Bonus! The Online Business Owner’s Guide to Taxes

Sam Vander Wielen: Hey, there. Sam Vander Wielen here. And welcome to this very private, very secret podcast episode. I guess I can say it’s a secret podcast episode for On Your Terms. Yeah, my podcast, if you listen to it already, but everybody else isn’t going to get this. Only you got this as a thank you for everything that you’re doing to help support us here at Sam Vander Wielen, LLC.

So, buckle up, buttercup, because today we are talking all about taxes. I am so excited to dive into this topic. Yes, I just said excited and taxes in the same sentence. I think I get really excited about taxes because it’s much simpler than people think, and I just in general really enjoy making people feel better about very complicated topics, right. So, that’s why I do what I do.

Speaking of what I do, in case we don’t know each other too well yet. I’m Sam Vander Wielen. I hope you’re having a good day. Thank you so much for being here and for listening. I’m an attorney turned entrepreneur and I own Sam Vander Wielen, LLC where I help online coaches and service providers legally protect and grow their online businesses using my DIY legal templates.

And part of going to law school is learning how to do taxes and learning all about tax code. And now that I’ve run two of my own businesses, and become an S Corp in different states, and helped thousands and thousands of entrepreneurs answer the very questions that we’re going to go over today, I’m very excited to dive in and just help you breakdown what the deal is with small business taxes.

Okay. So, first things first, I wouldn’t be a very good lawyer without starting out with some sort of disclaimer. So talking about how taxes like in particular are so highly individual, not only because it depends on where you live, what state you’re in, what kind of business you have, both like literally what do you do in your business but also like do you have a LLC or an S Corp or a sole prop or partnership or whatever? So, there’s all of that.

Plus, then we deal with all your personal stuff like do you have another job? Do you have a partner or spouse? Do you file married jointly? Like there are just so many different factors for people when it comes to taxes. You could have like a killer, I don’t know, investment portfolio and that’s going to like throw off your tax. I don’t know, right?

So, I’m going to speak generally today about taxes. I just want to break down some of the most basic issues when it comes to handling small business taxes. But keep in mind that nothing I’m saying today is prescriptive for you individually, because you’re going to have to run everything I say by your own CPA who’s the only person that’s really, truly familiar with your personal situation.

So, in today’s training all about small business taxes, we’re going to talk about how your business entity, the type of business that you choose to register as, how it affects your taxes. I’m also going to breakdown the two main avenues of taxes, both federal and state.

We’re going to talk through a little bit about quarterly estimated payments with taxes. It’s always like a really confusing and overwhelming topic. I’ll also talk with you a little bit about how to get tax help and I’ll round out today with talking you through some of the important dates that you need to know and sharing some of the resources.

So, it’s very important to know that I’m going to include a list of resources in the show notes for you, some things that I pulled together. Honestly, most of the things I typically pull together for these things or when a customer asks me a question is directly from irs.gov.

Irs.gov surprisingly has a lot of very good resources for small businesses, so don’t overlook it. Click around, read some of the stuff that they have. A lot of it is pretty straightforward actually, and so I would highly recommend it, but I’m going to include some of the things that I refer to today down below.

All right. So, maybe you want a pen and paper. Maybe you just want to go for a walk and you can take notes later, but let’s dive in. All right. So, let’s start out by talking a little bit about the kind of business entity that you’ve chosen either for your business already, or that you’re thinking about registering and how that affects your taxes.

So, most people in online business are typically choosing between registering their businesses as a sole proprietor or as an LLC. And I’m going to talk about S Corp in a second and what’s different about that.

But when we’re choosing between sole proprietorship and LLC, you’ve heard me in past episodes and in trainings and everything else that I do, you hear me talk a lot about the legal difference there, right. And that sole proprietorship does not provide you with any what we call personal liability protection. So, you and your business are essentially one and the same, and that means that you personally are responsible for the liability of your business too.

Whereas with the LLC, the kind of the cool thing and the attractive thing about an LLC is that it gives you what’s called limited personal liability protection, meaning that we use the word limited because it’s not absolute. You can’t go and do anything you want and like hide behind your LLC. But in general, if you act like a business and you kind of do the things and follow the things that I teach people how to do when they have an LLC, you get protection from having an LLC so that you are not personally liable for what happens in your business.

So that means if your business gets sued or your business all of a sudden goes into a ton of debt and like owes money for something, that doesn’t become your personal responsibility and destroy your life. It would, worst case scenario, shut down your business. So, we don’t obviously want that to happen either. I’m just saying, right. So, that’s the legal difference when it comes to sole proprietorship in LLC.

Now, when it comes to a tax difference, this is where a lot of people actually get confused and they end up by accident going with sole proprietorship, thinking that an LLC somehow is like this crazy tax situation, they’ve got to make a certain amount of money and like it’s not until you become profitable and yadda yadda.

What’s really important for you to know is that in America, when you file for a sole proprietorship or LLC as what we call a single member. So if you are the only owner of your business, you don’t co-own a business with a business partner or anything like that. If you just file for a regular LLC and it’s just you individually, and you don’t elect to be taxed any differently, which you would know if you did because it’s a wild process to be taxed as an S Corp and all that. If you just file it normally for an LLC in your state, by default the government treats you for tax purposes as a sole proprietor.

So, I know that’s really confusing because I just said to you like hey, the big difference between sole proprietor and LLC is that you get all this protection with the LLC. That is completely unaffected. That has nothing to do with anything.

The thing here that I’m talking about is just for tax purposes. It’s like essentially the government, the IRS, and then your state, taxation department looks at your business for tax purposes as if you’re a sole proprietor, or essentially as if you’re an individual. It’s what in taxes called a disregarded entity.

So, whether you elect to become a sole proprietor or an LLC as a single member LLC, in the eyes of the government, it’s the same thing, just for tax purposes. So you still have that legal protection. So, if you’ve had any of those doubts about like wait, aren’t I tax really differently or I’m going to become a sole proprietor? But then when I become more profitable, I’ll become an LLC.

You can hopefully see now that that’s not necessary because there’s no difference in the way that you’re going to be taxed. There may be a difference in the registration cost, which is really the only difference upfront that you should be considering. I personally, I’m always like, hey, if you can, go for LLC because you don’t get any protection with the sole proprietorship, but that’s really what you need to know.

So, with an LLC and with a sole proprietorship, we’re dealing with what’s called pass through taxation. Essentially, I want you to think of, like your business, it’s like it hovers above you. I’m very visual so I always think these things out. So, like it hovers above you and then the money like flows down to you as a person.

So, your business will have expenses and then it will hopefully make more revenue than those expenses. That’s the profit that you’ll make. The profit is what flows down to you and that’s that pass through. So, it’s essentially passing through as a taxation. That is the amount of money that you report on your personal income tax return. You file an individual tax return like a 1040. They may have to, your CPA may have to file additional like schedules and things to attach to your 1040 depending on your business in the structure.

But essentially that’s how it works. So, if your business generates $100,000 in revenue and you have $40,000 in expenses, that $60,000 of income is going to be reported on your individual tax return. Essentially, I’m simplifying it at best, but like that’s generally how it works.

So, what is the difference then when you become an S Corp. So, people will often say to me I don’t have an LLC, I have an S Corp. And it’s like, no, no. In our industry, that’s not like really a thing.

So, here’s the deal. Here’s the gist of what you need to know about this. You are an LLC, and then like I said, when you’re an LLC, you by default get taxed as a disregarded entity. That it’s that pass through taxation, just getting taxed as an individual. What happens is that you have this ability, this option to elect to be taxed as an S Corp instead of a disregarded entity.

So, when you become an S Corp, you’re not actually changing the legal structure of your business. What you’re doing is instead asking both your state because you have to do this on the state level, and then also the federal government with the IRS, you’re asking them to tax you, to see you as an S Corp for taxation purposes, instead of as a disregarded entity.

Why would you do that? When do you do that? Well, you would do that because it saves you a lot of money when it comes to what’s called the self-employment tax, which is what we’re going to talk about in a couple of minutes. So, when you’re an S Corp, when you’re filing taxes as an S Corp, instead of that disregarded entity, you only pay self-employment taxes on the amount that you’re paying in your wages.

So, if it’s just you right now, then it would only be paying self-employment tax on what you’re paying yourself as a salary. When you’re just a regular LLC, that’s filing taxes as a disregarded entity, you’re paying self-employment tax on the whole of the business, of the businesses profits. So, the self-employment tax is about 15.3 percent tax rate as of 2022, so it’s a significant savings.

That’s why when it comes to the when question, people will typically elect to be taxed as an S Corp when they have an LLC when you start to make profit consistently, when that profit gets a little bigger and bigger and bigger and you can also consistently pay yourself. There are definitely fees to doing this. There are costs to doing this, at least initially to setting it up. And then there are some maintenance costs in becoming an S Corp for taxation purposes because you have to be on payroll.

So, like me for example, I use ADP for payroll first for myself. For the first couple of years that I was an S Corp, I was still the only employee. Now I have several, so now we’re all on ADP. I’ll share that link below to the resources of what I use for ADP. I think they give you little savings if you use my link, but there are some of those costs associated. So, it’s definitely not free.

The other big thing that you need to know about this is if this conversation has piqued your interest in becoming an S Corp, this is a conversation that you want to have with your CPA. And it’s also not something you should ever do yourself. I feel pretty confident saying that.

If it helps you feel any better, I did not do mine myself. I had my CPA do it and I also hired an attorney here in New York. It’s very, very complicated. I didn’t want to miss anything. Also, frankly didn’t want to deal with it. But please do not feel badly about not doing this yourself. This is not something I would even recommend doing yourself. Because if you screw it up, it could be screwed up really badly. And I want you to do it right, but I also want you to do it so you save the most amount on taxes that you can and so that things are pretty straight forward down the line and don’t require any like undoing.

All right. So, let’s take a sip of tea and also talk federal taxes. So, when we talk federal taxes, so remember, we’re going to talk about kind of the two main avenues, two main categories of taxes you’re going to owe as a business owner or federal taxes and state taxes.

So, when we’re talking federal, we’re talking about income tax and self-employment tax. There’s also something called like excise tax. There are couple of like different taxes, but again, I’m trying to simplify this and like keep it straightforward.

Really, the big ones are your income tax, the amount that you’re reporting on on your personal income tax return as income. Essentially, when you’re self-employed, it’s the profit of your business, the money that’s left over after your legitimate business expenses and deductions have been taken. And then there’s this self-employment tax of 15.3 percent.

Of that 15.3 percent, I’m just going to break it down for you, 12.4 percent of that goes to Social Security and about 2.9 percent goes to Medicare hospital insurance. That’s what you get when you’re older.

So if you’ve ever had a nine to five job, a corporate job of some sort, that’s like the money that gets withheld from your paycheck. It’s essentially what like your employer pays for you out of your paycheck when you have that nine to five job. Now, you’re just paying it yourself when you’re self-employed with the self-employment tax, right.

So, this isn’t necessarily – I think sometimes people think of this as like, oh, this is big tax that’s added on to people who own their own business. No, everybody pays it. It’s just that when you work for someone else, they’re paying it for you and now you’re going to be paying it for yourself.

And if you have employees, you’re going to be paying it for them, right? So I pay it for my employees now, which also counts as a business expense for me. So, the more your business grows, that helps in the long run, right?

You will also pay these estimated taxes quarterly to the IRS, right. So, we’re going to talk about quarterly taxes in a second, but quarterly taxes are what you are paying every quarter throughout the year on the estimated amount that you think you’ll owe. Now, how you estimate and all of that, we’re going to talk about in a second, and it can be tricky and a little complicated, but essentially that’s what you’re doing.

The point is so that at the end of the year or when you sit down like come tax time in the first quarter of the following year, there shouldn’t be any gigantic surprise and big tax bill waiting for you because you should be paying quarterly throughout the year.

Now some CPAs will work with you to like in the beginning if you didn’t pay quarterly or if you don’t know how to estimate, you can pay all at the end of the year. But then usually, there’s some like little penalty of some sort, but it’s best to pay as you go along. Also, just for budgeting purposes so you’re not slammed with this like, I think I got slammed one time with like a $30,000 bill and that’s like on the low side for my business these days. But that was a big shock because I was doing something wrong.

So, it’s a lot to learn when you’re starting your business. The stakes are much lower in the beginning, so it’s good to get this kind of stuff worked out, right. In general, this is why I’m always just such a big proponent to finding a CPA that you really like working with early because you can lean on your CPA to get guidance on paying these estimated quarterly taxes.

First of all, they can probably help set them up like to make them automated. Mine are automated, so I don’t even have to think about it. But even in the beginning when I had, what they call them, but like almost like little waiver things that you had to like fill out and send in for every quarter, then you could call your CPA and try to get a good idea of how much.

So, you’re paying these quarterly taxes based on the estimated amount that you think you owe which would be estimations based off of the amount of revenue that you’ve been making and how much kind of you have in expenses, right. So, it’s balancing that and I really like personally to lean on the CPA so that I’m not guesstimating. I don’t believe in guesstimating.

Now, beyond the federal taxes, we also have state taxes. Your state likely has taxes for you to pay as an individual, unless you live in a state that has like no income tax. There might be other taxes though, so you also have state taxes that you’re responsible for. You also pay those taxes quarterly as estimated payments. You make those estimated payments quarterly, so that again you’re not stuck with a big tax bill for your state at the end of the year.

So essentially, just to recap this part of the conversation, when you own your own business, you owe federal taxes and you owe state taxes where you live, right. And so those are kind of the two main categories that you’re thinking of throughout the year. Those are that you’re going to file a federal income tax return at the end of the year, and you’re going to file a state income tax return at the end of the year through, hopefully through your accountant. And so, those are the two big areas that you’re going to be looking for as to what you could potentially owe in terms of what we call tax liability.

Now, these quarterly estimated taxes. Let’s talk about it. There’s a federal schedule here that I’m going to read to you. I’m going to share the link below, but essentially the way that this works is that throughout the year, there’s like a payment period and then there’s a due date.

So, for the payment period of January 1 to March 31, the due date is April 15. For April 1 through May 31st. the due date is June 15th. For June 1 through August 31, the due date is September 15. And then for the final quarter of the year, the September 1 through December 31, that is due January 15th of the following year, right.

So, those are the estimated taxes that are that are due to the federal government. Your state will also have these as well. Obviously, I’m not going to read all 50 rules to you. That would be a very very long episode, but you have those.

And then you also want to talk to your accountant, if you become an S Corp, your dates might be different. Or if you’re a C Corp or some other kind of corporation where you are, your dates might be different, so don’t live and die by these dates. I just wanted to give you kind of a general idea of how it works, like there’s the quarter and then it’s about two weeks after the quarter that the payment is due, and so you stay on this schedule. You can pay them by mail. You can pay them online. Apparently, they even have an app. I’m going to give you the link to the page, at least for the IRS website. But then you also need to work with your accountant to find out what your states’ requirements and dates are too. So, that’s the schedule.

In terms of figuring out how much you owe, again, I just really recommend working closely with your accountant and getting into a rhythm of about how much you’re going to owe. It’s kind of I guess like a budgeting and like risk assessment too, because you could like overpay every quarter with the hope that you might get something back. You could for cash flow purposes be a little bit more conservative, but then you have to budget in a way that you’re going to have money leftover at the end of the year to pay whatever the remainder of your tax liability really is.

I also very much recommend, in addition to just regularly working with the CPA, I definitely recommend having I would say one, at least one, if not two meetings outside of the meeting that you have with your CPA every year to actually like go over and file your taxes to check in and see how you’re doing. That’s especially important if like your business takes off or something like that and then your revenue really changes, your CPA might be able to look at your books and say you know what, I think the last two estimated payments of the year should be a little higher because your income is going to be higher now. So that might be something that you could just stay in conversation about.

I have a good resource for you below. Well, I shouldn’t call it good resource but it’s my own blog post that I wrote about how to find an accountant. I think it’s pretty good or I wouldn’t have written it. But I have a blog post for you below about how to hire an accountant, like what to look for in an accountant.

So, I personally, for small business owners like think it’s really important for us to find someone who’s willing to communicate with you as much as you need to feel comfortable. So personally, like a just friend to friend, I would not tell you to work with an accountant with having this kind of business who’s the like once a year or see you at tax time accountant.

I think you have to work with somebody who’s cool with you picking up the phone, sending an e-mail. Like I email my account and all the time. I call her when I have deeper questions. We have check-in meetings throughout the year. So like, definitely working with somebody who has that kind of communication style.

That’s just my recommendation. You don’t have to listen to me but that’s what I think is really helpful with having all kinds of businesses, because you just don’t want to have this situation where you only meet once a year, and then you’re like, wait, what, I owe how much? Like that’s not going to be good, right. You don’t want to put your business through that kind of stress.

I also like working with an accountant who will get access to my QuickBooks account. So you can, in QuickBooks, which is what I use to reconcile my books. It’s what the bookkeeper uses to reconcile my books and like where we can upload your seeds and all that kind of stuff and she can also have access to ADP. Both ADP, which is what I use for payroll because I’m an S Corp and now I have employees. Both ADP and QuickBooks have like a feature where you can add an accountant so you can give them access to it.

So, what’s really cool about that is that when I email my accountant, she can log in and see where I am at with everything. She can see generally what the revenue is for the year. She can see generally what the expenses are and so she can make educated opinions back to me of like, hey, this is what you need to do or hey, we need to adjust, we need to do that.

So, I really like if I were you and I was like looking for an accountant, I would ask them, like would you be open to me giving you access to my QuickBooks account for example. I’ll make sure I include a link to that below, as well as the ADP link. But that’s what we use for tracking our expenses and our income and everything. And so you can ask your accountant, would you be open to having access to this so that I could ask you questions or so they can jump in and look at stuff?

Some accountants also offer bookkeeping services, so that’s possible too. It would be kind of nice to have it like all in one. I personally work with an online bookkeeper and then I have more like in person local accountant that I work with. I wanted to support like a women-owned business that was local. That was just my choice. And so, that’s the way that I split it but you could also find somebody who does that all in one.

And then there are people like Megan Nas and Little Fish Accounting who I know, they also offer all of those services. So they’ll do like bookkeeping and pay invoices and file your taxes. So people are offering like really cool options that I feel like no matter where you live nowadays, you have options and I’ll make sure that we include some resources links for you below in the show notes as well.

Now, in terms of, after this conversation you might be wondering when exactly should I go get an accountant, when should I start doing all this? I hope that after this conversation, you’ve learned to, that’s like the earlier the better. Just open up that conversation, start learning now so that there’s less that you have to undo, less wasted time and frankly less wasted money because if you do things right earlier on, you’re going to pay less. You’re going to pay less in taxes. You’re going to capture more expenses, like all of the things.

So, I would do get an accountant, get a bookkeeper, get this financial side of your business really set, just like I encourage you to do with the legal sign. Do it early on, right. The earlier, the better. So, I hope that this episode has been helpful. I hope you’ve enjoyed it. I’ll include lots and lots of resources for you below.

I hope that you’ll send me a message, either DM me on Instagram, @SamVanderWielen or reply to my email and let me know if this episode was helpful. I hope so.

And please, please do me a favor, before you implement anything that you heard here today, I wanted to really just like open up the conversation, give you a lot of familiarity with like the terms and what we’re talking about. But please make sure that you correlate whatever you’re going to do with your own accountants that we make sure that whatever you implement for your business is the best for you.

I am so appreciative for you being here. I’m so appreciative for you referring people our way. Thank you so much for listening. If you liked this episode, then I’m sure you would love my podcast On Your Terms. If you don’t listen already, you can find On Your Terms wherever you catch your podcasts. Make sure you check out the show notes below for my playlist of all other relevant episodes that you can find on topics like this. I think if you enjoyed this episode, you’ll enjoy the episodes I include down below in the playlist.

Thank you so much for listening. I can’t wait to hear from you about whether or not you love this episode or not. I’ll talk to you soon. Have a great rest of your day.

Thanks so much for listening to the On Your Terms podcast. Make sure to follow on Apple Podcast, Spotify or wherever you like to listen to podcasts. You can also check out all of our podcast episodes, show notes, links and more at Samvanderwielen.com/podcast. You can learn more about legally protecting your business and take my free legal workshop, Five Steps To Legally Protect and Grow Your Online Business at Samvanderwielen.com. And to stay connected and follow along, follow me on Instagram, @SamVandeWielen and send me a DM to say hi.

Just remember that although I am a attorney, I am not your attorney and I am not offering you legal advice in today’s episode. This episode and all of my episodes are informational and educational only. It is not a substitute for seeking out your own advice from your own lawyer. And please keep in mind that I can’t offer you legal advice. I don’t ever offer any legal services, but I think I offer some pretty good information.