How To Pay Yourself In An LLC With Karlton Dennis

Welcome, everybody, to a live broadcast on a topic that's going to affect every one of you small business owners. Side hustlers. I am so. That didn't sound great. Side hustlers. I may need to change side giggers. Something like that. My name is Mark Kohler. I'm a CPA attorney, author, and here every week with you, excited to be on the entrepreneur platform as well as my own. And I have a special co host with me today. We're doing this together. We're going to throw down. I got Carlton Dennis here, tax strategist, enrolled agent, owner of KDA and the tax alchemy, training entrepreneurs, real estate investors, and other tax preparers around the country. He and I are just cut from the same fold, and I just love what he does. He's a huge YouTuber person. And you know what pisses me off? He's got more followers on YouTube than me. And I'm gonna. I'm on his tail. I'm gonna. I'm gonna get you. What do you call it? YouTube subscribers. I don't know. That's my problem. I don't even use the right words. Thanks for being here, Carlton.

Oh, pleasure. The pleasure to be here. Thank you so much for having me on. Listen, I have been following your YouTube channel for the last three, four years, and I've absorbed so much information. So thank you so much for inspiring someone like me to be able to grow my YouTube channel. I'm excited to be able to tag team this with you today and for your listeners out there. I know you guys have been waiting for this. So we're excited to be able to partner together and talk about something that's really important to you guys, such as llc.

Yes, very powerful. The title today topic is how to Pay yourself from an llc. And with one out of three working Americans now with a side gig or a side hustle, there's LLCs everywhere. And a lot of people think, oh, I got an llc. I'm done. You know, Nicki Minaj, you're nobody till you have an llc. You're like, no, we, you know, ain't nobody. I can't see it. I should work on that. But anyway, the point is, a lot of you are going to be affected by this. We both have videos on this previously, but we wanted to. To combine our superpowers. We'll take questions later, but we're going to dive into it now. This will be on the podcast as well as YouTube. So welcome everybody from wherever you're at. Okay, Carlton, I'll just I know there's a good way to tackle this. Obviously we're going to ultimately get to the promised land where the S Corp starts to play into this. But where do you like to start with your business owners when they have an llc?

You know, I like to start off with the mindset of an LLC owner. Because when you get an llc, especially if you're an early business owner, you think that having an LLC saves you money on taxes. So we first need to get the mindset correct that establishing an LLC does not simply save you money on taxes. All you've done is establish some liability protection and you separate, separated yourself from your business structure. And so that is like the thing we just have to cover. Mark. Yes.

No, I like it. And well said. I mean, enough said, people. LLC do not save taxes. But. And I love the asset protection point. They, the LLC sets the platform, the structure, because you may wake up one day going, ooh, I made too much money. Well, guess what? That LLC can spring to action. But until then, it's really not saving you taxes till you get to a certain point. We'll cover that. But yeah, it's. But the structure is important. It's good to have it there.

Yep. And that leads me into the second part of the mindset. What you choose to do with your LLC will determine how much you actually save on taxes. And I know me and you are going to get into that later on, but I just want you to know that if you're an LLC owner out there, you can take actionable steps to save money on taxes. And we're going to make sure that we cover that in today's video.

Yep. Yep. And here's another I love this mindset approach. And by the way, we did not, folks. This is live, uncut, unedited. We didn't even. We were like, do we have an outline today? Let's freaking go. You know, we like three points, you know, so I love this. We're going to see where this goes. But the other thing about an LLC mindset wise is I really like it for business owners because it gets them in the mindset of business ownership. You've got to get a different bank account. You've got to be thinking, maybe corporate credit. What's my URL? Do I have a. Do I need a dba? What's the name of my llc? How am I going to brand myself? Do I need a logo? And I really like the llc because even if you're just driving Uber, you know, get serious freaking A. This is a. The LLC is the gateway drug to, like, being a business owner. Let's use it. Right? Just get into it.

Yeah, it really is. Yeah. And when you have the LLC and you get past all those exciting things like naming it and getting your ein number, the next step is actually how do you fund your llc? And that's part that you have to take is really seriously. So one of the things that you have to understand when you're establishing a new LLC is, is you have to take the next step to figure out which bank do you want to bank with and actually take those documents that you were provided back from the irs, such as your ein number, your articles of organization, and go into that bank and go ahead and fund your llc. And what I mean by fund your llc. And mark, you know this. There's not many banks that will just let you open up a bank account and have $0 inside of that bank account. You might have to put $500 in for a business bank account or $1,000, and some banks even will make you put as high as fifteen hundred dollars into that business bank account. But you might be wondering, as a business owner, well, what happens with all the new money that I make? What happens with the money that I put inside of that bank account? How do I get reimbursed? And so what we like to talk about is one, making sure that you're funding your LLC correctly and then taking the next step on how you reimburse yourself, which leads into an accountable plan.

Yeah, and I love it. And I'll let you continue with that. But I'll add this in that process. Please. People realize one sheet of paper is also not an llc. You know, oh, I went online, I did my, paid my 50 bucks. I've got articles, people. The reason Carlton said it right out of the gate, one of the main reasons of an LLC is to get protection, legitimacy, and one sheet of paper that doesn't cut it. So we need to make sure you've got operating agreement, a corporate book, membership, certificates. Of course, we've got our law firm, Carlson's team works with our law firm as well. Our law firm will set up an entity in any state, give you all the pieces and parts, and do it affordably. Watch out for companies out there that want to sell you multiple. You know, LLC is unlimited for five, ten, or twenty grand or some crazy thing, and set them up in the state you don't even live. Yeah, we can do some advanced planning. We ought to do a show on some advanced llc. We talked about it with one of your groups the other day. But, but the basic LLC should be set up where you live. Don't get sucked into Wyoming or Nevada or something like that. Well, how do you like to reimburse? I mean, accountable plan? Some people book it as a loan, some just leave it in this paid in capital. There's a variety of ways. What do you like?

Yeah, typically I would like to have my clients who are new to business learn what an accountable plan is so they can get some of that money coming back out of their bank account and start fresh over once they've pay themselves all that money back out. But some clients will just leave it in their, their big account and becomes like an asset on the books. But one of the things that you want to make sure of is that you understand that the money that you're putting inside of your bank account, that money is not considered taxable income to you. So if you've ever wondered what happens when I file tax returns? Am I supposed to pull that money back out? You have the control to pull money out in the form of a owner's draw whenever you choose to. But that original money that you put in to fund your LLC is non taxable income because you're using after tax dollars.

I love it. I think of the movie Social Network when Mark Zuckerberg was getting his, I forgot his name now. That left the country, of course, renounced his citizenship. But he was like, hey, we formed this llc. I think in the movie they said Florida. Then ultimately they got Justin Timberlake to, you know, go get him legit. It's a great show on the startup of an llc. I mean, that was Mark Zuckerberg with Facebook. He's like, let's put in 500 bucks or whatever. And they, they just put the money in. And so it don't think it has to be anything too formal just going into the bank and saying, what do you need? 500 bucks? 100 bucks? 15? Just get it in there, open the doors, don't overthink it.

Yep, absolutely. And then once you get to a place, now that you have money in the llc, what happens now? Now it's time to actually get to work and start growing your business. But when you start growing your business, you start running into the second problem. Okay, I want to get paid. And there, there poses a whole lot of questions. How much do I pay myself? How much do I save for taxes? Do I just take the money out of my bank account? Do I wire it to myself? Do I zell it to myself? Do I venmo it to myself. And this is when we start really getting into a lot of the tax planning or advising for our clients, because we understand that there's just so many question marks in regards to this.

I like it. And again, we're just kind of riffing here. Actually in our studio. We have a amp over here with a guitar. Not that I'm great at it. I need my drum set. But so I'm thinking of riffing here. Let me say this with. We're going to call this maybe the Wild West. The LLC is the Wild West. It's nice because you can really put money in, take it out. And we're going to talk more specifically about that. But then we've got to move into the promised land, stage two, where the S Corporation is going to be become a part of this. And that's. So I was going to propose this. Paying yourself is loaded language is really hard because when people think, well, I'm going to pay myself, I need a paycheck. I need a W2. Those don't exist in the LLC. And I like the word you use, take a draw. And so I think in this Wild west format, I tell clients when you want. You're making money online sales, someone paid you. You're a landscaper, you're an affiliate, you're online. Whatever it money's going in, you pay some bills, you want to pay yourself. Just take this draw and your bookkeeping will reflect that. That's my take. How do you explain it to others? Or. There's so many ways to go at it.

No, you're absolutely right. That's the beauty of being an LLC owner is that you get to take money out as you please. But one of the things that you have to realize as an LLC owner is that you want to make sure that you're managing the amount of money that you have in your business. Because we've seen people take money out of their business for personal reasons. But then they get towards the end of the year and it's time for them to start figuring out their taxes and they start realizing, like, hold on a second. My taxes are more than what I actually have in my bank account. And that's when they get to the place of improper planning. And now they're on payment plans with the IRS and they start jumping on YouTube and bouncing around on videos like mine and yours, Mark, to try to figure out a better plan of how they need to tackle their taxes. As an entrepreneur, I like it.

Oh, man. And I want to get into mindset on that business again. But let me. Here's what I suggest, and I know you do the same. I've seen your info on. This is perfect. People pay your pay the IRS First. I love the, the concept that it's not your money until you set aside what's there for the IRS. So, yeah, take 10% of your sales, take 30% of the bottom line, take 20% of a number, find that number and work with your accountant, work with your coach, whoever you're working with. I know you and I teach clients this all the time, but I'll tell, like, say it's a realtor. When they have money come in, just take 10%, put it over here in a tax account. Before you take any money out for yourself, set that aside. And I think that's a way of paying yourself. You're setting it aside for the irs. Then you can say, now whatever's left in the gas tank, I might want to take some out. What do you think?

I like that. Which means that I have to be a responsible enough business owner to know that I should probably have a separate bank account set aside for taxes or AKA savings. So when I go in initially with my paperwork, my ein, and my, my articles, I should be going in with the intention of opening up more than just one account. Just a checking account might not be enough if I'm trying to be a true entrepreneur who is planning for taxes and also planning for opportunities.

I love it. And back to this mindset thing. I love that you brought that up early on when you said when you're. You've got to respect the LLC and the LLC and the books, and you've got to know where the money's going. And so this is your, this is your training ground. This is a great time, everyone. When you have an LLC, get familiar with Quicken, QuickBooks or whatever the accounting software app you want to use. Now you're a business owner, no one's tracking it for you. It's a whole shift. And the more careful you are with your books, you're going to be better business owners, people, successful business owners, freaking know bookkeeping. They just.

Yep. Yeah, they do. And when it comes to that mark, it's so funny because I remember the first time I opened QuickBooks and I'm like, where do I start? There's like so many different tabs now. It's a little bit easier. It was so important for me to learn how to swim before I decided I was going to assign that swimming lesson to somebody else. Right. I just want you Guys to know as an entrepreneur, you don't want to get to a point where you've, you've grown and you don't know how to read your own numbers because you never took the time to set aside and look at them or enter in your own numbers. I think it's just important to just know how it feels before you completely outsource this. Because I believe your best time is spent obviously, you know, being in your business selling products or services and providing the most value to the marketplace. But I also think it's important for you to understand your full business and that's also making sure that you're looking under the hood of the car and knowing what's going on with your accounting.

Freaking love it. Okay, so spoiler alert everybody. This is the climax of the wild west. The first stage. Just take money out when you want it. It's called a draw. You've set aside money for the irs. You want to take pay yourself, pay yourself. You do not have to wait for a paycheck. You are not going to 1099 yourself. You are not going to W2 yourself. In fact, technically you cannot. If you have an accountant out there that's saying you're going to pay yourself a W2 out of an LLC not taxed as an S corp. We're coming to that folks. But if you just have a plain old LLC, there's no 1099, there's no W2. Just take the damn money. When you want to pay yourself, just take it. That's the easy answer. An account for it.

Yep. And Mark, listen. The reason why Mark is saying this guys with so much severity is because you receive no tax benefit for placing yourself on W2 as an LLC owner. When you place yourself on W2 as an LLC owner, you do not get a payroll tax deduction because you have not switched over to an S corporation. So you're paying into payroll taxes essentially for no reason. And that really costs you money. Especially knowing that you're already subject to self employment tax. Yeah.

And talk about getting into an audit. It just looks weird. There's no line for it people your accounts going to. If you have an accountant trying to shoehorn you into it, you got a bad accountant. Okay, so now we come to I've been paying myself, I got an llc and what's this S Corp thing? How long can I. You know what? And some people just stay in this realm where they're making 20, 30 grand a year. The LLC is perfect for them. How do you like to describe the Transition to stage two.

I like to look at it like you're graduating from junior high school and you're stepping into actual like high school college, like you're putting on this, this new jacket, you got this new swag and you get to benefit from it. But before you go there, you have to make sure that you're ready for this stage. So if you're a business owner that's making, you know, 20 to 30, maybe you peek over to 40 grand, sometimes LLC is, is where you stay. That is your arena, that is your ballpark. You're cool taking money in and out of your bank account. Things are real easy for you. You file your tax returns at the same time every single year. It's all gravy. But when you start to jump into the 40,000, the 45 or the 50k net profit, which means after all expenses and me and Mark are talking about towards the end of the year, we're talking around November, December, you know, you're going to make around 40, 50k net profit. Now we want to start getting some tax savings. And what we mean by tax savings is all these business owners who are operating as LLC are paying the same taxes. They're paying federal taxes to Uncle Sam, they're paying state taxes, if they're in the state, that taxes and they're paying self employment tax, which is Social Security and Medicare which is at 15.3%. But you become a point in time where you don't want to pay 15.3% on all of the money your business is making. So now you graduate and you put on this new jacket like me and Mark are saying, and you switch over to an S Corp. Now, in order to make sure that you're doing this correctly, there are some steps involved. There's this 2553 form that you have to familiarize yourself with or you'll hire a professional like Mark and myself. And to be able to succeed in getting that document submitted to the IRS in time for you, once the IRS accepts this document, this 2553 form, you are now an S corporation, which means you have new responsibilities and new duties. And Mark, you can kind of fill them in regards to these new duties. But I want to make sure that you understand the process of switching over to an S Corp. It's the 2553 form.

Oh, I'd love it. Yeah, let's just keep unpacking this. And so what Carlton alluded to by referring to November, December, is any of you out there right now, we're shooting this video Here in June, you're an llc, you're having a good year, great, keep it up, tiger. You keep going. And then all of a sudden you get to September, October and you're like, I'm taking home pretty good. I think, you know, I'm taking home some good money now by the way. We got to, we could do shows all day long. And all the write offs you should be taking dining and auto and travel and equipment and computers and technology and cell phones. We loved all that stuff. But after all your expenses, which are the same in an LLC or an S corp, you're writing off everything under the sun, you're starting to take home that range of over 40 grand that Carlton's talking about. You can actually in the fall back date to become an S corp for the whole year. If you're not an llc, you can't do that. So this steps that Carlton's talking about, you're not going to do. You can't look into a crystal ball and do it for the next year. You're allowed to look back in the first year, you can look back and your accountant's going to attach the right revenue ruling a letter with the 2553. It's not just go online and click, click please hire a professional. These 2553, we charge two or 300 bucks. I mean, it's not hard, but there's a lot of steps involved and I know you're in the same range pricing wise, so it's something you do in the fall and. And that's okay.

Yeah, absolutely. Because you typically don't know as a business owner how profitable you're going to be until towards the end of the year, like November, December. So we can make that S election for you late and sometimes we even make it on the tax return. But once that S election is made, here's where some of those tax savings really start to kick in. That 15.3% which we call self employment tax, which you were paying on all of your profit before as an LLC owner or a sole proprietor, now we are only paying 15.3% on whatever we identify as payroll for ourselves, which invites in a whole nother conversation that me and Mark call reasonable compensation. You see, with S corporations, when you become one, the IRS makes you take what's called a reasonable salary from your S corporation. And all that really means is that you're just going to draw a W2 paycheck from your business. So you're only paying self employment tax on the amount of money, AKA Social Security and Medicare that you took out of your business in the salary. And so that becomes tax deduction for this new S corporation. And me and Mark and paint an example for you guys. You know, let's just say that we were making $50,000 this year selling T shirts online. Well, if that's our profit for the year and we decided to switch over to an S corp now we're going to need to take a reasonable salary and we might cut this reasonable salary in the months of November or December, right at the end of the year, well, I might want to take a reasonable salary somewhere in the range of 30% or more of my net profits. So maybe I take like $15,000 as a reasonable salary in profit. I am going to now receive a $15,000 tax deduction inside of my S corp because I'm the employee that's taking that salary. But I'll still pay my taxes. I'll pay my Social Security, I'll pay my Medicare, which is 15.3%, right guys? But now I'm only paying 15.3% on that $15,000 instead of that full $50,000 like an LLC owner or a sole proprietor would pay. And that's where the tax savings really starts to come in. When you understand the S corp. And

the interesting thing here, everyone is you're not saving income tax, you're not saving state tax, you're saving self employment tax. Again, you still have all the same write offs. If you made 50 grand, you're paying tax on 50 grand federal and state. But we're only paying self employment tax on that payroll portion. The beauty is too. The payroll doesn't have to be difficult. Carlton and I have payroll teams most small business accounting firms do where they can do your payroll quarterly, they can submit the form at the end of the year. Different accountants might approach it differently in the way they bill for it, but it doesn't have to be a pain in the butt. It's not like, well, Mark, I don't have money one week. Do I still take a paycheck? No, no, don't worry about that. It's kind of an after the fact process. We're going to see how the year goes or the quarter because once that train leaves the station next year, your account is going to be every quarter asking you how much did you make? We got to kick out a payroll report. It's these 9, 40 ones. So just let your accountant do that piece that's you want to know what it is and we'll call it the split. Whatever that Payroll split is how much is W2, how much is profit. But you know what's funny everybody? You're still taking a draw. You just take a draw. Whatever you want to pay yourself, just take a freaking draw. The payroll report is something for the accountant and you to strategize it about.

That's, that's the beauty of also switching over to an escorp. Most people think that switching over to an ESCORP is so complicated. It's going to be so many hoops to jump through. You still get to take owners draws. You still get to transfer that money out of your bank account into your personal account as you wish. You just have a few additional steps. Maybe you're tracking your min, your meeting minutes on a yearly basis because you have to have meetings with yourself or with your employees. Or maybe you have to file your tax returns a month earlier and make sure that you're taking a payroll every single year. When you really add up those three things, it really doesn't become such a cumbersome when you think about the amount of money you're saving tax wise. Especially knowing that you're truly trying to grow the profits of your business year over year.

Well, I love it. And I'm going to throw down here with you too, Carlton. I do not see. I want my clients, even in an llc, to have a board of directors, a board of advisors. So you people don't see doing minutes. We have a company maintenance program at our law firm. Well, for 150 bucks a year we'll do the minutes. Your accountable plan. It's all in your little corporate book. And you want to do that even in an LLC people. Because now I can write off my trip to New York, my trip to la, my whatever. I'm going to meet with my mom, dad or best friend. So no, I love that. And one other mindset thing. This is tricky everybody. Once you make that election to be an S corp, please tell your accountant, your insurance agent, your bookkeepers, your professionals you work with that you're an S Corp. You're still going to keep the LLC acronym, you know, ABC Company, comma, llc, that's fine, you're still in the state, an llc, but for the irs, you're an S Corp. And if you walk around telling your accountant, oh, I'm an llc, we're going to go, why aren't you an S corp? Oh well I'm an S corp. Well then lead with that for crying out loud. Le know that you're now an escort. Own it.

Yeah, Mark, what do you say to customers that you know, ask you, well, should I just go straight to an S corporation or should I set up an LLC and then wait to switch over to an S corporation? And what is the difference? Because that gets brought up all the time.

Yeah, I, if, if I, someone walks in the door and they're already making 40 to 50 grand, maybe they're a realtor. They got a lot of people show up and go, I just paid my taxes, holy crap, what happened? And they see this self employment tax line. So if you're already making net 40, 50 grand or more, then I'm going to lead with maybe an ink. We're just going to go straight to a PC, a pllc, an ink. There's so many different formats. Your state may be a little different than the state around you. You might be a licensed realtor, an engineer, financial advisor, insurance agents. You might have to choose a different entity. The lawyers will help choose the right entity. But yeah, I'd come right out of the gate as an S corp. If you're already making that type of money, don't wait and see. Just.

Yeah, you agree? I would, I agree. Yeah, absolutely.

What do you think about payroll at the end of the year? I, years ago I used to be so scared. I tell clients, do your 941 every quarter and I think sometimes it's good because it gets them making deposits throughout the year rather than a big wham in January. But some people feel like hey, you can just do one big paycheck at the end of the year per se. You're not going to write yourself a paycheck but you're going to report it. What do you got? What do you like to do there?

So this is a good, a good topic to have. It depends on the business owner. When I'm dealing with a business owner that's more responsible, I'm actually going to have them take payroll towards the end of the year and leverage some of that business income to reinvest back in their company or even buy real estate. Right. Because we know if they really participate and do some of the things that me and you know, in the tax code, we're going to use the losses to offset some of the flow through income anyways from their S corporation. So I don't want them to take too much of a salary. Right. But then I have some clients that you know, you know they're making a lot of money but they're not as responsible with managing things when it comes tax wise. And that's part of the reason why they came over to my firm. So I am going to put you on quarterly payroll, even though you have a lot of cash coming in, just because I know you came over to me for previous tax issues that you might have had. So it's really based off of the customer. But the reason why we talk about taking payroll towards the end of the year, for some of you guys that are trying to understand this, is because when you think about it, one of the benefits to being a business owner is you make money first, you spend money second, and technically you pay IRS third, and then you pay your taxes. That's when you, when it happens right when you're a W2 taxpayer, you get paid or you make money, IRS gets paid, and then you get to spend whatever is left over. It's kind of the reverse. So as business owners, you almost want to have that money and reinvest that money to grow your business as opposed to just paying into payroll taxes when you don't know yet how much you might profit. But one of the things that you do have at your disposal as a business owner is you have the ability to file zeroed out quarter one, quarter two and quarter three payroll forms. And you could take a year end payroll, but that means that you have to budget for the year in payroll. And that's why me and Mark are making sure that we're careful in saying this, that you want to make sure you're planning that out with a tax professional.

Yeah, the B word is the F word because some of you hate to hear the word budget. And Carlton was being very nice when he said the more responsible business owner. So, and frankly, I'll be. I'll own this myself if I can do deposits throughout the year. I want to do some. I want to try to stay ahead of the curve a little bit because I already know that there's a baseline of what I'm going to generally owe. I may not take the bigger paycheck or payroll allocation till 4th quarter when I really know how it's going to sift out. But people leaving yourself with a big tax bill at the end of the year, remember this is right after Christmas. It's the new year sometimes many business owners have. Unless you're in retail, December can be slow. And so you're now hoping that you're going to dig up money out of somewhere because all these deposits have to be paid in January. You can't wait till April or later when it comes to payroll stuff. So, yeah, really know yourself and own it. I like that.

Yeah, I like it too. Now let's jump into some of the mistakes that we were talking about earlier, Mark, that me and you see with LLC and S corporation owners outside of taking payroll with no S election, we also see that certain business owners are underpaying themselves when they're an S corporation owner. Can you talk a little bit more about the dangers of underpaying yourself?

Yeah, no, I love it. I love that what we're hitting here, the, the thing is this reasonable salary that Carlton referenced is about paying your fair share of fica. And another F word that we hate. Fica, Social Security, Medicare. And so that reasonable salary needs to be there. Now this is where, you know, notice how everybody. Carlton threw me this one because this is a dangerous answer. And so I'll say this is the one that freaks out accountants all over the country. Okay? So you accountants out there that are like whoa, I wonder what Mark's going to say. Let me lead with this. In 25 years, this is why I'm the old guy. Carl can throw it at me. In 25 years, I've never had a client audited for taking too little of payroll. Never. And so we want to find that balance of taking just the right amount maybe to fund a 401k, a solo k. There's all sorts of competing interests here, but I don't want to pay any more FICA than I have to. And so we've created a matrix that is a starting point. We might do payroll of 30%, 40, 50% payroll. So in that example of someone making 50 grand selling T shirts, Carlton said maybe 15 grand in payroll. Well, you might be in that 15 to 20 range. You're going to find that range that works. But there's accountants out there or clients that take zero or five grand. Well, the IRS is going to be pissed. And so you got to get up to a point that the IRS just says yeah, they're not worth chasing. And we've a lot of accountants think I'm aggressive and I'm like bring it. I'll freakin sign your tax return at 30, 40 or 30 or 40% allocation. Especially if you're making 50 to 100 grand. So that's where I fall. What's your take on it? Where do you like to be?

I love that I like to stay right around 30% unless there's a reason why I need to go higher. If I'm qualified, qualifying my client to get a mortgage loan. I want to make sure I'm also speaking with the mortgage lender ahead of time to know exactly how much the mortgage lender wants to see on the tax return, if we possibly can get that information. If I know a client's making a huge retirement contribution, so they need to take a salary and then, you know, allocate some of those funds over to a retirement account but still show enough income for what they might be trying to do. But outside of that, no, I want to make sure that I'm not paying into any more fica. That F word oh just rubs me wrong. More FICA than I absolutely have to pay. And I want my customers to understand that completely as well. But I like that 30% as a ballpark because it typically works with a majority of taxpayers I work with.

Yeah, I love it. Well, I'm going to mention one more mistake and then maybe you mentioned one and then we'll do some questions. So folks, please ignore any bots that are posting about cryptocurrency or anything out there. If you have a question that maybe you posed 20 minutes ago, please retype that question so it gets caught up in the feed here. Patrick, be ready to roll here in a moment. But one other mistake I see just in general, simple and easy is our business owners that think it's just going to magically happen. Folks, you are the captain of your ship. You have to take some ownership in making sure these things happen. And sure you're going to spend a couple grand doing this process, whether it's an LLC or an S corp or payroll. You've got tax returns and bookkeeping to do. That's okay, Carl, not I want to save you 10 times whatever you freaking pay us. So. But just own it, understand it. Do your commitments and your company maintenance with for legal purposes, do your tax return, get your deposits done, know your books, know these concepts when you talk to your accountant. Don't let them push you around. You freaking demand good planning and we, we've got our teams that'll help you if, if not. But yeah. Any thoughts on that or another mistake or final word of wisdom here on that?

My thoughts on that is it's. It's like having skin in the game, right? It's like what you just said. You are going to pay a couple of thousand dollars to get your LLC maybe transitioned over to an S corp and filing the tax returns and taking payroll. This is a part of being a business owner. You have to be okay with it and you have to be willing to take the actionable steps to reach out to your tax accountant or your tax advisor to request these Things your tax provider might not be as proactive as me and Mark are in regards to trying to get you to take action on saving money. So you need to be responsible enough to go have that conversation when you hear this information.

Love it. All right, well, I. Carlton, you're such a pleasure. This is so easy with you. We just ying and yang here. Just throwing around the ball. I love it. Playing catch.

Put it in the comments section. Are you. If you're loving this tag team with me and Mark and if we do more of these.

Yeah, if you guys are loving this. Want to see more of this? You tell you, throw it down. We'd love to do more. Okay, what do we got? Patrick, first question.

Okay, this is from Woody Dunlop, setting up a new LLC for my new travel business. Can I move my existing E commerce business into this new llc?

Oh, okay. So it sounds like two businesses at least a travel business, whatever that may be. That's. And then an E commerce can combine them. I'll throw the first one at you. What do you think, Carlton? How would you reply?

You could run your businesses under the same LLC if you'd like to. When it comes to these two businesses, I would almost want to keep them separate personally, depending on the profits of the business. Because one business is a service based business and one business is a product based business. So those are just two different types of liability. I might want to just separate those two businesses out and just have them running in two separate bank accounts and I can track them separately inside of QuickBooks. But I also want to be able to ask you how much revenue you might be making because I don't want to have you paying so much in accounting Feees to operate 2 LLC. But if I'm living in a perfect world, yes, I'm going to keep those two businesses separate.

I like it. That. And for. And there's a point of graduating here too because at the baseline you're going to have two LLC or two bank accounts and two schedule cities. C as in Charlie folks, two sole proprietorships. And that's okay. But once they combined are making more than 40 or 50 grand, I would like to merge them into your parent company and that's where your S Corp comes in. So the S Corp can have multiple streams of income. I have One S Corp in my life. It may own three or four LLCs, URLs, trademarks, DBAs, whatever. So level one, keep them separate. Level two, merge them and take one of those LLCs and make it an S corp. Create a subsidiary with the other one, there's all sorts of ways to organize it. Make sure you get with one of the lawyers and to organize it. And then we'll have the accountant, whoever they are, get on the line, make sure we're all on the same page. But they're a little reorganization as you grow.

I love that. Yeah, I'm the exact same way. I have one S Corporation. All my LLC subsidiaries fall and roll up into the S corp. And it just works out really well that way, especially for saving money on self employment tax.

I love it. Okay, next question.

All right, this is from Sarah Finia. March 8th of this year, I opened an LLC using a sole proprietorship and would like to switch to an S corp. How much time do I have to make the switch?

Ooh, well, I'll take first stab at this one. So they formed their LLC, Sarah, on March 8th. How much time do you have to switch? Well, before you even get to that question, Sarah, I'd ask, should you, where are you at on your income? You heard us talk about it previously. If you're already making 40 or 50 grand, I would say switch as soon as possible. Get used to it, own it, get on it, go. If you're not sure yet, then you could wait till the end of the year. There's different ways to skin the cat here. What would you say on options?

I wouldn't wait. Too many taxpayers forget to do things. So if you find out that you are at 40 or 50,000 and Carlton and Mark are telling you that they feel comfortable having their clients switch to s Corps at 40 or 50,000, as soon as I hear that information, I'm acting on it. Like I don't want to take another step. Like I'm going online and figuring out who can help me submit the 2553 form to get me transitioned over to an S corporation, I would do it immediately.

Yeah, and involve your accountant. If you're trying to find someone to do the 2553, you need to step back and go, who's going to be my tax advisor? Carlton and I both train and have groups of tax strategists and advisors. We're combining our forces more and more. But you've got to make sure your advisor that you're going to use in your tax preparer is on the same page with you because they may poo poo the idea. And right there, you know, you got the wrong person. But to be totally technical, you could pull this off by the latest, in my opinion. First week of January of 2024, because if you're going to make that selection In January of 2024, you're knocking out your. Your final payroll with deposits by January 15th or the end of January, depending on. So you got to be moving on this at the latest in December, getting in. In contact with your accountant. But that. But again, I like Carlton's. If you don't know where you need to go, get it done, take some action.

Yeah, so. Yeah, and the reason why Mark is saying that, guys, in case you're. You didn't catch that, he's saying January because he understands that's when payroll taxes are due. So if you're going to be transitioning over to an S corporation, you're going to have to process payroll. It's one of the requirements of an S Corp. So we don't want to set you up for failure. Just know that if it does make sense to transition over, that's when your deadline is.

Love it. Love it. Next question.

All right, the next one is from Bernadette Coloza. What if I sold my escort business because it was not making money? Should I dissolve the S corp and create llc? Is if I want to do consultations and go into rental real estate.

Oh, okay. Do you want to take a stab at that, Carlton? Or I could set the table. What should we do?

I'll take it from the back end.

All right, so Bernadette has an S corp she sold. The first thing I'd say is, Bernadette, no offense, you didn't sell your S corp. You still have your S corp. What you did was sold the assets in your S corp. So when you start to approach this, make sure you reframe that with your professionals. I had an S corp. I still have an S corporation, but I sold the assets in it. And she's saying, should I shut it down and go to an LLC for some real estate consulting And.

Yes.

Okay, now remember, if you're going to go to real estate holdings and you're going to buy rental properties, that's a separate LLC in and of itself. Many of you know the trifecta. Both cartel and I teach left side, right side. Leave operations on the left, put your holdings on the right. You might have two llc, one for holding rentals, one for operations. Bernadette, I mean, this is where a personal consult would really play out. Because why dissolve an S corp if you might need it? I'd. Yeah, don't shut it down to just form an llc. I. And then have to redo it. What would you. Yeah, what would you add it to.

If I've already established that ein number and I built business credit on it, I filed tax returns, I would, I would have a hard time just letting that ein number go. Especially if I know I'm starting another ordinary income business which is going to lead to self employment tax. I'm going to need the S Corporation in the future anyways. Right. So I think more importantly, I would try to figure out why are you trying to get rid of that S Corporation. We can set up a separate LLC for asset protection and to hold your investment property, but why are we trying to get rid of the S Corp and go to an llc? That would be the question. I would.

I got an analogy. This just came to me. If you have to look at an LLC versus an S Corp, the LLC is kind of like your Jeep Wrangler. It can go anywhere. It's versatile. You can take the top down and whatever. When you go to the S Corp, you're getting into that sports car, you're like, okay, I'm going to freaking make some money. I want to be efficient. I want to get in the fast lane. Well, if you get rid of a couple passengers and you're like, I don't know if I don't need the S Corp as much right now. Don't sell the whole car and go back to a Wrangler when you might have to upgrade a year from now. Just bring it down a couple gears. Slow down the car. Let that S Corp work for you. Focus on building your new revenue, building that new business. Don't go to the dealership and go through that huge cost of just trying to switch everything out. Just, just bring it down a little bit. And that was a sweet analogy.

That was a really sweet analogy. I was like picturing, I was like, man, it's still a sports car. You still are going to have those S Corp payments. But like, when you think about the fact that I'm gonna have to go back to an LLC and then eventually back to an S corp, that's probably gonna end up costing me more. I should just slow down the speed and park the car for. Right? Yeah.

You know, and now let's make next level. Now I'm thinking, I'm thinking Ferrari Red, Christie Brinkley Vacation. Yeah, we got. Yeah, I mean, that's a classic Chevy Chase little shout. All right. Okay, next question.

All right, the next question is from Terry Kim. What if you start up with possibly no income, would you still start an S corp? Because it will eventually get bigger if you don't do Distribute distributions, have losses and no reasonable salary.

Oh, I. I'm gonna throw this one back at Carlton. This is what he covered right out of the gate. What do you think?

Yeah. So we talked about this right at the beginning. If you're just starting out, you're really kind of in that junior high school that we were talking about where you just have an llc and that's completely fine. You have liability protection. You separated your business from yourself. You're still growing when you start to get to business profits. And me and Mark identified that right around to be 40 to 50,000 in net profits. That's when we look at switching over to an S corporation. But the LLC is going to be your. Your starting blocks, your training shoes, pretty much where you'll be until you. You make that profit.

I love it. I echo. Done. I don't. Enough said on that one. Next question.

All right, the next one is from Privateer Merchant. So if I make 75,000 at my job, does that change the amount I should be shooting for before I change my side hustle from an LLC to an S election?

Wow, I love this. What was his first name? His first name again?

It's from Privateer Merchant.

Privateer Merchants could be male or female. Okay. I just trained on this yesterday. A group Carlton. So here's the issue, everybody. Okay? Now, for those that are getting technical, I'm going to throw down a little tech here.

It's a good one.

Yes, it's a good one. So the question is, people, day job, W2. What do you say? How much? 75 grand. So he's got a day job W2 of 75 grand and a side hustle. Very common estimates are 40 million Americans are in that. That, that box.

Yeah.

Well, what privateers getting at is there's a limit on how much the 15.3% applies. There's this payroll limit. It's $160,200 this year. So you only pay 15.3% on $160,200. Then it's 2.9% for the next 50 grand or 100 grand, whether you're single or married, then it goes to 3.8% on everything above it. So there's these tiers. These tiers matter. So what privateer is getting at is if I've got a side hustle and a W2 of 75 already, what should my payroll be in the other company? Well, there are so many factors because if you've got a full time job over here, I might use a lower payroll allocation here because you can argue to the irs. I'm more hands off anyway. Right, Carlton? And then you got to figure out how much payroll do I take or not. And this is where, if I have a doctor with 250 grand, W2 and a private practice, we're going to have a different threshold there, too, so. Oh, it's very, very complicated. Where would you go with this, too? I mean, trying to unpack it.

We would obviously need to get more information. But to paint a picture of why this is very complicated, just imagine that you're a W2 salary earner and making 75,000, and your S corporation is making like, 200,000. Or your LLC is 200,000. You might now want to switch your LLC or over to an S corporation and take a salary, so you get that deduction for paying yourself. But you're finding out. Hold on a second. I don't want to overpay into Social Security and Medicare if they have a threshold on when it stops having to factor in so much. So we have to start looking at how much should we draw out of your LLC in the form of salary and tax it over as an S corporation. And this is a number that we won't know unless we know your numbers in front of us and we're calculating with the taxes.

Yeah. And while we're going deep here, I'll mention this as well, people. You want spoiler alert or inside info? The payroll allocation is not based on your net income. It's based on your draws. Now, that's now 99% of our. Well, 90% of our clients, when they make money, they draw everything because that's their business, their livelihood. But if you're reinvesting your profits and you're not even taking draws, you're not required to take a payroll. So that's another technical piece that when we're doing a one on one with a client, we're gonna go, oh, you got a day job making 75 grand a year in your side hustle. Are you taking draws? I'm not even taking draws, But I'm making 100 grand.

Whoa, whoa.

That changes the equation, too, because if you're reinvesting that profit for the future, then you're not even required to take a salary. We may stay. Well, you're. No, no, we want to make the S election because that'll carve out all that fica. That would have been an llc. Yeah, that S corp would be absolutely critical. With no payroll. That'd be kick ass. Boy, that I just kind of wowed myself.

It's Almost. The. And. And the reason why is because you're already paying into Social Security and Medicare on the W2 side. So maybe I don't take a salary on the S. Corporation side and just only have the S Corporation income subject to just federal and state tax.

Oh, love it.

Yes.

Yes. Oh, man, I love you, Carlton. We're thinking the same way here. Okay, maybe two more questions. One more.

Okay, this time for one more.

I'm sorry, Two more questions. Give me one.

Okay, gotcha. All right, this is from Junior. I formed an LLC in California. In March 2023, I was informed I need to submit a California statement of information. Can you guys explain what this is?

Boy, this is a hard one. I'm going to say this, this is good for everybody out there. If you formed an entity in California or any state this year, there's a lot of states that are going to require a follow up declaration as to officers, managers, a statement of information regarding your address, registered agent. Not all states do this. But what this question is bringing to point, the point here is you, you're doing a diy. You're doing this yourself and you're trying to figure out what's the next form I'm to follow. You know what the truth of this answer is that you're asking? I don't know. I let my paralegals freaking do it. And I'm gonna, I'm gonna challenge you or ask. You call the law firm, talk to. I'm gonna. You're gonna go with Kristi Rice. You're gonna call Christy Rice and she has a whole team and she knows all the rules by every state and she's going to go. What's her first name?

Junior.

Junior. She's going to say, junior, quit trying to do the plumbing in your house at Home Depot. We're an expert here. You're. You're playing around with fire here because you don't know what you don't know. There's other forms you need to fight. You got the 568, you got a deposit on the minimum tax. You've got other forms that are going to blindside you. Let the paralegals do this stuff. It's a few hundred dollars a year to get it organized. I, frankly, the answer is I don't know. I let my paralegals do these little things. And people, you should too. Don't get caught in the minutia. That's my take. Do you know the answer anyway? Do you want to. I mean, the statement.

Oh, no, it's just. It's just one of those requirements that's in the state of California for having LLC. Just like you have to pay your $800 state filing fee, you're going to have to provide a statement of information declaring who are the owners and operators inside of your company. It's one of the requirements of being a business owner. The reason why Mark is telling you this is probably something you should outsource is because we see so many business owners forget to submit their statement of information, forget to pay their 800 or their 100 or whatever their state filing fees are. And it's as simple as just hiring somebody that's on top of this full time as a profession. And so you don't make mistakes.

Yeah. And better yet, Carlton, you get these emails all the time. People as soon as you open a freaking entity, you're going to get deluged with mail that if scam artists that are saying you need to file this, you need to pay this. And people are scared, they just pay it and it's a scam.

Fake departments that are telling you to register this, register that.

Yep. Fake state seals. And so if you're on our company maintenance program with our paralegals, you just fax it in or anybody fax, take a picture, email it in, whatever, and then the team will tell you, oh, don't pay that. And so you want to outsource all this maintenance stuff because you don't know what you don't know. I don't. I let my team do it. Last question.

Okay, the last question is from Jonathan Jobin with three operational LLCs under 1s Corp. Is there any problem paying minor children Family management company from the LLC they actually worked for for bookkeeping especially rather than the S Corp. Oh, I love this.

This is right up Carlton's of mine alley. I Do you want first task? You can take first shot at this if you want.

I mean, I want to know how you would answer this question. Because initially in my mind I'm thinking I want the S Corporation to take the deduction for paying the the management llc and then I'm going to take management expenses such as paying the children inside of the llc. Since the LLC doesn't allow for FICA taxes when I pay the children out as long as I'm paying them up to the standard deduction. So that's, that's my initial way of wanting to do it. 1. Yeah, yeah, I would want the children.

Here's the trick, Carlton. I think Jonathan is someone planted him in the crowd because Jonathan here's the trick here. Now listen to his question, everybody. This is why we're paid the big bucks. He said he has an S corp with three subsidiary LLC that feed into the S corp. And then he threw us kind of a red herring. He goes, now I want to pay my kids out of a management fee or I want to do a management fee expense. Pay my kids. Love it. We're all over that. Want to pay the kids. But are you saying, Jonathan, you're going to pay the kids out of one of the subsidiary LLCs? Because if you are, no go. You need to have a separate management LLC for paying kids. So I'm hoping, Jonathan, you're referring to a fourth LLC or a fourth entity. It's got to be off to the side. Carlton and I are all over that. Love it. But do not. Don't pay the kids out of one of the subsidiary LLCs, because that's essentially paying them out of the S corp. And you're jacked because it's owned by

the S corp. Yeah, say that again.

So repeat it another way. Sometimes people need to hear it two different ways.

Yeah, so part of the reason why we wouldn't want to pay the child out of the subsidiary, even if they might be working out of the cesarean, I would rather them working out of the management company. They're managing the businesses anyways. Right, guys? So the reason why is because it's owned by the S Corporation. And the S Corporation requires anytime that I pay an employee that I have to pay Social Security and Medicare taxes on their salary. So if we switch that and have them get paid out of the llc, that's a management company, AKA the fourth entity that's not rolled up into the S Corporation. This entity sits outside of the S Corporation just to the left of it if we're looking at it on our operations and assets. Right. And the S Corporation will pay that LLC a management fee. And the S Corp records the tax deduction inside of the management company. You will go ahead and pay your children out inside of that company the standard deduction amount so you don't have a tax return for the child to file or taxes to pay. And then you will also be able to take other additional management expenses for managing that S Corporation that manages the subsidiaries.

I love it. Carlton, you said it wonderfully. And I'll add this to one thing that we've been seeing a problem with a lot of clients. A little mistake is I like how Carlton said, don't pay the kids more than the standard deduction. You can you can pay more than the standard deduction, but they don't have to file a federal return if you pay them less than the standard deduction. But don't forget the state standard deduction. And I know you know that. And just for everybody out there, if this client has lives in California, the state standard deduction is around 6400 bucks. But the feds is going to be over 13 grand. So you pay your kid 10 grand, there's no federal return. You got to do a state return for around 3,600 bucks. So don't forget that. That difference people. And 25 of the states don't even follow the federal standard deduction approximately. So you're, you're, many of you could be in a state where you've got to file a state return for your child, working in the business, but not a federal. Well, Carlton, you have been just amazing. This has been so much fun.

This has been fun. We got to do this more often. What do you guys think? Let us know in the comments. Should we do this more often?

Everybody?

I mean, guys go far more advanced too. We can go past LLC guys, but you got to let us know in the comments.

Yeah.

If you'd like to see us.

Yeah, you want to launder money, you know, whatever. No, I'm just joking. Okay, now down below, people, we're going to make sure there's a link to Carlton's YouTube channel. My YouTube channel. Our contact information will all be down there. Please give us a like a five star whatever. Subscribe to both our channels. You're going to see Carlton and I present videos on sometimes the same topics and sometimes a different look or a take on the same topic. But it's a wonderful way to really unpack a conversation and to get different perspectives. And so I just wish you the best, Carlton and everyone out there, keep living the dream. Carlton, you get the final words. Give everybody a charge, ramp them up for this weekend.

I love it. Hey, listen, this has been absolutely amazing. Mark, I'm grateful to have you on. Grateful to be on your platform. For those of you guys that are watching, we plan on doing more videos like this. Whether it's on my YouTube channel, whether it's on Mark's YouTube channel. If you're somebody that is out there trying to leverage the tax code, then you're going to need to get the right information and you're going to need to get the right professionals. Me and Mark are more than willing to help you. Feel free to reach out to our different firms to be able to get what you need. And we look forward to helping you as you guys build wealth. We'll see you guys on the next video.