Whether you like it or not You are a brand. Everything you say and do either adds or subtracts from your brand. Ignore You and your brand starts to turn stale.
You, Inc. is your brand. It will take you wherever you want to go. But do you know what You, Inc. is all about?
It is simple to see You, Inc. in action when compared to a business. Take this blog for example. I can speak at conferences or just attend to build contacts. Guest blogging brings more visibility to my work. Or I can spend money to promote my brand. How I act and interact with people around me reflect on my brand. Treat the brand well and it will take good care of me; ignore it or treat it badly and the brand will kamikaze faster than you can snap your fingers.
Building You, Inc. takes time and effort; destroying You, Inc. can happen fast. Your income and net worth are directly related to the brand of You, Inc. Arming yourself with knowledge is the surest way to supercharge your brand. But knowledge is not enough. Knowledge without action is worthless. Creating a large net worth in a relatively short time is possible. Increasing income to retire debt and grow investments is the only road to financial independence.
Building the Brand
There are two phases to your brand: the building phase and the maintaining phase. In the building phase you attend school and work a job or run your own business. In phase two you have reached financial independence. Building more net worth is unnecessary in phase two, but it tends to happen anyway. In fact, if you do it right, you earn more and grow your net worth more once you reach financial independence than while in the building phase.
There are two reasons for this. During the building phase you are so focused on earning a living, paying bills, raising a family and investing there is no time to see all the opportunities, none the less act on them. Once you reach financial independence you tend to release the huge breath you were holding. The tension is reduced and you finally relax; your vision is clearer than ever before. At this stage you have more experience than at any time in your life.
You, Inc. is a multinational conglomerate. Unfortunately you focus on only one income stream early on because you don’t know better. It hurts the financial statement badly. Economic winds toss you to and fro. Sickening!
A multinational conglomerate suffers when it only cares about income from one division just like You suffer when all you consider is your paycheck.
The best run companies, the best brands, have money coming in from all directions. Any company with a large percentage of the revenues coming from one source is at risk the one customer leaves or the one job disappears. You need to diversify.
It’s Only a Job
I can hear you already. “It’s only a job.” I get it. Your job is a stepping stone to bigger and better things. Your brand still matters and you must work constantly to build the brand. If you disagree, tell me this: How important is the brand of a convict released from prison? It might only be a job, but they are hard to find and even if you do all your eggs are in one basket. How much better to have an awesome brand with multiple stream of income?
If you want a job then get one. A regular wage-earning job is perfectly fine if it is what you want. It isn’t the end however. A job is only one source of income. Your journey to financial independence needs a margin of safety. Your brand needs to expand.
Business owners understand the concept better. One customer is not a business, it’s a job. (Well, it actually can be a business for tax purposes.) When you have a job you technically have one customer and she holds all the cards.
While you build toward financial independence it is best to have many sources of income. Your brand will pave the way. To supplement your wage you can add rental income or a side gig. Once debt is sufficiently reduced your index fund investments throw off a stream of dividends which is another source of income.
Throwing a Net
So how do you build your brand? How do you bring You, Inc. to life? Every situation is different. Your favorite accountant’s practice was generally a local or regional firm until Mr. Money Mustache gave me a push and this blog showed up. Now I have a national and even an international footprint. To adequately manage a larger footprint takes additional effort. I travel much more now than I have in the past. Speaking at conferences is almost a given.
But what about You, Inc. Your favorite accountant is fine and dandy, but that doesn’t help you. For most readers the net you throw will be local or at most regional. A side gig or full-time business will lay limp unless you breathe life into it. The breath of life can either be in the form of expensive advertising (something that doesn’t build a small local brand effectively) or well planned brand building.
Example: How much would you need to spend in advertising to match the advantages of a well executed speaking engagement? Imagine your favorite accountant advertising. Would it grow the business? Maybe. What if I gave a presentation with lots of ideas at the local apartment association, Elks Club or Optimist Club?
Your brand will determine if you speak locally or more broadly. Podcasts are important to grow a blogs brand. But a side gig can get a real boost with a guest appearance on a local radio talk show.
Starting local and expanding from home base is a logical way to build You, Inc. When opportunity arises you can spring into action. If your eyes are always open for opportunity your sphere of influence will expand.
A well oiled brand has numerous automatic streams of income. Index funds throw off a growing stream of dividends. Investment properties grow your rental income. A side gig allows you to take on work you enjoy while earning extra coin. The best part is the taxes. The worst form of income is wages/salaries. The IRS beats you silly when this is your only income. W-2 income has few chances to reduce the tax bill.
Qualified dividend income is taxed at a lower rate than ordinary income you bust tail to get. Same applies to long-term capital gains. And even if you read this blog poorly you will have noticed the serious tax advantages of owning income property.
Then there are some streams of income that are sporadic and only partially automatic. When your focus is on pounding out as many hours as possible at a job there is no time left to explore better deals. Tax-free credit card bonuses are a good example. Worst of all, with no time to plan you probably overpay the IRS.
There is only one solution: dump phase one. That’s right! Dump phase one, the building or accumulating phase.
The dirty little secret rich people don’t tell you is formalized work is not necessary once you have a small nest egg started. If your annual spending is $40,000, then you need $1 million invested considering the 4% rule. But that is a big fat lie! Many people (most who actually try) earn more once they retire or at least end formalized work.
The cost of working is high! Driving to work, wearing office clothes or other required uniform and lunch on the road add up and you have little control over your income. The biggest expense of working a formalized job is the information and knowledge you miss on awesome deals. You’re either not around to see them or too busy to notice.
Phase one is required, but you need to move beyond the beginners phase as quickly as possible. The real money, the real opportunities are out there. Once formalized work is out of the way you can attend conferences where you meet people of like mind. Before long you have more profitable offers than you can handle. Trust me, I know. You can’t even accept a fraction of the offers.
Phase two is the fun phase. You want to get there as soon as possible. This is the one time it is okay to put the cart before the horse. I tell my children they only need about $300,000 before they can retire. Dividends/capital gains, credit card and other banks giveaways and selling trade lines will be more than enough to pay the bills. A side gig will put the final nail in.
The side gig can be almost anything. My oldest daughter has found so many ways to earn coin while not working much in a formalized work setting. It is disconcerting to her because all her friends do “normal” work. Sorry girls. Dad’s not normal and there is this thing called genetics.
Use media. Facebook and other social media are fine, but the real hidden values are more sublime. My oldest daughter again has this idea she wants to tutor. She devised a method to help children with challenges learning. She tried it out with great success working part-time at the local YMCA. Now she is going on local radio talk shows. Did I mention the word busy? Of course it works! And radio talk shows are so hungry for guests they bleed from the eyes. Christian radio especially. Twenty years ago I published a book and went on radio talk shows around the country all by phone and sold nearly 50,000 copies. And it was a blast!
One financial conference will provide you with more ideas than you can use. You can sit at home watching cable or screwing around on social media. The choice is yours.
Or you can keep the “normal” job. Somebody has to do it. Not me! But you might be fine with it.
Tax season is officially over and not a moment too soon. As much as I love the work, when months go by without a day off it begins to wear on me. The worst part is the sitting. Too many hours planted in a chair coupled with sleep deprivation and health is not getting the attention it needs.
Loving something as much as I love tax work is also a challenge for people around me. Mrs. Accountant is an angel, allowing me the opportunity every year to disappear for months to help complete strangers and semi-strangers with their tax, accounting and financial problems. My daughters have learned from an early age dad is a very intense man when it comes to his work.
Work has never been a four letter word for me. (Considering my profession you would think I could count to four better.) Growing up on a farm meant everything was work, but not work. Running to the creek to fish was something you did. Planting in spring was fun, not really work. Harvesting was an addiction; sleep was hard to achieve until the crops were off the field. I know of no greater pleasure than watching a barn filled with bales of hay, placed there by my own hands. There is no greater thrill than to see the milk cooler fill each day to the rim. A full bulk tank meant money, and therefore, life. It was a good life and I had no idea what the real world was like outside my vision horizon.
Formalized work is another story. Working on a farm is just doing stuff you feel like doing. Calling the cows for milking was more pleasure than work. Even the farm dog knew when it was time to sic’em. Our worldview was narrow, yet innocent. And there is something to be said for ignorant innocence.
But I was smarter than the rest of them. And restless. Never satisfied, I had to know what was on the other side of the hill. “Greener”, you say? Well, I gotta see that for myself.
The family farm was reaching the end of its lifecycle and the world would open before my eyes. With an optimism only the ignorant can feel, I headed out into the world as the family farm took its last gasp in bankruptcy court. The cows were gone and some of the land. The homestead and most of the land (the core holdings, for sure) were preserved in the family name. I had different ideas.
On one hand I say work doesn’t bother me, but you may have noticed I have yet another hand. Neat, huh? With this extra hand I’m lazier than shit. I wanted nothing to do with the daily grind and obligations of milking cows. Working for the man would never cut it.
Well, of course, those lazy-ass business owners have it made. Hire a bunch of slaves, ah, I mean employees, aka team members, to do all the work while I did the one thing I really enjoyed: counting the money.
This whole early retirement thing is an alien concept to me. Retire early? From what? My plan was to never start! Take that Mr. Money Mustache. Work until you’re 30. Pftt!
Unfortunately the world is not always kind to idiots, ah, innocence. I had a plan and life had a few plans of her own for me.
The Best-Laid Plans of Mice and Men
The best part of living in the middle of nowhere is that you never develop the bad habits of the world at large. As a kid, my biggest expense in life was dropping money into the plate Sunday morning. My senior year of high school I think my entire spending for the year never broke $200 and most of that was enforced school spending which pissed me off to no end. Come to think of it, I still have a burr in my shorts over it.
By nature I was fiscally tighter than a rusted ring shank nail. Working at saving was like saying I have to work to keep my heart beating. The darn thing does what it does without any conscious input by me. Money, saving and investing worked on the same rules for me. And good thing. If the world had taught me the bad money habits most people have you would not be enjoying this wonderful story this very moment. (I am not conceited. But I am right.) It was thrift which gave me a fighting chance to pull the stunt I was planning.
I needed to find a business where I could work very part-time and screw around whenever I wanted. My preferred screwing around was books. I loved to read and still do. I read every day. That is one better than eating because I periodically fast.
Out of high school I was still working on the family farm. A few months later it was gone. With few options available in the Rust Belt during the early 1980s recession I went to work for my dad’s agricultural repair business. Talk about work. This was nothing like farming! Hundred hour work weeks for minimum wage or less (I worked for family) educated me about the “real” world damn fast.
Bookkeeping, taxes and payroll all looked mighty good. Sure beat crawling into another dirty silo. (My brother, on the other hand—remember, most of us have two hands—enjoyed the silo work and still does. To each their own.) My dad hated paperwork so the task fell to me. For a few years I had my side gig while busting tail another 80 hours a week turning a wrench. Don’t feel sorry for me though. The lessons learned from hard work are never lost.
I learned I needed to get that side gig going and going fast. Sick of the ag industry, I left the family business and moved into my own home. I was 22. For the first time in my life I could indulge my reading habits with reckless abandon. Lucky me. My side gig was 50 or so tax returns each spring. Investments rounded out the rest of my financial needs.
My first home wasn’t much to look at. Houses are cheap in the boondocks. I paid $12,000 and change. Don’t quote me; I don’t recall the exact number, but I am close. I had money; I had books; I was happy as a pig in shit.
Then I met Mrs. Accountant.
From the FIRE to the Frying Pan
I would never have amounted to anything if Mrs. Accountant hadn’t found me and shown me the way. A year after we met we were married. Now some folks would say I went from the frying pan to the fire, but it ain’t so. I was in the FIRE (financial independence, retire early) and Mrs. Accountant kicked me back to the frying pan. And good thing.
Frugality allows for some serious laziness. When needs are small and desires nonexistent, so are money needs. Without debt, the required money needs are rather small. Any side gig would do. But the one thing I love was unfulfilled.
As Mrs. Accountant and I prepared for married life, the minister marrying us required we take marriage counseling. Innocent enough. As the counseling reached its end the minister commented on my lack of employment. He offered me a job as janitor (that’s custodian to you!) for the parochial school attached to the church. What could I say? I accepted. As memory served, I fought back tears at the time. Once again I was working a dreaded job by the clock. I thought nasty things about God. In his house, of all places.
Don’t let the whelming tears in my eyes cause you any emotional trauma. The work of a janitor is honest work and I took to it like a duck to water. The main reason it took so well is I discovered a janitor can get his work done in a fraction of the time needed. This allowed plenty of time for reading on the clock. God was coughing up a hairball for your favorite accountant!
Regardless how honest the work and wonderful the people at the church and school, I had other plans. It was during this one year swilling toilets, picking up puke and mopping floors that I decided on my official side gig: tax preparation.
I had it all figured out. I’m a smart guy and I’ll tell ya about it if you ask. If you don’t ask I’ll tell ya anyway and wonder what the hell is the matter with you. Tax preparation was the perfect job for a guy that really wanted to spend all day reading. For two and a half months I worked reasonably hard (don’t take on too many clients now) and for nine and a half months I do . . . nothing! Ye-Haaaaa!!!
Back Into the FIRE
Remember how I told you I was a smart guy? Well, I lied!
The first few years in my retired side gig life were peachy. Mrs. Accountant and I had a new home and my office was in the remodeled basement. Life could not have been better. This is where a medical condition I have affected my so-called intelligence.
I record everything in business. I knew how many returns I did every single day. I still have the handwritten pages next to my desk going back decades. I can tell you how much money came in on any given day and how many returns I prepared that day. It was a sickness. Now the records are computerized in QuickBooks and Excel worksheets so I can micro-analyze the data even better.
There was only one goal I ever had in life: beat last year’s numbers. At first this was a noble endeavor. The numbers were small and tacking a few onto last year’s performance was no big deal. But compounding, as we all know around here, takes on a life of its own.
No longer satisfied with my performance, it was time my side gig went viral. (This is before there was such a thing as “going” viral. Back then viral meant you needed to see a doctor for that little indiscretion you had while traveling overseas.)
I wanted back on the farm so I bought my current office building and farmstead. The year was 1995. A mere five years after starting my serious phase of the tax side gig I was going all-in. The side gig was now a full-fledged business. I had employees working in my basement, but now we were putting on our big girl panties. (This is a family blog so there will be no pictures of people in big girl panties.)
I was back in the fucking rat race. (So much for a family blog.) An office building and more employees meant . . . WORK! You may not know this, but I have a life threatening allergic reaction to work. I break out in hives and need plenty of rest to recover from any such incident.
Truth is, I was happy. The business had plenty of room to grow. And grow it did. A storefront sent a bulging client list into obesity. It worked for a few years.
Payroll and bookkeeping were minor parts of the company. A one-man (or woman) summer staff was all that was needed. Seasonal help made the office hum like a beehive. I lived for the thrill of tax season.
But I still had the sickness; beat last year. And beat it, I did. Within a few years I blew past 2,000 tax returns and was turning people away. Stress showed up about the same time. It was too much. My disposition was not conducive to this kind of business. I was never going to be a Bill Gates or anyone who would take a small tax practice to a multi-location regional or national firm. I knew what the price would be and refused to play. It was time to stop beating “last year’s numbers”.
I honed the client list down to 700 over the next few years. I was happy again. I was doing what I loved most: reading a lot, preparing taxes and researching tax issues. I was a pig back in the schmoo.
But . . .
Do we see a pattern here?
All that reading and knowledge really should be put to work. Right? Well, smart as I am, I started thinking. I pay property tax for the full year for the full building. I pay for building upkeep. I pay for computers. On ad nauseam. My thinking was simple. Computers cost exactly the same whether I use them for three months a year or if they are used all year long. What a concept!
So I started adding more payroll and bookkeeping clients. I felt I could hire and retain better employees if I could give them full-time work instead of seasonal jobs.
For several years I turned my practice into a job. Bookkeeping and payroll burst through the seams. Since my focus was tax, the payroll and bookkeeping never turned a profit of any size. Toward the end it even lost money. I’m a tax guy and know it.
I built strategic alliances for bookkeeping and payroll (yes, I know I still owe you guys a post on this outsourcing program). Most payrolls are handled outside my firm and bookkeeping is headed in the same direction. Yes, computers don’t cost more if they are used all year, but if there is no profit, why bother? Now the strategic alliances turn a profit, so feel free to contact my office for payroll and bookkeeping. We do it better and cheaper now. No stress for me; better service and price for you. And I make money. And last I checked that is the reason I am in business; side gig or no.
Danger, Will Robinson!
Tax season is over. I am writing from home. The office is quiet. My office manager and one tax preparer are all that remain. Friday’s are very short days. Only one full-time employee will haunt the halls of my practice until the next tax season. Even the office manager is on truncated hours. And me? I am writing, reading and speaking. My schedule is full. Too much traveling for my taste, but necessary for the life of a blogger who wants to turn it into a real business.
And now we get to the real issue of this blog post. I hope you read this far.
I share my story because I want you to understand the dangers of a side gig. There is one last thing I haven’t told you yet. It is the worst possible thing ever anyone is forced to do.
My practice is more a side gig than ever again for the first time in years. The long hours of tax season are over and my lusts have been satisfied. I accomplished a lot and missed a few things I really wanted to get done for clients. Now I look into the maw of a summer without payroll issues. Some tax work still comes in. It is easier to finish a couple hundred tax returns over nine months than a thousand in two and a half. Yet my heart is heavy.
It is not lack of work to fill my days weighing on my soul. It is the people. My employees. Summer work is done and what started as full-time opportunities turned into seasonal work. As this tax season progressed I knew what had to be done. Good people, people I enjoyed working with, would no longer have work to do in my practice.
I am a coward in these matters. My office manager broke the bad news. My front desk: gone. Tax professionals: gone. Karen, my office manager, keeps the place running smooth. Dawn, an undiscovered tax prodigy (Don’t let it get to your head. Dawn likes to read this blog so I need to keep it real for her.) who somehow wandered into my sphere of influence is the sole remaining full-time employee. There is enough work for her to do as long as I send her on research projects for upcoming blog posts and for extensions and wayward taxpayers seeing the light.
Two years ago Mr. Money Mustache gave me a great honor by pointing out my office and work. He meant well and we get along fine. I do his tax work and even advise MMM on tax matters. When I feel punchy I tell people I’m the financial consultant of MMM. It impressed the shit out of people. He is a fine man and I will always be grateful for what he did for me.
Two years ago it created a huge challenge in my business. The side gig became the worst job ever. MMM has a huge following and it is hard to control the flow. A blog is easy by those standards. More readers are relatively simple to manage. Not so a massive influx of tax clients. There are only so many hours in a day and they were then all consumed. I learned new skills from the challenge.
Two years ago some people got jealous of my success. Why did I get such an honor from MMM when they deserved it? Worse, I had two jealous employees sabotage the business. They couldn’t stand an ‘ol farm boy doing well on such a large stage. Those employees went and the ones they poisoned.
New employees arrived and were trained. Life moved on and my practice grew in the right ways. There is still room for improvement and you can expect that from me as we move forward. There was no doubt I was out of my league two years ago when things hit.
And that is the danger of a side gig. Loving something can quickly turn into an obsession. A seasonal or part-time side gig means you will let good people go. Make no mistake, I fully understand the consequence of my actions. Families are affected.
And I never realized how many times I would have to tell people “no.” There is only so much of little ‘ol me to go around.
That is the real danger of a side gig. You do it because you like doing it. Then it takes over. Learn from the experiences of an old accountant from the backwoods of Wisconsin. Love can be very painful. It is not a character flaw; it is life. Know this before going in.
The side gig is the greatest thing on Earth. It will take you further than you ever imagine. Whoever though my practice would do taxes for Americans on the other side of the planet? Not me. Not even a wet dream. (Not even a wet dream.)
It started when I had a great business proposition for MMM that went beyond anything I could imagine. If I would have known how my life changed the second MMM interrupted my presentation three years ago in Seattle, I would have run from the room and never returned. You can’t mentally handle what the world has in store for you. You just have to take it as it come.
I’m still a farm boy from the middle of nowhere. Things like this don’t happen to people like me.
It was just a side gig, for Christ’s sake. What the hell went wrong?
There is an interesting stream of questions hitting my mailbox. My recent suggestion to cut back and retire early has led to one interesting question. I recommended cutting back to a part-time seasonal job and enjoying all the free time. I used tax preparation as a business idea perfect to live the relaxed lifestyle. CPA’s and other tax professionals came out of the woodwork with the same question: How do you get clients?
Getting clients has always been the easy part for me; finding qualified people to help me with the abundance of clients is a different story. What I am sharing today is something I charge a minimum of $3,000 for a personalized plan to increase your clientele. For free I’ll share my business growth story and few example businesses to help you create your own growth plan.
In the Beginning
Starting a business is always the riskiest time. All the start-up costs strain working capital while you have the least community recognition and the fewest clients or customers. Advertising can be a budget killer which leads us to:
Keith’s Rule # 7: If somebody is selling you on a great advertising idea it rarely works and costs plenty, while your own cheap promotional ideas frequently work.
There are plenty of salespeople and companies willing to tell you how to promote your business. They are all expensive with no real thought on how it will drive business in your door. If I had a dime for every time I was told I’d be out of business if I did not advertise with their company I’d have, well, about thirty seven and a half bucks by now. It is still a lot of predictions of my demise and after 30 years of hearing it I am coming to the conclusion they don’t know what they are talking about.
We will start with my tax practice as an example of how to do it right. In all the examples I will assume a small to medium sized city for business location; the rules could change a bit for businesses in major city centers. If you understand my thought process I am certain you can duplicate the results anywhere.
My original intention was to retire before I started working. (More in a future post.) Tax preparation appealed to me due to the seasonal nature of the work. I prepared taxes for a few people part-time for years before going full-time so I understood the business in the way only a greenhorn can be confident in his expertise. I also worked for a year at the church where my wife went and where we got married. After a year of doing the Lord’s work I gave my tender for January 31st. Here it was, February 1st and I was in business as a real tax preparer.
My plan was simple, everybody needs their taxes prepared and I have experience so if I hung a sign outside my house and put an ad in the paper so I was good to go. As I would explain to business clients decades later, “Everybody has to eat, but not at your restaurant,” I learned a valuable lesson. Here it was, April 15th, and all was quiet. I had a total of 48 clients, mostly simple, low-fee, tax returns. I stared out my bay window on April 15th and thought, Oh sh . . .
Let me share how bad it was. My revenue was $3,000. Sure, it was 1989, but $3,000? I had money packed away and was not in fear of starving. Still, I needed more income or I would eventually run out or my spending would stay permanently low. It was in this moment I learned a skill that has served me well. I learned failure is the best teacher in the world and desperation a hell of a motivator.
Expensive advertising was too much of a risk and hit working capital too hard. I decided I would spend the summer building a client base and even considered working during the summer doing bookkeeping, payroll or other accounting work. Several low cost ideas helped (business cards with my puss on it, business card magnets) brought in a few clients the following tax season and a few late filers over the summer. There was one more thing I did. I created a flyer on my own computer and printed out 2,000 copies. The local newspaper I noticed delivered the paper in these neat plastic baggies. The newspaper was willing to sell me a box of 10,000 for about $50. Over the New Year’s holiday I stuffed 2,000 flyers into the baggies and over the next week Mrs. Accountant and I walked the street hanging the flyers on the 2,000 closest doors.
The efforts paid off. The next tax season saw a tripling of business to a few more than 150 clients. The average prep fee increased too. My revenue approached $12,000. Better, but not enough. I rolled up my sleeves and decided I needed a new approach. I owned a few rental properties at the time (how do you think I was living?) and joined the local apartment association. Each month the association brought in a guest speaker. Well, I had the perfect presentation for my fellow landlords. It was then I learned a massive number of organizations are hungry for speakers, the perfect venues to ply my trade.
For some strange reason apartment association members did not flock to my door when I sat with them in the audience. A few were clients, perhaps five. I researched and rehearsed my presentation for over a month in advance. I must have practiced that first speech 100 hours. It paid off. In less than an hour I had the audience eating out of my hand. I fielded question after question and answered like a pro or offered to find the answer after the meeting. That night I went home with over thirty new clients and they all owned rental properties, a higher fee tax return.
Speaking in front of a group does not bother me in the slightest because I think I have something important to share. Some people get the jitters when faced with public speaking, not me. The trick to speaking to a group is to treat it like you are talking with a group of friends that need your help. After that it is a piece of cake.
I searched out more speaking engagements the remainder of that year. The following tax season ended with over 500 tax returns and I had to hire Mrs. Accountant to help out. I hired a tax preparer for the following tax season and have been a job creator ever since. By my fifth full-time tax season I was knocking out over 1,000 returns and was forced to move to a commercial building I bought near my home. A few years later I pushed past 2,000 tax returns, and payroll, bookkeeping and consulting took over my life. Business was too big. By the year 2000 I started pruning the client list to keep my sanity and now enjoy a 900 return practice. The returns are usually much bigger and include a full line of business services.
There are a lot of ways to promote your business with a small investment. Speaking engagements are the cheapest and best. Sometimes you even get paid to talk about your business. Sweet! When I speak to a group I focus on an area of tax law that affects the group. Taxes are boring until is puts a bigger refund in your pocket. It is rare to speak and leave. More often I am surrounded by an eager group of people looking for answers. My business card is always handy and I encourage them to call my office and set an appointment.
But how do you use the speaking idea if you are a car mechanic? Or a restaurant? I would recommend talking to groups around town about better gas mileage or increasing the value of your car for resale. A restaurant can give a presentation about healthy eating or organic food. Never talk about you. Don’t treat it like a sales call. Talk about them! Give them value! When you do that they will ask to be your client. Talk about the ultimate soft sell.
If someone is happy with their accountant I tell them, “Why change?” If they are unhappy with their accountant I am more than happy to welcome them into the company. There is no need for a hard selling style when you use my method. My way is easier, fun and people and businesses ask to be my client; much better than putting on a full-court press to snag one.
A Few More Ideas
Every business is unique in how it must be presented. Speaking works for most businesses, especially service businesses. I helped a small restaurant triple sales in less than three months with one simple idea: coupons. Not any old coupon, mind you. I had him get 250 flyers printed at a local print shop for under $100 and hand them out to the closest businesses to his restaurant. Each flyer had a coupon for a free cup of gourmet coffee and a simple $1 off a lunch item. The employees of the nearby businesses started to come in for the free cup of coffee. I told the restaurant owner to keep breakfast sandwiches on hand and breakfast sweets. When people got their coffee they bought a sweet roll, cinnamon role or egg croissant sandwich with it. The best part was his restaurant could not handle all the business, but since so many were carry-out it did not matter.
Then came lunch. Think about this for a while. Employees are always looking for something good to eat for lunch. A dollar off a pizza or a sandwich is all you need to draw people in. Employees need something fast so they can get back to work. The restaurant was not only full for lunch, but take-out orders were massive. People don’t just buy lunch for themselves when they have a flyer with $1 off, or some other special, they buy for the whole office. Think of it. Here is a small, struggling restaurant with an average ticket sale of $10 and he now has people ordering over the phone with tickets sometimes over $200. Another bit of advice: Don’t take the coupon. Give the customer the discount and encourage them to reuse the coupon. People love it!
Do It with Passion
One final thought. Business is hard, we all know that. If you start a business I’m going to assume you love what you do or you are playing our Chump’s Game. And if you love what you do, do it with passion. Act like your clients are long lost friends. Have an up-beat attitude; share stories; make your clients feel welcome. When people think you care you will have more clients or customers than you can serve. And really care. No faking it. Remember:
Keith’s Rule #8: Too many customers is a good problem to have.
There is a lot of confusion among small business owners when deciding on their entity classification and the tax savings involved. It is the first discussion I have with most business clients. It takes time to get pertinent information out so I decided it would be a good idea to write down.
There are five business entity choices, but it really is only three since two are default choices: sole proprietorship, partnership, limited liability company (and its close cousin, the limited liability partnership), regular corporation (also called a C corporation) and the S corporation. You default to a sole proprietorship if you are a one-person business or a partnership when two or more owners are involved.
Choices: LLC or LLC Treated as an S-corp
Most attorneys feel every business ought to be an LLC. I agree with the attorneys on this and not only for legal reasons. I like to tell people LLCs are like tuna, it takes on the flavor of whatever you put it with. A single member LLC defaults to a sole proprietorship and joint owners to a partnership. There are no LLC tax forms (with the exception of the “check in the box” election form). A single member files a Schedule C on their personal return; a partnership files Form 1065 like any other partnership. Sole proprietor and partnership tax rules apply accordingly.
An LLC can also take on the flavor of a regular corporation or an S corporation by making a simple election. The “check in the box” election informs the IRS how you want to conduct your business. Most of you don’t want to follow regular corporation tax rules so you will file a second form electing to be treated as an S corporation.
Regular corporations pay their own taxes and dividends paid to the owners are not deductible by the corporation and are therefore double taxed. S corporation profits flow to the owner’s personal tax return and are only taxed on the personal level. Corporations must pay owners a reasonable wage. If you are wrapping your mind around this concept you will naturally want your wages from your LLC/S corporation as low as possible to avoid self-employment taxes on the pass-through profits. The IRS knows this and requires a reasonable wage, but reasonable is a wide road. The tax court is littered with cases on fair compensation. The IRS has not provided a safe harbor (read note below), but many tax professionals feel 60% of profits as a good starting point in determining reasonable compensation.*
Example: You have an S corporation with $200,000 before owner’s payroll. Safe harbor for owner’s wages are $120,000.
Is it possible to have a lower wage and still be reasonable? Yes. A safe harbor is just that, a place where the IRS agrees not to challenge your position. Many owners will not use the safe harbor method. If you have employees (let’s say 20), a large portion of the profit is derived from said employees. Remember why S corporations exist. They allow small firms to conduct business without the negative tax rules of a large regular corporation while still maintaining the legal protection of the corporate structure. The concept of the S corporation is to allow profits from non-owner’s work (passive income) to flow through to the owners without the double taxation of regular corporation dividends or self-employment taxes on the profits derived from employees.
Small businesses frequently have several employees or subcontractors. A reasonable wage for owners may be higher or lower than 60%. Safe harbor is 60% so we can hang our hat on that nail as an owner’s wage ceiling. The higher the profits, the more likely the safe harbor will only be a guideline. There are several places online to find reasonable compensation numbers. Robert Half has a temp agency (Accountemps) that publishes reasonable compensation numbers for a large number of professionals; unemployment offices in most states do as well.
Before we start this part of the discussion I want to remind you I am not an attorney. I encourage you to consult a competent attorney if you have any questions. I only provide my understanding of LLC versus S corporation law as it pertains to taxes.
What is the difference between an LLC and S corporation? Both provide legal protection. It is easier to understand LLCs when you understand why they were created. LLCs were created for legal, medical, and accounting firms. The reason LLCs were needed for these industries is because regular corporation tax laws are devastating to service corporations (you pay the top tax rate on every dollar of profit) and S corporations back then could only have 25 owners (100 owners allowed now). The other drawback of a corporation is the liability issue of all-acts versus own-acts.
An attorney can explain all the different rules between an LLC and corporation, both C and S. We will not dive into those details. There is only one legal area we will review. Remember, I am not an attorney. What I share here is how I understand the laws regarding LLCs and corporations.
The difference between LLCs and corporations involves something called own-acts and all-acts. As I understand it, LLC owners are only liable for own-acts while corporation owners are liable for all-acts. This is easiest to understand with an illustration.
We will use a medical firm as our example. Suppose two groups of doctors get together to start a clinic. One group of doctors organizes as an S corporation, the other as an LLC. After some time in business both clinics suffer a malpractice lawsuit against one of their doctors. Unfortunately, both doctors lose their suit and own a huge settlement. In the S corporation, owners are liable for all-acts; therefore, all doctors are liable for the one doctor’s malpractice. The same situation happens in the LLC clinic. However, with an LLC, liability is only for own-acts; only the doctor sued is liable; the other doctors are protected from loss by the LLC.
Once again, review your situation with an attorney. Feel free to leave comments below. If I verify additional information, I will include it in a future edit.
Show me the Money
Now we get to the part I love the most, the money. How much money can you save in taxes with an LLC treated as an S corporation? To make it clearer for everyone I want to start with a really small company example and work up in size. We will assume our small business owner organized as a LLC from day one, but only elected to be treated as an S corporation at the appropriate time.
The micro business: We start our example with a small home-based business earning a modest $10,000 of profit per year. At this low level of profit electing to be treated as an S corporation is inadvisable. The cost of filing the extra tax return for the S corporation would eat up more than the tax savings. There is still one thing a business owner can do: rent out a portion of his home to his LLC.
Let me review the office in home rules. A single member LLC treated as a sole proprietor will follow office in home rules like a sole proprietor will with one additional option. The office in the home must be regular and exclusive. This means you can’t deduct a corner of the living room you use sometimes. The office in the home must be an exclusive area of the home (like a spare bedroom) and used only for the business.
The LLC is a person in the eyes of the law. (Remember Mitt Romney raising people’s ire when he said this on the campaign trail. He actually was right, even if his delivery could use some work.) Just because your business is reported with your personal tax return does not change the fact that the LLC is a person. Therefore, the LLC can rent space in your home from you. You must have a rent agreement between you and the LLC. You don’t need anything fancy. A simple commercial rental agreement will meet IRS requirements.
The LLC can deduct the full amount of the rent. With an office in the home it must be “regular and exclusive”. For a rent agreement between you and the LLC it only has to be for the benefit of the LLC, a much lower bar to hurdle.
Let me illustrate with some numbers:
Office in the home:
Safe harbor deduction of spare bedroom office used “regular and exclusive”: $720 ($5 per square foot x 144 (a 12×12 room))
Business profit after office in the home deduction: $9,280
Self-employment tax: $1,420 (we round numbers when we prepare taxes.
Income tax (assume 15% federal; 5% state): $1,856
Total taxes attributed to the business: $1420 + 1856 = $3,276 total tax
LLC renting space in your home:
Fair rental value of bedroom office, plus storage area of part of the garage and work area used in the basement: $500 per month; $6,000 per year
Business profit after office rent expense: $4000
Self-employment tax: $612
Rental income: $6,000 – rental portion of home expenses (mortgage interest, property tax, repairs and maintenance and depreciation) $720 (to keep consistent with the above example) = $5,280
Income tax: $4,000 (business profit) + $5,280 (rental profit) = $9,280 x 20% = $1856
Total taxes attributable to the business: $612 + $1,856 = $2,468
Total savings doing it the Wealthy Accountant way: $3,276 – $2,468 = $808
Not bad for a company only earning a $10,000 profit!
The next business we will review earns a $30,000 profit per year. I consider the $30,000 to $50,000 range a no-man’s zone. A $30,000 company can benefit from an LLC elected as an S corporation in some cases, depending on the industry. By the time you reach $50,000 it is easier to get enough tax benefits to offset the additional costs of an S corporation (payroll service expense and tax prep fee for the additional S corporation tax return). Our example will consider the LLC treated as an S corporation.
Our example will assume a small home-based business, but will not consider the LLC renting from you; I will incorporate that into the wage data which will give us nearly the exact same answer without getting to long here.
As a sole proprietor:
Self-employment tax: $4,590
Income tax federal and state at 20% combined: $6,000
Total tax: $10,590
Ouch! Now you can see why you start thinking of tax alternatives when your business starts generating $30,000 or more in profit. It becomes painful really fast.
As an S corporation:
Profit: $30,000 – $18,000 (owner’s wage) = $12,000
No self-employment tax.
Payroll tax: $18,000 x .153 = $2,754 (We will not consider unemployment taxes either.)
Income tax at 20%: $30,000 (profit plus wage) = $6,000
Total tax: $2,754 + $6,000 = $8,754
Total savings doing it the Wealthy Accountant way: $10,590 – $8,754 = $1,846
Better, but it still hurts having a business. Still, you get to keep over 6% more of your money.
As we move to higher levels of income we can introduce other methods of tax reduction. To keep our illustrations simple, however, I will review these additional tax cutting ideas in future posts. Always consider these illustrations as non-inclusive; there are always variables that will change the results. By painting a narrow brush stroke I can show how a strategy works in a vacuum.
The remainder of this post will provide a quick illustration of the tax savings for a non-home based S corporation over a sole proprietor at $50,000, $100,000, $150,000, $250,000, and $500,000 profit levels. Once we reach over $100,000 the Social Security portion of the self-employment/FICA tax begins to reach its threshold and the tax savings change. I’ll point this out when we get there.
Self-employment tax: $7,650
Income tax federal and state at 20% combined: $10,000
Total tax: $7,650 + $10,000 = $17,650
Profit: $50,000 – $30,000 (owner’s wage) = $20,000
No self-employment tax.
Payroll tax: $30,000 x .153 = $4,590
Income tax at 20%: $50,000 (profit plus wage) = $10,000
Total tax: $4,590 + $10,000 = $14,590
Total savings doing it the Wealthy Accountant way: $17,650 – $14,590 = $3,060
Self-employment tax: $15,300
Income tax federal and state at 25% combined: $25,000
Total tax: $15,300 + $25,000 = $40,300
Profit: $100,000 – $60,000 (owner’s wage) = $40,000
No self-employment tax.
Payroll tax: $60,000 x .153 = $9,180
Income tax at 25%: $100,000 (profit plus wage) = $25,000
Total tax: $9,180 + $25,000 = $34,180
Total savings doing it the Wealthy Accountant way: $40,300 – $34,180 = $6,120
At this point I assume there are employees of the S corporation other than owners and reasonable owner’s wages are less than the 60% safe harbor. The Social Security limit is $118,500 for 2016. Wages or profits (for sole proprietors) above this level only pay the 2.9 % Medicare portion of the self-employment tax or FICA tax (both employee and employer share).
Self-employment tax: $19,044
Income tax federal and state at 30% combined: $45,000
Total tax: $19,044 + $45,000 = $64,044
Profit: $150,000 – $70,000 (owner’s wage) = $80,000
No self-employment tax.
Payroll tax: $70,000 x .153 = $10,710
Income tax at 30%: $50,000 (profit plus wage) = $45,000
Total tax: $10,170 + $45,000 = $55,170
Total savings doing it the Wealthy Accountant way: $64,044 – $55,170 = $8,874
Self-employment tax: $21,944
Income tax federal and state at 40% combined: $100,000
Total tax: $21,944 + $100,000 = $121,944
Profit: $250,000 – $100,000 (owner’s wage) = $150,000
No self-employment tax.
Payroll tax: $100,000 x .153 = $15,300
Income tax at 40%: $250,000 (profit plus wage) = $100,000
Total tax: $15,300 + $100,000 = $115,300
Total savings doing it the Wealthy Accountant way: $121,944 – $115,300 = $6,644
Note: There is a bubble effect once your income hits a certain level. Your tax savings may decline if you don’t apply other tax strategies. Working in a vacuum illustrates how the tax saving affect different income levels.
Our final example will not consider and Affordable Healthcare taxes.
Self-employment tax: $29,194
Income tax federal and state at 40% combined: $200,000
Total tax: $29,194 + $200,000 = $229,194
Profit: $500,000 – $100,000 (owner’s wage) = $400,000
No self-employment tax.
Payroll tax: $100,000 x .153 = $15,300
Income tax at 40%: $500,000 (profit plus wage) = $200,000
Total tax: $15,300 + $200,000 = $215,300
Total savings doing it the Wealthy Accountant way: $229,194 – $215,300 = $13,894
A final thought: This area of tax law covers a complex issue. It is not the only tax cutting strategy a business can use, but a very important one. It is of vital importance to business owners if they wish to survive. Several factors could slightly diminish the illustrated tax advantages shown while a significant number of other tax opportunities can reduce the tax liability. If you started as a partnership, the tax savings approximately double, especially for a husband/wife partnership. Knocking $25,000 off the tax bill is meaningful money.
Even if you prepare your own taxes, a tax professional should help you set up your business entity and help you determine reasonable wages. So many factors can change the results. Your situation will differ based on facts and circumstances.
Note: I received many questions on forming an LLC or corporation. In my office we used a company for years called The Company Corporation. You can check out their service by clicking the highlighted text.They handle all U.S states.
* This isn’t exactly true. The IRS previously went through a laundry list of explanations over what “reasonable compensation” is. At one time they said any wage by the owner was acceptable, though there are many instances when they didn’t follow this, wanting a sizable owner’s wage. Then the IRS unofficially said $10,000 was a floor for the owner’s wage and to avoid “reasonable compensation” issues.
At some point a large number of accountants felt 60% was a good starting point for reasonable compensation when the IRS became more vague in their explanation. The IRS kind of, unofficially, acknowledged this “might” work.
As with everything, facts and circumstances prevail. An attorney with $100,000 in profit might be hard-pressed to argue $60,000 as reasonable compensation. A doctor could face the same issue. A plumber might argue 40% of profit as a reasonable owner’s wage and win.
It is my experience that the size of the company and number of employees matters. An S corp with 20 employees might only pay the owner 20% of profits as a salary and it could pass the reasonable compensation test. A one-man firm, on the other hand, might pay out nearly all profits as compensation to meet the “reasonable” requirement.
There are several salary guides available online. These guides provide an approximate wage or salary for the position in question. Salary guides are a good tool in determining a reasonable wage and winning an IRS audit should the IRS question your owner’s wage.
We use the 60% quasi safe harbor here and in our examples so we can more easily compare results.
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