Mission to Grow: A Small Business Guide to Cash, Compliance, and the War for Talent

MTG_Jason Blumer
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Mike Vannoy: [00:00:00] The title of the show is Mission to Grow, right? And so, at getting access to capital, staying compliant and then managing the talent you need to grow your business, it's, this is just part of the growth trajectory. You're going to have to, whether you, ~whether you~ hire them in house, which is heck a lot more expensive, or you're using outside firms and professionals.

This is just part of the natural growth

[00:01:00]

Mike Vannoy: Entity classification,

S Corp versus Schedule C. So man, if you're an entrepreneur, you just started your business, maybe you've been in business for a while. Uh, and you started hanging a shingle out for yourself. Maybe you started with one employee, maybe five employees, maybe you've grown to 10 or 20 or 50 employees.

And these are things maybe you just didn't think about. Uh, but they're really, really important, uh, for entrepreneurs to understand what's the difference between, uh, different classifications and different tax treatments for businesses. So, uh, Got a great guest to unpack this topic with me today. Uh, he's the founding partner and CEO of a virtual CPA firm.

They specialize in design, web marketing, and agency niches. He co leads Thrival. com, a community providing education, support, and resources for entrepreneurial accountants everywhere. Uh, he facilitates business transformation through onsite consulting and coaching for firms, agencies, and service based businesses.

He's the founder and host of [00:02:00] two monthly PO podcasts since 2011. You're early there. Uh, the Thrive Cast and the Business Allergy Show. Uh, he's the CEO of Blumer and Associates and CEO of Thrival. Welcome to the show, Jason Blumer.

Jason Blumer: Cool. Mike, thank you for having me. Hopefully we can clear up some of these classification issues on tax.

Mike Vannoy: You know what? And maybe clear up, uh, but also maybe, uh, uh, make people I, I suspect. Make people aware of an issue that they didn't even previously know was an issue, right? And maybe nothing to even think about. So

Jason Blumer: Yeah.

Mike Vannoy: let's, maybe just from the jump, can you maybe just help clarify what it is we're even talking about when we say entity classification, and I think technically we're a little apples and oranges saying S Corp versus Schedule C.

Right. Help, help brings just some definitions here.

Jason Blumer: well, sure. Well, um, so, you know, in the U. S. you can run a business really as yourself. You can, you can start a business and use your social security [00:03:00] number. So to the IRS, you can run a business just as you. You know, people would write a check to you as a person and you would report it on just a schedule.

of your tax return. And so that's not being an entity, that's being an individual running a business. So when you start talking about an entity, this, word entity, it basically is creating or it's, it's creating out of nothing, a whole nother thing that gets taxed, right, which happens to be a business.

And in the business world, we do call those entities, and there's ways to set them up and then things you can do to them. So that's really where that word comes from.

Mike Vannoy: And, and I think most people probably have a general understanding, just maybe just super high level. What are the different types of entities that you could classify yourself as?

Jason Blumer: Yeah, for sure. So if you are operating as yourself under your social security number, you can be a sole proprietor. A lot of times that's what [00:04:00] we call them. A solo owner. There's going to be a lot of different, you know, nomenclature people use for that. Um, but when you become an entity, you basically go to the state that you live in, typically, and the entity is created by the state's secretary of state.

So the Secretary of State is what creates this entity, uh, into existence, um, and it can be a corporation, those, those, those businesses that have ink on the end of it, uh, and it could be an LLC, uh, limited liability company, um, or there are other different types of, of entities. Entities too. So those are two of the most common.

And the entity is created by the state, and that's, that's very specific, not by the federal government. So the state is what creates that entity. Um, and now that you have that entity, they are taxed in certain ways. And I just wanna make sure, Mike, we could go down the, you know, the tax road or if [00:05:00] we want to do more about what these entities are and you can do to 'em.

I'll let you kinda lead that way.

Mike Vannoy: You know what? Let's maybe just high level. What are the, and there's a bunch of educations I know, but. What are the big buckets of the types of entities? Then we're going to talk specifically about S Corps and I think it'll become self evident as to why Yeah, for sure. Well, the LLC, you know, that really the LLC and the corporation, these are the two big buckets. Um, you can really create these, uh, by yourself in some states. I think you have to be an attorney to create a corporation. Uh, some of that's, you know, legal, you'll get into some legal issues as accountants.

Jason Blumer: Sometimes we're like trying to stay away from the legal side, uh, but getting an LLC, is just as easy as giving them 250 bucks and, you know, or whatever that fee is in that state and filling out a piece of paperwork. So, those are the two entities you would, you would start with. Um, you know, the, the corporation is going to come, that can come with more, uh, there's just more [00:06:00] to do for a corporation, uh, because you got to file this corporate tax return now with the federal government and with the state.

Um, an LLC sometimes You now have an entity, you can give that entity a name, but upon the creation of that LLC, it can actually operate as a sole proprietor. So the sole proprietor operated under your social security number for tax purposes can operate the same as an LLC that's now using a federal ID number.

And they'll be taxed the same, but one now gives you limited liability. And that's the goal. There are people we would consult with and we're like, Hey, you're doing a type of business where you want a little bit of protection, right? You want to separate your business transactions from you personally. An LLC is sometimes a great way to do that.

to set up an entity and run the business through that LLC, and it does bring some legal limited liability where they don't come [00:07:00] fully after your personal assets if there were some problems with that LLC.

Mike Vannoy: Jason, am I oversimplifying to say it's a little apples and oranges? LLC versus corporation versus an entity classification. Cause you could be an LLC and classify lots of different ways. So the LLC is a legal classification. The entities are a tax classification.

Jason Blumer: that's good. So, so when we create entities, we mentioned this, you're creating that by state law. Uh, you're going to create a corporation and an LLC where examples of the entities you create. Now, A tax classification, as you're saying, is something that you can do to both of these, or either one of them, and you go to the federal government to do that.

You go to the IRS and say, hey, this LLC I created, treat it, call it an S corp, uh, or hey, IRS, this incorporated entity, which the [00:08:00] IRS is going to call a C corporation, you can go with that same form and say, treat that as an S corp. Uh, treating it like a sub S corporation, which is just the title of the tax code that allows for the ability to call these companies or to tax these companies differently as what we call an S corporation.

So that's a, it's a, it's a form you fill out with the federal government, the IRS.

Mike Vannoy: What would, what would be other types of classifications that we're not going to go deep down in any of these, but

Jason Blumer: Well, that, that's the main one, you know, that we would, that we would file, you know, with, with the government. I mean, they're with, with the IRS, so that's the main one that we would file. Now, you may mean, I'm not sure what, do you mean there are other types of ones they could choose other than the S Corp?

Mike Vannoy: correct. That's where I was going.

Yeah, yeah, well, I'm, I'm not sure. I can't think of the, the other ones right now that you may pick, because a lot of times with small businesses, we're, you know, we're, we're normally just going to the S Corp, kind of, if they [00:09:00] need it or not.

Mike Vannoy: Right. And, and, and honestly, my brain was going towards, okay, you're growing, you're a bigger, uh, larger enterprise or different, different types of ways to incorporate, but

Jason Blumer: Yeah, yeah,

Yeah, but, but but mainly for small business, yeah, just focusing on that S Corp, you know, entity classification with the IRS is the main thing we would do as they're growing.

Mike Vannoy: yeah, right. Okay. Um, so

Jason Blumer: yeah.

Mike Vannoy: business, uh, home remodeling business, uh, uh, hair salon, gas station, whatever it is. Uh, a good way to start is as an LLC. So you got legal protections, limited liability, uh, uh, company with your state. And I think an awful lot, is it fair to say a lot of people just, that idea of purpose just happens.

They end up being sole proprietors. It comes tax time. They're fidget, they got to fill out a Schedule [00:10:00] C, uh, Why is it that businesses, and there's going to be a lot of nuance here. Why is it that business owners should think about classifying from a tax purpose on the federal level, the IRS, as an S Corp instead of just staying as a sole proprietor?

Jason Blumer: yeah. No, it's a good question. Um, so, so you, you can stay, yeah, C Corp or an L L C, you can stay in L L C forever if you want to. Um, but if you, If you were a sole proprietor and you're growing, you want some protection, you become an LLC, what the IRS is taxing you at the highest rate. And that's the problem.

Uh, so, so basically all of that, that income you're earning through that sole proprietor LLC business, it's all being taxed Uh, at a, um, a self employment tax rate, 15. 3%. And that's on top of just the ordinary tax [00:11:00] rate. So the ordinary tax rate are when we, you know, when accountants are talking about tax brackets and things like that, what tax bracket are you in?

They're talking about ordinary tax brackets where we tax the regular income of people. But if for people who own a business. And they just are starting out. The IRS is going to tax it. They're going to do an additional 15. 3 percent tax, which is pretty steep. That's pretty steep tax. And of course, if you're, if you're not making money, then there's no tax, which there are some rules around that.

Um, but if you are making money, you 15. 3%. Off the top of that. And so if, as you start growing, that becomes a problem, you are starting to give, you know, if you make a hundred thousand, if you're a small business and you make a hundred thousand dollar profit, which could be, you know, some small business you do on your own.

Um, you're giving them 15, 300 [00:12:00] bucks. Like you're giving them a lot of money. And so that's when an accountant or somebody would go, you might want to think about being an S corp.

Mike Vannoy: Okay. So, so you're, so you hang a shingle, you're an LLC with a state, you're a sole proprietor, you're filling out your Schedule C, you're paying your normal income tax. But on top of that. It's on your schedule C, you're paying 15. 3 percent on that. There's something kind of, sort of, maybe it's not magical, but coincidental about that 15.

3%. Why? So you're making more money, you're paying extra tax. Why would it be a tax savings to reclassify

Jason Blumer: Yeah. Yeah, that's, that's a good question. So, so now when you become an S Corp and the, the, that subchapter S Corp section of the tax code that was created for small business, it basically says, okay, you don't have to pay that 15. 3 anymore. You're not going to have to pay that. Uh, [00:13:00] that is now, so when you become an S Corp and so, so, okay, so you're an LLC, you're making a hundred grand in profit per year, and you're paying 15.3 You switch to an S Corp and you do it as of the first of the year. In the next year, so that next year you make a hundred grand, you just saved 15, 300 bucks, because the code lets you do that. and some people may wonder, how is that possible? With the, the government's just giving you more, giving you money.

Well, they did create that code to really be a benefit to small businesses, but there is one issue and the IRS is going to require, now that you've become an S Corp they're going to require you to take payroll. Now you got to set up payroll

Mike Vannoy: Yep.

Jason Blumer: and you have, and boy, you do not want to mess up payroll.

Mike Vannoy: Oh, And there's a lot of reasons why Mike, which you probably know, but we could get into a lot of those.

yeah, and, and, and we'll go down some of those rabbit holes. So, [00:14:00] so basically. As a sole proprietor, my, my business income shows up on the schedule. See, I'm paying the 15. 3%. Um, as an S Corp, uh, the, that corporation we'll talk about is going to pay, you're gonna pay taxes on the profit of it, but you don't have to pay that 15.

3%, but you're going to have to have payroll. Why do you have to have payroll? And then here it comes in our, here we revisit our 15. 3%, right?

Jason Blumer: Yeah. Right. So, so the IRS, they're not stupid, right? So they're, they are giving you a tax benefit, but when now, when they make you take a salary in the S Corp, uh, and the way we do payroll. As, as Mike, as you and your companies know very well is the company withhold 7. 65 percent FICA, you know, sometimes we call that FICA and the company pays 7.

65 percent to the government, and then out [00:15:00] of your check as an employee, you have FICA withheld from your check 7. 65%. And when you put those together, that's 15. 3. And so the government's going to get their 15. 3. Um, but instead of on a sole proprietorship, the only way they could do it is say, I want 15. 3 of all of the profit.

And in an S Corp, they're saying, I'm only going to make you give me 15. 3 percent on just the part you've designated as a salary.

Mike Vannoy: Yeah.

Jason Blumer: That's, that's, and so that's kind of how they're going to get their money. But as accountants and strategists, we kind of know, well, You know, if I was making 100 grand profit paying 15.

3%, I switched to an S Corp and only pay myself a salary of 50, 000. Now, now I'm not paying 15. 3 percent on the full 100, 000 profit. I'm only going to have to pay 15. 3 percent on the 50, [00:16:00] 000.

Mike Vannoy: Right. Cause

that 50. the difference.

And, and, and do I have it right that there's kind of two components here, right? So if my profit was a hundred grand and I just put myself on salary for, for 50 grand, I'm paying the half of the 15. 3, the 7. 65%, the employee portion of my salary. So, so I cut my rate in half on that 50, 000 of this, my salary. And the remaining, the 50, 000 I'm paying, the entity, the S Corp entity is paying me, is a business expense.

Jason Blumer: That's, that's true.

Mike Vannoy: And, and, not only is the salary, but the money that I'm paying to a payroll provider or my accountant, my, my insurer, whoever is doing my payroll, that's a business expense. Therefore, reducing the my profit and therefore reducing the amount of taxable [00:17:00] income the business has.

Jason Blumer: That's true. Yeah. So yeah, not only are you not having to pay that 15. 3 percent on that 100, 000, you're now only, yeah, as the employee, you're giving up only half of that 7. 65 percent out of your check on the 50, 000 and the company is deducting that 100, 000. These things too. And so, yeah, it, it, it's good for a lot of reasons.

Now you're getting deductions you weren't getting before.

Mike Vannoy: That's right. That's right. And so admittedly, it's a bit more complex, right? So it's like, okay, I'm going to have to, I mean, uh, not being too self promotional. You don't want to do payroll yourself.

Jason Blumer: No, listen, you don't want it to payroll by yourself.

Mike Vannoy: Yeah. I mean, it's not for, it's not cause you can't, uh, uh, divide 50, 000 by 52 weeks and give yourself a weekly check.

It's tax filing is what's complex.

And you, the cost of a mistake just isn't worth it there. And it's really, [00:18:00] really inexpensive to outsource

payroll. totally.

Yeah. So, so it is, it is more complex. You're going to have to put yourself on payroll. You're going to have to have a fair market wage. We can talk about that in a sec.

They're gonna have to process payroll. So there's some complexities, but on that a hundred thousand dollars, there's a few thousand dollars of savings of tax arbitrage that literally just goes in your pocket,

Jason Blumer: Yeah, for sure. Yeah. And so, you know, the, and then we can get into, you know, what is the right amount, you know, to start helping, you know, to do this, but what, what we, what we find, and of course, you know, we run a firm and help small businesses do this stuff. If we're going to save them money, we want to make sure the money I'm going to save you is worth the additional costs.

You've got to pay a payroll provider. To actually do your payroll for you. And we would say, you cannot do your own payroll. You need to pay somebody to do the payroll. And that cost is so [00:19:00] negligible compared to the savings that the, you know, the, the client is just pocketing so much money, um, by, by doing that.

Um, even when they're starting to pay somebody to do their tax return now, their S Corp tax return, even if they're paying a payroll provider to actually paying them to, to make these filings for them. Um, it, it is worth it. The savings is still so large. Uh, it's, it's enough to pay for all of those additional administrative expenses, basically.

Mike Vannoy: Jason, let, let, let's, let's go there. So what, what, what are some of these additional expenses? So there's, and you, you hit at least two of 'em, right? So if I a thousand s corp, um, I'm gonna have payroll, so I'm gonna have payroll tax. Uh, uh, payroll provider that I'm going to have to pay. Um, I'm going to have to pay my CPA, my accountant, probably a little bit more money cause it's not just my personal tax return, I'm going to have a business tax [00:20:00] return and personal tax return.

Jason Blumer: Two, right? And that's that entity. It's now an entity. And an entity has to file its own tax return. That's, that's part of the pain. And you don't want to file your own S corp return. I mean, that you don't want to do that. You want to pay an accountant. So now you've got accountants doing payroll or you're paying, you know, you're buying a really good payroll software, uh, to do that.

Uh, those are needed. Also, when you file an entity return, an S corp return, it's, It's got really two financial statements on it. It's got a, um, it's got a profit and loss statement and a balance sheet. And they're, they're kind of, they're very summarized, you know, but they are there. And when you have two statements, what you've just moved into is double entry bookkeeping, basically.

And before, when you were a sole proprietor, you were only keeping track of the profit and loss, so to speak, which is money in Money out, the difference is your profit and you're paying tax on that. Now, when you file an S [00:21:00] corporation, then you're filing also a balance sheet. And so you've moved into double entry bookkeeping.

And so we would say you should get an accounting software too. And now, now you got accounting, you got to keep up your accounting. And if you're big enough, you may want to pay your accountant to do your accounting on a monthly basis. Uh, some really small businesses will do their own accounting. We would say.

You should not file your S Corp tax by yourself. You should not file your payroll by yourself. Uh, but you might be able to do your accounting if you're small enough. But you may also want to outsource that too.

Mike Vannoy: And maybe some hybrid hybrid. I've been involved in businesses where you outsource the whole thing. I've been involved in businesses where you did everything you possibly could because you're scraping nickels and. And you just have a pro do your taxes at the end of the year. And then these hybrids where you have a daily bookkeeper, maybe your office manager, part of their duties is Totally. bookkeeping,

Jason Blumer: Yeah. Yeah. And a lot of that depends on [00:22:00] just how big are you? You know, well, how much weight is this on you? You know, and if you're running this huge landscaping business, you might be out in the field a lot. So you may not be in the office needing to do accounting. You know, So, uh, and I'm going to go there next about like what size companies should be thinking about this. We'll make sure I have it sized properly. Okay. Uh, I filed with the, by state, I'm an LLC, so I have the legal protection of a limited liability company. Um, now I'm just learning of this great tax benefit if I, reclassify from a sole proprietorship into an S Corp.

Mike Vannoy: I put myself on payroll. So being an S Corp, I'm going to have a tax advantage, uh, by putting myself on payroll. Um, because now it's the only employer side, the employee side of FICA that I'm paying. So that 15. 3 percent goes to 7. 65%. And that payroll is a legitimate business [00:23:00] expense for the business. So I'm actually lowering the profit Therefore lowering the taxable burden on the top line as well. All that means I've got to, I've got to sign up for payroll. I've got to, uh, uh, do double entry accounting. Someone needs some accounting software. Uh, so there is some additional costs there. Is there anything else in the cost and complexity side, uh, for businesses to think about

Jason Blumer: Yeah. You know, there probably are, but those are those are the big ones. You know, there there would be a lot. We would teach people about just how to run and operate a bigger business. You know, you're going to have to start thinking about building team and in things like that, but I think you're mainly talking about what other administrative expenses?

diseases are there. You know, if you're an LOC, you might have some annual, uh, LOC renewal filings with the secretary of state, you know, you have to make, so there's a, there's a number of administrative things, but we've just hit the real big ones that are going to really come out of your pocket because you made an S corp election.

Mike Vannoy: Maybe one last [00:24:00] thing on this topic, uh, Jason, and, um, What are the rules? What does the IRS say about giving yourself a salary? Cause before doing this, you probably just took distributions, right? Right. So, um, can you lowball yourself and say, I'm only going to take a small amount cause I want to be safe and provide some cushion or, Hey, I'm going to milk this thing for everything it's worth, and I'm going to give myself a hundred thousand dollars salary and there's no profit left in the business.

But what does the IRS say about

Jason Blumer: yeah, yeah. This is good. Um, maybe we can talk about, so if, if you're an LLC and you make a hundred thousand dollars in profit and you're taxed at 15.3%, really you can take all 100,000 out and when you switch to an S corp, um, you could also take 100,000 out, uh, in payroll too. But if you do that, you're actually still, you know, kind of giving 15.3 on a hundred grand to the IRS.

So if people become an S corp, if you want to do it. Fraudulently, which obviously we're saying you shouldn't,

Mike Vannoy: We're definitely [00:25:00] not advising that.

Jason Blumer: no, no, no, that's not what you want to do. But some people that do this wrong, right? They're wanna, you know, they're like, I want to save that hundred grand from that 15. 3%. I'll switch to an S Corp and then I won't pay myself a salary at all.

And then I completely avoid the 15. 3 percent on all of it. And so the IRS, again, they're not stupid. They say you must take payroll. If you're an owner. And then they also say, you must take a reasonable wage. That wage must be reasonable. Um, so, and that's really how they define it. So, there's, uh, they, what they want is the freedom to really define that reasonable wage, sometimes in a tax court. And so, so nobody has the right way to define exactly what is that a reasonable compensation. Basically, the IRS just says you better pay yourself a reasonable [00:26:00] compensation. And so you could go too low, right? If you say, well, I'll just save a hundred grand, you know, that 15. 3 percent on a hundred grand and pay myself an annual salary of 2000.

So obviously most people would go, well, that's, that doesn't make any sense. So you're not going to pay anybody 2, 000 a year to run a hundred thousand dollar profit business. So, well, what is the number? Is it 50? Is it 75 grand? Well, the lower you can get that down. The less tax you're going to pay and the more you're going to save.

But when do you hit the threshold of it not being reasonable anymore? There's not a magic line. And so some firms, some accounting firms will, they'll really take risks and they're going to want to push the threshold. Your salary is super, super low. What we do as a firm, which I think most, you know, strong firms do, is they really have a way, they use some software or we use processes to calculate reasonable comp, and we'll use a lot of pay ranges [00:27:00] and, uh, and things like that to really try to give advice to our clients to say, actually, this is a reasonable wage that we believe as a firm would be defensible before the IRS as reasonable.

That's what we want to hit.

Mike Vannoy: that's really kind of the litmus test. But in my, my, my accountant CPA, same, same thing. It's because there isn't necessarily a black and white is, is what is reasonably defensible is

Jason Blumer: There you go.

Mike Vannoy: targeting. Right.

Jason Blumer: Yep. That's, that's what you, that's what you want. And, and then also, you know, as the tax strategist being hired by that small business owner, we want them to save a lot of money too. And so we're gonna, you know, we're going to try to get this to a place where we can. Not give them this huge salary, you know, and, and try to get some savings out of it.

Uh, but either way we do know, you know, if they're, if they're making a hundred grand in profit, we're going to be able to get them a lot of savings. We can start with 15, 300. That's the savings. And then whatever salary we add [00:28:00] back. Which probably is not going to be a hundred grand, right? It's going to be, uh, who knows?

It might be 50. So we're really going to save 7, 650 bucks off the top. Uh, and then there's some fees for payroll and accounting and things like that. Our client is gonna, they're going to really come out good, uh, if they're the right kind of business and we switch them and elect them as an S Corp.

Mike Vannoy: Yeah. So the average business owner listening. If your business profits 100, 000 and maybe that sounds like all the money in the world to you because you're just starting out and you're just, uh, you know, starting, starting your own, your own venture, or maybe you're, you're blown way past that. But just as a benchmark, put an extra 7, 500 in your pocket on a hundred grand.

There's not a lot of ways to do that.

Jason Blumer: no.

Mike Vannoy: You're not going to find many ways to drive 7, 500 cost out of your business.

Jason Blumer: Yeah. This is a, this is a really big tax savings move. Um, a lot, a lot of firms use it wrong. They use it in a [00:29:00] poor way, but it, because it's so real, it's, it's legal, it's good. It is a real way to save, you know, taxes. Um, so this, man, this is low hanging fruit for small businesses that are profitable.

That's a key.

Mike Vannoy: And the thing I would just encourage. Folks, business owners watching, listening to think about, man, this maybe sounds a little, okay. That's just, that's more headaches. I got to worry about things are more complex. I want to keep things simple. What hoops would you jump through to drive 7, 500 of costs out of your a hundred thousand dollar profit business, you'd probably, you'd work a lot of hours, you'd renegotiate a lot of deals, you'd find better suppliers.

You would do a lot. It would. I can, and very few opportunities that you could do it as simply and easily as this.

So I'll, I'll, I'll, I'll probably stop there, but this feels for most people, like kind of no [00:30:00] brainer that they should be, yes, it's more complex. It's also a no brainer. It's

Jason Blumer: It is a no brainer. This is a no brainer. You know, we, you know, if we, like, sometimes the client doesn't even know this. And when we see a small business come in and we see this, you know, situation, we're like, you kind of need to do this. Uh, this, this is something that we feel obligated to tell you to do, and we're encouraging you to do it.

Now, sometimes we'll tell them, now you're going to pay us a little more money to do now an entity tax return, and we can manage your accounting and payroll. Um, and we don't mind saying that, right? It's worth you paying somebody to manage the headache of it, because it's easy for us, but the money you're going to save is massive.

It's huge.

Mike Vannoy: Yeah. Right. Right. All right. So there are some, certainly there's a headache. Okay. Simplification of the business. How much do I really want to take on? There's pretty math driven drivers here too. About what, [00:31:00] I want to talk about the threshold of when does it make sense for an employer to make this move, right?

You know, is it, is it, you know, I'm a, I'm a, I'm a landscaper and, uh, I'm, um, I've hired my first employee and I've just billed 75, 000 a year. Is it worth it to me? I mean, where, where, where do we draw the line before Yeah. Yeah. That's, I mean, that's, that's always the question, right? How do you do it? So just, I'll start by saying the S Corp election is just that. It's an election. Which means, and that's, you know, that's a, that's a word we use when we're trying to tell the IRS to do something. So we can either elect to turn our, or we can either elect to have our LLC taxed as an S Corp, or we can elect not to do it.

Jason Blumer: So it's really, you don't have to. And so that means there's an opinion involved, right? So different firms, you're going to find do this in different ways. Some get [00:32:00] super extreme. Right. With their, their clients. And they're like, I want to switch everybody to an S corporation. And a lot of times they might do that so they can get more fees for accounting and taxes or something like that.

Uh, even if it's not viable, um, right. And some may do it for other, um, you know, unscrupulous reasons. Um, but we're only going to do it. We are only going to do it in our firm. If switching that client saves them enough money. To cover the costs of all the administration, they've got to add, they've got to add to the business.

And so different firms are going to say different things, but the, the company does need to be profitable. So that's key number one. We want to see a profitable business, ongoing profitable, not where you only oddly profitable in one year and you're going to run losses for the next four years, then we would not want to switch them to an S Corp because remember, and you know, this might, when you switch to an S Corp, you get that savings that year and the.

The rest of [00:33:00] all the years, all the years you operate, you're operating as an S Corp, you're getting those savings every year. Uh, but there is a level that you can have profit low enough that it wouldn't be valuable enough to the client. And also it might not be valuable enough for us as a firm to manage that client.

So I am going to want my small business client hitting 80, 000 to 100, 000 in profit. Uh, that's us as a firm. Some firms may have a lower profit threshold. Some may have a higher profit threshold, and that's just because that firm doesn't want to work with small businesses. Uh, but you know, if they're working with larger businesses, they're probably S Corps or C Corps anyway.

So it totally depends.

Mike Vannoy: If I'm just trying to do rough math in my head, keep me honest here. If, uh, if my potential tax savings is call it five grand,

um, I'm probably going to be less than five grand, but [00:34:00] approaching five grand in what I'm going to pay for more complex tax filing, uh, a payroll provider, just a little, uh, the, the, the, the, whatever fees for the entity classification itself.

So. You're probably the floor is if you're going to save, I don't know, and I'm making this up 2, 500 bucks, 3, 500 bucks, you might be able to break even once you start getting 5, 000 or more, this starts to become just more, more obvious.

Jason Blumer: yeah, exactly. Yeah. So you're basically saying if I added up all the costs of this new level administration, you got to pay some other professionals or a payroll software. And I've got to fork out, you know, 3, 500 bucks a year to cover all of that. Then obviously you want your savings to weigh, to 3, 500.

And we want our clients to pocket a lot of money too. So I'd want them pocketing at least five to seven grand more than that 3, 000. So I'm going to want to, I'm going to want a hit of 10, 000 bucks at a [00:35:00] minimum of savings. Uh, so that's going to put me in that 8, 100, 000 in profit just to get my client so much savings that it way more than pays for the administrative costs to actually run this escort.

Totally.

Mike Vannoy: does it matter? It's really just a matter of profit, right? So I could be a consultant. I have a handsome hourly rate that I charge, and so that a hundred thousand, uh, uh, uh, in profit might come on 110,000 in top line revenue 'cause I don't have that expense. or or it could be a $2 million business with 5% margin, uh, to get to the same hundred.

But it's, it's, it's that 80 to a hundred is kind of your tipping point regardless. Right,

Jason Blumer: Yep. Yeah. So all the, the way you operate your business, whatever business it is, none of that matters. We're just looking at that bottom line profit. When you get all your revenue minus all your expenses. And if it's, you know, 80, a hundred grand, we're going to want to [00:36:00] see that move out of a sole proprietor schedule C reporting.

and start looking at electing an S Corp.

Mike Vannoy: right. Um, are there other unintended consequences of. Filing as an S Corp, reclassifying as an S Corp, um, or even not. What, what, what are the, what are the blind spots that people

Jason Blumer: yeah, well, for sure. Yeah, well, this is, uh, it is a particular election. So there are some limitations to it. Um, you know, this is a U. S. based, uh, small business election. So you got this big international company. Uh, it's really not right for an S Corp. So you need, it needs to be a domestic corporation.

Uh, basically it's operating in the U. S. Uh, Um, it's supposed to be a small business. So it's not for some big, huge company. So you can't have more than a hundred shareholders. in this thing. [00:37:00] Um, uh, you know, so that's a limitation. The, a C corporation can have multiple different types of stock and that's because you, you want to, in a C corporation, you might invite different types of owners and give them different preferred treatments like common stock, preferred stock, things like that.

But in an S corp, you can't do that. You can only have one class of stock. Um, so it, the thing about the S corp is there are some limitations. That you have to abide by. And if, if you don't, and this, this is the funny thing. You could actually be operating your escort for five years, saving all this tax money, you're like, this is awesome.

Um, and you invite. Like a foreign person to become an owner, which is not allowed in an S Corp. Um, you, what you can do is you can, um, kick that S Corp. You can make it not real basically. And you won't even know. And, and what you can do is you're like, cool. I got a new owner in my S [00:38:00] Corp. This person's really helping me.

I met him, you know, abroad. Uh, and you start filing them as an owner on the S Corp and the IRS catches it and Hey, they're not allowed to be an owner. They'll go back and find out the very date you made them an owner, take your S Corp election away, and if the IRS, you know, doesn't catch up to you for another three years, and there's three years you've been filing S Corp returns with a non allowed owner, they'll go back and restate three years ago and say that S Corp, you blew that up three years ago.

So all these years you were filing as an S Corp, I'm going to go back and make you file now as a sole proprietor. And so you can actually blow up that S Corp election by allowing people in, uh, like you can in, in, Indiscriminately, you can actually, uh, treat some owner differently than you treat yourself.

And the IRS could say, technically, that's [00:39:00] technically two different classes of stock. Uh, and so, the, you know, you, we, that S Corp is no longer valid. Um, and so there are things that can mess it up and you don't even know you've messed it up. That's kind of rare, but that can happen.

Mike Vannoy: I was going to say, is it fair to say, The IRS, despite maybe popular opinion, the IRS is actually reasonable to work with when you, when you, when you would try to play within the rules and the intent of the S Corp is for small businesses, there aren't tons of gotchas out there, you could accidentally fall into a trap like ownership or more than a hundred shareholders, but pretty uncommon, right?

Jason Blumer: Yeah, those are not, those are not common. Um, you just, and, and we would always say if you do become an S Corp, I think you probably need to start using a firm, some kind of accounting firm, payroll software. Those things are just, you're buying protection when you're doing that. And so some of those professionals are that.

That software is going to catch things you don't even know to catch, because like your [00:40:00] software, Mike, won't even do something wrong like that if you're trying to run something through. And so you need those limitations when you get into an S selection and you're trying to stay within that S selection requirements.

Start to use a professional that's going to tell you, you can't do that. That's just keeps you safe. It's just smart.

Mike Vannoy: the title of the show is Mission to Grow, right? And so, at getting access to capital, staying compliant and then managing the talent you need to grow your business, it's, this is just part of the growth trajectory you're going to have to, whether you, whether you hire them in house, which is heck a lot more expensive, or you're using outside firms and professionals.

This is just part of the natural growth. One of the beautiful things here, if you do it right, and you time it right, you get over this, I like your number, this 80 to 100, 000 in profit threshold. Not only are you gonna, dare I say, putting on your, your, your, your, [00:41:00] your, your, your grown up pants,

Jason Blumer: Right. Yeah, for sure.

Mike Vannoy: and, you're doing things that will help scale the at the same time that will more than fund itself.

Because so yes, more complexity, uh, there's more cat, more dollars in your pocket. That's a nice for you, but you're also creating the infrastructure to actually scale way beyond an S classification

Jason Blumer: Yeah. And that's it. That, that is a thing we want to tell our clients, right? If we're a business firm, we're saying, Hey, this, that selection doesn't just stand by itself, right? We're trying to create a company that has structure and weight. That you can grow inside of, right? And an S Corp is something you want to grow inside of.

You, you don't want to keep growing inside of an LLC. If your business is blowing up and expanding, we want, you should stop doing it in a certain entity and switch to another one that's more tax advantaged and set up for you to grow. So if you are on a mission to grow as a, [00:42:00] you know, as a entrepreneur, there are some, you know, entities you shouldn't do that in, right?

An S Corp is one you can grow in. It is perfect for small businesses. So, yeah, it's not just about getting the money in your pocket. It's about really funding your growth and helping you grow, uh, and be, you know, structured appropriately. Mm.

Mike Vannoy: you might decide to punt on this question. Um, Cause the advice will be very specific, but so a lot of times business owners will be advised to create LL, lots of LLCs, you know, like, uh, uh, you know, maybe you had a real estate portfolio, maybe you have a day job, but you own some, some rental and, uh, properties, and maybe you put each rental house or apartment complex in its own LLC, just for legal protections.

Um, are there, are there, are there. Do you have guidance for folks how to think [00:43:00] about multiple LLCs as part of an S Corp? Do I have to have separate S Corps? Are, is there a holding company? And, and we're going to get real complex real fast. What's your guidance here? Because I know a lot of yours have multiple LLCs.

Jason Blumer: Yeah, yeah. Well, and that, yeah, the guidance on that is across the board, right? We're going to see, I don't know, tax guidance on Instagram, probably from some people, or TikTok, uh, be different things than we may suggest. There are reasons for those things, right, to do it. I think what we tell our business owners is we say, You want to create as much complexity as, as the benefit that it's giving you, right?

So a lot of people have so many different entities. A lot of times, it doesn't make business sense to do it. It's too complicated to keep up with because every time you start an LLC, you got to keep a set of books. I mean, you got to track that [00:44:00] stuff so you can stick it on a tax return at the end of the year.

So it becomes a pain in the butt if you have six or seven different LLCs. You got to track the books for all of those. But when you're talking about real estate, when you're owning, you know, land and property, that is something you do want to protect. So, uh, typically you do not put real estate inside of an S Corp.

Because a corporate entity is something you can't really get real estate out of very easily if it appreciates, uh, cause that's going to be a taxable event. Um, so an LLC typically is what people use to hold, uh, real estate. And then there's going to be different levels of suggestions. You could say, well, I just have a group of condos, maybe three little condos on the same street.

Can you put those all in the same LLC? You could do that, right? Uh, but. You know, some people would want to put each condo in its own LLC. And that is just remembering the purpose of the LLC [00:45:00] is limited liability. That's what those two L's stand for. So we're trying to limit liability. So if you have three condos in one LLC and somebody slips and falls and sues you, on condo number one, they're going to sue the LLC entity and try to go after everything within that, which will be all three condos.

And so some people will just limit their liability and keep at least real estate property inside of an LLC. Uh, that's one way to think about it. Now, and there's going to be opinions that accountants would give you, then there's going to be opinions that attorneys would give you. Um, some of the, some attorneys and accountants don't match, you know, in terms of how they would suggest each other, uh, do these types of things.

Uh, so, you know, some attorneys will, they want to set up as many LLCs as they can, because they're getting fees to set these things up for, for clients. And then some attorneys will tell you, no, you don't need that. Uh, so it just totally depends. And you got to remember sometimes your attorney and your accountant, your [00:46:00] business accountant won't even agree.

Uh, but. What we are focused on is entrepreneurs and we're trying to help them grow and we don't want to add complexity to their life that they don't need to add to their life because they already have complexity enough just running that business. So Yeah. our, goal.

Mike Vannoy: I like, I like that lens. Maybe, uh, one more question. Since the S Corp. It's, it's, it's an election. Can you say yes or no to that toggling back and forth? Oh, I'm profitable one year. I'm not the next. And so I'm going to treat myself as an S corp this year and not the next, and I go back and Yeah. Good, good question. You can't, you can't do that. So when you're, when you're in an S Corp, you're generally in, you know, you want to stay in that. Now you can undo the election, you can undo it, but then the IRS is going to give you a waiting period. So if you say I'm an S Corp one year, and then you say, I don't want to be the next year, they've kicked you out of the running of being an [00:47:00] S Corp.

Jason Blumer: And I can't even remember, it might've been three or five years, something like that, that you can't go back and be an S Corp for that same period. Uh, so it is not a toggle back and forth. That's why we think it's important. And this is kind of a downside where we see accountants flip people into an S corp too soon.

Uh, sometimes there's just not enough profit to justify paying the administrative costs and what the client will pocket in tax savings. So we always want to just go, are you sure, is this something you're going to grow? Is it going to be this profitable for the next foreseeable future? And if so Let's move you into it and take on the weight of some of those administrative tasks, because you can't toggle in and out of it.

It's not, that's not the purpose of it, right? You want to get into an entity that's actually going to be best for you and very tax efficient, and just let you go think about growing from here forward.

Mike Vannoy: And, and fair to say, just cause you may have had a great year. Maybe, maybe, maybe you had a [00:48:00] windfall year, you know, uh, I mean, shoot, the pandemic did, was, was, was crazy. If you were in the movie theater business, didn't matter how good you were. It was, it was brutal. That's telling video conference software, uh, you could have been pretty terrible and probably had a lot of success.

Jason Blumer: That's right.

Mike Vannoy: So, uh, if you had like a windfall year and you're looking for tax savings, But you don't have a good outlook for greater than your 000 a year in profit in the, in the subsequent years,

Jason Blumer: Yeah.

Mike Vannoy: you're, you, you, this might not make sense because you are willingly signing up for all the complexity and expense that is going to go along with this Corp election ongoing,

Jason Blumer: that's right. Yeah, you are. So, and you know, it's an election, so it's an opinion. So, all, all this stuff just needs to be talked out with a professional. You need to talk to somebody and go, do you think I should do it? And they can go, I don't think so. Because when you're asking an accountant, should I, should I elect an S Corp?[00:49:00]

They have a lot of, You know, experience with a whole bunch of clients they've elected as an S Corp. So they might look at you and see very clearly, no, you're not a case study to do this just because they've seen it so many times. Or they can tell you very clearly, yeah, you totally should do it. Even if you may not grow as much as you're growing now, it's not like it's going to hurt you if your profit goes down next year.

It's just not helping you as much. So, and that is one thing to say, Mike, you could get in an S Corp this first year and it saves you a lot of tax money because you got a lot of profit. If your profit goes down the next year, it's not necessarily hurting you that you're still an S Corp. You're just not saving as much.

And that, and that's okay. You still have your administrative costs you got to pay for, but just know generally you want to make the move when you really start to see your business grow, or you're going to try to grow it and create more profit. Yeah, you should do it in this kind of entity. It's really tax efficient for you.

Mike Vannoy: just, I think, [00:50:00] I think we've laid out a pretty clear case that if you've got more than 80 to 100, 000 in profit in your business and it's ongoing profit, it's ongoing, if not growing, um, that you really should probably making an S Corp election and take care of the, the, the, put yourself on salary through a payroll system, pay payroll taxes and put a bunch of dollars in your pocket.

It's also true psychologically. So even though we made this case, and it's probably self evident to most folks, they should really probably do this if they haven't already. Most people are afraid, more afraid of making a mistake than they are of making the right decision.

so, okay, maybe I'll save 5, 000.

Maybe I'll save 10, 000, but what if I screwed something up in the, in the fear of making a mistake keeps people from making change more than lack of a good case, what are the top, [00:51:00] if any regrets you, you advise small businesses every single day, what, what, what, what regrets do you think business owners have for either doing or not doing this?

Jason Blumer: Yeah. Well, I, we tell, we tell our entrepreneurial clients and that's really who we work with people trying to grow a business is we say you have to take risks as an entrepreneur that you can't, you can't be an entrepreneur and not take risks. So, um, it's, a very unsafe kind of environment already, right?

Cause you're. You're trying stuff, right? You're putting the weight of the future of your career on your own shoulders. And again, an entrepreneur is the opposite of an employee. So an employee might have more safety. And that, it depends on the person. One might be right for the other, but we're telling these entrepreneurs that are making these S Corp elections or not, we're saying you've got to take risks.

That's part of the world of entrepreneurship. This is one of the risks you've got to take. Uh, and if you have a good professional, professional [00:52:00] firms and, you know, payroll firms like yours, Mike, we're not really scared of making those compliance mistakes because we know how to fix them. All that stuff can be fixed, right?

So if the IRS misunderstands something or there's a wrong, or there's not enough, you know, tax, you know, paid in, you know, through, through the payroll filings, You can, you can correct that stuff. This, this stuff feels scary. This compliance stuff with the government feels scary, uh, but it can be corrected.

Now, I would say, um, some things are rightly scary, and if you're trying to, if you're trying to grow a business in multiple states, you're, you should not be doing that on your own. So, Uh, a payroll provider that gets you into multiple states. That's one of the most complex ways to set up your payroll. Um, and that's a risk you should not take.

It's foolish. It's not even that expensive to try to get a payroll provider to, to file you in multiple states. [00:53:00] Uh, when you start going into multiple states, you're getting out of your comfort zone and you need a professional to do that. Uh, and a piece of software. So those risks you should not take because they're really, they're really pretty high and states don't play around.

Uh, sometimes they can be more aggressive than the federal government because the federal government is just huge, move slower, but state, state governments, you know, they want their money and they go after people, uh, that show up in their, their state and they want some tax money from them. So the

Mike Vannoy: states have, get these unfunded mandates from the federal government that, and they have to live within a budget. You're, you're exactly right. Sometimes they can be way nastier because they need the money.

Jason Blumer: I do. Yeah. So that, that's where you don't take risks. So you do need to take some risks, right? Uh, and, but you, you don't need to play around with some parts of accounting, some parts of tax, some parts of payroll. You don't need to be messing with that stuff. It's just small things. You know, Mike, you can do some really dumb, small things and get yourself in a lot of [00:54:00] trouble.

And they'll, man, they just have the, they have the law behind them to penalize you, uh, to, make you pay interest and penalty on a lot of your mistakes. Uh, that stuff can rack up really high. So yeah, don't, don't risk compliance. Pay somebody to do that.

Mike Vannoy: Jason, I really enjoyed the conversation. Uh, super helpful. Hopefully everybody else listening today found this helpful as well. So, uh, appreciate your advice.

Jason Blumer: Yeah. Thanks Mike, for having me on the show. I hope it's helped. I hope it helps entrepreneurs, you know, with the mission to grow.

Mike Vannoy: And if, uh, you're an entrepreneur, you're a business owner, hopefully this brought some clarity to maybe you knew this topic, but now, you know, Okay, this 100, 000 range, I'm not quite there yet, but I have some more clarity of when I should be making this move or maybe I've blown past that. It's like, oh boy, I've, there's an opportunity I'm already missing.

Clearly the recommendation is if you're over that threshold, you should be thinking about reclassifying, taking care of this. This [00:55:00] really low hanging fruit tax opportunity. So, uh, hopefully you do it, you take that money and you invest it in your business, uh, to grow. And with that, uh, we thank you for letting us be part of your mission to grow.