40. ROI TAX SERIES 4 OF 8 – THE BASICS OF SMALL BUSINESS TAXES

2022-02-09 ROI Tax 4 of 8

Rob Delavan  00:05

Good morning. Welcome to Episode Four in an eight-part series to the get rich, slow podcast. I am your host, Rob Delavan. Adrian Shermer, our normal host is in Hawaii. Lance Johnson is back to back to back with clients today. So, I have joined  and you’re welcome. You guys don’t have to listen to me talk for 15 or 20 minutes, I’m joined by Sue Hjort of ROI tax. So, hello, welcome back, and welcome back to get rich, slow podcast. So, this is again, Episode Four in an eight-part series. The title today is the basics of small business taxes. exciting, exciting stuff, especially for me, at least since I’m the owner of a couple or a few different small businesses. So, I want to share a success story with you guys today and this has been an ongoing thing year after year, but that Sue has helped me as a small business client of hers help planning when to buy vehicles. So, I don’t want to go into the nitty gritty too much. But section 179 of the IRS tax code, which we can link to the comments down below, basically states that within certain situations if I’m with certain criteria met, and we won’t go into it, but a real estate broker or real estate brokerage or a contracting company can utilize a one year accelerated depreciation right off of work vehicles and last few years, we’ve been planning on when I buy work vehicles, and that has reduced tax liability and allowed us to frankly, provide more work vehicles for our operations. So, thank you, Sue.

Sue  02:12

You are welcome.

Rob Delavan  02:13

If I can save on taxes to invest in a business, I believe that’s the reason why that’s a win that was put in it’s all day long every day. And I’ll do it year after year after a year. So, thank you for that success. Upcoming Events, we will link to our calendar of events for the entire year on our websites and we have the ROI-tax.com website for Sue, Delavan- realty.com myself, and then we have Adrian’s at directors’ mortgage, and ROI-financial.com. Also, everything will be in the show notes at the bottom. But go there if you’d like more information for the episode ahead. Sue again is going to be the big brain that we’re going to add to mine and she’ll be teaching us the basics regarding some small business taxes and frequently asked questions again for in an eight-part series. In the last episode three, we learned what to expect in 2022 when it comes to your taxes. So, Sue, you’ve only been doing this for what? How many decades, going on your third?

Sue  03:38

Yeah, I’m in my third deck.

Rob Delavan  03:41

She’s a with ROI tax and we always are lucky and blessed to have you especially given that this is February of 2022. So, we’re already into tax season, we will take everything we can get from you and thank you for graciously sharing your time with us. You bet. So as our trusted CPA, let’s just jump into question number one. So, what’s the difference between an LLC and an S Corp and when should you make the switch? And of course, I’m sure there’s some benefits one or the other and this is business Small Business Taxes one on one?

Sue  04:20

Yes, it is. I get asked that question by every small business owner. So, this is an important one. So, there’s some basic similarities. LLC and an S corp do not pay their own taxes. They may have their own tax return, but any net income or loss from an LLC or an escort passes through to the personal owner’s tax return. So, if it’s 5050 owned or  three way owned, however it is it gets passed through in those percentages, those are the similarities. But the big difference is, if you have an LLC, it acts like a partnership, an LLC is a limited liability corporation and with a partnership, if you have income, you don’t have wages in an LLC for the owners passes through to the owners return and they not only pay ordinary income tax, but they have to pay their own self-employment tax write on their personal tax return. So, as you can imagine, when you’re earning a net income of 10,000, on your personal tax return, that’s doable. Yo got ordinary income tax, but the self-employment tax, you’re paying the employee or half and the employee half, so that’s 15.2%. So, as those people are going up, you know, 20,000 30,000, you know, 50,000 100,000, when they’re getting over 50,000, consistently as their net income, and say, there’s only one owner, so that whole amounts going on their tax return 15.3% of it is additional tax that they have to pay. That’s when I’m talking to them between 50 and 100,000, is when I say, time to do an S corp, I’m now on an S corp, the owner has to take wages, and then any remaining net income goes on to their personal tax return, like I said, passes through, however, there’s ordinary tax on it, but no self-employment tax if they’ve already taken. So, we’ll go with that 50,000, they took 20,000 as wages, the payroll taxes on that as paid through the business, the 20,000 does go as wages on their personal tax return, the remaining 30,000 is net income. So, ordinary income tax, but no more self-employment tax, and not two sides of it. So, this is the benefit. I’m saving people 600,0 12,0000, $20,000 by not paying self-employment tax.

Rob Delavan  07:27

I would say that’s a big pivot point for somebody’s business, because it starts to go from maybe more of a hobby side business to okay, this thing is humming along and it’s making 100,000 and that’s like you said, the net income.

Sue  07:46

Yeah, you’re legit. This is a business and we’re not talking about, okay, you’ve lost money, five years, it, the IRS is going to think it’s a hobby go away. You’re going up the ladder, and you’re making it work and it’s a business, we need to do some tax planning.

Rob Delavan  08:06

Okay. Obviously, that’s been a big drumbeat for this entire series is, this is where we start really digging, diving into the benefits of, of an actual consultative tax approach, where we’re planning and being strategic ahead of time, rather than just reacting to whatever was the status quo before and would you say this is when you start having this conversation, this is where you start doing tax planning, during July and roll out other times of the year to?

Sue  08:44

Absolutely, because it usually happens when they had 20,000 of net income one year, and then the next year, they had 75 of net income, and they’re like, my taxes are ridiculously high, and I’m like, now is when you need to be an S corp, they’re only going to get bigger. So, yes, we do proactive. I’m looking at their books throughout the year, we’re making planning for retirement, all kinds of things.

Rob Delavan  09:13

What gets hairy is, oh, no, I just realized, you know, December 15, that I made triple what I made last year, it gets much more difficult to, to switch and even at that point, even though it’s before the end of the year, it’s basically impossible, you really have to do it for the next year.

Sue  09:32

Yes, I would really rather do it that way. Because there’s a lot more we can do if we start planning in March, May, as opposed to December 15ll we can do is kind of put a bandaid on it and say put some into IRA. But let’s talk about in May, getting you an S corp putting you on salary, maybe a 401, some bigger things.

Rob Delavan  09:58

Excellent. Okay, that’s great advice. Okay, so, my next question is, what is a Schedule C and why is it important, and we will put the definition of a Schedule C, just the basic one with references in our show notes.

Sue  10:18

Okay, so, Schedule C is where if you’re a sole proprietor, you have an idea for a business, you’d like to give it a try. But you don’t want to overcome it, maybe you become an LLC, just to give you that layer of protection, an LLC stands for limited liability corporation, it doesn’t mean you’re a corporation, it doesn’t mean you have to pay wages, it just means, hey, I’ve got a little legal protection. So, I’m protecting my other assets from this new leaf formed entity. So, it could be that hobby that you’ve decided to take a little further than that, hey, I’m selling some things to people, what do I need to do? Or it could be that family or some type of business where I’m giving this a try? I’m really liking it. Do I need to be an escort? I like to tell people to start as a sole proprietor or an LLC, where you’re just got a layer of protection and then I tell them, we’ll see how it’s going in three to five years and if it’s taking off, that’s when I take it to the next level of an escort, that type of thing. But it’s necessary for those things where you’re making, you know, you’re making some money, they like to call them cottage industries, sometimes where you’re doing it out of your home when you first start. Remember, Nike started in a garage, and a waffle iron. So, that’s why they call them cottage industries. So, that’s what it’s for. We have got a little reference in the notes too, a website called the balance.com and it will give some more information about schedule C’s.

Rob Delavan  12:21

Okay, great. So, last question for today. This is a hot button. You’ve helped me with this significantly over the years, when is it best to hire a 1099 contractor versus a W two employee and we might want to start with defining those terms, which we’ll throw in the show notes.

Sue  12:48

Absolutely! So, a 1099 contractor is your business is growing, you need a little help. But you don’t need somebody full time you just need, you’re selling stuff on Amazon or Etsy or something like that, you need somebody to come in and box it up and take it to the post office and ship it, once a week or something like that. So, that’s a contractor where you say, hey, your neighbor’s teenager or something, I will pay you 20 bucks an hour to just come over and do this and it’ll probably be about four or five hours a week, or whatever it is, that’s a contractor. But it can even be a part time person, you’ve got a moving company, that’s small an, I just need a driver a couple day a week. So, 1099 contractors, you’re paying them an hourly rate, but you’re not withholding any taxes for him. So, that’s how it saves money for the business by not having to pay the employer side of the texture. However, the biggest piece about contractors is they come and go as they please, they have a permanent place in your organization and they have another job. They could not be making a full-time wage doing what the hours you’re asking them something like that. Or it’s someone with a business that’s like, hey, I do tile but I need somebody to do this piecemeal work down here that I can’t do. So, they just have somebody come in and do that and off they go. They’ve got another business. Okay.

Rob Delavan  14:46

So, there’s a litmus test there. I think some of the questions that I’ve been asked about that by you actually, was are you telling them like what to do, when to do it? How to do it. Are you furnishing them in a chair? There’s a number of questions where if you start at answering yes, on all of those, it’s like, they’re an employee.

Sue  15:16

Those are all what I’ve asked you and all what someone needs to ask themselves and even on the Oregon Department of Revenue website, I think even on the IRS website, there’s like 10, to 12 questions that you ask, and those are the exact things, it’s a W two employee, you provide them with a place to work, you tell them what time to come and go, you train them or provide them, you know, this is what I want you to do. Those type of things, because even part time people can be employees, if all those things are met.

Rob Delavan  15:54

Oh, there’s an interesting nuance here in the pandemic world, everybody went to work remote, and which then just by definition started to make it well, there’s less telling them when to do it I am aware of a bit of a trend, usually, over the last years, it’s been converting more and more people from that contractor role to employee role and then just in the last couple years of the pandemic, there has been a little bit of direction, the other way of, at least, just from a social aspect, I guess, a social norm.

Sue  16:35

Exactly. There’s going to be a few more contractors, because you weren’t following some of those rules, they get logged in when they want and maybe as soon as their works done, they can log off and that type of thing. However, you can have flex time and still be an employee. For example, some employers have said, okay, we want you to come back, and there’s been to an office and there’s been pushed back. So, they said, you can be hybrid. So, maybe they spend three days a week at home, but their employer tells them, you have to be in the office two days a week. Or there are some employers that say, you have to be online these hours of the day, because that’s when we have zoom meetings, or I need you available to your boss or those type of things. Okay, so, you can still be remote worker and be an employee but yes, I can definitely tell you there’s going to be some range of contractors.

Rob Delavan  17:45

Okay, so, Sue, any final thoughts, 15 Seconds or less, small business taxes. Good luck!

Sue  17:55

I want to say good luck. I’d say if you’re starting a small business, you need to see a professional because there’s a lot more out there than you know about.

Rob Delavan  18:03

Yeah, okay. That’s huge. I can personally attest to that. Thank you so much for being here, Sue again, the value of especially during tax season, being able to provide this to our audiences is incredible. The best way to find Sue is visit her at her website www.ROI-tax.com. That will be linked below in the show notes and please stay tuned for our next episode in this eight-part series with Sue. The next episode, we’ll be learning how to make standard deductions versus itemized deductions simple for you. So, again, very exciting. I love it. Thank you so much for listening to the get rich, slow podcast and we’ll see you guys next time.