S6E7: Tackling Taxes - What Every Business Owner Should Know

Disclaimer: The information in this video should not be viewed and is not intended as tax/financial advice. Consult with an expert before making any decisions regarding your finances. 

Taxes got you twisted? I’m breaking down the most common mistakes LLC and S Corp owners make—and what you really need to know before tax day hits.

Transcript

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Myself a salary. I didn't do any owner's draws. I didn't use the business to pay for personal stuff. So I'm good. I'll file my tax return. And because that happened in my business, I'm not going to be taxed on it. For an LLC and an S Corp, that's absolutely incorrect. So if your business has made money, I want to show you with a little diagram that'll make this a little clearer exactly what happens and what you're responsible for when the tax dedicated date comes. And welcome back to Cash Flow this week in tax season. And yes, I'm going to timestamp this episode because I keep getting a lot of questions about taxes. It happens every year. There is one surprise that every small business owner I know who is making money for the first time in their business gets, and it's an awful surprise. So I want to break that down for you today and explain to you what to expect the first year you make money in your business. So we're going to start with the basics. There are a few different ways you can be a business, right? You can be a solopreneur where you literally get, you freelance a bit, you get a 1099 from some people and you file your normal personal tax return. Then you kind of move up the ladder a little bit and might set up an llc. And there are all sorts of reasons for that. We'll cover that in another episode. I know we've touched on it in, in season passed here on Cash Flow. But essentially you may, for various reasons decide, oh, it's time to get, you know, an IRS number for my business and set it up as an llc. And then the next step up that a lot of you probably start to do is you have an LLC that files their taxes as an S Corp. What happens once people get into this LLC and S Corp space is they start to think that that business is sort of separate from them. And the reality is it's not. And the big surprise most people get, in fact, two businesses that just started up this year and happened to be profitable really got this surprise badly. So I didn't talk to them until they were ready to do their taxes. They weren't an ongoing client and they thought, hey, I have this business, it made money. But I didn't take the money out of the business checking account and pay myself. I didn't pay myself a salary, I didn't do any owner's draws, I didn't use the business to pay for personal stuff. So I'm good I'll file my tax return. And because that happened in my business, I'm not going to be taxed on it. For an LLC and an S corp, that's absolutely incorrect. So if your business has made money, I want to show you with a little diagram that'll make this a little clearer, exactly what happens and what you're responsible for when the tax date comes. So hang on. And we're going to jump into a diagram that I think is going to help you a little bit here over on my blackboard. All right, so just kind of to give a little refresher, we have the nice and easy. Let me do white. I like white for this. I'm making hard on my producer. I know, but it's fun. We have the nice and easy sole proprietorship. Pretty easy. Just so you know, that gets filed on your personal tax return, which you'll hear tax accountants talk about as your 1040 form 1040. And you basically have what's called a Schedule C. And on that Schedule C, you'll put all of your income and your expenses and the net amount is what you'll end up being taxed on. Okay? And that's pretty straightforward. You kind of know that, right? You set up as a person and that's how you do things. The businesses that surprise people are these in the middle here. And there are four different kinds that I'm going to talk about. One is your basic llc. That's pretty straightforward. We all know what that is. You get an EIN number from the government for your business and you generally set up one of these four. So you have an llc, which is a limited liability company. Then you could have what's called a multi member llc. And that's if you have a partner, okay, in your business or more than one partner in your business, then a lot of people are now hearing for the first time or have been hearing from their tax accountants. Oof. We're an LLC filing as an S Corp. And when you're an LLC filing as an S Corp, you have a deadline of March 17th as well. And I'll show you how that's treated. And then finally you have an S Corp itself. Some people set up their business as an S Corp right from the get go. And there are all sorts of tax reasons and liability reasons for these different entities. And I'm not going to jump into that here because that's not tax advice. But what happens is, let's say in each of these four companies, we had some income, we had some expenses, and we had net income. Okay, so each of these, let's say we had. I'm just going to make this easy. Say we had 20 of income, 10 of expenses. So we had 10 leftover of net income in the business. So that is money that the business earned. Now, what's interesting about this, and I'm going to come down here and draw it. And this is true for any one of these four business types. Okay? Oops. Three, four. Going to show you a little something here. You kind of think that you're over here and you own this business. That is over here. And this business made that $10,000, let's say, and it's in there. I never took any money out of the business. I didn't put any money in my pocket. That did not happen. Okay? So, oh, fine, I'm going to file my tax return, my 1040. As a person, I happen to own this business, but I'm going to file my 1040. And because I took no money out of that business, I don't have any. Any taxes. I have zero income. I have zero taxes. Okay, maybe your partner or spouse or whatever makes money. Maybe you earn money some other way. But you're thinking, oh, I'm not going to have any income from my LLC or S Corp, and I'm not going to have any income taxes because I never took money out of it. That is the big false. Okay, here's what actually happens. What actually happens. Oops. Step up there. What actually happens is if you own an S Corp, we're going to make you here now, and we're going to make you with a big old belly and little stubby legs like a corgi. There we go. And what the truth of the matter is that S Corp or LLC is right in here, and the IRS sees you as one big old unit. And they say, whether you take the money out of here and give it to your belly or you leave it in here in the llc, which is already in your belly, I'm going to tax you for that $10,000. And that's the piece most people miss because they haven't taken the money out. And so they don't have it in their checking account to pay the taxes with. And they get very confused because they get that tax return that says you owe, I don't know, let's say, $3,000 of taxes, and they're like, wait a minute, I never took any of that money out and used it for anything personally. And a smile goes to a big old frown because it really kind of stinks because it's the first year they've made money in their business, and it's a ton of fun. And then all of a sudden, four months later, they get slammed with this tax bill they weren't prepared for. So the way I want you to think about this is that if you have LLCs, S Corps, anything, make yourself a big old stomach here, give yourself a little head, give yourself corgi legs and corgi arms, you're going to get taxed on anything that happens in these businesses, whether you actually take the money out of them or not. Okay, now, really quickly, there is one other type of entity, and it's called. Well, they're two. Well, there are more, but the ones I'm going to talk about, you have what's called a C corp. And a lot of people who have rolled their IRAs or their 401ks into starting a new business do something called a rob so that they can take the money out of their retirement account, not be taxed on it, and use it to start a business again. This is not tax advice. It's just a lot of small businesses do this because they can use their retirement money to invest in their own business. So if you're a C corp, or if you're an LLC filing as a C corp, it's a little bit different because these things are thought of as individuals, okay? They actually are thought of as individuals and they're taxed as if they were individuals. So if you have $10 of income or $10,000 of income in one of these, this corporation actually files a tax return with taxes due on it, okay? Or with taxes that need to be paid. Tax return of its own with taxes on it, okay? That tax return happens to be called a form 1120. It may be 1120 C, I'm not even sure, but it's 11. It's an 1120 form. And this entity will be taxed. And so, you know, literally it'll say, okay, now you have a tax bill of eight in your entity, or call it three in your entity. So you have seven left after taxes. And then your company pays that money off to the IRS over here for these. If you're filing an llc, you're going to be filing a tax form that's called a 1065. And if you are filing as an S corp, you're going to File A form 1120s. And don't be confused on this 1120s, it's still thinking of you as in the belly of the beast. The 1120 or the 1120 C is for C Corps. And those are the only ones that don't make you personally have to report the taxes on your personal form 1040. Okay, now that's complicated. So I'm going to do a really quick recap here so you can just have the notes at the very end. Hang on, let me shrink this or my director will yell at me. Here we go. If you are a person, you're going to file your own personal 1040. Okay? Piece of cake. If you, if you have a business that's an LLC or an S Corp or a partnership or anything, LLC or S Corp, you are going to, yes, file a 1040 for your share of the income in that business. But that business is also going to file either a 1065 or an 1120. And all the taxes are going to come out of your personal tax return. Okay? Taxes are coming out of your personal tax return here. Taxes are coming out of your personal tax return here. If you're a C Corp, this is an 1120s here. If you're a C corp, you're still going to have a 1040 for anything that the C Corp has paid you for salary or for dividends, they're called. You'll still get taxed on those, but the C Corp itself will file an 1120 and it will be taxed for the business income, not you. It's taxed. You're only taxed in a C corp for any money you actually take out of the business. That's my story and I'm sticking to it. I hope this is helpful. So the lesson in all of this is be prepared for your tax bill. What I really want to just encourage you to probably back in September or in September of 2025. Let's get ourselves ready for next year. By September of 2025. Have a pretty good idea of how much money your business is going to make if you're an LLC or an S corp. Regardless of how much you intend to pay yourself, have a pretty good idea of how much your business is going to make and make sure that you put aside tax money for that. That's our tip of the day. If you have any questions, definitely drop them in the comments here. We'll be sure to answer them. Also, while you're at it, leave a Like subscribe and we'll make sure that we keep giving you all these tips about your business all year long. Have a great week and we'll see you soon. Sat.