Episode 182: Fireside Chat - Profit, Distribution & Taxes with Micah
In this Club Capital Leadership Podcast episode, host Bradley Hamner and guest Mike Cannon discuss the financial nuances that insurance agency owners face. They compare informal cash bonuses sent via Venmo or Cash App to compliant payroll processing, highlighting the hidden tax costs and tracking challenges. The conversation moves to the importance of accurately recording total compensation for recruitment, retention, and performance reviews. A core focus is the distinction between profit, cash flow, and owner distributions in pass‑through entities, explaining how profit is taxed regardless of when money is withdrawn. They break down equity‑account categories—contributions, distributions, and tax payments—and warn about audit risks when cash payouts are not properly documented. Quarterly tax estimation is presented as a preventive measure against end‑of‑year cash shocks. The hosts advocate for disciplined, automated distribution strategies, sharing a practical policy of taking 50 % of the prior month’s profit each month and adjusting quarterly. Forecasting tools and CFO services are described as ways to predict cash availability and set disciplined payout cadences. Throughout, they stress financial discipline for former W‑2 employees transitioning to ownership, correcting misconceptions from the Profit First methodology about tax accounts being expenses. The episode concludes with actionable takeaways and sponsor mentions for recruiting, coaching, and marketing services.
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So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable? That is the question, and this podcast will give you the answers. I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting advisory firm for insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation. Check them out at club.capital. This podcast is brought to you by Autopilot Recruiting. Join over 1,200 State Farm agents in putting your recruiting on autopilot. Any successful insurance agent will tell you how important team is. Finding those rockstar team members doesn't happen when left to chance. It happens through consistent recruiting. You never know when you're going to lose a team member. And the key to an incredible team is constantly searching for the best talent. Autopilot Recruiting is a continuous recruiting service where you'll be assigned a recruiter that has been trained to recruit on your behalf every business day. This recruiter will take over and revamp your CareerPlug, send out assessments, do pre-screen phone interviews, and schedule your in-office interviews. All you need to do is to show up and give a thumbs up or a thumbs down. This ongoing service is extremely affordable and a no-brainer for taking your insurance agency to the next level. Listeners of the Club Capital Leadership Podcast, go to autopilotrecruiting.com and use the code Club Capital to get started. Again, autopilotrecruiting.com and use the code Club Capital to get started.
Welcome to another episode of the Club Capital Leadership Podcast. My name is Bradley Hamner, your host. On today's episode, Micah and I, we do a fireside chat. We were talking about distributions, profit, taxes, just a lot of different things, kind of some dos, some don'ts. I think you're getting a lot, a lot out of just he and I having a back and forth. And these are some of the conversations we've had on Mondays after we do kind of our normal weekly meeting and huddle. Uh, we get into talking about just financials and business in general. Well, I hope this serves all of you. Without further ado, here's my conversation with Mike Cannon.
I'll get back into it. But $10,000, if— I mean, if you gave out, for easy math, $10,000, or I guess we could do $1,000, $1,000 in cash bonuses last year. But if you're paying that out of your own bank account, and depending on what tax rate you're at, you know, first off, probably at least 30%, if not higher, right, between federal, state, you know, divided by 0.7, then that means, you know, it actually was $1,428 of your own money that it took to give them $1,000. So just cost— to think about how much that just cost you.
Yeah.
You know, rather than doing it compliantly and running it through a payroll platform.
Why do you think that is? Do you think people think that they're just avoiding the taxes by paying it out of their personal account?
I don't. I think it's ease of use. I think, I think Venmo and Cash App and things like that are super easy to use and people have and they've done a good job of making it super easy to use that it's really nice to just be able to like send somebody money real quick. Typical payroll platforms are wildly cumbersome.
Yeah.
And, uh, you know, you gotta call somebody or, you know, if you want to do something unique or do something different, and it's a pain in the butt where I could just send over some money real quick. And whether that Venmo is attached to a personal bank account or a business, you know, some people just choose to do that, um, and, and it's, it's just wrong to do. And the other reason is this notion that people like cash, sales team likes cash right now. You know, spiffs have been a huge thing in sales, you know, forever, right? And bonuses and stuff like that. But like, I get it. But you can still do that and do it compliantly, right? I can give my team $100 cash on Friday, but also let them know that, you know, by the way, I'm going to enter this into the payroll platform. Yeah, that I gave you $100 cash.
Yeah.
You know, no harm, no foul. You got $100 cash. I don't think the employee cares too much. Right. And then we all know that it, you know, got done appropriately.
Don't you think too? I was just talking to Steve Suggs this morning, and we were having a discussion around, um, you know, recruiting. And obviously he has CTS. And, uh, when you think about like attracting people, being able to have all of that, not just because it's been tracked and it's compliant— I mean, that's aspect of it too— but because it's actually in their system, you're able to see exactly how much you've paid somebody throughout the year. And then, but versus if you just put everything in through Cash App or Venmo, you don't contribute that at all to the total compensation that you're actually giving your current team members. And then you're not able to be able to share to like recruits, this is how much, you know, these people have made, or this is— I obviously wouldn't share specifics. I don't mean that. I'm just meaning like you're looking at the total compensation the incentive program that somebody has by working in your business. Does that make sense? Totally.
I mean, it'd be— it's so much easier to track. Plus, you should want to track that and use that, you know, as a retention mechanism too, you know, doing annual reviews with team members, showing them the total comp they made that year. And knowing what that is too, to even when you're going to recruit and you say, look, Here's your base salary, but, you know, last year I can tell you, you know, this person made on average this amount extra.
Yeah, right, right.
Just super easy to know. Um, you know, plus some of it that what people forget, um, is that this needs to be tracked. I mean, if somebody's getting excess cash, um, that's income, right, that needs to be reported. And, you know, hey, $20 here, $50 there is kind of you know, it's inconsequential, generally speaking, but things generally add up in a sales position to be sizable amounts of cash that need to be tracked. Yeah. You know, two ways. One, from the business side, you know, you know, especially if you're trying to record this as a business expense. Right. But you didn't actually say that it was and report it as income to somebody else, you know, you could be dinged for that in an audit. Like same way around, if an employee got audited and they looked at their bank accounts and saw all this other money coming in that wasn't regarding payroll, but come to find out it was income, right? They didn't pay tax on that. Who didn't pay tax on that? Oh, the agency didn't pay tax on that right now. But the employee and the employer are in hot water.
Yeah. You know, I think it's also too, I mean, the other aspect of this we haven't even really considered is the fact that a lot of times, I mean, this is kind of, you and I were talking about this before we hit record. Sometimes for the owner, they don't, they don't feel the profitability. I was, I think it was, I think it was Mariana on her episode, possibly she mentioned. Something about looking at profitability and like, let's say it went up year over year. Let's say it went from $120,000 to $150,000. I'm just making that number up. And she had said that people she would talk to would, would be like, I, I don't feel that. Like, I don't feel that additional $30,000. Well, not that you're giving $30,000 of cash out. You're not doing that, but You know, if you think about— if you give $20 a week for as a SPIFF for hitting certain things and it's in cash and it's out of your bank account, no, that week you don't feel much about it. If you've got, I don't know, 7 people that work for you, you know, but you add that up over the year, that could be $5,000, $6,000, $7,000 that just came out of the bank account. That's not being expensed of the business. And so it's, yeah, it's just, there's— what other things do you see sometimes that people do with the best of intentions? Right. I mean, clearly just like neglect. I mean, that's one, not looking, get that, you know, those are the obvious ones we've covered before, but are there any other little things that you see?
Um, yeah, there's, there certainly are. I mean, there's definitely, you know, tidbits and nuggets to probably grab, you know, all over the place. I think one good one to— and this happens a lot end of year. We talk about the difference between profit and cash flow quite a bit, and we've done that in other episodes. I think Peter did that, one of our account managers, a couple of episodes back. But there's also, you know, the difference between profit and distributions. Mm-hmm. So I think distributions or draws, and they technically have, you know, different definitions, draws and distributions, you know, but really when it comes to the agency world and what agents think of coming out of their account, right, a lot of agents really look at distributions that they take, right? So when they transfer money their bank account, from their business bank account to a personal, that's a distribution. Mm-hmm. Right. And so they think about that a lot as that's my income, right? Whatever's in this distribution account at the end of the year and whatever that total is at the end of the year, that's what I got to pay tax on.
Right.
So when that is your thinking, that will affect how much you want to take out. Right. Because I've seen some people say, you know what, I'm just going to keep it all in the business. Right. Keep it all in the business. Keep it here. And I, you know, I only took $30,000 out this year or $50,000, whatever that number is. And then we go in and we see, well, you know, your profit number was X. You know, this is the number that's being reported as income on the return, right? Kind of regardless of really where the money sits. And, and that is unique to— it's referred to as pass-through entities, right? Not every type of corporation or company has this, but specifically the ones that really agencies work with is pass-through entities where the income of the business is the owner's income. Yeah. So typically most agency owners are 100% owners of their business, right? So if you have $100,000 in profit of the business, that's $100,000 of income for you on your tax return. Right. And now obviously there's a ton that go into taxes that can reduce that, you know, total taxable income, you know, from $100,000 to, you know, something lower based on deductions and you know, and using depreciation, all sorts of other methods. But it's profit in a pass-through entity that is being reported as income regardless of distributions. You could have kept $10,000, you could have only taken $10,000 out during the year and kept the rest in the bank account. But that doesn't matter at all. You're paying tax on that money regardless. Yeah, right. Yeah. Yeah, that's definitely, you know, we've covered again profit versus cash, but I think profit versus distributions is one that we don't cover as much. Um, and I'll just expand on this a little bit more, but you know, there's different types of, um, of kind of accounts of what that is. Like a distribution, um, falls under what's called an equity account. So it's, it's equity in the business, and there are different types of equity accounts. Like retained earnings is a type of equity account. Um, you know, investment, initial contributions to the business or kind of startup cash. But really what we see on a regular basis are contributions and distributions, right? So if you send money in from a bank account, from a personal bank account into a business bank account, that's contribution. If you take money the reverse from the business to a personal, that's a distribution, you know, generally. And, you know, those will cancel each other out at the end of the year. So like what we do on the Club Capital side, like with the accounts that we have, instead of just having one account where there's like a lot in, a lot out, you know, whether it's contribution, distribution, we actually separate them so that people can see and kind of track them a little bit more. Because with self-owned businesses, there tend to be a lot of movements of cash. Almost period. There's a lot of movements of cash, right, that aren't always just very, you know, clean-cut and business-related. So we have some that are the normal ones, contributions. So money that you send into the business. And this could be, you know, if you needed money for payroll or whatever and you say, oh, I'll send money in from my own personal savings, right? That'd be a contribution to the business. And then distributions when you're taking money out. To pay yourself. But there's also one that people forget about a lot, and, and we— you generally lump it into an equity account, and people will say, no, no, that's not a distribution, that was my tax payment. Right? It's like, okay, yes, when you're paying federal or state taxes, you have to think to yourself, what type of, uh, movement of cash is that? Right. So when you think about the types of accounts, you've got revenue, expenses, assets, liabilities, equity accounts, you know, a payment to taxes. First and foremost, you have to remember taxes. The business really doesn't have any besides some corporate stuff to the state. Taxes are based on income.
Yeah.
To you personally. Yeah. So then all of a sudden that's a personal expense, right? You have to remember that. So it's not revenue. You know, a tax payment isn't revenue to the business. Certainly it's not an expense to the business. It's definitely not an asset or a liability. Right. So then it falls into— it's a distribution really from the business.
Don't you think? I just want to stop you right there on that one thing, and I want to come back to distributions in just a second. You know, we've had Mike Michalowicz on the podcast 3 times now. And so obviously the first time we talked about Profit First. Do you think that sometimes people think that, oh, okay, yeah, that makes sense. I'm going to set up a separate tax account. They start putting money in there and then when they make their quarterly tax payments, they expect that— let's just use $2,500 a quarter. Just making it a round number, they expect that $2,500 to be an expense. It's like, no, it's not an expense. You just took cash out of the business. Not an expense.
It's just a part of the profit, right? You have to think, you know, really you just have to be able to say, okay, you know, my business profited $100,000 this year. This will be a rough example. So kind of all things equal, you know, everybody's got a ton of things going on in their, you know, personal life. So not everybody's tax situation is equal. But, you know, to, to kind of make this an easy scenario, you know, really when you think about $100,000, you think about a general kind of marginal tax rate for somebody depending on where they are. Let's just call it 30%. I mean, you know, that $100,000 right, that's profit. I mean, you should assume roughly $30,000 of that is tax, right? And so people forget about this a lot because most people have been W-2 employees, um, you know, a lot of their life or previous to agency. Um, and when you're a W-2 employee, uh, you really don't have to think about this too much.
No, you don't.
At all.
You think about it one time whenever you get hired on and you have to fill out the paperwork, and nobody is like, I don't know, what do you do, right?
How many allowances, all this, right? So you don't think about it, it's withheld, you know. I mean, just remember, if you were getting paid, what is it, uh, $100,000 is what, $8,300 a month?
$83,333 a month.
Yeah, $83,333. So you weren't getting $8,333 deposited in your bank account every month. Yeah. You know, it was, it was far less than that, right? Especially with, you know, withholdings from for any benefits or stuff like that. But far less than the $8,333 was coming into your account every month. And you got to remember that too. Now, when you're a business owner and you've got these distributions and that require you, they don't have any taxes withheld. Right, and you need to be able to pay on that, is, hey, there's going to be some tax owed on this.
Yeah.
You know, throughout the year. So yeah, it's always a lot of times that for those that don't really stay on top of financials regularly or, you know, staying on top of, you know, really tax payments, it's this end of year kind of crisis of holy cow.
Yeah, I haven't been planning for the tax portion of this, which I mean, like, again, we're not—
we don't want to go—
we don't necessarily have to go back over this today, but that's why, you know, it's January when we're recording this. And so you get to the end of January and you say, okay, my business made $5,000 in profit, you know, do February, $5,000 of profit. March, $5,000 profit. So, okay, it's $15,000 in profit for that, for that quarter. Go ahead and make it in your quarterly estimate based on that, you know, and which is why having my point in saying this is not to get into, well, what should the percentage be? I mean, that's why you work with somebody to figure that out. More so for the fact that you actually know for this quarter, this is how much profit actually had in the business so that you don't get to the end of the year into an oh crap moment to where it's like, oh my gosh, I haven't been doing any of that, you know, that sort of thing. Um, let me ask you, I want to go back to this or I'm going to forget to do it. One of the things that I was really glad that I did a long time ago, um, I don't know, 6 years ago, 7 years ago, maybe, I'm not sure when. But was automate the distributions. So it was like, I looked at the forecasting and basically at the beginning of the year to say, well, I feel pretty confident this is what it's gonna be. And I'm just gonna automate the distributions. I know that I can just $1,000 a month, $5,000 a month, whatever. And then hope that at the end of the year, based on certain planning and looking at it, I'll end up having more. In there that I can then distribute some of that money if I want to. But if I don't, okay, fine. And then making that adjustment once a year. And the reason I say that is, for me personally, is that the up and down of the revenue, which, you know, it could be somewhat consistent, but I mean, the up and down the revenue, I would just be like, oh, it's a good month, I'll take more out. Oh, it's a bad month, I take nothing out. And then it's just this constant up and down, and it begins to get really hard to budget personally on some of those things. And then at the end of the year, I would say, I don't know, how much did I take out? Man, I took a lot more out than I thought I did. I didn't realize I took that much out. Or the opposite, oh man, I didn't take it out as much. So that has been helpful for me. What do you think about people automating the distributions?
Yeah, I mean, the first thing we talk about is— so we use the word discipline when it comes to distributions. Um, you know, what we try and, uh, we're gonna get— yeah, I mean, what we truly really try to, to install, instill with our agents is, um, some discipline over, uh, you know, the, the personal side of the business.
Right.
So everybody works hard. You manage, you know, to, you know, be successful, grow the business, be profitable. You know, I think I've said this on a previous podcast, but, you know, try and think about running the business as if you had two more partners or even one, but call it two more partners. Right. Would you tap into the bank account as much as you do today if you had 2 additional partners? General answer there is no, right? Because a lot of times what we see is, you know, we— bottom line, you have sole owners, it's your bank account, just like, you know, you know, similarly to, you know, your own personal bank account. Yeah. If you need money, you tap into it, right? It's great. It is fantastic. It's an amazing— you know, so many people are fortunate, I think, that do have you know, I have gone into, you know, entrepreneurship and building a business and, you know, so it is a great thing, but it becomes really hard to manage things personally when there's no defined cadence or schedule to the way in which cash is distributed from the business.
I totally agree with that. So I can tell you, having a partner before or having partners, You're so right. I mean, you know this, but if you do that, you would not go in there and just rip $10,000 out of the account and then your partner say, hey man, what was the $10,000 withdrawal? Oh, I just moved it over. I mean, you know, maybe if you were doing $10 million, it would not be a big deal, but like, no, you're going to run that by your partners, right?
Or, you know, I I redid or decided to redo my bathroom. So, you know, I've got $5,000 at Home Depot this weekend. Sorry, guys. Yeah, but you can come over and use it. But no, it's just treat it like there's somebody else, you know, watching sometimes. And that's where our team really helps too, is like we are the ones watching, right? And so we do ask the question. I mean, we're not the partner, but, you know, hey, what was this for? What was that for? And it ends up changing behavior a little bit. But when it comes to distributions, you mentioned something I think a little bit more advanced that would be more along— I mean, I know you, you do utilize our CFO services and do forecasting and things like that. When you do forecasting, which is really nice, you can be very certain on what's going to happen, right? As long as you're disciplined and follow the path of, you know, decisions that you're going to make throughout the year. You know, if these decisions are held, this should be my revenue, expenses, and profit every single month. So you're able to do that. And obviously you work and refine it every month, but you're able to say, hey, I should, based upon this very educated plan, I should be able to pull out X amount per month. Conservatively. You wouldn't want to pull probably 100% of profit out every month, or that'd be— it just might get you into a different cash position that you might not want to be in, depending. But you can do that. And then you can review on a regular cadence to say, hey, should I take out more, right? Or should I hold off for a little bit? This is what Club Capital does, right? So we have just a policy in place amongst the partners that we, we take out 50% of last month's profit every month. So there's one distribution every month. Mm-hmm. And it's based upon last month's performance, right? Profitability. Right. So a little bit of a hybrid here is we don't have one static amount, but we do review it every month and pull out 50% of whatever last month was. And then we review quarterly from there and say, you know, based upon that, you know, obviously that other 50% is racking up in the accounts. Do we need to use it? Are there some investments we want to, you know, to do to, you know, for the business and for growth? Are there some marketing initiatives that we want to keep some of that other cash for, you know, or do we want to go ahead and, you know, distribute more of that.
If people ever wanted to know what you and I talk about on Mondays, this is like our conversations. That's why we decided to start just recording these fireside chats. And then we should just put that on a podcast. And I said, well, look, why don't we just do that? Why don't we just put it on a podcast? Because we ended up talking about these kind of things, you know. And, uh, you've got stories, uh, to be able to share. Well, I think that's good for this pod. What do you think? I think so.
I think hopefully that can be helpful. Um, uh, you know, definitely this time of year, uh, is when people think about this, you know, so much. Um, and they're actually reviewing the reports, you know, with a fine-tooth comb this time of year. Uh, I think just my parting thought would be, you know, it's not meant to be once a year, right? Do it every month, right? And there's so many, so many, uh, so much more or less surprises, you know.
Uh, on some of the takeaways that Mike has shared there, I think, you know, we talked about, uh, understanding distributions and, you know, some of that language about, you know, that's an income account, etc. That may not necessarily make sense to you, but I can tell you that, uh, and some of you it does, uh, you follow Totally along with that, you're really disciplined in, in, uh, where you spend your money and how you manage the cash, etc. Um, and just see it as, you know, it's the beginning of the year. See it as that this is a skill that you want to be able to develop. At the end of the day, you got into business to be able to provide for your family, to be able to make a difference, and all those kind of things. And financials is a big part of freedom. I mean, for many of you, Mike mentions this in the episode around you know, going from, uh, or maybe this was before we hit record, I'm not sure, but talking about going from a W-2 employee to, to being a business owner, you got into it to be able to have freedom, freedom of time and money and purpose and doing what you want when you want and having the money to be able to do so. And financial discipline is a big part of that. Some of it is being able to increase top-line revenue, uh, some of it is just being able to control spending and having discipline around that. And you've heard us say quite a bit, you know, having tight financials, you may not be able to get, you know, where somebody else is, but you can definitely improve and develop skills to do it. So anyway, reach out to the team at Club Capital, go to club.capital and book a no obligation. We're into January, just a couple of weeks into January at this point. Look, you know, you need to be able to get some A players on the team. Reach out to the team at Autopilot Recruiting, autopilotrecruiting.com. Use the code CLUBCAPITAL to get started. They've got a fantastic service serving over 1,000 agents across the country. I think the results speak for themselves. When you get them on board, you got to be able to train and develop those A players. Reach out to Coach P. Go to coachp consulting.com, coachpconsulting.com. It's also at the first of the year, you're starting to look at your metrics to be able to set your production targets for this year. What do you want to do in terms of your sales numbers? Well, to be able to do that, you know, you got to be able to market and you got to be able to market and be able to create leads for your sales team to be able to convert at the highest level. That's where DirectClicks comes in. Go to directclicksinc.com, directclicksinc.com. Artofone.com. Art of One, appreciate you all. Till next episode, lead well.
So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable? That is the question, and this podcast will give you the answers. I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting advisory firm for insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation? Check them out at club.capital.
