Home Care U - What Your Home Care Agency Should Be Doing to Minimize Its Tax Burden (Mark Johnson Pt. 1)

Episode Date: February 6, 2023

Every year, too many home care agency owners—especially new owners—are slammed by taxes and legislation they had no idea about it. Come learn how to not be one of them.Enjoying the show? Send me a text and let me know!Learn more about Careswitch at: careswitch.comConnect with the host on LinkedIn: Miriam Allred This episode was produced by parkerkane.co

Hey, welcome to Home Care U, a podcast made by the team at Care Switch. Nobody went to school to learn how to run a home care agency, so we're bringing the education to you. Join our live audience by going to careswitch.com slash homecareu or listen on your own time wherever you get your podcasts. Home Care U is hosted by myself, Miriam Allred, and Connor Koons of CareSwitch. Enjoy the session. Welcome everyone to Home Care U.

This is a weekly live event series hosted by CareSwitch, where the recordings will come out as podcasts. I am Miriam Allred, the head of partnerships here at CareSwitch. For those of you who aren't super familiar with CareSwitch, we're the home care industry's first premium model home care software with built-in payroll you can learn more and get started for free at CareSwitch.com today we've got Mark Johnson with America Tax Solvers joining us Mark thanks for being here great to be here great to be here I also want to call out my co-host Connor Koons he's our VP of growth here at CareSwitch. He's here to ask Mark some of the tough questions as well. So thanks for joining us, Connor.

Thanks, Miriam. Glad to be here. So Mark, before we jump into today's topic and pick your brain on all things taxes, why don't you go ahead and introduce yourself briefly? Yes. So the name is Mark Johnson. I'm an enroll agent and I operate America Tax Solvers. And we are an accounting firm. You know, we do all the accounting from bookkeeping, accounting, CFO services. But the good thing is that we specialize in working with just home care business owners and home care businesses. And we have been doing it for years. And basically, that's what we do. We basically help home care business owners to maximize profits

and reduce taxes in a nutshell. Awesome. You've mentioned this to me, why you've come to home care, but share with everyone else, why home care for you yes so basically with for me and for most accountants or cps you start out working with every business you know you're basically a jack of all trade accountant and personally i found out that doing that i wasn't able to basically give any one of my clients any real service or add any real value more than just giving financial statements so you know after years I found out that you know what I needed to niche down so I sat down and I was trying to figure out what niche should I go to and there are some popular ones and everybody wants to work with dentists, doctors, construction. But I looked at all of my clients at that time, and I found that my home care clients were the best people to work with.

They were really nice people. They were really caring people. They were really genuine people. And I said, you know what? I'm going to go with home care. And that's why I'm here working with home care, specializing in home care. And I'm loving it and I'm enjoying it. I love it. You and I both and Connor as well. I think we're all here for that same reason. The people that we work with and the people in this industry, you know,

keep us going and motivate us. So we've got some of them here on the call today. So thanks everyone for joining us live today. I want to just call out as well. This is a interactive discussion for all of you here with us. Feel free to jump in the chat or the Q&A and ask questions as we go along with Mark today. We want you to benefit from this call as well. So let's jump into the topic. Today, we're going to talk about all things taxes. Mark and I talked just the other week about it's tax season and people are thinking about this date coming up in April. But Mark reminded me that there's so much more than this tax season, January to April, where people are thinking about filing their taxes. There's a lot more that goes into it around the tax planning and the tax preparation. And

tax season is really year round if you're thinking about this element of your business. So I want to start there, Mark, by asking you, what is tax planning to you and what does that mean for owners? Very good question, Miriam. So basically tax planning is that process where a tax professional would look at the person's life their business and then look at all the regulatory requirements and the things that are there that is able to help them save on taxes so for example you know everyone is different you know you're a married individual then basically you have a lower tax rate than a single person so that's looking at your life if you have kids you

can hire those kids in a business that's looking at your life again now as far as the business is concerned so for example a home care business there is a huge amount of credits that you can get just by running a home care business there are a lot of staff credits that are available for home care businesses and i'm sure there are a lot of home care business owners that don't know. So what normally would happen in tax planning is that during the year, you would look at all of those stuff to see where you can find those tax strategies or tax saving strategies. Awesome. Something to kind of expound on this, you know, there's tax preparation and there's tax planning. You know, for a lot of us, we lump these concepts together. You know, it's just taxes are taxes. But break down a little bit deeper the difference in your mind between tax preparation and tax planning. between both basically lies in what happens when. Tax preparation is only done after the end of the year. So you cannot prepare 2022 taxes during 2022. It is done after December 31st, 2022.

And it's normally done in April, while tax planning is done before the year ends. Most of the strategies, you would have to put them in effect during the year for them to take effect. Because if it's after the year, then the year has passed. So if it's something that you would have to pay for, you can't pay for something in January to affect last year. So basically, the difference is what what happens when so you do tax preparation after the year has done so right now we're in the process of looking to file for 2022 taxes now if we want to do any tax planning to save we'd have to do that for 2023 and that's where the the the huge difference is i don't know if i'm'm getting confusing, but I hope you guyspping, you know, for the April deadline.

But what you're saying is looking at tax planning holistically, you know, there's milestones throughout the year that you need to be thinking about in order to, you know, be prepared for tax planning at the beginning of the year. So let's talk a little bit more about tax planning. You know, everyone's in tax preparation mode, but talk to me more about tax planning. You know, everyone's in tax preparation mode, but talk to me more about tax planning. You know, what are some of the things that people need to be considering on a regular basis in order to, you know, be better suited for the tax preparation portion? Yes. As far as tax planning is concerned, normally I would advise if someone wants to do some tax planning, they would sit with a tax professional because I see people go on TikTok and Google stuff all the time, but those are normally

general ideas and a tax plan is normally specific to that individual. So someone would have to speak to you and find out what your individual situation is and we would be able to give you good advice on what it is. Now, on a general note, I'm just going to tell what are some of the things that you would normally look for. Now, as far as the business is concerned, you can look at your entity structure. What is the structure of your business? And when we talk about the structure, we talk, are you a sole proprietorship? Are you at LLC? Are you at S-Corp?

Are you a corporation? All of those different entity strategies would make a difference as to how much taxes you would pay. And often you would have to put in reports and all of those stuff. So that's one thing that we'd look at, and you should look at your entity structure. As far as tax money is concerned, concerned again another thing that you can look at is the business as in business

expenses what are the things that you pay for the business are some of these things tax deductible are some of these things uh heavily you know like the pre-fusion and stuff like those those are some of the things you can look at. There are multiple things that we normally would look at when we're talking about tax planning and the business. So let's dig in there a little bit. Some of the things you even just mentioned, maybe the question marks that owners have. You just talked about business expenses and deductions. Go one step deeper. And for context, a lot of your clientele, you've told me, are above that million mark, but they're asking these questions. They've been in business,

they've got a lot of billable hours, but they're having a hard time with some of these financials and deductions and tax planning. So break some of that down. What are some of the questions that owners are coming to you with and how are you helping them? Yeah. So one of the major questions is we want to hire kids. Yeah, that's one of the major ones. And yes, you can hire kids. And there are certain rules that you have to abide by in order for the strategy to work and work properly and one of the things is that the child should be between the ages of seven and 18 and um the reason for not being above 18 is the fact that I if the child if the person is below 18 then you don't have to pay any employment taxes for that person so you know yeah and um there's a maximum amount that you can pay them in order for it to be totally tax-free and that's normally the standard deduction for that year i think this year's standard deduction is about twelve thousand nine

hundred and sixty dollars don't quote me if i'm wrong but it's somewhere in that region because every year it is it changes but you should be able to get a deduction of, say, $12,900 per child that works within the business. So that's one of the things that business owners would ask, and you can increase that amount, $106,000, where you can do an IRA for the child also. So it could be the $ 12,000 plus six, which was like $18,000 if you actually set up an IRA

and pay it to the IRA for the year, which the maximum is $6,000. So that's one thing that they would normally ask. Another thing that they would ask is, how could I get my trips deducted and that's something that can happen and you know just the other day i was speaking to a client and she both her and her husband works in the business and i was like yeah so every time that you guys go on a trip as long as you can justify doing some form of business on that trip, the entire trip as far as paying for the fare, the plane fare and the room and all of those stuff can be paid through the business, both husband and wife, because they both work in the business.

And if the kids work in the business, they can have an entire family trip. And that's a business trip. Yes, Connor. So a quick question with that. So if I am thinking about my taxes and I'm doing what you said that I have a family trip planned and I'm preparing to kind of like find a chance to do some work on that trip as part of it to write it off. Like, does it need to be work that is that like has to be done on that trip? Or can it be like if I bring my laptop and do some work remotely? Or does it have to be something that's like you need to go on that trip to do it? Does that question make sense?

Yeah. So this is what normally I would advise even at a conference. I don't care if people go on conference a lot. So what you try to do is work everything around that conference and everyone goes. So there's a day that you go to the conference. With the IRS, the most important thing is having documentation as to what you did, why you did it, is it for business purpose,

and all that stuff. So if you go to a conference and you can document that this is the conference, you have the receipt and everything, irs can't come back to you and say no that's that's not business yep so so so what we try to do is go no say for example then you're in business you want to open a new location and you're going somewhere else to look at a location, no, that going, making a trip on that side and you can say, all right, we're going to Orlando to look at a spot to open a new office. Yeah, you go, you look at the spot,

you have the meeting, you document that meeting, but then you go to Disney. No, the part for Disney is that every expense in Disney is going to be a personal expense. Yeah, but the trip to Orlando is a business expense because you went to look on a new location or you went to have a meeting with someone regarding to the business. That's basically how we're talking about when we talk about doing the travel to be a business trip, travel or business expense. That make sense?

Yeah. So if I, let's say that I'm trying to do what you said and I'm expanding into the Orlando market and I plan a separate trip where like maybe my family is going to, I don't know, we'll say New York. And I do some work on that trip, you know, doesn't have anything to do with that location. What I'm hearing then is that trip would not be deductible because that location was not

necessary for me to travel to for any reason to do that. No, right. So the IRS has a word that they use, they call it ordinary and necessary. It has to be something that is ordinary and necessary for the business so if it is that is it is it's necessary that if you're going to a new location you have to look at the actual property but if you are just going to go to New York and say you know what I'm going to knock out these expense reports or knock out these whatever figures and it's not basically so you say if you're going to New York and say this is a retreat a say, if you're going to New York, and you say this is a retreat, a business retreat, where we're going to look at forecasts and stuff like those.

Yes, the entire family went on a business retreat, and you would have to have minutes for that. Meet all the meetings, the days that you keep meetings. Because as I said before, with tax, with the IRS and any tax strategy, the most important thing is to have documentation as to why you did what. Okay. That makes sense. Thanks for going into that. Yeah. So this is really interesting. So we've talked about, you've mentioned hiring kids and you've mentioned expensing trips and those types of expenses. What are some other misunderstandings or deductions that owners aren't aware

of in this realm? Okay. One of the main misunderstanding, I think we were talking about it before we went, we jumped on the call is switching over to S-corp, you know, because everywhere we take talk YouTube everywhere, they're telling you that you should be an S-Corp, you know, because everywhere with TikTok, YouTube, everywhere, they're telling you that you should be an S-Corp. No, the fact about, it's called the S-Corp election. The fact about electing to become an S-Corp is something that it shouldn't be done lightly. I've seen a lot of times where clients, prospective clients would come to me and say,

someone just tell them that they should be an S-corp and the person charge them a certain amount of money to file S-corp for them. I know the IRS is writing them because they are not taking a salary and they should have taken a salary and they did not know that they should take a salary. And sometimes it just get real messy. Now, I'm just going to explain because I was told that most of these owners are new owners. So a good explanation, if someone wants you to become an S-corp or you're thinking about becoming an S-corp, the first thing you have to think about is how much income is my business taking in currently or at the end of the year because

in order to become an escort the first thing that the irs wants you to do is pay yourself a reasonable salary and that's the word that they use reasonable salary and reasonable salary mean basically they're saying and if you're going to pay someone else to do the job, that would be a reasonable amount to pay them. And I'm going to briefly try and explain how the S-Corp works and why it actually allows business owners to save on taxes. So you can either be sole proprietorship, an LLC, or a corporation, or a partnership no the sole proprietorship basically the business is just you and um what happens as a sole proprietorship you'll file a

share you see and whatever income that you make you're going to pay a hundred percent of the employment taxes which is about 15.7 percent or somewhere thereabouts so say for example your net income in the business after paying all expenses as a sole proprietor is a hundred thousand you will be paying fifteen thousand seven hundred dollars in employment taxes and then top of that, you're going to pay your federal taxes. So that's a lot of taxes. So how the S-Corp works is if you elect to become an S-Corp, what is going to happen is that the IRS allows you to pay yourself a salary. And then once you minus the salary from the income, then whatever is left, you're going to pay. That's going to be your distribution. Now, what is going to happen is the same $100,000 that you made.

And I hope I'm not losing you guys because I know when you start to get into the figures people don't go and see but i'm trying to be exciting here so it says the same 100 000 dollars that you made but no you're an escort after that 100 000 you have to pay yourself a salary that's mandatory so say you pay yourself 50 so thousand. No, you're going to pay employment taxes on only the $50,000. So instead of paying the $12,000, the $15,000, which is the 15% of 100, the $15,000, $7,000, whatever, you're only going to pay $7,000 on $50,000 taxes. No, the other $50,000, you're not paying any employment taxes on those. So you're saving $7,000 in taxes right there, in employment taxes.

But the only other thing is that you're going to pay the federal taxes, which you would already pay. So basically the S-Corp would allow you to save $7,000. And on average, the S-Corp, the change into S-Corp normally would save somewhere in the region of $9,000. And on average, the S-corp, the change into S-corp normally would save somewhere in the region of $9,000 just to make the change. No, so the thing about it is this,

if the business is not making at least 70 to $100,000 in net income, S-corp election is not necessary. Because one, you'd have to pay yourself first let's say for example you're you're you're coming out with forty thousand dollars at the end of the year as income yeah you're coming out with forty thousand dollars you should be able to pay yourself a reasonable salary out of the forty thousand dollars no for the most part the person's reasonable salary but more than forty thousand dollars yeah so and the the irs is saying that you have to take a salary before you can take the distribution so that simply means if no salary is taken that forty thousand dollar would have to stay in the business so and so a lot of business

owners get into trouble because of that. They switch to S-carb, they don't have enough money to pay themselves, and then they take out the distribution and then IRS comes to them and say, well, basically we're going to charge employment taxes on those for the last five years or when, because the IRS don't come to you the next year, they come to you like five years after with interest. So the super simplified lesson that I'm hearing here is basically, you don't want to be in an S-corp before you're turning about 70 to 100,000 in net profit. Yeah. And speak to someone that understands about tax planning because there are other things that come with it because as a regular sole proprietor,

you would just file a one tax return, which is your 1040. And then there's a Schedule C inside of the 1040. Now, if you're an S Corp, you would have to file an S Corp return, which is an 1120S. And it's a separate return from the 1040. So that's additional fees for you to be able to pay a tax preparer to prepare that return and stuff like those.

Let's talk about that process of potentially changing the type of business entity you are. So if I'm listening to this and maybe my agency is like barely profitable right now or not yet profitable, but I think that at some point this year, I might start to hit that mark you're talking about of starting to turn 70 to a hundred grand in net profit. How soon should I think about changing the type of business entity that my business is and what are the steps there and what should I be thinking about in general with it? That's a very good question. So yeah, so the thing is this, once you're running the business and you're running your forecast, you should be able to have an idea of when you're going to be hitting that mark.

For example, you're running the business and you say, by about July, you would be hitting that mark where you're getting at least $100,000 in net profit. And that's the run rate. You should be ending the year at, say, over $150,000 in net profit. What you do is basically elect, well, first, speak to a tax represent someone that understand taxes so speak to your tax advisor or a reputable tax advisor to advise you on on what are your options because i would not just tell someone that s corp is the best what we normally do it and any reputable tax person would normally run an entity optimizer where what you do is put the person into something and run all the different entity structures. And based on their particular situation, based on their business, based on their family situation, then you would come up with what is the best entity structure for them.

But say, for example, the best entity structure is escort you would have to file uh uh form 2553 and uh what you do whenever you fought your file and form you can tell the IRS what date you want the escort to be effective so so you say so for example you want to need to be effective to in July you want to be effective to January 1st. You can. Yeah. Or if you want to do it for in July, you want to say want it effective today in July. You can.

So you can write the effective date as to when you want the S-Corp to be effective. Yes, Connor. How long does it usually take the IRS to make that change on their side? I guess the reason that I ask is like that probably means you have to have somewhat reliable forecasting because you want to be telling them to make it effective at the right time. But you probably also have to give them kind of some lead time, I assume, to make the change effective or whatever. Does that make sense? Am I thinking correctly there? And what's the answer? It does make sense. No, the thing about the IRS is we can't judge when the IRS is going to do what or what experience I've thought is this is this so for example you want to have

the date effective january 1st and now is april once you submit that form and you write that date and they receive it you can just assume that basically that's it is what it is because you have proof to let them that this is what I want so because the IRS works on the IRS's time basically basically so so what you want to do is ensure that you have the documentation to show that yes I applied for this date and um unless they get back to you and say no, 99% of the time, they will accept it. So you should just keep your copy. And I've seen just this year, we have a client. We submit for them to be effective January 1st, 2021.

And when we got back the actual letter the letter saying that yes it's authorized it says January 1st 2019. so I was like so I had to call I had to call and I was like yeah we said 20 21 you went back to 2019 because that then the the business owner would have to show salaries being paid in 2019 and none was being paid so so but which we spoke to them and all they did was say okay that's an error and they just fixed it so so that's why i'm saying as long as you have the documentation to show what you applied for you can basically assume that it's a not here. Okay, that makes sense. And that's useful to understand

because yeah, like that way, you just basically have to make sure that your side of it is documented and planned and you're good, even though, as you said, the IRS is operating on the IRS's timeline. Yeah, trust me. And since 9-11, excuse me, 9- said, the IRS is operating on the IRS's timeline. Yeah. Trust me. And since 9-11, let's see what 9-11, since COVID. I'm going back to 9-11.

But since COVID, they have been very, very slow. So, you know, yeah. Just since COVID? No, they have always been slow, but they have been worse. They are worse now, like totally, you know? Yeah. So we're speaking pretty in- depth about S-Corp, which I think is really beneficial. I want to better understand the benefits of each.

If you can share, in my understanding, a lot of home care businesses start out as an LLC. And I want to understand that that's not necessarily wrong. And what are the benefits of starting as an LLC? And what are the benefits of an LLC? But then what are the benefits of each of the options, just so that owners understand, you know, the benefits of each and where they should be and when yes so the major benefit of an LLC is that it's it's a simple entity structure uh there is not a lot of rules and regulations that comes with running an LLC as with the S Corp there are a lot of things that you have to file as as an S Corp you know with thec basically you file only one tax return which is is just your

personal return you file a personal return but as an additional addition to the personal return there is also a schedule c so that's that's one of the benefits for the llc and um as i said if you are in that state where you're not making the amount of profits that you need the LLC will be easier to to just file right there because it's just one tax return but once you get to a certain level and you start making more money LLC of its law. And also, as far as the LLC is concerned, the LLC as an entity structure, it is the one that basically would indemnify you against being sued and stuff like those, because it's a separate entity from the owner, as opposed to being a sole proprietorship. You had sort of mentioned how there's a lot of like consultants and like financial influencers on TikTok and

people like that saying to start out on the S-corp route, which you've done a good job of saying, here's why that doesn't make sense. What is it that you think is kind of making these experts like push people down that road versus having them start it out as the LLC that they probably should. Because it sounds sexy. It just sounds like a good thing to say, no, S-Corp, S-Corp. Basically, there are a lot of benefits in the S-Corp. So basically, because there are benefits in it, they would like to sell something that they know. And 90% of the people who are S-Corps, it's working for them because they're making money.

But no one is going to tell someone that if you're not making enough money, the S-Corp is not going to work for you. No, because it doesn't make sense to explain that. And then the ones that are pushing the S-Corp would normally charge the person to send in the form. Form 2553, you have to file a physical form with IRS. So some of those people and for all the clients that I speak to that come to me with the problem after becoming an S-Corp, they would tell me that, you know, person came to them and charged them to file the S-Corp's election for them and all of those stuff. And that's all they, so I guess that's the reason why they're forcing, well, not forcing, but they're pushing the S-Corp because there are a lot of benefits there, but you have to be cautious. That makes sense. You don't typically hear taxes and sexy

in the same sentence, but I get it here. It's something that's easy to sell to people and that if they need to switch to S-corp and you charge to help them do that, you have an incentive to tell them that they need to be in S-corp. So that makes a lot of sense. Yeah, but there are really a lot of benefits that doesn't come with the normal sole proprietorship, because even the old, you know, buying the car in the name of the business and a lot of other stuff. There are certain insurance strategies where as an LLC, you're not going to get those strategies so there are a lot of things that you can do but as well i always preface you know you have to sit with a tax professional and let them understand what your personal situation is and um uh why it is that it will work for you and one of the other big reasons for being an escort when you get it as a sole proprietorship is also, they call it a 199 deduction. And that's a 20% deduction based on your income.

We've had a really good question come in. We've talked a lot about S-Corp. I want to hear a little bit more about the sole proprietorship and then also about a corporation. We've had someone just ask about the benefits of a corporation. So talk a little bit more about the benefits of both of those. Yeah. of a corporation so talk talk a little bit more about the benefits of both of those yeah so as far as the sole proprietorship is concerned now the sole proprietorship is and um i'm not a lawyer so i'm not giving legal advice but i'm i'm just saying as a sole proprietorship you're basically opening that open up opening up yourself to any form of lawsuit or legal issues because you are not

separated from the sole proprietorship so so that personally uh for home care business where anything can happen that's not something that i would advise someone to to operate under for a while but then i'm not a lawyer, so I'm not giving legal advice. But the sole proprietorship would work basically as far as taxes are concerned, similarly with the LLC. But for legal purposes, the sole proprietorship is basically

you, the person, basically running the business as the person. So if there's any legal action against the sole proprietorship, it's basically a legal action against you as opposed to the LLC where if there's a legal action against the company, it's against the company

and it does not affect you as the person. Okay, that makes sense. I wanted to hit that clarification. So now let's talk a little bit about a corporation. What are the distinctions there? The huge distinction with the corporation and whether the LLC or the S-corp is that the corporation, you are taxed on your dividends and it's a flat 21% tax on the dividends. Yep. And also, the dividends are taxed whenever they come out of the business. And then also, you will also pay your actual, your regular taxes on your personal taxes.

So basically, they call it double taxation because you pay taxes on a dividend and then you pay the federal taxes also. So that's the difference. Now, why some people would go the corporation route is that there are a lot of things that you can do within the corporation, like fringe benefits and such like those. And if you plan to keep the money within the business so say for example you're growing your own care uh business and you want to maybe sell uh maybe in a couple of years and you're not really taking the profits from the business so because no distributions are coming

out you're not paying in the taxes so you can keep the profits within the business, grow the business and that the corporation will work for you right there. And there's a lot more benefits that you can get in the corporation because, for example, if you want to have owners outside of the U.S. as being a part of the corporation, that's the part of the business. It has to be a corporation because non-U.S. citizens can't be a part of the business it has to be a cooperation because outs uh non-us citizens can't be a part of an escort okay we're grilling you you're doing awesome this is really useful for a people starting businesses starting home care agencies and people that are in them you know they're probably still asking themselves these questions.

So thank you for covering this like holistically of, you know, do your homework up front and think through it as you go. Another thing about the cooperation is that as far as if you're running a home care agency and you're looking for investors, the best thing to have is a cooperation where you can sell the shares

also. Sorry for cutting you off, Miriam. Go ahead. No, that's great. I want to put you in the shoes of an owner, Mark. If you were starting your business, what approach would you take? Given all of these options, where would you start? And if you were going to make changes, you know, where would you make those changes? So basically, like personally for me,

if I would start and you start, oh, this is another thing that we didn't start out with, but I'm going to talk about it now. So if you're starting out, normally you start out as an LLC, you know, and it's home care. I've never normally heard about home care businesses starting out with investors and

stuff like those it would have to be a partnership i'm sorry a corporation is normally a wide person starting out so you start out as an llc one main thing that i didn't mention in the beginning which is a huge problem as an llc when you're starting out you cannot take salaries if you're the owner of the business you should not take a double two salary even if you are a caregiver if you're the owner of the business you shouldn't be taking a salary yeah so so that's something that um a lot of home care business that I see that because what happens is that you you'll end up paying taxes that you shouldn't pay that is employment taxes what you should be taking are distributions so if say for example i'm running the home care business and i know that listen

i need three thousand or five thousand dollars on a monthly basis to maintain my home and you know and the business is making enough money for me to take that what i do is take the three thousand dollars on a monthly basis or divide it out on a weekly or quarterly basis and take owner draws for that amount it should not be salary unless i'm a corporation or i'm i'm i'm an S Corp so so that's that's the first thing so if I'm starting the business I I know that I'm not supposed to take salaries in the business then I would I would look out for all the things that I know that these expenses uh ensure that all of my business expenses actually goes to the business and some expenses that may be personal can be justifiably put to the business example telephone if you have a cell phone everyone would

use their cell phone to send email and all of those stuff for the business so that cell phone can be a full business expense and if the kids work in the business you can get them phone also and all of those phones and tablets and stuff like those can be business expenses so those are the kind of things that i would look for if i'm i'm i'm new to the home care business and then what i would do is keep track of my income net income to see when I'm going to get to that point where I would need to start looking to planning for taxes. Awesome. I want to clarify. So you mentioned when you get started with an LLC, you shouldn't be paying yourself salary. You mentioned distributions, paying yourself based off these distributions. We had the question come in,

how do you pay yourself if you have an LLC? How do you define those distributions or how do you calculate those accordingly? From your profits. If you don't have any profits, there's no distribution. And it's a set percentage or how do you decide? So this is it. So I'm going back to, I'm the business person. Yep. So you're a business person, you're running. So this is it and i said so i'm going back to i'm the business person yep so you're a business person you're running so this is not about because i hear about profit first and all of those other stuff i'm i'm just giving it from an accounting uh practical standpoint you're running a business the business is taking in on a monthly basis thirty thousand dollars yeah you're paying out twenty thousand dollars so you have ten thousand dollars left no after that ten thousand dollars you as a business

owner would have to decide how much of that do I whether you need it or not to take for yourself to maintain your home if that's the only income that you have yes so for example you need five thousand dollars to maintain your work so you take that five thousand dollars and leave five know that five is you're leaving less money to grow the business so everything has to depend on what do you want for your business yes so there is not a percentage that you should take or anything like that because these are this is distribution so we're going to go on the flip side you're making thirty thousand dollars your expenses are thirty five thousand dollars so you're losing five thousand dollars what do you do no there is no distribution for you to take so what you would

have to do is borrow money to end up getting that $5,000 to pay that difference that you have. Yeah. So the business is going to be in debt. And basically, you would have to a salary and you made that $30,000 and you took $5,000 salary out of the business. Basically, that's $5,000 that you're borrowing from the business that the business did not make. Awesome. That makes sense. A follow-up question to this. We just had come in. How do you classify the money that you take as an owner? We're using the word distribution, but how is that classified? Owner's draw or payroll? Owner draw or owner distribution or anything to that effect. The key thing is that it is in the

profit and loss account and it is in the part where equity is. So it's owner draw or owner distribution, but it should be in the profit and loss account. It says owner-drawer, owner-distribution, but it should be in the profit and loss account. It does not affect the profitability of the business. So this takes us back to the original topic of planning. When you're getting into business, knowing these numbers, having your P&L in place, and thinking about this on a regular basis.

The last two people we've talked to, Jen Ramos and Julio Briones, they talked about, you know, agencies can't even open their doors before they're already losing money and taking losses. So you're talking about these numbers and it's easy to, you know, to take losses early on, but it's, you know, tracking all of this, being aware of this and planning ahead of time. Definitely. Definitely. Something that I wanted to ask with this, this kind of more of a broad question here, and this might get into the territory of what we're going to talk about next week. So if it is, then we can hold off. But I mean, you'd kind of mentioned how like one of the mistakes that you see made a lot is agencies that will start out as in an S-corp and then like they'll kind of end up like running into problems with that because they should have waited.

What other mistakes do you see agencies frequently making that cause them to pay more in taxes than they need to? Well, as I said, one is taking salary when you're not supposed to be taking salary. Because, for example, and I just did the example now. So for example, the business is losing, you're taking a salary. No, you're paying employment taxes that you shouldn't be paying because you shouldn't even have a profit to're paying employment taxes that you shouldn't be paying because you shouldn't you shouldn't even have a profit to pay those employment taxes you understand what I'm saying because once you take a salary you the the employment taxes are automatically ducting no if you were just running the business and taking draws because there is no profit to take draws from, then

there is nothing for you to, because if you're at a loss as an LLC, what happens is that you're going to be paying taxes on the profits. Now, if you're at a loss, you don't pay any taxes because you don't have any profits. So if you're taking salaries, what is going to happen is that on fictitious profits, you will be paying taxes that you shouldn't be paying. And I see it all the time. That probably happens a lot in home care, I would imagine. Yeah, I see it all the time. I see it all the time. And normally, they would wonder why they're paying so much taxes.

And I'd have to show them, I would like, listen, the business is losing. And if you weren't paying yourself a salary, what would happen is that you wouldn't be paying that tax. But because you're paying yourself a salary and basically, so, and oh, another key thing that business owners should understand. For the most part, everyone looks at their profit and loss. But everything goes down in the balance sheet. Because what is happening, if you're losing money and you're taking money, it would show somewhere that you're borrowing. You're borrowing, so the money has to come from somewhere so is either you're running a high credit card debt or you're you're taking what you're borrowing from an individual or you're borrowing from the bank but it should show in the balance sheet in your liabilities because the money has to come from

somewhere so you know most small business owners are most new home care business owners they would normally look at the profit and loss account, but don't check the balance sheet. But you have to look at the balance sheet to get the full picture of what is going on in the business, because that's where basically everything has to tie back in. That makes sense. What else? Another thing that I noticed is that, and this has nothing to do with tax planning, but most home care businesses, they normally would focus on the top line, how much money coming

into business. Yeah, we made $2 million last year. And when I say, you know, what is your gross profit margin? So many times they know, they would say, yeah, it's 40%. Oh, great. What's the net profit? Not sure. You know, the stop at the gross profit. No, you have to go right down to the net profit because you're in the business to make a profit. So you have to know what your net profit margin is. And if you're not keeping track of that what is going to happen is that and that's this is i see all the time most of those businesses are losing you can have a 40 gross profit margin and still lose and there are a lot of different reasons for that but for the most part, it normally works out in administrative costs.

That makes sense. I mean, that's the way. Sort of crazy to think that it is so easy not to pay attention to net profit because that's what directly influences what you earn as the owner most. but I've also seen and even experienced like that temptation to kind of focus on top line revenue and, you know, maybe gross margin and not, not think about the profits. So I get that. It's just important. I've seen it all the time. So it's not, it's very, it's, it's, it's very common and it's not, and, and what I,

what I normally would tell, uh, your business owners it's like when they come because they would be shy just to say to me as i listen this is not a place for judging or anything like that because at the end of the day you guys are carers that's what you do this accounting and finance is normally not your wheelhouse and not something that you even want to do so everybody's glad to see we're getting a lot of money coming in. But as far as what is happening down in the end and maybe we're losing, we don't want to see that. And I get that.

I understand that what I try to do and any reasonable or proficient financial person would try to do is basically just show them what is going on in the business from income gross profit all the expenses to the net profit and just show everything down the line just yesterday i'll give you that example just yesterday last week yeah last week we had because basically we do we and i but most of my clients right now we're doing the forecast for the year starting with with this client and she's telling me that you know Mark we're losing and we don't know how we're losing because they're taking in like two

million dollars but they're losing so I was like no problem we'll see what so when we sat down and did the forecast yeah and um our net profit gross profit margin phenomenon about 40 percent and uh when we go down and we start adding up all the administrative staff that she has it's a very nice person she's trying to employ a lot of our family members and stuff like those it happens all the time so you know before like saying anything to her the first thing I did was went to the homecare pause list of the amount of stuff that you need to have based on your revenue so I I showed her this is your revenue and this is what homecare Paul says you should have won this one that one that one that and um where are you know and she's like oh it's three times the amount

you know what I say is a nice person and they're trying to employ a lot of their family members you know but that's that does not work for the business so then I was like you know what let's just dissect what each person does so we start going down the line what does this person do what does this person do and just by explaining what the person does i can sense that in her head she was like yeah this is ridiculous why am i having this person working because sometimes just when you're talking out you see that what you're doing you can't explain it away and i saw it and this morning she wrote me and said you know what mark as of september as at uh the third of of this month which is the next two days is five people no longer working because i always said decision

is yours it's your business i can only show you what is going on. And she saw it. What I showed her was basically her losing money on a monthly basis, net profit loss, and why she was losing that money on a monthly basis. Exactly why all the people right there, because we have the percentages of what everything else should be and I was like 99 at the time the issue the real issue if you're losing money and the and it's a hard issue is when your gross profit margin is not good it happens sometimes because some places the rates are just really low and you have to pay the caregivers a

certain amount no that is an issue but when your upper your administrative costs are a problem sorry that's management you would have you have to manage that and what we what I try to do is basically just show you because a lot of times the business owners just don't know what should be done because yeah without home care points how would they know that they only need x amount of free because they just feel like yeah we just hire these we have the money to pay them so we hired him you know so and and then the flip side is you have other clients they would come on one person will be making 2.7 million dollars and it's just her and a care coordinator she's burnt out because at 2.7 million you need more staff but yeah she can manage it and um

miriam told me to not leave this one because, yeah, it's tax planning. So that person, just like that, had an income of $1.1 million. And she was looking at paying $600,000 in taxes. Imagine that, $600,000 in taxes from the $1.1 million in income. That is if she was going to continue being an LLC so no this is where we talk about advanced tax strategies because switching to an S Corp is only going to save her about ten thousand dollars we're talking about six hundred thousand dollars so while we we I was able to do a tax plan for her last year,

where she saved, I think it was about 357,000 of the 600,000. Oh, I'm not Donald Trump's accountant. I don't know how someone would get it to pay $700. I can't do it because I only use legal strategies. So yeah, but we're able to save her 357 000 off the 600 000 which i think was is pretty good as you can imagine cutting a check to the irs for 600 000 and on top of that that 600 000 because she was telling me that you know i bought i bought a building and i bought we

we're not talking about strategies where you have to buy stuff we're talking about strategies where you invest in things where you're going to get back that money yeah you've spoken some hard truths but i think really good things that owners need to hear at any stage you know these are some of the hard realities that owners are facing and so we appreciate you being vulnerable and open and honest and sharing a lot of this. I want to ask one question from the audience before we close. And I also want to leave people wanting more. Next week, we're going to talk through some stories of clients that you've worked with, like one you just mentioned that have faced some

harsh financial or tax realities that could have been prevented through some of the things that we've talked about today. So same day, same time next week, we want to invite people back to pick your brain a little bit more and hear some of these stories up close and personal. But just before we close out, we had a question come in. She says, I just started the home care business fourth quarter last year. I hired a bookkeeper but can't really give financial advice. If I hire an accountant for financial projections or planning, how much is the average payment or retainer fee should I expect?

And is that monthly or per inquiry or per task? How much should people be paying for some of these services? Okay. So, all right. So this is, I can only tell you what I do. Yeah. So, and I can tell you if I was a business owner, what I would do. You want to pay based on what type of return you're getting.

So you don't want to just pay. If you pay someone to do your taxes they're just doing your taxes and that's just a fee if you pay someone to the tax planning you should be seeing some pharmacy like the first that saved three hundred thousand dollars even if they paid twenty thousand dollars it worked because they saved three hundred thousand dollars so that's that's all i i look at it what kind of for return do you get now when it comes to accounting this is what I would say to a new person the bookkeeper would be there to ensure that items whatever expenses or revenue there should be categorized properly and all of those

stuff so the bookkeeping fee I don't know what a typical bookkeeper would charge, but that normally would be a set fee. Now, as far as hiring a CPA, and this is what I see for most CPA and what used to happen before I specialized, the average CPA is going to come in and do your taxes at the end of the year if they're going to help you with projections they don't know anything about billable laws they don't know anything about billable rates they don't know anything about home care so they can't really help you they can't tell you you know okay all right I need to add a salesperson they can't tell you how much billable hours that person need to bring in in order for it to be profitable so so it's an average CPA that you're going to employ and um because all of those other stuff if you don't want to do all of those stuff on your own meaning you would have to be calculating

those kind of management type things like how to work out how much billable hours we need to get to ensure that the salesperson is is actually working being for themselves you would have to work that out on your own because you're the only person that understands uh how the care agency works so so normally if your ircp is normally just the normal rate that you would pay someone to do taxes. Now, if you're going to hire someone like me, who I am specializing in working with home care businesses, what would our flat rate that we start with for the lowest rate is, and we talk about monthly CFO services, and this is where we ensure, we look over the books to ensure that everything is okay we go through go over all the the the kpis and stuff like those that starts at a thousand dollars and um depending

on how much revenue the business does and how much uh profits that we are able to make you then it can increase because what we do is we basically show you the results instead of just charging you just for us, just coming to just give you information that most of the time you already know. I hope that explains if it doesn't, maybe you can give them my information and we can talk more. Yeah, absolutely. I think that sounds perfect. Like I mentioned, we will be back with Mark again next week and we will share his contact information for anyone that's interested

to follow up with him. But I know we're at the top of the hour, so I want to wrap up. Thanks for being here today, Mark. I know we've covered a lot of ground and we've gone pretty deep on some of these business entities. But like I said, this is really useful information for owners to hear. So thanks for being here and we'll see everyone back same day, same time next week. Thanks for being here, guys. And I'm glad I love working with home care businesses. So, you know, this is like fun for me. Awesome.

Well, have a great day, everyone. And we'll see you again next week. Take care. That's a wrap. This episode was made by the team at CareSwitch, the first free home care agency management software. If you're tired of running your agency on an outdated software that looks and works like Windows 98, and you want to save a little money for your bottom line, check us out at CareSwitch.com. Thanks for listening. See you next time.