ll want to see if they are a good fit for you and your business needs. Even though we live in a virtual world, I think it’s important to connect via a call or video chat to get a better sense of personality, and start building the side of the work relationship that an email cannot convey.

Hint: Hire someone who you will enjoy working with – someone who understands and cares about the success of your business.  Many accountants have never worked with virtual businesses who sell digital products, generate affiliate or online ad revenue, so it’s important to understand who their target client is.

Top 5 Questions to Ask Your Small Business Accountant

  1. Who is your target client?
    If your accountant doesn’t have a specific client in mind or if they specialize in assisting clients outside of the scope of your business, you may want to continue your search.  Because I work with creative entrepreneurs, I have a deep understanding of the business structures, deductions, and tax regulations that are associated with photographers, graphic designers, bloggers, design agencies, etc.
  2. Are you a Certified Public Accountant (CPA), an Enrolled Agent (EA), or Bookkeeper?
    I may be a little biased, but I would recommend hiring someone who has CPA at the end of their name – for a few reasons:

    • The Certified Public Accountants (CPA) designation is one of the most widely recognized and highly trusted professional designations in the business world.
    • A CPA is licensed by a state, and must keep current with tax laws in order to maintain a license in that state.
    • After they are licensed, CPAs also must comply with continuing education requirements in order to maintain their licenses; accountants and bookkeepers don’t have this requirement or restriction.
    • CPAs must abide by the AICPA Code of Ethics and Professional Conduct and are at risk of loosing their license if they do not comply with these rules and regulations.
  3. What are your fees?
    Consulting, tax preparation, and bookkeeping fees can vary widely depending on the size of the firm you are working with, the structure of your business, and the amount of transactions your business processes.  Asking for a fees upfront can save you from a lot of heartache in the future.  My philosophy is to be up front and transparent about my pricing, which is why I list my fees directly on my website.
  4. Do you provide any education or training?
    I’m a big fan of the show Shark Tank, however it seems like every season there is a guest on the show who has no idea what their financials are for their business – and they never get a deal.  I’m all for working on your passion, but understanding your business financials are imperative for future success of your business –  your accountant should be able to assist you in understanding this information.  I spend a lot of time on client education in my blog, on my YouTube channel, and via my Be Your Own CFO course.
  5. Do you have any references?
    When you’re hiring an accountant, you are trusting that person with your most sacred business information, and it’s important to check reviews and references.  Most accountants will have a few clients that will vouch for the level of service they provide.  A quick Google search for reviews can ensure you’ve found the right accounting partner for your business.

What kind of Education can be Deducted as a Business Expense?

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You may be able to deduct work-related education expenses paid during the year as an itemized deduction. To qualify for a deduction, your expenses must be for education that:

  1. Maintains or improves your job skills or
  2. Your employer or a law requires to keep your salary, status, or job.

The education must relate to your present work. Expenses that you can deduct include:

  • Tuition, books, supplies, lab fees, and similar items
  • Certain transportation and travel costs, and
  • Other educational expenses, such as the cost of research and typing

Self-employed business owners can deduct costs for their own education, subject to certain limitations in the same way as individual taxpayers.

To be deductible, you must be able to show that the education:

  • Maintains or improves skills required in your present work,” or
  • It is required by law or regulations for maintaining a license to practice, status, or job. For example, professionals can deduct costs for continuing education.

Your work-related education expenses is not deductible if it:

  • Is needed to meet the minimum educational requirements of your present trade or business, or
  • Is part of a program of study that will qualify you for a new trade or business.

You can find more information, and examples of what qualifies on the IRS website.

How much does my business need to make to report it to the IRS?

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How much does my business need to make to report to IRS?

There is a common misconception that I’ve seen on the internet that says if you make under $600 (contracting, freelancing, etc.) – you do not need to report it to the IRS.  This is false, there is no minimum amount that a taxpayer may exclude from gross income.  Independent contractors must report all income that they receive as taxable, even if it is less than $600, and even if the client does not issue a Form 1099-MISC.

Next time you see this rumor in a Facebook group or post, be sure to share this post. You don’t have to just take my word for it, here’s the official guide from the IRS: https://www.irs.gov/uac/reporting-miscellaneous-income

The IRS will never catch you. This is the typical response from someone who has never been audited.  I’m sure there are a lot of taxpayers who have skirted the law, and not reported all their income to the IRS.  If you get caught, you will be responsible for paying the tax, plus interest, and a penalty. You may also be subject to criminal prosecution – underreporting income is a crime and you’re signing a tax return on penalty of perjury. Failing to report income may also lead to the loss of deductions and credits which rely on taxable income limits (such as childcare and dependent credits).

Why is $600 the common amount for this myth?  Taxpayers often get this law confused with the law that states that as a business owner, you must issue a Form 1099-MISC to any independent contractors if:

  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
  3. You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

To report your miscellaneous income, you must use the Form 1040 (Schedule C) or Form 1040 (Schedule C-EZ).  Contact me if you need any assistance preparing your taxes or issuing 1099’s to your contractors.

How to Deduct a Home Office as an S-Corp

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A simple guide to Home Office Deductions

If you have a home office and recently transitioned your business to an S-Corp, you’ll want to understand the steps you need to take in order to continue to take the home office deduction available to you. Here are the steps you need to take to deduct your home office as an S-Corp.

  1. You must complete an accountable plan. This plan will outline which expenses will be eligible for reimbursement, and how they will be paid. You may download a sample accountable plan here.
  2. Calculate the percentage of your home that is used exclusively for business purposes. To calculate this percentage, divide the home office square footage by the total square footage of your home. So, if your home office was a 10×10 room, the square footage of would be 100. If your entire home was 1,500 square feet, you would divide 100 by 1,500. In this case, you would get to deduct 6.7% of your home office expenses by multiplying that percentage by eligible home expenses like mortgage interest or monthly rent, utilities, interest, repairs and depreciation.
  3. Calculate the total amount of eligible reimbursable expenses. Use the IRS Form 8829 to assist with this calculation. Multiply each amount by the percentage of business use calculated in the step 2 and enter the results on the expense form that you use for your accountable plan.
  4. As an employee of the S-Corp, you must prepare expense reports and submit them in to your company on a regular basis. Be sure to keep all receipts or other documentation associated with the expense.
  5. To reimburse yourself for the expense, cut a check from the business account and deposit it into your personal account. Attach a copy of the check/transaction to the expense form as documentation that these were paid.
  6. Enter the amount of the payment into your S-Corp’s records as a reimbursement for employee expenses. Assign each expense claimed to the appropriate expense account category so that these expenses may be deducted from the S-Corp’s income on its tax return.

Bonus for email subscribers: Download the S-Corp Accountable Plan Reimbursement Worksheet!

While this does take a little effort to get started, once you have your accountable plan and reimbursement process in place the rest of the process is easy! If you need a little assistance or reassurance with your calculations, feel free to contact me.

What happens if I can’t pay my taxes?

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I can't pay my taxes!

Don’t panic – believe me, you’re not the only or first person to own money to the IRS. Thankfully the IRS has a process in place to assist you in getting on track. The absolute worst thing to you can do is ignore the IRS because you don’t have the money on hand. Here’s the simple two step process:

  1. Contact your accountant and file your return by the deadline and pay as much as you can to avoid penalties and interest.
  2. Call the IRS to discuss your payment options at 1-800-829-1040. They offer customized payment plans for your individual needs.

The IRS will not waive interest charges which accrue on unpaid tax bills, so get those tax returns prepared as soon as possible.

Are you behind on your taxes? Contact me TODAY and we’ll get your returns filed and get you moving in the right direction.

What is a Virtual CFO?

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I think it’s safe to say that I’m a big fan of making sure entrepreneurs and small business owners understand the financial side of their business. I spend a lot of time on client education in my blog, on my YouTube channel, and via my Be Your Own CFO course. However, there is a point in every growing business where the owner must transition from working in the business – and start working on it. This means stepping away from reconciling accounts, tax projections, and updating spreadsheets, and begin focusing on growing what you love. The next natural progression for your business is to hire a Virtual Chief Financial Officer (Virtual CFO). Your Virtual CFO is a contract professional who is responsible for all of the financials of your business.

My goal as a Virtual CFO is to take the financial stress (and headache) away from the business owner.  I offer a very robust and affordable package which focuses on providing the business owner with the financial reports they need to make quick decisions in their blooming business.

How to work with a Virtual CFO

The first thing I do with any potential new client is hop on a quick 15 minute call to learn more about their business and see where I can be of assistance. Even though we live in a virtual world, I think it’s important to hop on a call or video chat to get a better sense of personality and start building the side of the work relationship that an email cannot convey. Here are a few of my tips on hiring a CPA.

Hint: Hire someone who you will enjoy working with – someone who understands and cares about the success of your business.

Once the call is over, I summarize the information we discussed and send it over for your review. If everything looks great, I’ll send over an engagement letter and will begin the on-boarding process. On-boarding includes gaining access to any required financial information.  Once you’re business financials are all caught up is when the real magic happens.  Every month your bookkeeping will be completed and a report will be prepared for your review. Each quarter, quarterly tax calculations and tax payment vouchers will also be prepared for you, and I’ll schedule a call to clarify any financial questions you have.  Tax time will also be a breeze – my team and I will prepare your return and provide you with advice for your financial future.

What to look for in a Virtual CFO

I may be a little biased, but I would recommend hiring someone who has CPA at the end of their name – for a few reasons:

  1. The Certified Public Accountants (CPA) designation is one of the most widely recognized and highly trusted professional designations in the business world.
  2. A CPA is licensed by a state, and must keep current with tax laws in order to maintain a license in that state.
  3. After they are licensed, CPAs also must comply with continuing education requirements in order to maintain their licenses; accountants and bookkeepers don’t have this requirement or restriction.
  4. CPAs must abide by the AICPA Code of Ethics and Professional Conduct and are at risk of loosing their license if they do not comply with these rules and regulations.

In addition to this qualification, I would recommend finding someone who is flexible, willing to adapt to your business needs,  and allows you to focus on building your business.  Your Virtual CFO will provide you with vast financial knowledge and expertise at a fraction of the cost to bring someone into your team full-time.

Why I LOVE paying taxes!

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3 Simple Ways to Lower Taxes

Ok, I may have embellished this title a little bit. But, the bottom line is – if you’re paying taxes, you’re making money! As a small business owner I can’t say I’m the happiest about the amount of money that goes to taxes, so I make every effort to lower my taxable income. Today, I’m going to share a few ways that you can lower your taxable income.

Expenses are not the answer.

Every so often a client will ask me if they should make a big purchase (buy a new camera, subscribe to a new online course, buy the new fancy tool) at the end of the year so that they don’t have to pay taxes. I always answer this question with one of my own – do you need this to succeed and grow your business, or are you trying to avoid paying taxes on your income?

Ultimately we became small business owners to sustain our lives doing what we love. This means making enough money to support ourselves, and have a little extra profit left over for growing our business and planning for our future.

Are you running a business or a hobby?

If you have not turned a profit in at least three of the prior five years, the IRS can categorize your business as a hobby. If the IRS considers your business a hobby, it would prevent you from claiming a loss related to the business. There are some exceptions to this rule, but I’m confident that if you’re reading this post you do not work your butt of all year just for your business to be considered a hobby. There are better ways to lower your taxable income without increasing your expenses at the end of the year.

3 Simple Ways To Lower Your Taxable Income

If you have “extra” money at the end of the year and want to do something with it besides rack up more expenses or pay the government taxes on the profits, here are my recommendations.

  1. Contribute to your retirement. As a small business owner, you may consider contributing to a SEP IRA, solo 401k or a SIMPLE IRA.  All of these plans are great options for lowering your taxable income while saving for your (and your employees’) futures. Choose a SEP IRA if you are a small business owner who wishes to make a tax deductible contribution into an IRA for yourself and on behalf of your employees. Choose a SIMPLE IRA if you are a business owner with a workplace of 100 or less employees and will fund the bulk of their retirement. Choose a solo 401k if it’s just you.
  2. Contribute to a health savings account. This may not be the sexiest of options, but if you’ve ever experienced medical bills, you know how important it is to have an emergency fund dedicated solely to medical expenses. If you have a high-deductible medical plan, you may have the option to contribute to an HSA. The unused contributions can roll over indefinitely and grow tax-free.
  3. Further your education. The best business owners are lifelong learners. If you took time throughout the year to learn a new skill, you may be eligible for the Lifetime Learning Credit. This credit is worth a maximum of $2,000 per year, and helps pay for college and educational expenses that improve your job skills. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.
    Invest in your children’s education. Almost every state now offers a 529 plan. This plan is designed to help families pay for future expenses associated with college or other qualified post-secondary training. Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. In addition to the federal tax savings, over 30 states currently offer a full or partial tax deduction or credit for 529 plan contributions.

Quarterly Tax Payment Calculator

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Quarterly Tax Worksheet

Who needs to pay estimated taxes?

If you know that you will owe more than $1,000 to the IRS, you will want to make quarterly tax payments. Each state varies on their requirement for when you need to start paying in quarterly, so just look up your state’s department of revenue website and see what they require.

What happens if I don’t pay quarterly taxes?

If you don’t pay into quarterly taxes (and you are supposed to), you could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty depends on how much you owe and the amount of time that you owed it to the IRS.

What are the due dates?
-Quarter 1 payment (January 1 to March 31) – April 18
-Quarter 2 payment(April 1 to May 31) – June 15
-Quarter 3 payment(June 1 to August 31) – September 15
-Quarter 4 payment(September 1 to December 31) – January 17

Heads up:  Be sure to check your state’s website for their due dates! They are not always the same as the federal due dates.

 

How to make quarterly tax payments?

Complete the Form 1040-ES (Estimated Tax for Individuals) and mail it to the IRS with a check.  You also have an option to pay online via the IRS payment portal.

How do I calculate quarterly tax payments?

DIY Option – I have prepared a free estimated quarterly tax worksheet which will guide you through the process of calculating your quarterly tax payments.  You can download the printable worksheet below.

The percentages used in the worksheet are estimations. If you know that you usually fall into a higher tax bracket, you’re welcome to increase the percentages.

Please note, the state section is only for those states who have income tax. Those of you who live in states like Florida and Texas won’t need to fill this part out.

Once you’ve calculated the amount you owe for the quarter, it’s time to make the payment. I’ve linked to the federal payment page below and most states have a similar process for paying online. Try Googling “your state + online estimated tax payment” to pay directly to your state.

Keep in mind, you aren’t actually filing any information at this time. You’re simply making a deposit towards your year-end balance. If you skip a payment, it’s not the end of the world. Try to catch up the next quarter or plan to pay the balance at tax time.

Tax Professional Option – The amount you owe will depend on several things like tax deductions, tax credits, marriage status, number of dependents and several other variables. If you want a precise calculation, contact me.

Should I hire a CPA?

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Should I hire a CPA?

Finding the right mix between being a Creative and handling the money side of it all can seem daunting. Give me just a few minutes to paint a different picture for you. Hiring an accountant can be a huge game-changer for your business.

I worked hard to put the initials C.P.A. after my name but in my heart, I can relate to all Creatives. Easily, I could have stayed in a firm and crunched numbers all day, but I used every free minute to figure out a way to get closer to my own creative bliss. Working with such passionate creative people is the perfect mix in a world of spreadsheets and numbers.

As a Creative, you have all you can handle just staying on top of your business and now you’re being told you have to add spreadsheets and tax law to the mix? Accountants, CPA’s in particular, are required to keep up with Federal and State tax laws by taking continuing education courses every year. It is a good thing to have someone who does know these things on your side.

Your accountant can help to hold you accountable and keep your financial records up-to-date. I know it is tough to make ourselves keep up with the mundane tasks like bookkeeping. I struggle with it myself. One way to stay up-to-date is to set up quarterly bookkeeping reviews with an accountant. Peace of mind is a good thing. As a bonus, you will be able to see where your income is throughout the year and respond quickly.

Accountants can help you determine what you’ll need to pay in for estimated taxes. This takes a heavy weight off your shoulders as the end of the year approaches. We can also can help you understand the financial ramifications of choosing to be a sole proprietorship, partnership, Limited Liability Company (LLC), and S-Corporation as well as walk you through the steps.

Having your own Creative business is a wonderful expression of yourself. There are times, though, that we make use of other’s talents in order to bring our visions to life. In other words, we pay other people for their services. On the business side, this means you have to determine if a 1099 or W-2 needs to be sent to the IRS and your state. Your accountant can assist you and even prepare these for you.

If you’re not sure where to begin with a bookkeeping system, that’s the perfect reason to make an appointment with an accountant. You may be really comfortable with a spreadsheet, but if you’re not into formulas and hand-entering everything, your accountant can also recommend programs that automatically pull in transactions so you just have to categorize them (Check out Freshbooks or Wave). It is really important to have a good system in place you can stick with throughout the year.

Bottom line is that hiring a good accountant can be a real benefit to your business. I promise that it will reduce stress and leave you with much more time to spend on your craft and generating income! Robert Frost once said, “Freedom lies in being bold.” Don’t let your finances run you. Be bold, find an accountant and take charge so you’re working towards your own personal freedom!

Interview with an CPA for Creative Entrepreneurs

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Interview with an Accountant for Creative Entrepreneurs

For this interview I partnered with Idealust, a business coaching resource to help photographers and other creative entrepreneurs grow and scale their small businesses.

Q: Creative people and solo-preneurs tend to be very good at the creative stuff, and less pro-active about the financial stuff. What advantages do creative entrepreneurs access when they hire an accountant? At what point are they losing more money than they’re saving by not hiring an accountant?

A: When a creative entrepreneur takes the plunge and hires an accountant, they can stop stressing about the accounting and tax side of their business and put more energy back into the part they love – the creative part. An accountant can remind creatives about tax deadlines, assist in the case of a stressful audit, and be a resource for you to ask questions to as you continue to learn more and more about accounting and tax.

There’s a point where you’re spending so much time researching and trying to understand tax laws, deductions and that’s the time to call in an expert. A question, like “How to deduct business mileage?” may take you several hours to research, and it may take your accountant a few minutes to email you an explanation.

Q: As a CPA you see a side of things that creatives would love to ignore: the realities of financial decisions. What are the most common financial mistakes or omissions you see creatives making?

A: In my work with Creatives, I find that it is a common mistake to not plan for the tax due from the income their business generated during the year. By working with your accountant throughout the year and not just when your tax return is due, a plan can be made so taxes are paid in periodically or money is saved in anticipation of the taxes being due.

Q: Are there best-practices that you see creatives commonly neglecting or ignoring concerning tax time?

A: It’s easy, even for me, to want to put off the bookkeeping and focus on income-generating activities. The problem is that this makes tax time incredibly stressful because not only will you likely have a large payment due, you also have to set aside a huge chunk of time to organize a year’s worth of income and expenses. By setting aside an hour each week, or a couple hours a month, to get your bookkeeping squared away, you can see how your business is performing throughout the year and you won’t have an overwhelming amount of work to do at the end of the year.

Q: A lot of creatives do what they love on a part-time basis. Are there exemptions or write-offs they could be taking advantage of that they might never have considered?

A: There are a couple deductions some creatives forget to take or are nervous to take in fear they will cause an audit. The first is “car and truck expense.” This can be calculated by adding up all auto expenses and deducting a percentage of the total amount or it can be simply calculated by tracking all business miles you drive. It takes discipline to track each business trip and the business purpose, but with the help of smart phone apps, some of the hassle has been lessened.

The other deduction is for the home office. I hear time and again that the creative entrepreneur would rather just not take the deduction because they’re nervous it will cause an audit. With more and more people working for themselves and working from home, this deduction does not raise eyebrows with the IRS like it has been rumored to in the past. It requires a little work in tracking home utilities, repairs, and other home expenses, but it will be worth it if you’re able to lower your taxable income.

Q: What kind of tax savings are your clients commonly missing out on by not maximizing retirement savings?

A: There are several retirement savings options available to self-employed creatives. SEP IRAs, SIMPLE IRAs and individual 401(k)s all allow you to skip the tax on contributions made now, and pay the tax later, when you’re ready to use it in retirement. Depending on the size of the contribution, this can be a sizeable tax savings. ROTH IRA plans don’t get a tax break when you make a contribution now, but instead, you are able to let your money grow and use it in retirement, tax free! Either way, if you aren’t putting any money away, you’re missing out on the opportunity for tax savings.

What kind of tax savings or other benefits can creative entrepreneurs realize by incorporating? At what point should they be considering incorporation?
 
If a creative entrepreneur is considering becoming a Limited Liability Corporation and they are the only member, they would be considered a “single-member LLC” and would be treated, for tax purposes, exactly the same as a sole proprietor. If making the switch to an LLC, there is a benefit of limited liability protection. This means creditors can’t come after personal assets of the owner to pay the business’s debts.

When considering becoming an S Corporation, there are several factors to look at. As an S Corporation, tax savings occur when the business is producing enough income to pay the shareholder employees a reasonable salary, pay expenses, and have enough left over for distributions. While the salary is subject to payroll taxes, the distributions are not.

Q: Are there other ways creatives could be more proactive in their finances?

A: Take time to learn about the business side of your business. It’s the less glamorous side of being a business owner, but the better armed you are with information, the better you’ll be at making decisions for your business. For example, thinking about hiring someone? Knowing the difference between an employee and a contractor can have a huge impact on how you report their earnings and whether or not you are required to withhold employment taxes. While it can be necessary to hand work off to others (bookkeeping to a bookkeeper, etc.) you still want to knowledgeable enough to question the person if something looks odd.

Q: How much should creatives be setting aside in anticipation of tax time?

A: While everyone’s situation is different, I generally recommend setting aside (or paying as a quarterly estimated payment) about 30-35% of net income (income less expenses).

Q: Are there online tools, apps, or resources to which you point clients to help them better track and manage their finances?

There are so many great resources out there for creative entrepreneurs. A few of my favorites are:

  • TripLog is a mileage tracking app available for Android and iPhone that will automatically start tracking your trip when you are moving 5 mph or faster. Thanks to this feature, forgetting to track a trip to meet a client, or a trip to Staples to pick up supplies doesn’t happen anymore.
  • Freshbooks, a cloud accounting program, is a very simple program that pulls in your bank transactions. Their app allows you to take pictures of receipts so you never forget or lose one and you can categorize it instantly or while you’re waiting at the dentist office.
  • Xero is another option for cloud accounting and their app, similar to Freshbooks’ app, allows you to manage your business finances outside of the office.

Q: A client just asked you what 3 things she could be doing right now that would make the biggest difference to her at the end of the year, what do you tell her?

A:

  1. Keep your bookkeeping up to date, or hire someone to do it for you. The power from knowing how your business is doing throughout the year, rather than just at the end of the year can be huge.
  2. Make a plan for your money. This includes saving money for taxes, money for retirement, money for expenses, and money for yourself. Finding the right balance will take time but you will learn what works best through experience and a little chat with your accountant.
  3. Instead of putting receipts in a big pile, organize them by month so at the end of the year, if you or your accountant needs more information about a specific expense, you won’t spend hours searching through a mountain of receipts. I put mine in document-sized envelopes labeled with the month but you could also snap pictures and save them in Evernote (another great tool for creatives).
Are things like taxes & bookkeeping getting in the way of your creative time? Let's Chat!
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