How To Save On Taxes & Avoid an Audit on Your Agency
In this episode we discuss:
- How to protect your business, financially and legally.
- Ways to lower your taxes:)
- The IRS’s big secret on audits. This is HUGE!
Super-fun CPA and friend to U.S. agencies, Jason Blumer of Blumer CPA’s chatted with me about several tax-saving tips along with a few words of caution, and one big IRS secret on this episode of The Smart Agency Master Class.
Blumer founded and runs a virtual CPA firm with a team of 8 around the country who are specifically geared toward accounting for design, web and marketing agencies. (See? He’s niching his firm and you should be, too. But that’s another topic for another day :)) Keep in mind the advice here is just general. Your specific situation and questions about your agency should be discussed in detail with your own CPA.
What type of business classification is best for your agency?
Best advice: protect yourself and be something other than simply “self-employed.”
A sole proprietor should set up a limited liability corporation (LLC). This designation provides legal protection and operational flexibility, however there are no tax benefits. An LLC pays twice the self-employment tax since regular employees have the benefit of the self-employment tax being matched by their employer.
An S Corp can save you a lot in terms of tax dollars, however the hoops to jump can be pain. You must have a system for payroll and deductions, including paying yourself a salary. That means paying payroll taxes, too. Therefore, what you save in taxes can be swallowed up quickly by paying out professional fees to a payroll service.
Keep in mind, an LLC can transition into an S Corp as they grow. Blumer says he advises his clients netting $80-90k+ to go the S Corp route.
What’s the best way to lower my taxes?
This is always a hard one. If you make money, you’re going to pay taxes.
The best way to lower taxes is to spend money reinvesting in your business which ultimately lowers your net profit, meaning less taxable income. Retail or manufacturing businesses have it a little easier. They can buy equipment to invest back into their business. Service-based businesses are a little difficult to advise in this area. And agencies? We’re the worst. All we sell are our ideas.
Blumer says your best bet is investing cash in a retirement plan for yourself. Depending on the type of plan you set up you’ll benefit your taxes and your team. Other ways to save include training/educating your team.
Small businesses like to lower their tax burden with these 2 tactics:
You might think you are saving a ton on taxes if you’re doing one or both these things. That’s only true if you’re doing them right. Here’s the real deal…
1.Being a virtual agency
Technically, if you have a team that’s spread out around the country you should be paying taxes in every state where you’ve got people. There are states with no state tax such as Florida, Texas, Washington. There are also states that make it a major pain in the ass to be self-employed, like California, New York, Pennsylvania. Tax laws vary by state, so be sure to check things out for the state(s) your in.
And, if you’re not sure if you’ve got all your bases covered, talk to your account about it. Blumer CPA’s offers an Exposure Tax Analysis. This is a discovery of your tax liability to see if you’re compliant and in what areas you might be exposed. If your tax firm doesn’t offer something similar, I know a guy… 🙂
2. Having all (or mostly all) freelancers
If you’re doing it correctly this is a good way to avoid paying employer taxes. But your freelancers have to actually play the part of a freelancer. The term “freelancer” or “contractor,” in regards to taxes, is determined by the IRS. To be legit, your freelancers must be able to answer “yes” to all of these questions:
- Is there actually a contract in place?
- Do they invoice you for their time?
- Are they using their own equipment (computer, phone)?
- Are they available to work for others?
It’s simple. If they don’t look like a contractor on paper, you need to have payroll systems in place and pay taxes on them.
Want to know the IRS’s biggest secret on audits?
They don’t really want us to know, but the IRS is in real trouble. They don’t have the ability to enforce things like they once did…. A possible impeachment of the Commissioner coupled with losing budget dollars means they don’t have the leverage to effectively audit. It’s somewhat of a vicious cycle — they’re losing tax dollars because they can’t run audits, and they can’t run audits because they can afford to.
So, that’s kinda good for us. But, they DO still audit and audit selections are done totally at random.
The good news: less than ⅓ of 1% of businesses get audited. In fact, with 20 years in the business, Blumer’s only seen 2 or 3 audits ever. Don’t get too comfortable with those statistics, though. The IRS is still looking for ways to penalize and fine you. Make sure you’re compliant so you can avoid one of their nasty-grams.
What to do if you are contacted by the IRS
If you get something from the IRS, let your CPA or tax attorney handle it. There are things you should and shouldn’t say. There are also things you should and shouldn’t give them. Don’t be so scared that you hand everything over – that just opens a bigger can of worms. If you receive a notice, always question it. If it comes with a penalty, don’t pay it right away. These notices are computer generated and often wrong. Some are even waivable. Your accountant knows how to handle each situation while saving you time and potentially, some money.
Looking for a Great Group of Like-Minded Agency Owners?
My Agency Mastermind group has been wildly successful for lots of motivated agency owners looking to grow and scale their business. If you’d like to share thoughts, ideas, problems and solutions with people in your shows, check out my upcoming group. We meet every two weeks, so it’s not a huge time commitment but the benefits are immeasurable. You can read more details here and if you’re interested there is a brief application process. You’ll fill out a quick form and then I’ll let you know if the group is a good fit for you.