LLC vs. Individual Tax Filings

Recorded: April 13, 2023 Duration: 1:05:19

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Good morning, good afternoon, good evening.
Good morning. Good afternoon. Good evening wherever you're at. Welcome
GM Miguel
How you doing toad? I saw right. I saw right
Excellent how about yourself?
Good off to a good good start this morning. I get a little bit of the testing onboarding
Getting things done good times out with
The brother bear me mr. Brock this morning
Yeah moving stuff along getting ready for I
Think a big a big meeting for op alis
Which comes right up after this meeting this Twitter spaces today. So
Yeah, man billing productive this week. Happy. It's still Thursday and I still got a whole day to do stuff
Yeah, where are you at today? I'm just here in
Beautiful, Oakland, California
Excellent
Hello Brock to piss hello
Get up here dude
That's kind of fun to have brought to piss
Might as well come up as a speaker
It's gonna be room for you
Waiting for Darien and advisors to show up
Legends of crypto tax prep. What's up, sir? Mr. Brock?
Good to be back on the space with you loving it loving it
Always looking forward to Cameron dropping his knowledge man. I
Know dude, he's so knowledge heavy. It's crazy. I can't believe it's just one of the dumbfounding things to me that like
This is a beauty of op list of the beauty of web 3, right?
We get some of the greatest minds and we share with each other and it's just beautiful
I'm just happy to be here man
Happy to be here. It's all I got
That's proctopus happy to be here fabulous
There is man myth legend
Offended I'm not a coast and the get go have to request it
What is this
Why have you not moved up status
Good morning Cameron or afternoon where you're at now, right? Yeah, I'm on I'm on Eastern time right now. So afternoon
Did you were you able to get some sleep? Ah, I think I fell asleep at
Three and then the little ones had me up at seven. So I guess four four hours is passable
Um, I don't know. It's it's the sort I'm gonna die on as a CPA during this time of year, but it's good
Four hours with less than a week to go to facts deadline. That's pretty good. Yeah, it's not bad
It's not bad with kids with kids with kids
Well, if everyone wants to kind of take a moment and
Retweet it send it out to your community your through your preferred channels
We would appreciate it the more the better that people can
gain some knowledge
Had a good time yesterday, Cameron we did
Do some work
Yes the retweets, oh I thought you meant you're gonna be like tax returns while you're in the spaces
Just over here filing extensions for people
I'll be two-time any guys
You're not the other woman it's okay
It's like it's like it reminds me of this joke or a sign my
Who's this Irish guy is this guy that was like six years old this kid
I went to school with this kid and he had to sign this pub
It was Denny's pub down his basement said to our wives and our girlfriends, man. They never meet and I that's
Reminiscing right now. So but you guys know Darren obviously, so you guys have met and it's an amicable three-way
Excellent, so we're about four. We'll give it one more minute and we will begin
As we talk with Cameron from Darien advisors
drop in the tax knowledge
Five days to go to either ask for your extension or file your individual taxes
We have discussed in previous
Tax filing was at March 15th. It does happen one month prior roughly
To individual returns so we will kind of
LLC filings whether you did them or did not and hopefully we give you some necessary information
All right, so 1005 Micah, I'll let you start off
Lights camera action go
Are you watching loaded Cameron?
Didn't grab it, but I'm gonna go off the cuff today
Probably gonna get I don't know. Well, we'll see how you do without your yerba mate. That'll be interesting. You know, Miguel
I hope you interject some you're really laying it down yesterday. So say say hey
for sure for sure
I think everyone here has maybe heard Cameron do we want to let Cameron quickly tell everyone who he is again?
I think that's why it's Cameron tell them why you're so so bearded good at good at taxes
I'm I'm bearded because I'm self-employed and I I don't I don't work in industry anymore
So I can head I'm not governed with casual Fridays and button-ups for us the week
But who I am I am. I'm Cameron. I am the lead CPA and partner at Darian advisors Darian advisors is a crypto web 3
focused tax advisory practice
We do basically everything between cryptocurrency recon
Reporting we do tax filings and prep. We do a lot of advisory work
And we also help off this a lot for a lot of their coalition members
I get their S corpse and personal taxes and crypto taxes done
That's me in a nutshell you can check us out Darian advisors.io if you want to know more
But I'm a tax CPA. So tax tax tax and I focus on crypto
Yeah over here at the Opelis is you know, we get a lot of folks coming in our way
And of course one of the things you have to have at the Opelis is is a corporation
Like 99% of our people have an S corporation or an LLC with S Corp designation. I should say
Maybe Cameron can tell us what the difference is
but yeah, a lot of people are doing this for the first time and
Darian advisors has been ridiculously good great greatly efficient just you know, fabulously charming
Introducing people into managing not just their business taxes, but also their
Doing that on crypto or without crypto highly recommended good times great oldies always with Darian
Yeah, I I know that you know, there's there's a couple of deadlines that I think we're addressing today
Of course, we've got five days left until the individual deadline
Hopefully you've our business taxes if you're required to do so
Maybe Darian can give us some wisdom on what to do
Someone is whistling into the microphone or sneezing or something. I don't know
Cameron going through a wind tunnel
Am I oh my oh, I you know what might be happening is I have my hood up in my earbuds
I'd be touching three off of my head down
Sorry about that
Chilean wind tunnel
You know, I guess with like that's not maybe a bad place to start for sure
Let's get through some of the deadlines reporting things people need to do today tomorrow
And then hopefully we can get to some of the triage of triage is needed
But Cameron do you want to give us kind of like a low down of what the situation is currently?
You know if you've done what you're supposed to have done
Yeah, what you got
Yeah for sure
So, you know where we're at right now just kind of like the meta the basics of you know
The whole purpose of like what we mean today is the difference between LLC and an individual
So I've touched with this before in a few spaces
So apologies if you heard this before but um, I like to use the example as like hey
I'm Cameron and then I formed Cameron the LLC
Now all that does is I've created a different legal person
So I've like Cameron the human human and then I have like Cameron the business person
This that led you to plan engage over different bank accounts
The IRS until you file your s-corp designation will see you as the same tax person
So whether you engage as a freelancer on up work just doing some sole prop work or if you have an LLC
It still comes through on your schedule C on your individual tax return and you're governed by filing your 1040 your extensions
All that stuff here by generally April 15th, but this year because of holidays and where it falls on April 18th
Because you're listening your most people are Opel as members and therefore have
Formed an LLC with the intent or have become an s corporation
Wouldn't s corp designation does or election is that it takes that LLC in
Turns into a different tax person. So the IRS and state agencies go
Oh cool. Now, you're a different legal person and you're different tax person. That means you had to file a separate tax return and
we're beyond the original deadline, which was March 15th and
It is separate from that and the idea the reason why it is separate is because you need to take what comes from that s-corp return
It's called a k1 and it's your share of your profits, you know
Capital gains all that jazz that come from that s-corp and it gets reported on to your personal income tax return
much like the w2 from Opelis or any other employer or your 10 9 div your 10 and 9
Interests except 1098 through your mortgage servicer get received from third parties and then report on your individual tax return
Yeah, that's the first first part any questions on so far told or you want to dive into oh crap
I missed my s-corp deadline
I got a quick question regarding LLC
S-corp and c-corps. How often do you come across where?
Someone just has the LLC and no designation of s-corp or c-corp status and what do you?
then recommend
I'm not sure if it's my internet connection or not, but I got the gist the question is
So in that case like the I would say that happens a lot when people just want to have separate entity apart from themselves
So it's good when you're basically you're not just like moonlighting
You're actually, you know have the direction of you know working towards self-employment
You're either like, you know working part-time
You're like, hey, I'm gonna form an LLC and what's great about forming the LLC is like I said
It creates a separate legal person. So you can open a bank account
You can open a credit card. You can open up, you know
Anything you need and put it all you can buy an asset a car, etc in that LLC is name
And it's apart from you the individual
So it's nice to kind of like separate funds separate activities and kind of like make that accounting distinction
And it's really common for people that you know aren't transitioning
You know directly into like full-time employment or like have like I just got engaged
You know, I went from a w2 now I'm working as a contractor full-time and I've got a nice a nice retainer getting paid for that
Generally like where I see a lot of folks go from just like or just form their LLC and keep it a vanilla or a plain
LLC is that they're just starting out but also want to have things separate which is a great great business practice
And not legal advice, but it is good to form in Wyoming just because it's super cheap
You can have the entity on paper get the bank account opened up get started
And that way it's not, you know, you're not using your own personal Venmo Zelle bank accounts
And it makes things easier for yourself during tax time or if you're engaged in CPA things are just going well here
Here's my accounting records chew through it
Excellent
So let's get into oh shit, I did not file my
Yeah, um, oh shit it happens it happens and thankfully
There are abilities for recourse and seeking forgiveness because the IRS is not some crazy faceless organization
It is a faceless organization with rules also made up with humans
That can you know have discretion of flying said rules?
So we've had actually a few people come our way either didn't know what they're doing
They weren't they weren't sure and or they just simply missed the deadline it happens. It's okay. It's not the end of the world
the unfortunate answer is
Automatically the IRS starts tallying up late filing penalties
So if we didn't file your s-corp election by March 15th, or if you didn't get the darn return in time by then
You're gonna get a penalty of
$210 per shareholder per month that the return is filed late
That one is pretty pretty fixed
And however, if it's your first year being an s-corporation
You didn't know any better
You finally contact a CPA or listen to this Twitter space
The IRS is forgiving and what we do for folks in these cases is we just put together a short letter and we go
Hey IRS, you know, I wasn't aware of this deadline
I'm a new business owner. It's my first time
Please waive this penalty and it is actually quite common for that to get waived if it's your first year as an s-corporation
The IRS it's not like by what's not a specific form. It's not anything in particular
But we'd either mail or fax a letter to receive that forgiveness. Um, and it is discretionary
It's not automatically approved
But generally it is as long as you have the right letter and the right phrasing and can explain the situation
and even anecdotally
Um, I actually filed my extension about four hours late back in 2020 way during the death of the pandemic
And even though our s-corporation at the time was open for four years. We had experience with it
I wrote a letter personally to the IRS saying hey, you know
We missed the extension because I was way too busy
You know if it's covet all of our clients and making sure all their extensions got on time and just simply forgot mine
And the IRS is like cool. That's reasonable. We'll waive your penalty
Um, which is which is pretty awesome. Um
Even for a cp event knows better. So it's not something to fear. It does happen
Um, what is very important though?
If you have missed it is to try to file as soon as reasonably as accurately possible
The 15th is coming up here in a matter of a couple days
Probably not negative in time. Um
But we want to make sure that we get it in by the next 15th
So it would be may 15th to show hey, I try my best
It's not outstanding for like nine months. Um, I did my best even after discovering this error to try to correct and remediate it
Which just helps the conversation
Um when we do ask for that pretty please can you waive that penalty? Um
If you wait for too long, they may not grant that relief
So have no fear if you did not file
Don't bury your head in the sand. There is forgiveness. There is a way to remedy this
Um, so I some really great advice
Uh, cameron. Yep
Yep, and I would say oh go ahead. I'm sorry
No, sorry. I was just gonna say like I feel like for a lot of people when they're getting to the the s-corp tax
It's just it's just like new it's scary people don't even know what tools they need to use
You know turbo tax is pretty simple, right? Like you log in you do turbo tax you upload your w2 yada yada
Um, a lot of people are engaging with these tools for the first time or reaching out to a cpa for the first time
Um, uh, can you give us some idea of like the the dashboard of things I need to use to accomplish these things
You're asking me to do
Yeah, yeah, I mean definitely I mean there's not a lot different functionally
between like being a sole proprietor and
Having an s-corporation the s-corporation just has a few different filings or different forms to say the same thing
Um and how it gets reported
So as far as like, you know, making sure things are ready or if you're engaged with cpa or filing yourself
The things you're going to need to file is your ein and your ein
Um, which is your employer identification number the legal name of the business the date you formed as well as the s-corporation
Acceptant or basically request letter that you filed originally
Um apart from that that's kind of like the nitty gritty. Um, you also need your individual social security number
Which gets reported on that k1 I alluded to earlier
So basically here's my s-corporation and then here on camera and i'm a hundred percent sure of this s-corporation
I need that social to generate that k1 much like you would for a 1099 etc. Um to get that out the door
and then in addition
Um for if you're engaging with op list, they've got a wonderful excel report
It's called like op ec invoice data
It just kind of lists out the amounts per pay period the cost of the corporation
Which is your officer compensation or your shareholder your amounts for that
And then outside of the and then your w2 obviously and then apart from that which is more unique to the organization itself is
How much you earned from your clients or third parties or crypto trading or validator income, etc
And then your expenses so home office expenditures travel supplies
Office equipment meals, etc
Everything that you did in the spirit of the business. Um
It's good to have that, you know organize and categorize if you do your bookkeeping throughout the course of the year
Or you know if you're engaging us or any other cpa just making sure it's broken down like travel x amount
meals x amount supplies x amount so that data could be translated pretty easily into the actual s-corporation
So you're saying if i'm sitting here today and i've done absolutely nothing
It's like step number one quickly file an extension on my personal taxes
Um, you probably just do that like on turbo tax. Just like get it done post taste
Um, major ppa as quickly as possible to start
You know as mego likes to say pulling your head out of the sand, you know, don't stick it in the sand in the first place
Um to get the s-corp kind of paperwork in order
Sort it out
And then while I was engaging my cpa, I would want to be gathering like my ein
My s-corp filing as well as all my expenses and whatnot
And you're speaking for a friend not yourself personally, right because I haven't seen you come through our pipeline yet, but no
Joke's aside
Yeah, theoretically that guy
Um, no, it's yeah
Yeah, right that was that was heavy, you know, but um jokes aside
You know today is you know five days out from tax filing deadline?
Um, and i've spoken about this quite a bit and there's a lot of like flood out there is like
It's totally cool to file an extension like and if you're at this point you're scrambling
And if you're very much like, you know toad's friend that definitely didn't do or definitely did not do this
Um is file that extension take your time get things in place. Don't bear your head in the sand
Because an individual if you file late the irs isn't as forgiving because you know
If you're a function member of society you filed your taxes, you know quite a few years
Um, and the penalty is a bit more aggressive. It's it's five percent of any tax code
So it's very very important to file your extension personally just to give yourself more time and it's not scary
It doesn't make you more at risk for an audit
Um, it just signals the irs or any state agency that hey, I need more time to get my shit together
And that's a completely reasonable thing
Um to ask forgiveness basically ask that really or ask that extension for so no stress there
And then that gives you more time to sort engage a cpa
Um even file yourself and the extension can be filed through turbo tax. There's also some free like free tax
Forward camera with the act. There's quite a few services out there. All it takes is your social
Your address your full name
File that and that saves a lot of things what I really don't like to hear when i'm a cpa
So people come to me in the summer or we're getting close to like
You know or basically september, you know here in the fall i'm like I didn't file an extension
Um for my s corp or from my individual and that's like ah crap
Um, because at that point in time, it's it's hard to dial that back. There's a few times we've won cases requesting forgiveness
But um, it's always always important to get those extensions filed if you miss on the s corp
Yeah, we can we can figure things out. Um, but definitely the individual side. I sick it out. So this is enough
Make sure you get that
Um get that in place
So it's better to file the extension and take more time to get it, right?
Then to rush scramble file something inaccurate and then have to amend it
Um because at that point an amendment does elevate your risk for an audit
Because speaking as a former auditor not irs, but in public financial accounting
Is if you make a mistake an auditor goes well, he made one mistake
There might be more so it just kind of sets off those alarms
So it's always good to file as accurate as possible and then if you have to mend for good reasons
No problem
But you don't want to mend because you rushed and filed a crap return just to make sure you're hit by the deadline
It's okay to file after the deadline
Okay, good stuff
Uh, so I want to kind of uh turn it into a a different direction
Um, and this one's going to be for both toad and for cameron
Um, so let's say I um, I am a little bit organized and I am a freelancer and I am filing as a sole prop
You know what talk about
Why the obelisk platform would be a good direction to go for the new tax season?
um, what is the
What would be some of the benefits some of the you know, the pros and cons and also how does the irs see?
my expenses as a sole prop
An llc with an s-corp status
Terry do you want to go into like the the benefits of you know
Access and all the all the benefits of an awt over sole prop when it comes to like as a risk manager perspective
And I i'm happy to take kind of the taxed and optic side with the irs
for sure for sure
I feel like so much of what happens when
You uh, you join opolis is you you separate your entities as you know
cameron speaks to
Um, I feel like a lot of the benefits i'll speak to are really on the individual side
And cameron will speak more to like the business side of you, you know, you're having like these two different
Tax, you know entities write yourself in the business
I don't know you might think of those two things as like two different gardens with
Different income sources different different unique plants inside of each garden, you know
There's different income income sources inside of each and you you want to water the plants
differently for each garden with different tax strategies and
You know, you're going to face different challenges inside of each tax entity, right different like, you know tax liabilities
So yeah, you know, they're they're separate places i'm over here talking about you as an individual
one of the the big things that changes
when you become
An individual meaning you're receiving a w2
And you're not mixing those things, you know
If you're a freelancer a sole proprietator and you're like a business entity and an individual entity like no one's really sure how to treat you
But whenever you are just an individual and you're receiving a w2 income
It can mitigate a lot of risk for you
Because there's like an on paper trackable amount of money
That you know like unemployment insurance needs to reference disability insurance needs to reference workers comp insurance needs to reference
like when I think about the
You know the the problems that a freelancer faces at least the risks that they may be carrying
without necessarily being aware of those risks
Like a lot of those risks come back to just like ensuring that your cash flow
remains consistent
And you know if you're a sole proprietator if you're not tracking your income on the w2
You are going to have a hell of a time
Getting any type of income protection
You know issued
particularly things like disability insurance
You're also going to have a difficult time paying into unemployment
And you most likely certainly do not have workers compensation insurance
And in between between those three different types of like income protection
That is pretty much like it covers you all the time
You know if you have disability insurance you're covered while you're not working or with you get sick
If you have unemployment insurance you're covered, you know from getting unemployed firing yourself from your own company
Um, you know if your project goes belly up or the dow
No longer funds your contract or whatever
You know filing for unemployment is going to be really nice
And you know like it's going to be so great filing for unemployment. Let me tell you
Um, you know at least you have options right at least you have options
Yeah, I think of like mitigating risk around like my financial wellness
Is like having a w2 and having?
You know the the traditional way of tracking how much money is coming to my personal finances each month
You know that being taken care of is a big perk of opolis
and then outside of that the the way that we work is you know, we we bond a lot of
individual employers
Together individual escorts together to form one single employer group
And inside of this employer group you've got you know people like myself people, you know, just just the opolis team
With all of their unique abilities doing things for you
Uh things like negotiating group benefits
um, you know opolis is
Opolis has group benefits. We have you know, the big one is of course, you know health insurance you have dental and vision you've got
All of the benefits you would expect to find at a tech company that employs some 500 people, right?
So you go from being just little ou
Little ou sole prop to being you with an escorp in the back office you with you know
An individual up front looking like you work at a tech company with 500 employees
instead of just being on your own
Insurance is insurance is kind of governed by like the the rule of large numbers, you know
Like the more pool the more people you have in a pool the easier it is to manage the risk on that pool
And also just like the more money that's available inside that pool
So on the opolis side, you know, we've negotiated group health care and we've negotiated great rates for you
And also because there's so many people inside of the pool
We're actually self-insured
Which means that like we're we're in the back office growing our reserves
So that we can long term provide a better rate to our to our people so that we can
You know long term like always always provide a good deal to you
So there's you know benefits on being an individual side. There's benefits on accessing things that are just
Not going to be as affordable or as robust if you went about them the other way
Um, you know, those are some of the big reasons to do it on the individual side. I know that for years
I was a sole proprietator and I couldn't qualify for any type of
of disability insurance
There there was a one year where I made significantly less money than I had made before
and like if I had been
An s-corp paying myself I would have laid myself off and qualify for unemployment, you know
um, I wasn't able to do those things because I wasn't using an opolis, you know service at the time but
Those are my two cents
Good stuff. Awesome about that other garden over there. How do I water? Yeah
Well, i'm gonna i'm gonna water your guard a little bit too to chime in
Uh, so on the power of numbers like and also with with unemployment insurance, there's two things anecdotally
I've experienced over the years and this is thankfully what you guys are invited
But like in the case of law of numbers first actuaries are more borrowing than accountants
So do you thankfully you're not i'm not an actuary i'm an accountant but uh jokes aside
We went through this for our own our own first practice trying to like find a policy and you know
Not just even as an individual, but you know, say you're a startup or a small business
That's you know, looking to offer insurance to employees, etc
We went out
UHC blue shield, etc, and we got really really crappy rates because we were a team of 10
Um when you know in the case of power of numbers you also have 500 so it's bigger collective bargaining power
You can self-insure this experience rating
And it just makes things cheaper because you've got more people and you have a better pool to estimate that risk
Um, so even like for ourselves a lot of small business clients that worked over the years like health insurance something they want to offer
It's a friction, um to attracting talent and you know democratizing that and using the obelisk coalition and pricing
Makes it a lot easier for smaller businesses and entities to get access to that and also offer those incentives to their
contributors employees contractors for every way you want to call it um, and then similarly too with unemployment insurance, you know, we
During the early days the pandemic. I worked a lot of like freelancers and social providers that um
Didn't pay into ui and certain states, you know with the you know with the pp or not ppp
But like a lot of the covet relief funds did eventually grant it
Um, but they had to deal with backlogs of four
Weeks to multiple months to try to get unemployment insurance or benefits
As a sole proprietor even though, you know, the law and what got signed into congress made them available because they all got disseminated through various state
organizations
And put by clients that were w2 employees or were s-corp shareholders that did receive salaries and did pay into unemployment insurance
we're able to tap into that benefit a lot earlier because
All the california edd or x you employ unemployment insurance august goes cool
You've got w2 wages during the period or for the past prior quarters
You paid into it
You got laid off. Is that reason eligible? Is it fit within our within our requisites?
Awesome, you get paid unemployment insurance, but ask is a sole proprietor a freelancer is a lot harder conversation in certain states
Yeah, you can opt in or pay in
Um, but it's not as easy as just paying through w2 wages and pointing to it
It's a lot more complex to get access to those um those benefits
back in my own garden, um
so in the case of you know tax optics all that jazz, um, and I kind of like transition from what toad said is
Say, you know you want to go out and get an auto loan or you're looking to apply as a new tenant or get a more
You know go out and get a mortgage
Even though you can make a hundred grand as a sole proprietor or a hundred grand at w2
The hundred grand of w2 wages is always sexier from a borrower applicant perspective
Just in the pure optics perspective because the idea that you know, you're getting paid by the man
You have income that's going to be guaranteed for the foreseeable future you're on a w2
It's coming from a business not yourself as an individual
And doesn't matter if you've been a sole proprietor for the past 10 years you've had good incomes
The very active getting pays at w2
Merely looks better to third parties to get access to those other benefits
So that's just a pure optics in tangenials thing
from the tax side of things
I as corporation, you know generally makes sense as a tax advantageous vehicle
So basically a better way to not tax evasion tax avoidance
So ways to structure take advantage of the code
Benefits outweigh the costs are generally about you know
50 to 75 grand of taxable income just depends on
State location. I know opless is a floor
In line with the aca of you know, 32 k or 35 grand
Um to issue w2 wages, but to really benefit from those tax
Those are non-tax better. I mean w2 is apart from that and everything that tow touched on but from the pure tax perspective
That kind of like trade-off makes sense when you're gross a little bit more because then you can take advantage of
certain deductions
For you know, you can accelerate your 401k
Um and whatnot
And kind of touching back on the optics perspective
Of filing as a sole prop versus an s corporation very very similar to borrow
It's the same kind of perspective with the irs
Is I could be in business for the past 10 years
but if i'm an s corporation
The irs sees you as more of a business because you've won file an election
You've committed to filing a separate business tax return
And because the irs aware of uh, you know, so proprietorships
Are you know can be ripe with fraud not obviously hopefully people not moved or we're talking with here other clients of mine, but like
It has been exploited in the past where people have fraud reductions
They'll take, you know, 10 grand of x or whatever it is here
And it is seen as a vehicle that people do exploit
Um by bad actors and take advantage of the tax system through their sole proprietorship
People can also confound copy versus actual bits of income and that's also ripe for error as well
But once you legitimize that business or an s corporation that just takes away that teeth in the irs
Um and going back to even just like rent expenses and home office as a sole proprietor if you're working out of your home
You have to file what's considered form 88 29, which is the home office. Um deduction
Expense deduction and it requires listing your area of the office space your rent or mortgage mortgage
Um, the total area your utilities and then taking the pro rata of that space
And the case finesse corporation, it's just rent expense, baby
Um, so that rent expense can be your co-working space
It can be you know, working at your home office
It can be part of the space when you're working out at airbnb while you're traveling
It doesn't really matter because all the irs sees is office expense
Which means it's less ripe for audit because it's less of you know, less subjective and uh, you're not actually confounding your personal home
with your business nature
Um and how we reimburse those expenditures or what's considered an an accountable plan
Um, which is a very fancy way of saying tax-free reimbursement plan to the shareholder
Um, so in the case of my own s corporation
My current living situation is is mixed like I may work out of my office at home
I may go into co-working space and be traveling
But through my s corporation I can go i'm gonna reimburse cameron brown the shareholder
$1,000 a month tax-free so tax-free benefits myself in a deduction of the s corporation
To be used at any one of those ventures as long as it's with an authorized use
I can't take that thousand dollars and go, you know, go play the lotto
But as long as i'm using those funds for its intended use, it is a valid tax section of the s corporation
and just in general like as a kind of the more meta macro is
Because you've chosen to file with an s corporation as a sole proprietorship
That alone produces your chance for audit and risk, um and just future headaches and loss asleep at night
So kind of the bargain of like, yeah, I know it's stressful
It takes a little more to file the s corporation tax return
But also think of the fact that this is legitimizing my presence. This is showing the irs
I'm a better actor than just a regular freelancer sole proprietorship. Not that people
Don't or people are bad actors or do know various things that s corporation or sole proprietorships or take bad
Bad, um bad deductions or fraud reductions
But the irs also knows that those type of individuals that file schedule sees
Aren't as savvy. They may be first time entrants in the business
They may you know take incorrect deductions or confound personal businesses because they know that fact
Having an s corporation just shows that you are a better business person
Um, and just reduces that risk of audit further down the road
If it walks like a duck and smells like a duck it's probably a duck so look like a business person
Just real quick uh, so really what I got out of that is that the irs is going to scrutinize that s core
Uh a lot less with your expenses
So you streamline it through you're not scrutinized as as much as if you were a sole prop
Exactly. Yeah, and i've had clients that were sole props
They had like totally legitimate business expenditures
They had supplies of like five grand for one year and then the next year same amount of income
They decided to buy like 15 grand of supplies and the irs goes well, that was weird
That was different from last year explain it
um, that's less likely to happen with nes corporation just because
The audit and resources aren't focused much on that and that's just the
unfortunate situation of our tax code and tax enforcement
Excellent, uh, go ahead uh, so excited to interrupt you
No, you're good. I was just going to say I know we've got the peace ants over here
They come around to a lot of spaces looks like they got a question. I wanted to see if they could hit it that real quick
What's up peace ants?
Hey, yeah, sorry for interrupting. Um
I was uh, and uh, sorry for my ignorance
Ask what the difference was between an s-corp and an llc was and then also
maybe the difference between a for-profit and non-for-profit and like
Maybe and is it possible to have like
Make an llc that's both for-profit and non-for or like have a for-profit arm and non-for-profit arm or something like that
Yeah, I can I can definitely dive into this one
And thank you for joining all these sessions and let it be very long-winded and putting up a tax talk
But the kind of the first part of like what's difference between llc and s-corporation
So an llc
Is a legal distinction. So it's a different type of legal entity
Tax-wise that llc can be a partnership
It could be a corporation
It could be an s-corporation. It could be a self-proprietorship
There really is no hard and fast rule about how the llc is treated because you get to ask what that is
In the case of an s-corporation
You can't legally be an s-corporation
Um, the s-corporation only exists as a tax entity
So it's basically the irs and state agencies recognize that tax-wise you're an s-corporation
but legally you can be a
In-corporated corporation, you could be a non-profit corporation. You could be an llc. You could be a general partnership
You could be a limited partnership. You could be a public benefit corporation
You could be a social purpose corporation. You could be a series llc. You could be any type of legal structure
But tax-wise as long as if you are in the business of making profits
You can only be a sole proprietorship or disregard entity
a partnership and s-corporation or a corporation
Um, and that's the distinction between those two
When it comes to like can you at the same time to the same entity being a profit and non-profit vehicle?
The shorter answer is no
Because like I said to the irs that entity can only be one thing it can't be both a corporation and non-profit corporation
Because everything is tied to the employer identification over the ei yet and to become a non-profit corporation
You can and this more is more of a legal question
but theoretically
You could form yourself as long as you have the appropriate governance and bylaws and rules of conduct
um, you could form yourself as a
unincorporated non-profit association an llc a regular corporation
And then all you go to the irs is you file form 1023
Which is basically saying hello. Hello given my mission my goals my bylaws my governance, etc
I wish to treat as a non-profit entity and the irs goes cool. Seems like you're non-profit there you're non-profit
And I get the question a lot kind of on this topic like should I be a non-profit should be a for profit?
And it just depends on what are the overall aims and goals long term the entity?
Now if the entity is meant to be for personal or for the shareholders benefit, you're looking to have upside you're going to sell it
Be they get acquired make money benefit from this apart from just like your overall labor like have a long-term upside in the overall entity's growth
Um, you probably should be a for profit
If your entity is to exist to be for public good or for specific social purpose good
And isn't seeking to as a contributor or a participant or an owner or director in that company
You're not looking to make make a long-term, you know
Basically, you're not looking to sell this off to another vc or etc for monies
You're just looking to grow this thing to exist in perpetuity and exist beyond yourself
Um, then a non-profit corporation may be the best fit or non-profit
Okay, yeah, thank you for the uh, very thorough and um clear explanation. Thank you so much
You're welcome
Yes, if anybody else has a question, uh, please don't hesitate to ask this is what the space is for
We want to uh grow your knowledge
Be more comfortable
uh, dealing with taxes
Oh, yeah brought to bus
Okay, so let's see if I can formulate this question intelligently
um, okay, so yesterday I heard you say something cameron about
federal taxes and an escort
Can you kind of explain?
Like an escort is what's considered a pass-through corporation, correct?
So all so really if you're doing things correctly the taxable event happens
When the money goes from the s-corp to the
The quote unquote owner or whatever. Is that correct?
Correct and yes, and I i'm I all there's I would say mostly correct. Do you care if I jump in there?
Yes, please take over cool
Okay, cool. Cool. Cool. So
The concept of pass-through entity applies to a regular llc where the profits or earnings done entity
Passes through and is then reported on your personal tax return
Um partnerships are like this regular vanilla llc. So proprietorships like this
S corporations are like this
What are not pass-through entities are non-profit entities as well as
Corporations which file 11 20 s and in the case of a pass-through entity
You any sort of profits gains losses activities credits
They are reported on the s corporation or partnership return
But then the share of those so if you're 100 owner of in the case monopolist llc or your 50 50 with a partner etc
Your share of those get reported on form k1
Which then gets reported on your personal income tax return
And then because those profits and gains or losses are
Passed through to you personally the tax is paid at the individual level
Now at there is very and I won't confuse folks
But like for 99 of the cases for s corporations and partnerships. There is no tax due at the federal level
Income tax there may be payroll taxes or anything of that sort
But there is no income tax due at the federal level
Because all that gets reported on the personal income tax return to 1040 where you then pay personal income tax rates on that income
That's varied. It's different from a corporation where a corporation will pay corporate income tax of 21 percent as well as state tax
And then any profits that are distributed to members are the negative they're going to be if they're paid out as a you know
As wages they're gonna be subject to income tax the individual level or they'll get paid dividend tax as if they're paid out in dividends
but in the case of passer entities
Everything comes back to your personal income tax return as if it's been yours the entire time. Um
And I get the question a lot of like hey, I paid myself my w2
Great w2 just like any other entity from your opolis llc or s corporation gets reporting your personal income tax return
And if there's funds left over or profit
After you paid yourself a w2s or like 10 or 15 grand in the bank
That is considered k1 or an area income or your profits which then gets reported
Back onto your individual 1040 and you pay tax on what's left over there
What is the advantage of let's say I have 20,000 dollars left in uh in my llc as profit
Um and doing a k1 distribution, what is the advantage of that?
from the tax perspective
There's no real benefit because the irs is they'll because the past rent so you're gonna be you're gonna pay tax your profits
Whether it gets distributed to you and you leave zero cash to the bank or you leave that cash to the bank
So tax wise it doesn't make a difference
Um, the only benefit to retaining profits
Well, not only benefit but the profit been if one of the benefits to retaining profits the entity
Is if you want to have some cash on hand to?
Pay credit card reserve for future w2 wages, etc to plan for expenses
Um a lot of single member llc s corps run pretty lean. So there's not a lot of need for that
Um, but in the case of like my s corporation where I do have employees or contractors and other parties that need obviously money is to be paid
Um, I retain those back then paid for their future benefit
So but there is no need to keep those in there if you don't have a business need for them
My so so here was one of my the ideas that I had at one point the way that I run my personal finances
I try to have an emergency fund
I would generally think that financially speaking. This is a decent idea
So is it a good idea to keep a little bit of money in my business funds?
To earn my business account as opposed to switching it over right away, even though i'm going to pay the taxes on it
Just so that I have the ability there to pay the op list
You know, you know what i'm saying
Just capital. Yeah, I mean, I don't know if that makes any sense or if that's a silly idea
I mean it's it's no idea silly. Um
But like if you want to pay future w2 wages or like to make sure you're eligible for unemployment or
Etc or whatever you need to depend upon that like it may make sense to retain that
Um, you are speaking to someone that's very much like, you know, cash sitting idly by is wasted and especially in a
highly inflationary environment
If cash isn't being put to work or use or certain fashion, there's the opportunity cost of that just being set there. So
Balancing that future need with the current need is probably a better question to ask people as far as what they actually need that cash for
Anecdotally and for a lot a lot of people I see is like they keep their escorts very very lean because
If there's not a use for it like and even you can always take that cash out
And put it back into the company to run w2 wages
But just to have it sit there idly by is um, you have lost opportunity costs
You can't uh, as so it says you can't you know, is it net neutral something untender fight?
They got easily you got a little his position. He does I can't remember
Yeah, so basically either way if you save the money in your in your s corp account as
The way that i'm basically set up i'm still gonna have to pay taxes out of it on the personal side. Anyway, regardless
Exactly. Yep. Okay heard. That's thank you so much
As always
All right, we are giddy to about 10 minutes left, uh, please if you have any questions for cameron, uh valerie
Hey, good morning. How's everyone? I hope you're all doing well today
so my question for you is
Depending on you know, what entity you are if you're an s corp or you know individual llc
Um, how do you know how often you have to pay taxes? Like how do you know if it's
Annually or quarterly and how would you look something? How would you look that up?
Good question. So, um, i'll start with like the easy answer, which is I don't even have an llc or anything
I'm just a w2 wagie working for somebody else in that case your withholdings are done automatically
There's no estimated taxes. There's nothing to do out throughout the course of the year. That's being paid from your w2 salary
Now if you're an s corporation, but you're in business for yourself the same thing applies
You don't need to worry about quarterly taxes unless you're not paying out a hundred if you're paying out, you know
80 90 of what you're earning
Is w2 wages you probably don't have too much of a bill where you need to worry about it. Um, and that withholding
Gets is processed for you or those estimated taxes through your w2 w2 wages
Now if you're just a regular llc a sole proprietor freelancer a gig worker, etc
You are liable to remit quarterly taxes. Those are due on weirdly april 15th
june 15th september 15th and january 15th
And that's kind of like to do the same thing where you're if you're making money
Through freelancing or sole proprietorship
Is you don't withhold the amounts from your w2 from your wages because there's no w2 wages
So the irs likes to see you pay amounts throughout the course of the year
Towards that balance. Um
And what you don't want to do is make pay nothing, uh throughout the course of the year one
It's a bad cash flow management strategy. I've got a lot of clients that
Don't pay estimated taxes and then they have this huge tax bill owed at the start of the year
And then secondarily, um, the irs
Does require you to pay your estimated taxes, um based upon what you estimate your income to be
And there's a fancy penalty that's you know, you've got to remit
100 of your prior income tax balance or 90 of your current year
Whichever is the lesser by january 15th to avoid estimated tax penalties
It's not one that's assessed very often
So as long as you're, you know making some payments throughout the course of the year and trying to
Estimate or pay something in what you don't want to do
Is make a bunch of money throughout the course of the year and then make a fat payment on january 15th because the irs goes well
You probably didn't make that money in the last quarter. You probably made it, you know
Q1 q2 and q3
Thank you and then, you know, that's a lot of information
Obviously have to remember so is there a website, um that I can go look this up if I need to remember
Yeah, I um, a really good one that I use is uh,
Complete blanking my mind right now. Um, i'm forgetting to be able to sleep. Um
irs smart asset
Yeah irs irs I gov darn advisors us uh smart assets pretty good
There's other one that comes to mind too even like quickbooks like intuit has a lot of good resource and just like
When to pay how much to pay how do I calculate this for those kind of basal questions?
but this is the part of like what are the benefits of op list and and running through w2 wages is like
You don't got to worry about that unless you have a lot of income through capital gains or whatever
You're not paying through w2 and even if you are
Earning amounts through capital gains, um or other sorts of income
You can take those and pay w2 wages and have those be withheld. So it's a good mechanism. You just not have to worry about like
Apart from paying your payroll topless. You don't have to worry about quarterlies or planning or extra deadlines. Just pay w2 age and make it easy
Yes intended to uh to recap on that
For what I understood cameron is that as a sole prop
the irs sets up these
Estimated taxes quarterly that you should send almost a way to protect yourself
So you don't have that huge liability and now you're getting into like patch trouble
So it's set this up. So as a sole prop and you're making freelancer money
The irs wants you to be sending quarterly, uh estimated taxes
It doesn't have to be 100 accurate
but your estimated taxes because if you try to submit all that uh at the end like you said
The uh irs sees like no you just didn't make all that right now
You were probably doing q1 q2 q3. This is why we want estimated taxes
Exactly anecdotally like the espe tax penalty is one that is very very very rarely assessed
And that's i've seen this for the past seven years
The only time I saw someone like two times I see people get hit with it is where they had substantial income throughout the course
The year they made a fat payment in january the irs goes
You probably made some more money after the course fit
But as long as you're making an effort
If you pay like 50 percent of your estimated tax bill, just try to admit something
You're not getting hit with that penalty and even if you do
It's just interest which is not the end of the world. It's not like a percent of tax code
It's just well, you probably should have paid it into us and we're going to charge your interest. We're not paying us
But it's always good to be on the good side of the irs and avoid those conversations all together
Um, but the biggie
Is making sure everything's over by april 15th every year. That's that's the big one you want to hit
Okay. Uh, I know that we have three minutes left and I want to ask one last question
And I know some of you do have to get off at 11. So thank you for joining but um
Cameron if i'm a sole prop and i'm like, okay i'm doing my thing already i'm getting my
Uh estimates, I don't like to give you know, uh, I like to use my tax money throughout the year or whatever and I you know
you know, it's it's uh
I don't like to get these w2 taxes taken away because I feel like
The government is taking more as if I were doing a sole proprietorship
Is that kind of like a a false narrative that sometimes you see with sole props?
Yes and no so the idea of like if like I touched on earlier is like if you're making enough
Where it makes economic and tax sense like tax saving sense defiles nest corp it behooves you to
Ride that and actually make those w2 wages because you're in the long run over the course of the year
You're going to save more money on taxes
Um, if you are very firmly, you know libertarian and not making less than don't want to give them a loan
I totally understand that um, just know that you you know, if you retain money's back and it's uh, this is also kind of like
arbitrage of set in essence like the irs
Spides by the treasury rate like it's five six percent
You're like well
If I can take that money and go invested and make ten eleven percent like yeah, and then you just pay the interest
It's a function of doing business
Um, I am notoriously notoriously risk-averse pardon my profession
Um, but I do have clients that will not pay as much into estimated taxes to receive more capital to invest it deploy it
And use it for more beneficial means and then just pay their taxes down at the end of the year, which is okay. Um
You don't want to do that all the time unless you're okay paying penalties or like interest essentially on it
Then what you don't want to see is the flip side of that whereas you're borrowing those funds according to the irs
You lose them or your whatever you invest in was superiorly depreciated
And then you don't have the monies at all to pay those tax balances owed
Um, you want to avoid that because then you're having late payment penalties
It's a little bit more aggressive than just interest at that point
All right
Well, basically what you said it is in your best interest too
If you're a freelancer and you're meeting your state's minimum
Uh, it really uh, you should really look into opolis and see what these benefits
See if it's a fit for you
Uh, because opolis is here to help you run your business better
alongside the partnership of
Cameron and darian advisors
Um on that note everyone. I want to really thank everybody who came in
To join the spaces. Thank you so much for the questions. I think we uh, we we did really well with uh
Participation and questions and we look forward to the next one
Um, and we're just going to go ahead and end it. Thank you so
Much everyone and we look forward to seeing you soon
and again, um
If you want to reach out to darian advisors see them on their website opolis. We are here to uh
To help you out. So have a good day everyone
Cheers, thanks for hosting always good job with the toad
See you cameron later guys
Thank you