When to use an S-Corp in your Business | Main Street Business Podcast

Welcome, everyone, to the Main Street Business Podcast with Matt Swanson and Mark Kohler. We're so excited to be with you today. Talking about, I think, a pretty important topic.

Yeah, I mean, s. Corporations. This is an awesome topic. And for those catching this on podcast, we're going to try to visually, with our words. Sorry. Articulate with our words. Some diagramming in our. With our.

This will be like a game show. Yeah, Like a game show or maybe a party. You know, game you play at a party.

Yeah. The password is. Yeah. I wanted to do a little quote from Cable Guy, but we're trying to keep this.

Yeah, we got to keep our E for everyone rating here on the show.

If you've seen Cable Guy, they play Password. So funny. Yeah.

That's what it's called.

For Christmases, they play Password Taboo, I think. And that's. That's a funny one. Okay, so if you're catching us on YouTube, forgive my appearance. I am a little more casual today, but since I'm 10 years older than Matt, he gives me a little leeway here and there and. Awesome partner.

So, yeah, I'm obviously in office. This is not a zoom background. Mark is on location. On location. He's at the California office.

Yes, California office.

He's out there doing some research, you know.

Yeah.

Watching the California laws and, you know. Yeah.

And lots of board meetings. Those would be surfboard meetings, but, yeah. No, we're here, so thank everybody for joining us. If you're new to the show, you can tell we're going to try to keep this light. We're both tax attorneys, and if. If you haven't caught our books on Amazon, maybe some of our prior podcasts, we encourage you to do so. This may seem like a very basic topic, talking about S Corporations, but we want to cover it once a year. There's always new little nuances. We get smarter and better, and we hope and meet with clients every day, trying to help them through the entity choice issues. And we just thought. We covered LLCs a month ago, and we thought, you know what? It's S Corp's turn is a good refresher for everybody. So that's my disclaimer, and I'm sticking to it.

Yeah. And Mark and I are fans of S Corps for ourselves. We both have our own S Corp that says S as incorporation, not as in corps. It's not an S Corp or an

S or an S Corp in Vegas. That's a whole other thing, too. We don't.

Yeah, that's. That's. That's A different show. You're on the wrong podcast for that.

Yeah. We're not going to tell you how to maximize the. You know, the use of.

Set up your escort.

Yeah.

How to set up your escort service.

No, this is S Corp, as in Corp, as in Peter.

Yeah.

As you're going to go through the pearly gates someday and be judged by Peter. Am I making anybody feel guilty? Okay. So, yeah. S Corps.

Yeah. Now, this is the number one entity for small business. As I mentioned, I have one, Mark has one. They're cool. You know, every small business owner should have one if you're making enough money. And we're going to talk about that today on why you should use an S Corporation instead of an llc. Instead of just being a sole proprietor. And talk about what do you do if you have a partner? Also, how do we do an S Corp if we're partners? So we'll walk through those common questions and structures that we're doing every day in our law firm at KQ Solars.

And I've got a new concept and term I've been using, Matt, called S Corp Insurance. So I'm going to kind of wow you with that. For those that are regular listeners, be

like, I don't know if you thought you'd catch my attention by using the word insurance with S Corp.

I don't know. I'm just trying. I'm.

Wow. We might want to take that back to the marketing department. I know how we can really make this exciting. Let's call it S Corp Insurance.

Yeah. Actuarial is insurance.

Oh, we're talking.

Yeah. Everybody's like, tone it down, guys. Getting out of control over there. Oh, my gosh. Yeah. So rather than quote another movie, which we are classic, for which I had one in mind, Planes, Trains and Automobiles, I could sit through an insurance seminar for days rather than. Okay, Matt, someone asked me the other day, we're not doing tax and legal tips with our new format on Main street business. Do you want to call an audible? And I'm just going to rapid fire. Do you have a quick tip that.

Let me ask you this.

What was the. In your last three consultations, what would be a takeaway that your clients learned from you or you may have stumbled on yourself? It's just a little nice golden nugget of information. Anything just throw. That could be tax or legal or business.

Yeah. Well, my last client. Email. This is actually an email reply. Was about the backdoor Roth IRA and doing Roth IRA for his child who was six. All right. And so the Backdoor Roth ira. They're high income earners. They've been doing it already. They're coming over to self direct. They want to do it here at directed ira, which we do. But they also wanted to use start contributing to a kid's Roth IRA who's only six now. We love Roth IRAs for kids. You know, that's a great account. It could be even a great college savings account because you can put six grand in and you get the contributions out if you ever need it. You know, there's no penalty to take out what you put into a Roth IRA for kids. So I think it's a great savings account for kids. It grows tax free, comes out tax free again. You can pull the contributions out for any purpose. You know, you want to help them buy a house, you want them going to go to college, they're going to start a business, whatever you want. Those are options. So that'll be one tip is consider the Roth IRA as kind of a savings account for your kid. Whether it could be to help them pay for college or to buy a home or start a business or I don't know, it's just a great savings account. If they don't use it, that suckers growing tax free into their future.

Yeah. And you know what, I am just going to not amend but put a rider on Matt's comment. Everything you said I loved. I just want to add a little bit to it and that'll be my tip. I'm going to say two or three things. One, children have to have earned income in order to start a Roth, which

I did caution that I was like six is a little aggressive.

Yeah, I don't know yet. And I don't know if Matt's saying six grand for a six year old or a six year old getting.

I said a six year old but it was six grand. So that was, yeah, that was one of the points in there.

Yeah. Yeah. And I, and I'm okay paying a six or seven or eight year old, maybe a thousand a year to help clean the office, empty trash, shred paper. I think that. And I've had literally we've had clients go before the IRS in an agent review and say, okay, that's okay, just show me what the kids did. And they've checked, they've pass that off and I'm okay with that. But just don't overdo it. The second thing I would say is I love teaching kids the concept of saving and it's not just you doing it behind their back. So I've gotten all my kids an Acorns account, which is a really fun app that helps teach kids how to save. And you can have an Acorns Roth that teaches savings, but then have a self directed Roth that you dump the money into on a regular basis from Acorns. We don't want to invest out of Acorns. We just want to save in Acorns and teach this habit of saving and then move the money. Every time they get 1000, it's time to move it over into a self directed structure where you can partner in your projects with your children's Roth, therefore exponentially growing it. So I love that. Matt, just this morning I was at breakfast with my daughter and Acorns sent me a little text that went, look at how much you would have if you started saving and had a little calculator. Went, I think these apps are very familiar for children where they can be learning how to save. It makes it fun. And so I would just add to Matt's comment that engage your children in this, involve them in it and make sure that they're a part of the process so that you can instill a good mindset for the future with them.

Yeah, like it.

That's a good little tip.

Yeah, yeah, yeah. You know, we can do it. Okay. Now the S Corporation, as I said at the beginning here, now Mark is the expert, you know, on this. I mean, I'm not too shabby on it myself. Mark's got chapters in his book Tax and Legal Playbook. And what's your other book? What your CPA isn't telling you has got a chapter on it too. So, and this is the, again, I said it before. This is the most common business entity for a small business owner. There is a reason it's popular.

There's a reason even Joe Biden has his own personal S Corp. There was a fun article in Wall Street Journal last month. It was on page 13. I don't know why in there, but I had people sending it to me going, look, he took a payroll that was substantially lower than his total revenue in his S Corp. I think he had revenue over the last two years of about 13 million. And he took payroll of about 750 over those same two years. So about 325 a year. So if you look at the ratio of payroll to revenue, very, very low. They calculated in the article that he'd saved about $500,000 in Medicare and Obamacare taxes. And for his buddy, President Obama passing that law, he was able to sidestep it. Joe Biden himself with an S Corp. Now, I'm not faulting him for it. I love it. I've been teaching that strategy.

We do that.

Let me even be more blunt. Every dentist, doctor, engineer, contractor, plumber, electrician, realtor, broker, attorney, cpa, sales rep, online marketer, affiliate marketer. Anybody of those titles making more than 50 grand, they are an S corporation. Let me reemphasize that LLC is Do not save taxes. They are an S corporation, period. End of story. I'll bet anybody $10,000 to back that up. The end.

Yeah, unless they're, Unless, unless they want to pay more in taxes. Like, it could be dumb or they could have got bad advice or they could have set it up on legal Zoom or whatever and, or, you know, but even the Joe Bidens, you know, who created the tax laws to try and raise more revenue, are using a Cess Corp strategy. So I think sometimes people hear a lot of tax strategy like, well, that doesn't. Is that fair? You know, well, okay, you know, this is how tax planning is done. You just, you learn the rules and you're, in some ways, you're playing the game. So now let's talk about why. Why does the S Corp save you taxes versus an llc?

And Matt, let me make one comment here because I probably freaked a few people out that said, hold up, I'm an LLC taxed as an S corp. Is that okay? So let's get that off the table. And in fact, that is my S corp insurance strategy. Some people that are just starting out and we don't know how much money they're going to make in a given year. Yeah, we'll say start out as an LLC and we can elect it back in time to the first of that year or whenever you set up your LLC during that year to an S Corp. Now, if you have an LLC taxed as an S Corp, you have an S corp. Don't call us up and say, I have an llc and then we start to go down this rabbit hole. If you have, it's going to still stay at the state and on your letterhead, llc. But once you elect S Corp, you are now an S Corp to every accountant on the planet. And so keep that in mind. An LLC taxed as an S corp is okay. An LLC not taxed as S Corp is not saving you taxes. And I call that an S corp insurance. Because you can set up an LLC and backdate it to an S Corp if you need to, but if you don't even have an llc, you can't just backdate a new S Corp. And that's the insurance aspect that I like. So that was my twist, man.

Yeah. And I think a lot of people might be like, well, why wouldn't I just set up an S corp then? Why would I do an LLC taxed as an S corp? Well, an S corp is more expensive. If you go out of the gate with an S Corp, you have to start doing payroll. You're going to do a S Corp tax return 1120s. At the end of the year, there's. So there's some more tax work and administrative cost and burden on you. With an S Corp, it's not a lot. But it's more than just an llc. That's a sole proprietor that's just going down to schedule C on your personal return. Particularly where someone's starting out brand new that hasn't made a dollar yet, that doesn't know if their business is going to be successful. Am I going to get customers? I'm going to make money or not. So that's why Mark likes. I love the llc. Sorry, the S Corp insurance. Doing the llc, you can elect to an S Corp because you can start out with an entity. You have a legit LLC for some asset protection business structure. You can come back later at the year to make the S selection. And if you don't, let's say you only make ten grand that year. You know, a lot of businesses in their first year might not have a good net profit. That's cool. Just stay sole proprietor year one, year two, you can elect in for the S corporation tax treatment and start to get the tax savings when you have enough income where you get the tax savings.

Love it.

Love it.

And when Matt says they're more expensive, not for the cost of setup. We're the same cost for setup. The filing fees in almost 48 states are the same for an LLC setup or an S Corp. When Matt says they're more expensive, it's just that maintenance piece. And we're gonna. You're gonna see why here in a moment as we explain why they're helpful. But the setup cost is the same. It's that payroll, quarterly service and the tax return at the end of the year that's gonna blindside you.

Yeah.

All right.

Now we talked about the types of businesses that fit well for an S Corp that's pretty much any small business in America. Now let's keep in mind, S Corps are not good for rental income.

Right.

So for you rental property investors out there, you're using llc. It's great asset protection tool.

Perfect.

And remember, there's a difference between what I would just call business income and investment income. If I have a small business, that's considered ordinary income. Right. If I have rental properties, that's rental income. This is more passive. It's investment income. And those types of income are taxed differently. So we don't want to run them into the same entity for tax reasons. So your rental properties are generally going to be going through an llc. It's not going to have an S election or S corp tax strategy. You don't need it. We'll get into that here in a second. I'm just saying, for rental properties, don't be thinking about the Escort. Just use an llc.

I love it. And what I'll. And I may grab a yellow pad and a Sharpie here and just hold it up to the camera for those that are on the YouTube version of our show. But let's just try to set this picture visually for you. If you had a white piece of paper, a white whiteboard or a yellow pad, I'm going to put a line right down the middle. On the left side is your operations. That's like what Matt's saying. Sale of product, sale of service. Ordinary income on the right side is going to be your holdings or your rental property or passive income. So we've got this brother sister, this left side, right side. And if I can do this left side, right side and a concept and get it and maintain it, it makes life so much easier because you might have one LLC on the right side that holds all of your rentals or your future rental LLCs. We want to keep our eggs in different baskets. I'm not saying set up one LLC for 50 rent. We're going to build that holding side with that LLC on the right side and we cover this in our LLC podcast. But on the left side, we want to try to maintain one S corporation and let that S corporation be the funnel or the receptacle for all of our ordinary income. I, Mark Kohler, have one S corp in my life. I've got paralegals, I've got a law firm and accounting firm. You're like, Mark, you probably have 7s Corps. No, I only have one. I don't want all the headache. So 1s Corp can own multiple LLC or multiple operations, multiple URLs, multiple DBAs. And that's the left side, right side concept. And Matt. Oh, I like it.

I like doing that.

Yep, that's the trifecta. And see the Bottom, we've got the trust. So Matt, for those on the podcast, Matt did kind of a three legged stool. He's got the S Corp on the left, LLC on the right. And at the bottom is the llc. Oh my gosh. At the bottom is your trust and your revocable living Trust or your 1040 is where everything flows. So that trifecta is what we're building. I'll have it. I'll go through that same concept for clients that are making $10 million a year to a client that's making 10,000 a year. Same foundational concept.

Yep. That's why an S Corp owner making 14 million like Joe Biden is the same as the dentist making 140 grand. So a lot of people will say, well, why would I use the S Corp if I'm making like a million bucks a year? And well, there's still incremental tax savings here as we get into the strategy. So I like how you said that market, it's really, as long as you're making 50 grand or more, you're gonna save using the S Corp over any other tax strategy out there or any business entity structure.

Now I like what you said. Why Matt, I won't steal your thunder. You were going to go there now. So everybody, this is the, this is the in the protagonist movie story. This is the real issue here. Why would I even do this? So why would I want an S

Corp to save on self employment tax. Okay, that's it. That's the secret.

And you know, even though this is rated E for everyone, we've got to say the F word. Fica. We want to save on fica. And so whenever you feel like you need to swear at your kids, you can just say what the fica. Because FICA stands for Social Security and Medicare. And when you work for someone else, they withhold 7.65 and they match it. That's 15.3% and change. Well, when you work for yourself in an LLC or sole prop, you're going to pay that 15.3%. Now this is where it starts to get tricky. On the first $130,000 of profit, then if you're married or single, it starts to get a little variable. But at about 250, from 130,000 to 250, it's about 2.9%. And then once you're over 250 grand of net income, it goes to 3.9%. That's where the Obamacare kicks in. So for the average person that just doesn't have An S corp that FICA can add up quickly. Very, very quickly.

Yeah. And so the unique thing about the S corp is see when you pay yourself from an S corp and this is where the strategy happens here is you get to take a salary from the S corp and you get to take a dividend or profit from the S corp and the cool thing about the strategy is when I'm paying myself from an S corp the dividend or profit coming out of the S corp is not subject to fica, whereas my salary is. If I was a sole prop, every penny coming out of my sole prop is going to be subject to this tax to self employment tax. So that's the strategy is in the S corp you're allowed to break up the income by saying, hey, I own the business so I get to take out profit of this business as the business owner, but I'm also the employee and I'm working it. So I got to take a salary. You're going to take two pieces of that. You're going to pay yourself a salary and take out some profit. Salary, you're going to pay FICA profit. You're going to, you're. That's where the tax.

I love it. And let's do two examples. I won't say I'm loving it anymore, I'm loving it.

Say show brought to you. Why, that's McDonald's. Right?

Okay, two examples. Let's say you've got a small business owner that's a realtor, an electrician, a plumber, online marketer and they're going to net 100 grand. So let's say they brought in 120, 130, 140 and we wrote off everything under the sun. We could auto, the kids, home office, marketing, accounting, legal. And we net, we're at the very bottom. We've written off everything we can and we netted 100 grand. So you're taking home approximately eight to $10,000 a month on average. You know that's going to fluctuate throughout the year. But when the dust settles at the end of the year you netted 100 grand and you didn't leave it in the company, you just took it out to live on. I just described 90% of small business owners right there. So if you're a sole proprietor, you're going to pay 15.3% or 15 grand on that 100,000. Then you're going to pay state tax in 41 states. In nine states you wouldn't pay any state tax, but in 41 states you'd pay state tax. Then you're going to pay your federal. Now if you just take an average of maybe 6 to 7% state. Now you take your FICA at 15, we're already up to 22 that. Then you throw in another maybe 20% for fed. Just being conservative, you're, oh my gosh, you're over 40% in taxes. And this is what blindsides the small business owner. Well, with the S Corp in that same example, we might do a 40% split to payroll and 60% to net. So in that same hundred grand, all we do on paper you don't have to take a paycheck. We'll get into procedure here a little bit later. But you're just going to allocate of that hundred forty thousand dollars to payroll and sixty thousand to net. By doing that, you pay the FICA the 15.3% on the 40, but not on the 60. Now for you high end people out there like Mark, Matt, you're too basic here. I know all this. We're going to get to some unique examples and take it to the next level here in a minute. We're just getting the basics out there. So 40 grand payroll, 60 net. Well, I just saved 15% on 60 grand that I would have paid otherwise. That's 9,000 in savings. So I can't count in my career how many times I've got on the phone with that classic example where 80 to 90% of our clients fall with about 100,000 in profit, which is your median income. Middle income American small business owner. And I can say we can save you nine to ten grand. Ten grand is a life changer.

$10,000 for someone making 100%, that's a 10% raise. Yeah, by picking a different entity structure. It's not that. Yeah, every year it's the saving.

Every year it adds up. Now for you high end people, the percentage starts to get to be the debate. Like, okay, well my accountant says I can't do 40% or that's too aggressive or you guys are too crazy. We've never had a client audited in 20 years. And if we sign your tax return and tell you what your payroll should be and we know your whole picture and we know all the moving parts and we still say this should be your payroll and you get audited and there's a problem, we'll pay the penalty. Never happened yet in 20 years. So using that as an example, everybody's a little different. But look at Joe Biden. He brought in 13 million and he took salary of 750. That's not even a 5%, that's barely a 5% allocation. And you're telling me I'm too aggressive at 40%?

Yeah.

Bull crap.

Yeah. So the salary allocation is the, is the issue though. So you got to be careful about it. You have to take a quote. Reasonable salary is what the tax code says without telling you what the heck reasonable is. So generally the most aggressive grass it will be a third, you know, marketed 40% there in that example. Usually the most aggressive third as you saw when you get really high income like Joe Biden, you can even go below the 1/3. So there's a lot of other factors at play here, but the typical small business owner I think is going to be in between 1/3 and maybe the 40, 50% bracket in there, I would think. And so, but that is the strategy. It's a savings on self employment tax. And if you are an LLC, like let's say you're like, crap, I'm making 100 grand a year or more. I'm making 50 grand a year or more and I'm an LLC. All right, boom. We can add the S election on right now and you can move in to this S corporation party, so to speak right now if you're like, well, I'm a sole proprietor. I don't have an entity yet. Perfect time. Let's talk about January 1st and starting 2021 off with a brand new west score. One of the things we start doing this time of year, we're setting up a lot of entities to be effective 11 21. Because a lot of clients just want to close out what they're doing this year. Maybe you're the sole prop or whatever entity you may be and they want to now they've got the revenue, they figured it out.

Yeah.

1121 is a great time to move and start a new escort for people.

Yeah. And there are so many little nuances and we're going to try to just brain dump a few more strategies here for all of you to think about.

Let's go over how the payroll works.

Okay, cool.

And when it comes to timing, let

me say one thing about timing. Don't call us in the middle of January 2021 and go, I remember you guys said to set this up. Well by the time we get it done and up and going it could be February. So now you've missed a month. Now you're doing a part year return and it gets complicated. So now between now and the end of the year we're recording this in September, it may. It could make perfect sense to still pull out an S Corp right now for the last three months of the year based on your income. Some of you are like, if the first nine months of the year I was a sole prop and I'm paying tons of fica, I may not see any savings in the next three months. I'll just set it up and have my call and get it all set up so that it's out of the gate. Ready January 1st. Good move. But it takes three or four weeks to get this done and rolling, people. You got to set up bank accounts, you've got to get the tax ID numbers. So don't think it's going to happen overnight on January 1st. Get started now. And so I just wanted to say that timing probably leads into the procedure once you set it up. Matt, what are some things you got to do? Yeah, I like it.

Last. First thing you got to do once you do the S Corp or you make the S Corp election on your llc, you need to worry about payroll. So you want to be talking to your accountant or a payroll provider who's going to start doing payroll. Now a lot of business owners think, does this mean I got to be cutting myself a check every two weeks and the company's cutting your check and I'm depositing my personal bank account? No. I mean, you could, but no. All you're going to do is at least on a quarterly basis, you're going to say, here's the salary I made. So let's say you had 30 grand for the quarter of net income. That's your best estimate. Maybe you think you're going to make 120 for the year. So you're saying I made 30 grand this quarter. You might take a 10,000, $12,000 salary and you're just going to tell your payroll provider, let's take 10,000 or 15,000 in salary for, for this quarter. They're going to submit a salary report and say you took that much in wages. They're going to say, here's how much you owe in FICA. You're going to send your check to the U.S. treasury. And that's the strategy. So you're paying in quarterly. And a lot of clients, what they're going to do is in fourth quarter. Sometimes businesses, you know, a lot of small businesses have a pretty good idea where they are going to be for that year based on what they did last year. Now, I know 2020, Covid, and everything's jacked everybody up. I get it but fourth quarter is a great time when you're in January to look at and say, all right, maybe I need to take more this year or Maybe I take a 0 payroll for fourth quarter if it's been a tough year. And so you can kind of write up or write down your salary in your fourth quarter payroll. I mean, even I'm doing, you know, year to year to make sure I'm just kind of getting my calculation right for my total year end based on what I think my net income is.

And Matt makes it sound very flexible and it is, but there's limits. For example, some people are like, I'll just wait and do payroll at once at the end of the year. No. Do you think IRS is okay with that? Do you think they want to wait till the end of the year to hope you've got enough money to pay your FICA and they're going to trust you to do it? No. Once you set it. Now here's the weird part. Once you set up your S corp, maybe the first few months or the first half of the year, you really didn't make a lot of money. Do you have to do payroll? No, not until you take a draw and you're starting to show profit. So let's look, let's say you set up your s Corp in January 1st and you're going to go through the first three or four months and not make any profit. But then in the fourth month you do take make some profit and you take a draw. Well, at that point you've got to start your payroll because you're taking money out of your corporation. So now that I'm taking money out, I may skip first quarter payroll report, but second quarter, I've got to start my payroll and I start my report. So April, May, June, I'm going to send in my payroll report in July. Now you're off to the races. Once that horse leaves the barn, you start payroll. Every quarter. From now on, you have to do a payroll report. It's called the 941. Your payroll service, Costco even has this service paychecks. All the big payroll companies have this. So at the very beginning there is a little bit of flexibility, especially when you do an S selection on an llc. You may say, well, I didn't do payroll the last six months. That's okay. The IRS says that first little bit, we understand you're going to get the system down. But once you do payroll and they tell you when you're supposed to, now that you made your selection now you got to keep doing it quarterly. And like Matt said, it doesn't mean you have to cut yourself a paycheck, but you have to do the payroll report. And I know that may sound a little difficult to grasp here. I will say that this is a chapter in my book. We've got. I've got videos on YouTube on this and my tax and legal library on my website. I go to it in depth. This is probably a good chance to plug my little business owner workshops that start this weekend. I'm doing four of them this fall. Friday and Saturday, a basics class on Friday and advanced class on Saturday. As low as 150 bucks a day to go and zoom in. You get it recorded. And we're going to dive deep into these types of topics and go through a whiteboard zoom meeting all day long. And if you miss a part again, it's recorded. So go to markjcohler.com if you want to sign up for one of those classes. And I'm only doing 30 people per day so that we have plenty of opportunity to interact and answer questions. So don't feel like this podcast. You have to get all the answers, Matt. I mean, we have some. This is what a brand new doctor has to deal with. A brand new whatever. And they're like, what? It just takes a little learning curve and it's okay.

Yeah, yeah. It's a little foreign. It's not something they teach in school. And even, you know, and it's just not taught. Even like business schools, it's just not taught. But it's the reality of this is the practical way you actually run your business and small business in America, this is the number one entity. And it's because of this strategy.

And you know what? In my master's program to become a CPA and in law school in the advanced tax classes, they didn't talk about this.

I know they don't.

They're teaching all these concepts and heaven forbid a professor is actually living this and they're not. And now I'm so for education. I love my education and degree, but there's institution of education and there's the institution of practical day to day operations. And they're two different things. And that's why I teach classes on this.

Yeah, I love Elon Musk who says, he's like, you don't need to go to college to learn. You can learn for free. He says all you do to go to college, that's all college proves that you can do your chores. That's all the college proves you can learn anywhere. And that's what business owners have to do. But it's not complicated. That's the thing. You get in the habit of it, you start doing it. You know, you got your quarterly's coming up. You know, once you get on a schedule with your payroll company, your accountant, they kind of know what to go with. You can bump it up or down at the end of the year or as you're going just because you know how your business is. But that reminds me of one thing that's important too. You gotta be doing bookkeeping. Okay? If you don't have an idea of how profitable you are, you don't know what payroll to be taking. And so you gotta be good at your bookkeeping and have a really good eye on your business in terms of what is the net profit coming through. Cause that's gonna dictate how much salary I'm taking. So good bookkeeping really helps you maximize and really perfect this strategy.

Okay, Now I'm gonna. Now we're gonna go to advanced strategies. Believe it or not, people, that's just the basics. That's it. And every one of our business owners, again, that makes more than 50 grand a year. You're the captain of your ship. And I'm going to say this bluntly. If you don't know what payroll you're taking or how much compared to your profit, and you're just assuming my accountants doing it for me, you're losing money. I'm going to say it right now. Because typically in this we teach accounts across the country. This strategy, typically the accountant is going to be more conservative than you. This is. People that become accountants are conservative by nature. They don't want to push the envelope unless you ask them to. And you may even have to change accounting services. And that's very common. And any. Anybody accountant listening to this or and is like really upset that I'm saying that. Do your research on this. I go to every reasonable compensation continuing education course provided in the country. I do the CCH training. I do that. Oh my gosh, I can't remember all the different CE.

Basically you go to a lot of nerdy CPA.

I do, I do. I just went to a two hour reasonable compensation seminar with the two top attorney CPAs in the country on this. Did they like my percentage allocation? Nope. Did they say it works? Yeah. Now they sell software that goes with it. And there's nine factors and you need to consider their age and the business total profit, how many employees. I get it. But when the dust settles. The IRS has a computer system. They also have kind of this smell test of. Does this feel like the attorney is. I mean, sorry, is the taxpayer ripping us off? And as long as you meet certain thresholds, you're going to be fine. Yeah. And so don't let your accountant push you around on this. This is. You're the captain of your ship. I don't know. I didn't get to my advanced strategy. I just ranted, give us an advanced strategy. You got one, I got two or three.

Well, I was gonna say there's. There's other parts to the S Corp. Remember, the S Corp is an entity. It has the corporate veil, like an llc. So if I set up an S corp for my business and I have an S corporation, you know, I've got liability protection. So something goes wrong in my business, I got a customer bend at me, or, you know, maybe I'm a contractor. I build a home that doesn't. I got problems with. They've got to sue the entity.

Okay.

They can't sue you personally, so you've got the liability protection. So it's not like you need an LLC and an S Corp or that you should do an llc, taxes and S Corp for the asset protection. The S Corporation itself has a corporate bail and corporate liability protection to protect you as the business owner. So you're still getting that with the S Corp structure?

I like it. Okay, advanced topic number one. When you go to determine your payroll, you always want to figure out what's the minimum amount of payroll I need to take to make sure I don't have problems with the IRS. That's level one. Level two is, do I want to contribute to a 401k? What is my contribution to the 401k going to look like if I fluctuated my payroll. And sometimes taking more payroll will allow you. In fact, it's not. Sometimes you take more payroll, you'll be able to do more in your 401k. Yeah, but is that the right strategy? I have a YouTube video on the sweet spot for the 401k where I really feel there's kind of these spots where you can take too much payroll and it actually hurts you in regards to your 401k. Now, if you search for that video, make sure you put Sweet Spot 401k, and don't just leave it at sweet spot. I'm not liable for what you might find on your YouTube search. But now how do you do that? What's your take on that? On finding that Balance between payroll to do your 401k.

Well, let's just run through the numbers on how it works. So as Mark said at the beginning, you want to take a little payroll as possible. Right. So as aggressive as you can be,

do the 100,000, 40, 60, what would your 401k be?

Okay, let's say you had 100,000 net. You did a 40 grand payroll. Now that. Now here's the way the 401k contribution works. It's off the payroll you take. I made 100 grand on my business. No, your, your 401k contributions are based on the payroll part. Not that 60k problem. So you're going to run the 401k contributions off to 40k. Now, when you make contributions to your 401k, and we're presuming you're doing a solo K, we had a show on that just a couple weeks ago with Kevin and I that went over the solo K. So for those combining the S Corp and the solo K, awesome strategy for the small business owner with no employees.

Advanced strategy. Yep.

Yeah, advanced. Okay. At a 40,000 salary, you can put in 19,5 as an employee contribution. That's the 2020 numbers. Plus you get to put in 25% as an employer match or the employer contribution, which would be 10 grand. So on 40,000 a salary, I can put in 29,500 bucks in the 401k. Love it. That's a good sweet spot, I think. Yeah.

Now here's the counter argument. I have this all the time. People will go, well, if I didn't do an S corp, I'd be able to do 25% of the hundred grand. Okay, so you do your 19 five and put 25 grand in, but it cost you $9,000 more in FICA.

Yeah.

So you're like, oh, so now when I look at that, I'm really.

You got like 15,000 more in, but you had to pay the IRS 9 to do it.

Mm. And you're like, that's not worth it. And so, so you, you want to keep in mind how much you can put in the 401k, how much you want to put the 401k and then taking it to the next level. Ooh, I want to do Roth 401K. Okay. Now you don't get a write off for the Roth, but you can put it in. And so. Okay, now how does that play into my overall tax bill? Next level, should I put my spouse on payroll? Well, my spouse helps in the business, so I Better put her on payroll. No, no. Your spouse has attributed incomes that she or she or she can still do a backdoor Roth IRA. But do you want to do a 401k for your spouse? So, Matt, what's your take on that? Since Matt. This is Matt's expertise.

Well, let's say you're still $100,000 business. All right. And you took the 40,000 salary yourself. You could peel off another 20,000 or so to a spouse, and I might do that. Now the spouse is going to pay FICON this. We've now taken 20 grand off the no. 15%. So now I'm having to pay FICA on this 20 grand to pay my spouse, which is going to cost me three grand, right?

Yep.

It's going to be 3,000 bucks in tax the IRS, but I could drop in 19 5. Let's say I paid, I paid my spouse 20. I can drop in 19 5. I'm going to get a tax deduction on the 195 if I did traditional. But if I was doing Roth, it really is going to cost me 3,000 bucks. So. And, and, and you could company match it. That's right. Five grand. Yeah.

So if we did the math there, we don't have a calculator, but 25% of 20 would be another 5. So you could do 24,500 for your spouse on FICA of only probably 22,000 would get you to the 19 5.

So you'd have to do a paycheck

to your husband or wife. That's what I do with Jennifer. If I'm going to put money in her 401k. I just do enough to hit the 195 after FICA, then do the match. Now I've got my 401k and her 401k at this, this sweet spot. Kind of that law of diminishing returns where if I paid her anymore, wouldn't be as much bang for my buck.

Yeah, I want to get that 19

5, then get match and get the freak out. So that's a major advanced strategy on this.

Yeah, love that one.

Next.

You know I love that one.

Yes. Next is the 199. A pass through now under Donald Trump and the GOP's tax bill. The, this $2 trillion tax legislation that was the biggest in 40 years came into play at the beginning of 2018. Corporations like on Wall street got a 21% flat corporate rate. That's what corporations got. The average American got better standard deduction ends and all these other little things. Small business owners. This Big swath down the middle of this huge legislation said hey, we're not going to give you a different tax rate but on any profit you have, we're going to give you a 20% deduction. What? So that's called the 199A pass through. So in that example of 100 grand in profit, if you take 40,000 in payroll, you've got that 60,000 in net. Let's say we pass on the spouse salary. So we still have 60 grand of net pass through income. Not subject to the F word, FICA. Well, I can take 20% of that as a deduction, so I get to take 12,000 off of that. And I'm only paying tax on 48 grand. Now what's that going to motivate people to do? Ooh, I want to take even less payroll so I can get my pass through deduction even higher. But I want to put money in my 401k and I don't want to get audited and what do I do? And I got my PPP this year and I've got to take enough payroll to get that forgiven.

Yeah.

And this is, that was a phone call I had yesterday. And we had ppp, we had spouse payroll, we had the primary business owners payroll and we had the 199A and the 401K. And he goes, mark, I had to call you and this is a client that's very, very intelligent. And I was like, oh. So we got on a piece of paper and tried to find that sweet spot. And frankly I said let's do this for now. Let's talk in November and December because we don't even know what his ultimate profit was going to be. So this can be, this is why December so busy. If you want to save taxes now, if any, if I've kind of blown your brain here, you can see why. Oh my gosh, it's worth it to pay one of these associates at Kkos lawyers four or five hundred bucks.

Cause they're going to save me ten

times that in one call. In one call. It's nuts. Yeah.

And Mark said no, December, not April. April 15th. I need to get some tax planning. I got my, get my return in for last year. Too late. Okay, let's see now on the S Corporation, just for just basic entity stuff, I wanted to note a couple other things. Our can you last tips you got on it too. But you're going to have to keep it active with the state just like any other entity. So you got to keep it active with the state pay your annual fees. Want to be doing your company maintenance and annual minutes. We have our company maintenance service for that at KQS lawyers where we charge 150 bucks. We do your renewal, we do your minutes, which you have to have for a corporation. It's required under the statute. And we just need. We have our cleanup special. Oh, yeah, Right now till maybe another week. Get it in. If you have one of these S Corps you did up by yourself or your LLC that you want to get taxed as an S corp or any entity that's frankly a mess and you know it. And you're like, does this even protect me? Did I even do this right? I don't even know what I have. Just get it cleaned up. That's what we call it, to clean up. Clean up on aisle. I set up my entity@legalzoom.com, you know, but that's a special right now. How much is saving right now?

499.

499 saves like a hundred bucks.

And we'll do your S election, we'll do your minutes, we'll get you up to state, up to gear with the state. Get your new bylaws. You can go to our website, kkoslawyers.com and there's a banner right at the top doing our special right now. And we'll probably run it into October a little bit, but once it's gone and you need to clean it up, it's going to cost you more. And you get a half hour with an attorney who can answer some questions on your S corp moving forward.

Look at your docs, of course, and say, what's missing? What'd you do wrong? And sometimes, and this happens. So sometimes it's a do over. Okay. Sometimes you bring us a turd and we just can't polish it. You know, it's just, what are you going to do? I mean, I. We can polish it up for you, but it's still going to be a turd. So sometimes we will start over, but most times we can clean it up and fix it.

Yeah. Yeah. Okay. Now, I wanted to hit a couple other, I don't know if I want to say, advanced strategies on the S Corp. And I think these are important ones that people don't realize. If you have an S Corp, when you pay your health insurance, your health insurance premium has to come out of your S corp before, when you're a sole proprietor. You could do it Harry, carry the business, might pay your s. Your health insurance premium. You might pay it your spouse May pay it, it doesn't matter. You just freaking auto debit out of any account. But for IRS purposes, your health insurance premium needs to be listed in total of what you paid during the year on the W2. And it has to be paid by the S Corp. And if you're like, I'm not doing that, well, start doing it now. I'm not saying we're not going to write it off, but we're going to give you a little CYA letter that says if you get audited they might disallow that the S Corp has to pay because remember you're a corporation and you're an employee now you're an employee of a corporation that's paying your health insurance. If the corporation doesn't pay the premium, the corporation doesn't get the write off. You can't have this alter ego that the corporations you and you can just be. That's why Matt said bookkeeping earlier. You got to respect it. You got to let the court pay the frickin bills and you can't throw caution to the wind like maybe you were before. And this is where some of our clients that have been business owners for years that are a little scrappy when it comes to bookkeeping, we're like,

you

know, you don't cry in baseball. You know, you got to do it right. The other one is home office. Home office becomes now a rent expense. But it's still calculated based on the home office figure. See, when you're again a sole proprietor, you are a person, you have a home, you have an office in your home. When you're a corporation, you're not a person, you don't have a home, you're a corporation. Now I'm an employee working for the corporation that's going to reimburse me for the use of my home. And you may say, well that's technicality. Yeah, that's what happens in an audit. So the IRS is going to go, did you claim this as rent? Did you do a reimbursement amount that was fair, not rent. And there's all these blow hard workshops around the country where people are saying rent the home to your corporation for 10 meetings during the year for $10,000. And it's, and it's, you know, the Augusta rule down in Georgia. I get the Augusta rule. We don't do it. It's too aggressive and I'm pretty darn aggressive. So only a few clients would even qualify for that Augusta rule. So if you, some of you are like, I've never even Heard of it? Well, if you hear of it, be careful. But the point is, you're going to do a reasonable home office reimbursement from the S Corp to you. You can do it on the as a journal entry or a monthly check. Auto. Yep. Auto expenses are going to be through the corporation. I want the corporation to depreciate your vehicle if you're going to do kind of a bonus depreciation. The auto deductions as big as it's been in 40 years, it's huge. And if you do mileage, it's okay. But again, remember, you're turning in your mileage to the corporation and the corporation's gonna book a reimbursement to you for use of your vehicle throughout the year.

And that corporation doesn't need to own your auto.

Yeah, it doesn't have to do mileage. Yeah. If you do mileage, it doesn't.

Yeah, that's what most people do. I was just throw out one other benefit of the S Corp over being a sole proprietor. Cause a lot of people go from sole proprietor to S Corp is audit risk.

Yo, good.

You are 15 times less likely to get audited in an S Corp than you are being a sole proprietor or an LLC that's just passing through on a schedule C which is a sole proprietor. Okay. Sole proprietary returns. This means you're a sole proprietor. You've signed up for a 15 times more likely audit than if you picked an S corp next.

A lot of people go to the S Corp to start building corporate credit. You're going to get a Dun and Bradstreet number. You're going to start building a paydex score, which like is a FICO score for credit for yourself personally. Your corporation starts to get a credit rating. Mine and Matt's S corporations have credit lines and they're building their own credit. It takes time. There's no fast track to corporate credit. If you get sold that, be careful.

So.

But you want to get that corporate tax ID number and start respecting it. My corporation has an account at Verizon. It has an account at Home Depot. And you start to build credit within your corporation and I think that's really powerful.

Mm. Like that.

And there was one more I wanted to say too. Oh also for those of you out there buying homes when you're a sole proprietor, it's always freaking a mess going into the bank. I'm a sole proprietor and here's how much I made. And they want to see three years of a schedule C. And you just don't fit into Fannie Mae, Freddie Mac box and they get, they give you a hard time. Well, with a corporation you're going to walk in and go, here's my W2, I want to refinance my home. Here's my K1. You fit more into the corporate world

when it comes to banking.

And so I've had clients take a bigger payroll one year because they're refinancing or buying a home. And they're like, mark, I'm gonna pay the FICA because I know I'll be able to get the jumbo loan that I need to on my home purchase. And they're gonna go in looking like squeaky clean Johnny on the spot with a little W2 from the rest corp rather than trying to prove all this schedule C LLC crap. So I think you for out there, if you're gonna refinance or purchase a home, the S Corp is gonna help fast track you that lending process.

Okay.

You look more legit. I think the ink.

Yeah.

Awesome. You do. You start to get that legitimacy.

Mm, yeah. I mean Ricky Bobby, he had, you know, he had Ricky Bobby Inc. Remember this? You know Shake and Bake was a trademark of Ricky Bobby Inc. Could not be used without permission of Ricky Bobby Inc. So

now, oh, on that note, once you start using your corporation, my godaddy account is owned by my corporation. So when I set up a URL, my corp owns those URLs. If I set up a DBA, it's not me. My corporation owns that DBA. Now if say Matt calls me up one day, it goes, hey Mark, let's go find that. There's an apartment building down the street. Oh my gosh. And I know we can do a condo conversion. We can run it through the city and sell that 12 unit apartment building as 12 separate condos. About a year or two from now, we're going to double our money. It's going to be awesome. Well, that's a development sort of income. It's short term in nature. It would be subject to FICA because we're not renting it, we're flipping it and we're going to create 12 condos. So now we have developer status for that project. What's the IRS going to want? Fica. Because that's a business. It's a second or third job of mine and Matt, just what we need. So we've got this project. Well, am I going to. We're going to form an llc.

Yeah. We talk about the partnering, how to partner with S Corp. So if you have partners we don't like. Like Mark and I are going to form an S corp together that we each own 50% of. We each have our own S corporation that's going to own an LLC each 50% and that LLC will own the property. That's the same thing our law firm is. We have the LLC or Limited LLP and we have our S Corps that each own 50%. And that is. So the company's going to make the money, the partnership, the llc, let's say it's going to pay employees or it's going to pay expenses on the project and then it's going to push down profit that each of our S corps pick up. Then we're each doing our own tax planning, our own salary dividend split. We have our own other separate income coming in. If Mark wants to buy a new laptop and his S corp, knock yourself out. We don't have to buy it up here in the partnership and make me buy one because I don't want one, you know.

Yeah, Matt plays with his salary the way he wants to, I play with it mine. And that's an advanced strategy because once you get your S corp, you want your S corp to do all your operations. And on this note, last strategy Matt, and we'll wrap it up is the board of directors. This is such an awesome opportunity. I know Matt's two daughters that are in college, they're on his board of directors. I've got three adult children including Molly who turns 18 this next year. They're all on my board of directors. We had our board of directors meeting three weeks ago for this year and we had a little family Kohler conference and we had this board meeting and we talked about business, we talked about saving, we talked about an LLC that all of our IRAs are in. And then it broke out into a fight as most family meetings. But before that it was really good and we had a great business meeting. But that's a tax write off. I literally flew my son and daughter in law into my small town on a corporate credit card and took a write off for our annual board meeting. They stayed two days and flew out. He also gave me advice on some marketing and some video shoot because that's what Dylan does. And completely legitimate tax write off. Get your family involved in the board of directors and that's what you're doing with your cleanup. That's when we said a minute ago, do the cleanup. That means choose your brother, sister, mom, dad, best friend, sister, whoever put them on your board of directors. Susan's gonna put that in your minutes, go have a meeting. It's a tax write off. Huge.

I love it. All right. I don't think there's more reasons. We don't need to get more reasons to do an S corp. So we want you to have an S corp in your life. And it's going to. It'll change your life. It'll change life. At least leave more money in your pocket, less than the irs. So that's a win for us.

Well, Matt, you're awesome. I am so grateful to be a part of everyone's lives listening to this. If you know a small business owner, please forward on this podcast. We meet so many people every day. I want to be careful about what we share about our private operations. But I'll just say this. We're setting up over a thousand entities every year and many, many, many of them.

Almost 2000 this year.

Okay.

I just wanted to be over a thousand. Almost two.

But those are all over the country. We can set up an S corp in any state. Just share this with your family and friends because there's people that are paying too much in tax and it's a $5,000 swing can be a life changer for people. And that's a $500 a month car payment. That's helping a kid get into a school. That's helping you have a retirement. And when you get that savings, don't buy a new car. Go put it in your retirement account. We want you to retire with wealth and we are hand in hand with the Dave Ramsey strategies. We want you saving, we want you building wealth, we want you paying off debt. But we also you want you using good debt to make wealth and a business is that next level strategy that so many of our clients have the self discipline to do. So thanks for being here. Give us a five star review if you felt this was a life changer. We really, really appreciate it. Only takes you two minutes literally. Just throw in there a few words, make sure you emphasize me and how

amazing and that'd be fair. I mean, Mark Kohler's pretty great, so.

Oh man, you're so cool.

I'm not gonna disagree with that.

Oh yeah.

Well, maybe I'll go put one in and I'll tell you how great you are.

I'll do that for you. See, would they let us do. I have never done a five star review of my own show. Can you do that?

I don't think so. Yeah. And we, yeah, you know, we're seeing our. We change the show topics so if you're looking at this, you're like these guys have no five star. We changed our show. Hopefully all the new the old ones from our last show name is gonna filter over. We're waiting on that. But till then we're gonna be. Maybe we'll be hitting people up for five star reviews.

We already have 300 five star reviews but we're getting itunes to slide them over to our new title of our show has been pain in the rear. But okay, everybody, we'll see you next week and maybe open forum next week. Maybe every. No, last week was open forum.

Yeah, yeah, yeah.

I think we're gonna have to do it next week. We may even record it live on YouTube as well on Facebook.

Yeah.

How to get your PPP forgiven.

Yep.

We talked about it all spring. Now it's time to talk about the application. So.

Yep. Let's do it.

Yeah. Stay tuned, people.

Thanks, everyone.

See you next week.

Sa.