The 3-Part System Wealthy Painting Contractors Use to Pay Less Tax

If you click this video, you're probably a painting business owner who's tired of making good money and then watching a huge chunk of it disappear to taxes, lawsuits, and chaos you didn't see coming. And you're not alone. Most contractors are working their tails off to grow revenue, but they're building everything in their personal name, in one business entity, with no coordinated structure. That's risky, it's expensive, and it's completely fixable. Today I'm going to show you the trifecta A simple framework that helps painting business owners keep more of what they make, protect it intelligently, and pass it on the right way. If you clicked this video, you're probably wondering the answer to these 3 questions. Number 1, how do I legally pay less taxes without doing sketchy stuff? Number 2, how do I protect my home and assets if someone sues my painting company? Number 3, how do I organize everything? Business rentals, investments, and family so it's clean, simple, and scalable. If those questions are on your mind, this video is for you. I'm Daniel Honan. I'm a CPA and former painting business owner that's worked with over 500 painting businesses over the last 10 years. And what I've seen is this, most painting contractors don't have a tax problem, they have a structure problem. And once the structure is right, the tax savings, the protection, and the clarity start to happen almost automatically. All right, let's break down the trifecta. The trifecta is a 3-part system that aligns your personal wealth and family wealth, your investments and assets, and your business operations all under one coordinated tax and legal strategy. Think of it like a triangle, and at the center of the triangle is your 1040 tax return, because no matter how many entities you have, Everything ultimately flows back to you. Now, quick credit where it's due. This overall trifecta model was created by Mark Kohler, JD and CPA. We've adapted it and made it super practical for painting business owners. The 3 parts are: 1, your revocable living trust, the foundation; 2, your asset LLCs, the right side; and 3, your business LLC taxed as an S-corp on the left side. Let's start with the foundation. Foundation, the revocable living trust. Your revocable living trust, also called RLT, is the foundation of the entire trifecta. And let me be really clear, a revocable living trust is not a tax-saving tool. What it is is a control tool, an organization tool, a privacy tool, and an estate planning tool. Here's why that matters. The more successful you become, the more revenue you generate, the assets you acquire, and the more visible that you become, the more you become a target. Not necessarily because you did something wrong, but because opportunistic lawsuits happen. And most lawsuits don't start in a courtroom, they start with a search. Someone Googles you or looks you up on the county property records or searches your name in the state business directories. If everything is in your personal name, you're basically a neon sign that says, "Here's what I own." And when your trust owns key assets, your personal name becomes much harder to trace. Instead of Daniel Honan owns this home, this LLC, and this rental, it shows something like Oak River Trust or the Blue Ridge Holdings Trust. It doesn't make you lawsuit-proof, but it can make you significantly harder to identify and target. Now, inside the trifecta, the trust becomes a central private hub. It can own your S-corp shares, your LLC membership interests, your rental LLCs, your commercial building LLC, your personal residence, and any other titled property. It's not about secrecy, it's about privacy and organization so your family and your wealth aren't exposed unnecessarily. Now let's move to the right side. The right side, asset protection for investments. On the right side of the trifecta, we put assets, especially real estate. That includes long-term rentals, short-term rentals, commercial buildings, land, storage units, and sometimes syndications. And we put these assets into LLCs. Here's the key point. LLCs for real estate do not save taxes. They are purely for legal protection and structure. Their job is to contain risk because if something goes wrong in a rental—tenant injury, a contractor dispute, a lawsuit—the LLC keeps the problem from spreading into your personal life. Some best practices here. One, Use an LLC in the state where the property is located. 2, structure it as manager-managed, not member-managed. 3, have your revocable living trust own the LLC. 4, keep high equity properties separated. A rule of thumb is if a property has more than $200,000 of equity, it deserves its own LLC because the bigger your equity, the bigger the target. So that's part 1, foundation trust and asset LLCs. Now we're ready for the left side, and this is where the biggest tax savings usually live. But before we go there, let me quickly tell you about something I put together that ties all this together in a simple way. If you're enjoying this and you want a full roadmap to knowing your numbers and scaling a painting business without chaos, I wrote a book called Profitable Painter. It's built specifically for painting contractors doing roughly $500,000 to $2 million in revenue who want to scale profitably. And it walks you through the key numbers you need, the bottlenecks that hold painters back, and the frameworks we use like scale and gaps to help owners grow with confidence. If you want the book for free, just click the link in the description. All right, back to the trifecta, because the left side is where we can usually create the most immediate tax savings. Left side, your business, the income engine. The left side of the trifecta is your business. Your painting company belongs here. Your cabinet refinishing brand belongs here. Coaching, consulting, side hustles. If it's active income, it belongs here. This is where wealth is created, and this is where the most valuable tax savings live. Why the business should be an S-corp. Here's the big issue. If your business is a sole proprietorship or is an LLC taxed as a sole proprietorship, you generally pay self-employment tax on 100% of your net profit. That's 15.3% payroll tax layer on top of income tax. But with an S-corp, you can split income into two buckets: a reasonable W-2 salary subject to payroll taxes, and distributions generally not subject to self-employment tax. Here's a simple example. Let's say your business nets $100,000. If you take a reasonable salary of $40,000, that salary is subject to payroll taxes, but the remaining $60,000 in distributions is not subject to self-employment tax. That can often create $8,000 to $10,000 or more of annual tax savings. Now, I wanna be clear, S-corps are not for everyone and reasonable salary matters. We're not playing games, we're being intentional. When to convert the $70,000 rule. At Profitable Painter CPA, our rule of thumb is this: once you are consistently netting $70,000 or more per year, that's usually when the juice becomes worth the squeeze because now you can pay yourself a reasonable W-2 salary, take the remaining profit as distributions, and justify the cost of payroll and compliance. Now here's the decision matrix we use. High level. Step 1, are you eligible? Do you have an LLC or corporation formed? Step 2, are you profitable enough? Do you consistently net $70,000 or more? Step 3, does your state kill the benefits? There are a few jurisdictions like New Hampshire, Tennessee, and New York City where extra taxes can reduce S corp savings. Step 4, have you already maxed out your Social Security? If you already have W-2 income above Social Security wage base, your savings might be limited mostly to Medicare. Step 5, are you comfortable running payroll and taking distributions properly? Step 6, do you have ownership complexity? S-corps require pro rata distributions. Step 7, does your business own appreciating real estate? If so, we typically separate that into its own LLC because holding appreciating real estate inside an S-corp can create problems down the road. Step 8, are you converting from a sole prop with negative equity? If yes, you need planning around basis and contributions. Bottom line, if most of these boxes are green, an S-corp probably makes sense. If you've got several red flags, it may be a not yet. Now here's an important nuance. Reducing payroll taxes today can reduce Social Security benefits later. So the smart move is use your savings to fund your retirement, like IRAs and 401(k)s, because the return on that can be better than what you get from Social Security anyway. And that's how you turn tax savings into wealth. Trifecta plays, advanced layers. Once the foundation is in place, there are trifecta plays, advanced strategies that we deploy at the right time. I'll give you a few big ones. Play 1, S-corp holding company with child LLCs. If you have multiple service lines or brands, instead of multiple separate Schedule Cs, you can set up one S corp holding company with multiple child LLCs under it. These child LLCs are disregarded entities and all the net income flows into the one S corp tax return. This means one W-2, one set of distributions, one payroll system, and one tax return. Cleaner books, lower admin costs, and less self-employment taxes. Play 2, family business services company plus kids on payroll. Another big play is using a family business services company. The S corp pays your family services company for legitimate services like admin, social media, cleaning, and video help. Then that company employs your kids for real age-appropriate work. When done correctly, kids can earn up to the standard deduction and pay zero federal income tax. And here's the power move: because they have earned income, you can open a Roth IRA for them. A child who starts early can build tax-free wealth for life, but guardrails matter. It must be real work, market rate pay, and hours tracked, and also payroll done correctly. So you need documentation. This is not a loophole, it's intentional tax law. Play 3: Using real estate losses to offset active income. This one is advanced but huge. Real estate depreciation can create paper losses. But those losses are often passive and get trapped. There are IRS-approved ways to make certain rental losses non-passive so they can offset business income. The two main paths are real estate professional status, often for spouse, or short-term rental strategy when the average stay is 7 days or less with material participation and good hour tracking. This is powerful, but it requires discipline and documentation. Play 4. Starting with 401(k) for aggressive savers. A 401(k) inside your business can be one of the best ways to reduce taxable income today and build long-term protected wealth. It pairs perfectly with the S-corp structure because salary drives contribution rules, and this is how you keep more money now while building more wealth later. Play 5: Fully fund the trust. And finally, this is the one that most people skip— funding the trust. Creating a trust is step 1. Funding it means retitling your major assets so the trust actually owns them. An unfunded trust is basically just a binder on a shelf. Funding the trust is what turns the trifecta from ideas into a coordinated system. Summary: The trifecta in one sentence. So let's summarize. The trifecta is not about tricks, loopholes, or gimmicks. It's about intentional structure. It aligns how you earn money, how you own assets, and how you pass them on under one coordinated strategy. Or in plain English, keep more, protect it, pass it on the right way. Now, in the next video, I'm going to show you something that high-income painting business owners use all the time to reduce taxes. It's called 3 Ways Painting Contractors Use Real Estate to Slash Taxes Legally, and we're going to break down how depreciation creates paper losses, how to avoid trapping those losses as passive, and what you have to document to do it the right way. So make sure you're subscribed and I'll see you in the next video.