186. From Paying Yourself to Saving for Tax Payments to S Corps - Braden Drake Shares Business Entity and Cashflow Tips for Coworking Space Owners

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186. From Paying Yourself to Saving for Tax Payments to S Corps - Braden Drake Shares Business Entity and Cashflow Tips for Coworking Space Owners

00:00:01 Welcome to the everything co-working podcast, where you learn what you need to know about how the world wants to work. And now your host coworking space owner and trend expert. Jamie Russo, Welcome to the everything coworking podcast. This is your host. Jamie Russo. Thank you for joining me today. I have a non co-working guests today, and I'm looking forward to introducing you to him.

00:00:39 His name is Braden Drake. He is a resident of San Diego, California grew up in Indiana. So he is a Midwesterner. And you know, I love Midwesterners. I came across him in another group that I'm in and found some really helpful advice that he shared on his website around electing to be taxed as an S-corp. So we're going to get a little technical today.

00:01:05 Here's why this episode might be useful to you. If you are starting a coworking space or run a coworking space than the sort of legal structure business entity, as Braden refers to it, your, your legal structure, your tax structure, and some cashflow topics that he's going to cover are important to help you think about how to make sure you have the right legal systems in place.

00:01:31 You're filing the right things every year. And I find the cashflow discussion to be really helpful to any business owner, because I think even experienced business owners are always trying to improve how they manage cashflow, how they prioritize paying themselves, managing expenses, that kind of thing. So I think this is a really helpful discussion. If you think I've got that covered on it.

00:01:55 This is, you know, one of my strengths have a listen anyway, because I would bet that you have a lot of members in your space that struggle with these topics, and it might spark some ideas around programming that you can do for your members. Braden is going to host a session. We are doing event shares for my flight group program and community manager university program members.

00:02:19 If you are one of them, Brandon is going to do an event that will be shared across that network in March for the members of those spaces. So I think it'll be a really good listen, regardless before we dive in a couple of things. One, I want to say some thank yous for podcast reviews that have been popping up. I did an ask for those back in December because I realized ouch 2020 was a painful year in terms of reviews.

00:02:48 So thank you for those who popped into Apple podcasts in particular and have been reading review writing reviews. This one is from Rachel, the CC so much great information. Pod cast has been so helpful in answering and helping to think about everything that goes into creating and running a co-working space. And I won't read the rest of it because I just feel like I'm bragging about myself,

00:03:10 but Rachel, the CC, thank you for taking the time to do that. I really appreciate it. We are actually running a Google review contest for our community manager group. This month, I offered up a prize for the community manager that gets the most new reviews in the month of January. We did a training on how to Uplevel your Google, my business game and how to solicit testimonials that go beyond saying thank you for the coffee and the internet that are a little bit more meaningful.

00:03:38 And we have a clear winner so far, but we have a lot of focus in the game. I think our winner just announced that she has 20 new Google reviews, which is pretty amazing. So those reviews are so important to our businesses real quick. Also, before we dive in, if you are working on opening a coworking space, I want to invite you to join me for my free masterclass three behind the scenes secrets to opening a coworking space.

00:04:03 If you're working on starting a coworking space, I want to share three decisions that I've seen successful operators make when they're creating their coworking business. And I've seen a lot of them. So I want to make sure that you avoid these mistakes and think sort of big picture about these topics. When you're designing your business plan. This masterclass is totally free. It's about an hour,

00:04:27 which includes Q and a time. If you'd like to join me, you can register at www dot everything, coworking.com forward slash masterclass. I also want to mention that I launched a private podcast. I know super cool apps that are available these days that will show up in your podcast player, but it's not public. You can register for that. It's all about the community manager,

00:04:51 the profile of a successful community manager, the hats they wear the most recent episode talks about how to do a forward look into 2021 as sort of a review slash expectation setting session with your community managers. So if you have one, you can check out that podcast at everything co-working dot com forward slash cm podcast to cm for community manager cm podcast. Okay.

00:05:18 So I am excited to introduce my guest today. Brayden Drake, lawyer, author, podcast, and educator. Let's dive into my conversation with Brayden. Hey, I just wanted to jump in with a really quick notice about this episode. Usually My episodes are pretty squeaky. Clean. Brayden has a book and a business, Yes. With a bit of a potty mouth name.

00:05:43 So if you are sensitive to that, have little ears in the car listening, you should probably hold on this episode until you are by yourself. We do not use swear words gratuitously, but the name of his book happens to have the F bomb in it. So it is used a couple of times. So I wanted to give you a totally clear,

00:06:05 fair heads up that you might want to save this one for later. If you have a little ears around, I have a nine-year-old who is very sensitive to the potty mouth, so I totally get it. And do you know, that's not typically my style, so I wanted to give you a heads up, but I think Brayden's content is a really helpful,

00:06:23 so, and I wanted them to feel comfortable. So that word is used a couple of times referring to the name of his business and the name of his book. Thanks. I am with new guests today, Braden Drake. So I came across Braden sort of in a non co-working world. And I love to introduce non co-working folks to the coworking audience.

00:06:46 Braden is in San Diego by way of Indiana. So Midwesterner turned West coaster like myself. Braden, thank you for joining me today. Yeah, thanks for having me. I'm very excited to be out here on the West coast with you. So I finally said to Brayden, I had to hit record, but I listened to Brayden's podcast. And so he's sort of a mini celebrity to me.

00:07:10 And I feel like Braden, I feel like I know you because which is sort of a weird thing. I'm like, Oh, I want to talk to Brayden about CrossFit and about the container store and about all the things. Talk about all those things. I don't know if your audience would care about any of it, but I'm always here for it.

00:07:25 You know, my podcast is kind of known for its site tangents. Totally. No, but I think it just speaks to you do a really great job of talking about, you know, a pretty sort of technical business content, but keeping it interesting with your, you know, infusing your personality, which God like God only knows we can only, we can only talk about contracts for so long before we need some like 11 in the air.

00:07:50 So I have to ask you though, your, your CrossFit videos, do you sneak in there? We've been closed every time I see you in a gym, I'm like, how's it get into the Jim? Yeah. So you'll notice if you follow closely or not. You'll notice that my CrossFit videos tend to come in spurts very sporadically and pretty rarely.

00:08:07 And it's because almost every time I'm posting those videos or when I'm back home in Indiana, because my sister owns her own gym. And so she gives me a key every time I go home. So usually I'm in there by myself, just like setting up those videos. So your sister owns a CrossFit gym. It's not a CrossFit gym. It's like small group training classes,

00:08:27 but they do high intensity, a high intensity interval training and kind of similar stuff. They've got all the things. Yes. But it's fun like here in San Diego, like we actually still have classes. We're still doing them outside at our CrossFit gym, but whenever I go to class, I still get my ass kicked by a number of people in the class because they're all very fit.

00:08:47 And then I go to my sister's gym and I'm just do like a strict pull-up or like a butterfly pull up. And they look at me and pure amazement, which maybe not great for my ego, but it is good for my confidence. You're hitting the bar muscle ups. I was thinking about your bar muscle ups, because yours are very yours or,

00:09:02 you know, the memes, like what I think I look like when I do a bar muscle up and what I actually look like, I should record myself more often because video is so good for improving technique, but I did an online qualifier for a competition in Northern California. So I had to do it in my garage. And I, I was watching the recording of me doing my bar muscle ups.

00:09:24 I mean, they're, they're not pretty, yours are like, the form is so nice. So I did 39 of them, which is the most right. So, so quantity is, Well, it's funny that you say, because I've only managed to do it like eight times and I haven't, I did them in Indiana and I haven't managed to do it again.

00:09:44 Since I got back to San Diego, I like lost my rhythm, Very elusive for a very long time. And now they're pretty on demand, but my legs do this like scissor thing in the air, which is terrible. Try to pick yourself up by one of my coaches though, she's a gymnast. And she said, that's actually very normal. Like in gymnastics,

00:10:04 she said he usually get a skill and then it goes away and then it comes back. And usually what happens is the time in between where you can't do it gets smaller and smaller and smaller until it's Noah, until you can do it regularly. But it just kinda, it pisses me off. And I get really frustrated because I'm the type of person that's like,

00:10:20 I've done it once. I should be able to do it every single time. It's a strange thing. I haven't done a ring muscle ups since last March, because I don't have access to rings, which makes me very anxious because those took forever. And I'm worried that they're going to go, But I haven't tried that. My, my coach actually told me that what I'm doing are technically gymnastic muscle ups.

00:10:40 So the forms a little bit different than a standard CrossFit muscle up. Yeah. But I think that becomes problematic on the rings then, because I basically just swing around in a circle. Yeah. Oh, I see. Got it. I don't know. I th I think it'll translate, but anyway. Yeah. We'll see. We'll see. Hopefully some of your listeners like care about CrossFit A little bit.

00:10:58 I do tell them sometimes I'm like, I know you want me to stop talking about CrossFit, but I do have some, I actually, iron man training starts in a week or two. So next time on the podcast, we can talk about that. Okay. I'm doing an iron man Sacramento, which will be the first year of the race, assuming it happens.

00:11:14 Wow. Awesome. I'm going to come up my way, so, okay. So let's talk about what we're here to talk about today instead of evil about our bar muscle ups. So I, so I had come across Braden in a Facebook group that I'm in about using courses to teach people things, which I do. I run a couple of programs in the coworking space.

00:11:37 And then Braden, I think I really dove into your content when I had a talk with my accountant and my accountant was like, Oh, you need to be an escort. And he was like, go do that. And so I said, okay. And so I, you know, put it on my to-do list. And then a little later I started researching and I think I might've found your blog post on it because it's super in-depth and your blog hosts made my accountant look not so helpful because he was just like,

00:12:04 go do it. And your blog posts like, well, you need a bookkeeper. You need you, I think you have to declare it in the first quarter of the year and you need something else. I can't, you know, a bunch of things that I was like, he didn't mention any of those things. You can't just go off. And so anyway,

00:12:20 I encountered Braden and started following Britain has a podcast. So Brayden is let's introduce Brayden. Officially Brayden is an attorney. So he graduated from law school in San Diego and passed the bar exam and officially became an, a lawyer and then decided to get his master's in tax law, and then started a law firm and worked one-on-one with a lot of creative and small business owners and discovered that his real passion was for teaching and empowering entrepreneurs.

00:12:53 As Braden would say to kick ass in business, we have to give you a warning, a language warning, by the way, we don't often potty mouth on the podcast, but Brayden's book. I'll let him talk about his book. And a little bit is potty mouth. And Brandon, I have to tell you, my nine-year-old is very sensitive to the potty mouth.

00:13:10 I don't know how this happened, because I have a little bit of one, I don't know many grownups who don't write when you work. Like when you, I wonder if that's an attorney thing too. Like, I didn't have much of one until I started working. And I was like, Oh, everyone swears, this is so interesting. She gets very,

00:13:27 so I listened to the podcast, you know, in the car and she'll get very offended. So That's hilarious. I know. Totally. She, I don't know how to, like, I tried to even explain to her, I was like, look, grownups do that. It's not personal, but anyway, so there might be a little potty mouth.

00:13:43 So Braden supports entrepreneurs and his, his book is about it's called how to on w w I can't don't even know if I can say it out loud, how to F your biz a step-by-step framework to get your legal and tax shit legit. And I have a, a copy of the book here. So it's super, super helpful. And his blog posts kind of led me down the road of wanting to chat with him about his work and about some specific topics that I thought would be really helpful to the coworking space owner audience,

00:14:14 and certainly to their members. Brayden. Do you want to share anything else about yourself that I haven't mentioned yet? Pretty good. I know a lot of people are confused. Like, what is a tax attorney? What do they actually do? A lot of tax attorneys work with people who have back taxes. So if you've seen all those commercials, like been in taxed at like call this eight one hunt,

00:14:33 like one 800 number, and we'll help you get out of your tax debt, like tax attorneys do that type of work. But a lot of them, like, for example, my best friend and my tax program, she's in San Francisco. Now, she works for Deloitte and she works in their tax division. And one of their primary clients is Facebook.

00:14:50 So they help Facebook pay us a little money in taxes as possible. I decided that was not for me. And I'd much rather work with small businesses. The small businesses need much simpler tax help. So that's why a lot of what I do more overlaps with how CPAs do consulting. So I do legal work and I do like tax consulting work no longer,

00:15:14 really on a one-on-one basis, but all through my education channels, my courses, podcasts, all that kind of, Yup. I love it. I feel like tax and legal topics for small business owners while they're simpler or more stressful and more sort of impactful because the average small business owner has no idea what they're doing. I have an MBA from a good school,

00:15:37 nothing I learned there prepared me to, you know, set aside quarterly taxes and know kind of all the legal stuff you need to do. Yeah. I feel, I feel you even like, even in a masters of tax program, like no one ever teaches you how to file a tax return. They don't even really tell you about quarterly taxes. They're like,

00:15:54 well, we're going to skip over that. And we're going to talk about what happens if two people want to form a partnership and they both contribute $5 million worth of real estate that they bought in the seventies. Like, how do you do evaluations for that? And I'm over here. Like, I don't really care. Like I just, I want to help people with like how to make sure they don't get into tax debt and how to run a profitable,

00:16:14 small business. Yeah, exactly, exactly. And running a profitable, small business is key and not getting those scary notices from the IRS because you've screwed something up and not filed something. You have to file. There's a lot to keep track of. If you don't know where you're doing it, I kind of love your style. You're hosting a bookkeeping party.

00:16:31 Is that right? Yeah, we're actually, so we did a 10 99 filing party last week, a week from today. So it might be over by the time this podcast errors, but we're doing a PPP application party. They're going to do some bookkeeping ones and basically party. And my world just translates to a co-working zoom call, where everyone comes and do the stuff that they've probably don't want to do.

00:16:54 So I always joke, like I pretend like it's going to be fine. It probably won't be that fun, but if you're going to actually get the work done, as opposed to just not doing it and you're You totally, you just need it on the calendar. We just started for one of my programs, we started an accountability group for running the EOS process.

00:17:13 I don't know if you've read traction, but I teach that. Okay. So, but lots of small business owners on their own are like, well, I liked the process, but it's, what am I going to have an L 10 by myself, you know, by yourself. Yeah. So we started like an EOS party once a week. Same thing.

00:17:30 It's not that fun, but we get together, it's on the calendar and we make ourselves do it and we get it. It Like that. Yeah. I have my unfuck, your biz graduates, my alumni go through an additional course called unfuck your systems. So where we go through the EOS process. That's very, yeah. Oh, Oh, nice.

00:17:46 Yeah. Good. Okay, cool. Okay. So let's dive in and talk about our first topic, which is entities. So business entities, and I mentioned, I think that's how I found you is the LLC or the escort. Do you want to kind of dive into your Sure. Let's, let's talk about it. Well, one of the things I learned pretty quickly in business,

00:18:07 I remember one of my first blog posts I wrote was titled which business entity is right for you. And then I had several much savvy or business owner, friends of mine, right? Like tell me like Brayden WTF. Is this blog even about like, what are business entities? I don't even know. So that's an SEO lesson for us. All right.

00:18:25 Now my blog posts are like, should you be a sole prop or a DBA? And like, technically from a legal perspective, that question doesn't even make sense, but it's like give the title that people are searching, then explain it. People Are asking, right. Even if it's the wrong, right. So our starting point is understanding that whenever we start a business,

00:18:43 we're automatically going to be deemed, I call them the default entities. So a sole proprietorship, if you are on your own or a general partnership, if you have a business partner and those are the defaults, they provide no liability protection. I'm going to go out on a limb and assume that most of your listeners have already formed an LLC because owning a coworking spaces like a pretty serious business,

00:19:05 not that everything else is not a serious business, but it's a lot different than like a lot of my students who just get started, like doing like a wedding planning for their friend. Yeah. It's a little pro probably more implications, legal implications and yeah. Investment. But I would still say there's probably a lot of fuzz around, am I doing this right?

00:19:29 Am I, you know, and the, you know, the escort piece, I think you're right. There's probably general awareness of that. I do suspect we have folks who have partnerships who don't have good operating agreements in place and yeah. Yeah. We gotta go. We gotta get, we gotta get those for sure. So let's talk about a lot of you probably already have LLCs,

00:19:47 but let's talk about what an LLC actually is because there's a lot of people form them and they don't really get it even after the fact. And LLC is just a vehicle for liability protection. So in my book, Jamie, you may be read to this point. I'm not sure, but I teach about how LLCs are like a magic bubble or protection.

00:20:05 I always tell people to think about the scene in the wizard of Oz when Glenn, the floats down and her magic bubble, but like replace your business with Glenda. So if you have a coworking space, it's very easy to do this. Imagine your coworking space inside the bubble. And if any thing ever happens to your business and your coworking space, where to like,

00:20:25 we can think of it as like a literal explosion, your bubble of protection, your LLC is going to protect everything you own on the outside from the shrapnel. So LLCs are very important specifically if you operate a physical space because you have potential issues of premises liability, so people get injured in the space. Plus you, you know, you have contract issues,

00:20:46 all this kind stuff. And LLC is a really important starting point, particularly in this business. The common misconception is that people think an LLC or a, sorry, they think an S-corp is an entire different type of legal structure. And that's not the case. And S-corp is just a tax status. So you form an LLC or you form a corporation and then you elect for it to be taxed under subchapter S of the tax code.

00:21:13 And that's where we get the term S corporation. I'm still Sorting that out in my brain also. So yeah, Really what it is is like you form an LLC and then you can file like different paperwork that says, Hey, I, the default is for your LLC to be taxed the same as a sole proprietorship. So as a disregarded pass through entity,

00:21:34 it's a lot of loaded language, but we'll get there. Or you can say, I want my LLC to get the benefits of subchapter S of the tax code. And if you file that, election's called a form 25 53 with the IRS. That's when we say that you have an S-corp, I believe this was where I'm always kind of, if I'm pretty sure you can have your LLC taxed as a C Corp,

00:21:52 it's just, you would never really do that. It doesn't really make sense for small businesses. So that's how that operates. And it's funny because I talk to people all the time who formed escorts, usually their accountant did it and I say, okay, but are you an LLC? Or are you a corporation? And they always just stare at me and they say,

00:22:08 I'm an S-corp. And I'm like, yes, I know, but you know, how did you get there? I also teach these things. I call it like the Pokemon evolution of business entities. Like you have Charmander Charmian and Charles art, right? Like a lot of people are like, what are you talking about Brayden? But it's the cute little lizard Pokemon.

00:22:24 And then he becomes like the bigger, big dragon Pokemon. So we all start out like as a sole proprietorship and then begin to take the immediate next step to become an LLC. And eventually we all want to evolve into an Escore provided that it's advantageous for our business and our state and all those specific details Note on the LLC and our business is if you have multiple locations,

00:22:48 generally it's recommended you have a separate LLC for each of those locations. Yeah. That makes sense. That's a separate entity for the IP. So if you have not to get too in the weeds for you, but if you do a management agreement with a landlord, so you have sort of a joint venture, you may separate out your brand and some of the IP around managing and marketing a space,

00:23:13 something to think about for folks listening that are thinking potentially expanding and moving into additional locations. Yeah. And this is why, like, this is why I really liked the bubble analogy because it's scalable. So like one way you can think about it is some people will set up, they call them shell, like shell companies. I don't like love that term because it usually incentives.

00:23:32 Doesn't it? Right? Like it, like, it makes you think about tax evasion. But what it is is you could set up like one big LLC. So think about like a giant bubble. And then like each location is it's in its own bubble inside of that bubble. So like the one LLC owns all the other LLCs. That's where I don't really get into that.

00:23:50 That gets more complex. It's based on state law. And that's where you definitely want to have a local attorney. I always say, who understands your business? Luckily coworkings not really that difficult conceptually for attorneys to understand. So you probably don't need to get anyone who's too niche. So speaking of attorneys, you have a great podcast episode and I highly recommend Brayden's podcasts.

00:24:11 By the way, I listened to pretty much every episode, it's not all written, you've done some episodes on money on you did one with Meg Wheeler on kind of how to support. I don't know how to describe that episode. It was creating equitable financial practices in your purse, Which I love and could, could apply to our co-working folks. Anyway,

00:24:32 you have a great episode about like things you should and shouldn't pay an attorney for. So forming an LLC attorney, no attorney, If that one, I would say it depends really where the attorney comes in is helping you, sorry. Yeah, of course. Professional legal advice. It depends. Yes. It depends. So for the LLC, the biggest question is,

00:24:55 is an LLC, right? For me, how many, and in your context, how many LLCs do I need and how should they be structured? Who are the owners going to be? An attorney can help you answer all those questions actually filing the LLC is not that difficult. So this is where I really say it depends. Again, I work with a lot of creatives.

00:25:13 So if a wedding photographer is going to form an LLC, it's not at all complex, they can typically do it themselves. And in my programs, I give them all the templates they need for their meeting minutes and operating agreements for you all, especially if you have like a business partner and you're opening a physical location, there's added complexity that goes into those legal documents.

00:25:32 And that's when I think an attorney would be very helpful. Got it. Do you want to talk a little bit about when the S-corp election comes into play? Yes. Okay. So let's talk about how escorts actually worked because basically no one understands them. That's why I call them the mythical unicorn of business entities through like a mystery. So the way it S-corp works is okay.

00:25:54 So let's first, let's back this up with an example. So let's assume that we are like bill Gates, right? So bill Gates has a shit ton of money. Microsoft makes them a lot of money and let's assume that like pretty early on in his business, he gets paid a salary. So now maybe 20 years ago, his salary was 150 to a hundred thousand dollars.

00:26:14 And they're going to say, Hey, Mr. Gates, this is your compensation for being the CEO of this business. Like cool, right. He also owns a substantial amount of stock in the company because he's, I don't know if he's co-owner owner, it doesn't matter, but he then gets dividends and distributions right from all of that. And that's what we call like,

00:26:35 we often call that your reward for being the owner of your business. So you get one chunk of money over here for your actual physical labor. And then you get this other chunk of money, which is like your, your reward, your profit from the business. And generally when we're sole proprietorships, even it doesn't really matter what our business structure is.

00:26:53 We don't really think about ourselves that way, because we don't really think about ourselves as like that kind of business. When in reality, we're all business owners, right? We're all CEOs. So when we form an S-corp, we end up doing the same thing, we're going to pay ourselves a salary for our work on the business. And then we're also going to get profit distributions,

00:27:11 which has all of the profit in the business above and beyond that. And the way this works is that your salary is subject to both income taxes and self-employment taxes. So when we say self-employment taxes, that's Medicare and social security, but your profit distributions are not subject to self-employment taxes because technically we only pay self-employment taxes on our earned income from self-employment. And we don't consider profit distributions to be earned income because it's not compensation for services.

00:27:43 So that may have kind of over explained it. But you can, you can let me know if I need to follow back on anything. So the advantage is, well, do I don't want to direct if you're, are you going to continue on the trail here? Yep. Yeah, we can't. Okay. Let's should we go through an example?

00:28:00 Let's do it again. Example, I think the example is really helpful and I love how use your, your Dave Ramsey example, by the way, was amazing Audi out she's shopping at Audi and Bloomingdale's, let's assume she's not covering her. It's like, Oh my gosh. Oh, in The texts, in my book, you mean, I know that your blog posts that you just put out.

00:28:20 Yeah. It's funny. I wrote that last week and I like don't even really remember You have great examples. I think it example is really helpful. So if you don't pay yourself a salary. So I think this is really relevant because I would guess, I don't know that most coworking space owners are, unless they have a good accountant. Like, although I thought mine was mine was somewhat helpful.

00:28:42 And yet didn't give me the right direction on how to even what needed to be in place to elect it. His concern was you're paying self-employment tax on all of your income that you should stop that. Right. And also another important point, which maybe we'll talk about later. I don't want to get this to muddle, but you know, my effective tax rate is because it's an LLC,

00:29:04 as a pass through entity is impacted by my spouse's income, which you had a podcast, which I also thought was really helpful because mentally I get really frustrated at, you know, building a business, especially folks who might be listening, who are new and they're not making, you know, their profit is growing, but it's small to start with. And then your spouse has a normal job that puts you in a tax rate that just kicks your butt on,

00:29:31 on your income because you're taxed at a high rate, even though you feel like your profit is, you know, baby profit. So that's it. I think that's helpful too. But really my accountant was concerned about all the self-employment tax I was paying, which is in California. I don't know if this is standard is 15% on top of our 10% or whatever,

00:29:51 a tax rate, state income tax rate and our, you know, federal tax rate. So he was like, you have to do something to make this better. Yeah. Well, so self-employment tax goes to the IRS. It's 15.3% on income up to like 138,000 ish dollars adjusted each year for inflation. So it's the same for everyone. The thing about self-employment taxes like an escort,

00:30:15 doesn't just like, get you out of self-employment tax. It's not really that easy what's required. And this is where a lot of people have a misstep is you have to pay yourself a reasonable salary. So when we're employed, right? So if any of your co-working space owners have employees, this will be very simple for them. You put them on payroll,

00:30:35 you withhold their taxes and they get like set payments every other week. Or maybe they're hourly. It doesn't matter. You're withholding their money. But when you form an S-corp, you actually have to put yourself on payroll and you have to pay yourself a salary. And because technically the lower your salary is the more in taxes you're going to save. They require that your salary be reasonable under the law.

00:30:57 So you have to look at factors like what would someone in my position, in my geographic area with my level of experience, expect to earn in this specific role. And that's what you have to pay yourself. So here's our example. Like let's assume that you have gross business income of 150,000, and you have business expenses of 50,000, our net income.

00:31:20 I'm going to put you on the spot and ask you questions. What's our net income. You want me to do math? A hundred thousand. Okay. Right. Easy. So net income is a hundred thousand dollars. That's our profit in the business. So let's assume that we do our research and we determine that our reasonable salary is $60,000, right?

00:31:42 So what's our net income. After that reasonable salary, after we paid ourselves that reasonable salary, 40,000, right? So we've taken out all of our business expenses. We paid ourself, our salary. We're going to pay income and self-employment tax both on that $60,000. And then our remaining profit in the business is 40,000. And that's basically our reward for being the owner of the business on that $40,000.

00:32:07 We're only paying income tax. We're not paying self-employment tax. So in other words, we can assume that on $40,000, we're saving 0.1 by three, 15.3%. Self-employment tax, which yields a savings of $6,120. So that's the way I do the math really quickly. I cut out a lot of steps and reality. It's probably going to save us like 4,000,

00:32:32 maybe $5,000, but that's how the math shakes out. The problem is. And I see this all the time is if your is like, Hey, Jamie, you're paying too much in taxes. You need to put yourself into an S-corp and they don't tell you anything about reasonable salary. If your profit and your business is only $50,000, you can't even pay yourself a reasonable salary.

00:32:53 You don't have enough income. So the S-corp is not going to provide you with any benefit. And technically when you have the S-corp, you're not even meeting your legal obligation to pay yourself that salary You have. Well, coworking spaces should have bookkeepers already. So that's a given. Some of your folks may not have bookkeepers, but you ha you legally have to have a bookkeeper manage your books when you elect to be taxed as an escort,

00:33:17 or are there other I'm trying to remember? So you don't legally have to. I just strongly advise it because escorts are escorts are more prevalent to fraud because people form escorts, they pay themselves $20,000 in salary. And then everything just turns into a mess. It's more of escorts, have a slightly greater degree of risk and being audited. So I just encourage people to go ahead and hire a bookkeeper.

00:33:44 Got it. So to relate this to my audience, if you're an owner operator and you're actually running the space, you may not qualify for an S-corp in the first year or two as you're building your profit. But although it's a good question there. If an owner is acting as the community manager called them a GM of this space, right? They're the community manager,

00:34:07 but they're also doing the marketing and they're like the CEO, but they're at the front desk. Right? Do you have to be an S-corp in order to pay yourself in that scenario? That's a good question. I don't, I'm pretty sure you could put yourself. Well, you could probably put yourself on payroll before you have an S-corp. You just normally wouldn't do that.

00:34:26 You would just pay yourself, you just pay yourself on a regular basis. It doesn't necessarily need to be through a payroll provider. Yep. Oh, that's the other, is that a requirement or just your recommendation? The payroll provider. Well, when you have an escort, yeah. Yeah. When you have an S-corp you're required to pay yourself a payroll,

00:34:44 and this is where it gets like a little bit dicey because technically it doesn't have to be through a payroll company, but you have to pay yourself a set amount of money through payroll. And those taxes need to be automatically withheld. This is where I honestly get a little lost in the weeds because technically I think it's fine. As long as you have someone who's filing the payroll taxes That I have run into trouble with that I was doing that myself with an employee in my first space.

00:35:11 It's easy to make mistakes. I've done a podcast on this. Like a lot of accountants don't even run payroll because it's very complicated. So that's why, like I just tell all of my students that I pretty much just tell them the requirement is that you like have a payroll company that runs your payroll because then when I have to word it And there was no like Gusto,

00:35:29 you know, like there was no way to have somebody do it. So I was doing it. And there's a right there, a lot of forms and things, you have to do that. Or if don't know what you're doing, you can miss that. I missed some and penalties and all that. Yeah. They're fantastic. I'm actually an affiliate for Gusto.

00:35:44 I recommend them to everyone. I use Gusto to pay all my contractors as well. And it makes it really awesome because in January, which is right now, I literally just click a button and it sends out my w ins to all my contractors. That's awesome. Yeah. So super helpful. So in the case, you know, but I think about it if a co-working space owner,

00:36:05 if they are acting as the community manager, I would think once they could pay themselves market rate, then they would probably qualify to elect as an escort. But that market rate would need to be for their full scope of responsibility because they're, you know, a basic community manager would be one rate, but if they're kind of acting as a general manager,

00:36:25 they might want to think about Right. You would probably need to look at what the salary is for this. Like more for like the CEO of that business, because you're doing more than just that role, ultimately. Yeah. But you also, the thing is you need to have profit above and beyond your salary for an Corp to make sense, because remember you're saving the money on the net income after salary.

00:36:45 So I typically tell people, you want to be at least $20,000 above your reasonable salary. There is a nuance for this though, because some States charge different tax rates for escorts than they do, like non S-corp. So in those States, there might be little to no benefit of forming an S-corp. So you want to do your research on that as well.

00:37:04 Typically, if you just ask these questions to your tax professional, say, how are escorts tax like in the state of Tennessee, for example, and that they kind of like, look at you with the blank look thing, you know, you can realize this person might not be the best person to advise me on this top. Got it. Okay.

00:37:25 So this might be a good segue into kind of cashflow topics talking about kind of paying ourselves. And you talk a lot about cashflow on your podcast and in your book, do you want to give us some of your words of wisdom on managing cashflow and setting aside money for taxes and all the things? Yeah. Well, we'll start with, this is something that I always overlooked,

00:37:45 but then people ask me about it. So I try to remember to give a preface. When I talk about this topic is the question of what is cashflow. So it's something I never really think about explaining, but then it's a question I've been getting recently. So cashflow is really just the question or the processes of once you get money in your business,

00:38:05 what happens to the money? So in co-working spaces, you have what we call the members we have, okay, we'll call them members. So in your coworking space, you have members, they pay you their a member fee or their rent or whatever you want to call it. That's the income. So ideally that's going to go into your business bank account,

00:38:23 right? Hopefully no, one's putting that into a personal bank account, but once it goes into the business bank account, what happens to the money? Like this is our question of cashflow. You're probably paying your business expenses. If you have an S-corp, you're going to pay payroll, but do you have any formal process? Does the money trickle into certain places?

00:38:41 Do you have multiple bank accounts? That's kind of the primer on cashflow. And we want to set up a system that makes sure that your expenses are being paid, but that you're operating in an optimal profit margin that you are paying yourself on a regular basis, even if you're not on payroll and that you are automatically saving for taxes. So those are kind of the starting points for business cashflow.

00:39:06 And then we evolve into like personal cashflow as well. I love it. Let's see. Are you, I think you're a profit first fan. Do you subscribe to that? Like to the T or what do you recommend to your students? Not to the T I think a fan is a fan as a go to word to use because I'm not a profit first professional,

00:39:24 which is like their whole $5,000 licensing credentialing process. And I was like, thanks. But no, thanks. I don't think I need to do that, but yeah, I like, I like I do, we could have, we could have a whole podcast on that. I can rant and rave about it, but I do like it. I teach like kinda my own spin on the profit first system.

00:39:43 So if anyone's listening and they've read the profit first book or listened to the audio book, you should know what we're talking about there, but yeah. So give us kind of the high level of how folks, if they don't, if they're sort of blanking on, okay. Cashflow is about kind of where the money goes when it comes in, give us kind of some things we should be thinking about in terms of a commitment to probably the two priorities,

00:40:06 commitment to saving for taxes and commitment to paying yourself something. This is a big pain point I hear from a lot of operators is like, I wish I had understood that idea of paying myself something, you know, from the beginning. So I'd love to hear That's, that's actually the genius of, I think the profit first brand, like I think he really nailed the name on that one because the whole idea is you pay yourself first and people like people always kind of look at you.

00:40:33 Like, you're crazy when you say that, because you're like, well, I should pay the IRS first. I should pay all my creditors first. And it's like, well, yes and no. But the idea is you pay yourself first. And if there's not enough money left in your bank account to pay your expenses, then you need to cut your expenses.

00:40:50 So it's not saying to like pay yourself and say, fuck everybody else it's saying, pay yourself. And then you'll have a good idea of if your business is sustainable. And if not, you need to make some changes to give a little bit more of a primer on this though. I always talk about the envelope system. Most of us are familiar with this.

00:41:06 Dave Ramsey is all about it. I'm from the Midwest. So of course I have family. Who's obsessed with them. I'm not the biggest fan for more information, going to read yesterday's blog post. But what he does is he literally tells you, like, once you get paid, you take all of the money. I'm assuming out of your bank account,

00:41:26 I guess that's how that works. And you have all the cash in hand and you put the money in the envelope. So like, my mom has her envelope. So like 2% of every paycheck goes in cash and do a literal envelope that says Christmas on it. And then once black Friday rolls around, like, that's her shopping much. Right? That's how she does it.

00:41:47 She's not Whipping out the credit card. That's actually avoided the credit Cards, right? Like she doesn't have any credit cards. My sister's mother-in-law does this religiously, like she had, my sister told me like a little while ago, her Jeep broke down and she was like, Oh, don't worry about it. I have my Jeep on envelope. And she went and got an envelope out of her bedroom that had like $2,000 in it for car repairs.

00:42:07 And so that's how they do it. So this is a similar system for business, except instead of literal envelopes, you're going to use a bank account. So the idea is you open multiple bank accounts. A lot of people are resistant to it because it seems like burdensome. They think, why do I want to have all these bank accounts? But it really does simplify your business finances and make it a lot better.

00:42:26 My starting point for this and the way I kind of tweak it a little bit is I use a savings app. It technically opens a bank account for you because you get an account and routing number, but it's called Capitol is spelled Q a P I T a L. If you want to use my referral link, you can go to www dot Braden,

00:42:44 drake.com forward slash capital a it's my referral code. And I think you'd be like, get like five or $10 for free when you open through that. I don't really know, but you link that to your business bank account. And then I use it to automatically save money for taxes as the starting point. So you figure out what percentage of your income needs to go towards taxes.

00:43:05 Let's say it's 22% and you're going to tell capital 22% of every dollar that hits my business bank account. I want you to pull it out and save it. And then the money just sits there. And then when we go to make our quarterly tax payments, we pay it directly from that account to the IRS. So the taxes are automated and then we manually move money from the business bank account to a salary account to pay yourself.

00:43:29 And then from your business account to your expense account to pay your expenses. And it keeps all of that siloed. So then you have like a very concentrated budget for your expenses and you allocate based on percentages. And I know it probably sounds a little complicated, but you work your way into it. So you start out with what your current percentages actually are.

00:43:51 And then you slowly work your way towards hitting target percentages to get the profit merge into one and to pay yourself more money. Part of the concept of profit first is I think he says, pay yourself 1% to start, right? It's like the habit of paying yourself. So if you're like, wait, I'm not making, you know, I'm not cashflow positive.

00:44:09 I'm not well pay yourself, you know, 1% so that the system is in place. And to your point, I think the other piece with starting a coworking space is like, there is a slippery slope of reinvesting yeah. That you can get into. And I think that's where I've heard feedback from owners saying, I wish I understood this concept because sometimes I think we get into this mindset of thinking sort of like a company that's not in the same categories as ours.

00:44:39 Like ours is a brick and mortar business. There's a lease. We have a lot of fixed costs. It is not a technology company. We are not going to spend, spend, spend and hope that someday, you know, we're profitable. There is a ramp up period, but like, things like this is embarrassing. I don't even want to admit it out loud,

00:44:56 but I still think about it sometimes. You know, like the things you beat yourself up about when I started my space in Chicago, it was super new, was early coworking. You do like, there's just, we're not, there's not information out there. I was making stuff up. I was a new business owner and I was not focused on this idea of like,

00:45:14 I mean, I was focused on profit, but sort of this reinvestment. So I had a, a fitness area in the, in the space and then people would come in and say, Oh cool. That's cool. Well, do you have showers? And I was like, no, I don't have showers. And so, but I, so I ended up building out an X,

00:45:32 it was $7,000 put in this like really nice shower because I thought, Oh, if I have the shower, I'll convert more members who will want the fitness space because now there's a shower. Right. But I really had no evidence that that was true. And I just, I think if I was like focused on the process of like pay yourself and maybe,

00:45:53 maybe, you know, have the, the bank account for reinvesting, then I would have done that later after I had more evidence that it would matter. And that's probably a big example, but just, there are so many little things that you feel like you can spend money on and it can spiral out of control and then you're not paying yourself. And then you don't have this business that supports your income goals.

00:46:14 Yeah. That's where we have, like for that kind of thing, I would open another bank account. Like the answer pretty much has always to open another bank account. But what I would do is I would have my business expenses, like my monthly operating, fixed costs going into this bank account because I know how much he needs to go in there every month.

00:46:32 And then you could have another bank account for like future projects or just like business goal savings, Space updates, like, yeah. So I feel like it was, I was just being super Willy nilly and emotional, which is, I think what the system sort of helps you avoid. Right. And you have to be very objective about what you have in your right,

00:46:55 your, your envelope, your be your fake account for space improvements. And I think when you're first starting, you just don't, it's everything feels emotional. And so putting a system like this in place, I think can be really, really helpful. Yeah. I call that. I actually call that the WTF happened to my money hamster wheel, where it's yeah.

00:47:15 It's where our income increases are, where our business expenses increase alongside our income. And you get three years in your business and you're like, Oh, like my tax return shows that I had $300,000 in gross revenue this year. Like, why does my life still feels so hard? Like, why am I still like stressing out three days before my rent is due?

00:47:37 When I'm making eight to 20 times more money than I was two years ago. And it's because you've let your income, your expenses continue to creep with your income. Yep. And it's even, you know, in, in our world, sometimes it's like apps, like the next marketing app that like, you have to kind of, if you're paying,

00:47:54 if you're paying yourself first, then you're not going to buy an app that prevents yourself, you from paying yourself. And sometimes there's an actual investment and it should be done. Right. But it makes you right. That's the big fan. Like, that's why I'm a big fan of the pay yourself first process. But it's also like the way I always teach it is it's kind of putting all of your payments in order of priority.

00:48:12 So you've got to pay yourself at least enough money to pay your own personal cost. So you don't like lose your house or whatever. Right. And so that's where it really is important to pay yourself first. And then you're going to pay the IRS. Okay. Because the IRS is like the only person. Yeah. They're like the only entity that has like the ability to put a lien on your bank account and just start automatically taking your money.

00:48:35 So he paid the IRS next. And then after that, we pay your expenses. So I even have some of my students have contractors or they might have employees. And for those people, some of them have actually decided, and I've helped them work this out to have a contractor account and then to have an expense account because basically we're putting it in order of priority.

00:48:54 So if something like a global pandemic happens and their income substantially dips, now they're saying, okay, I'm going to make sure that I have enough income to pay myself first, my taxes, second, my contractors third, and then all my other expenses fourth. So at the end of the day, the money runs out after paying my contractors. I'd much rather know that this person who relies on me has been paid then this like technological app that I could like do okay with without a few months in my business.

00:49:22 Yeah. I love that. And the tax piece, I feel like we kind of jumped over that too. I think that can be mysterious for new business owners. And so thinking if you've been in business awhile, you've probably figured this out, but a lot of people still have this major surprise at the end of the year, around how much they owe the IRS and not pulling that out as they go along.

00:49:42 I love that app. I heard you mentioned that on the podcast and I have not signed up for it yet, but even I do a little bit of a like, okay, I'll eyeball, what comes in the bank account? I put it, I actually only have a savings account. I don't have the bank down the street, but I'll sort of,

00:49:56 you know, I balled the percentage, put it in there, set it aside, but it's not precise for sure. And I'll do it at the end of the quarter, but I still feel a little tinge of, did I get that right? Did I not get that? Right? So this is a little link to that app in the show notes.

00:50:12 This is my tax account. I'm showing you on my video camera. So you can see, I just made my semi tax payment for fourth quarter tax payment of 2020 was due on January 15th. So I paid basically all the money I had in there at that point in time. And the 15 from the 15th to now, I now have $1,100 in there so far.

00:50:32 So that'll keep growing. And then on April 15th, which I know this is very cruel, but our first 2021 tax payment is due the same day that our 2020 taxes are due. So on that day, hopefully I will have already filed my tax return and I will own any taxes cause I paid quarterly taxes and I'll take the balance I have in my tax savings account to pay my first quarter,

00:50:56 a 2021 taxes. Yup. And your bookkeeper can help you stay on track also, but really more after the fact. And so if you really want to be current, then your app and you talk through your book covers how to calculate what to set aside. Yes. Yeah. Unfuck your biz book.com. You can go grab a copy there. It walks you through actually like the first eight people is,

00:51:20 think this is a little crazy, but the first eight chapters walk you through, like very specifically in detail, how to estimate how much you need to be paying for quarterly taxes. Actually I think the first eight chapters are the full learn process. So it might only be the first six chapters that cover the tax process. But I have like a very strong,

00:51:40 what's the word I'm looking for? Philosophy. I don't know. Like basically my hot take is that I want everyone to have a fairly good conceptual understanding of taxes because I want you to know like, Oh, if I get married and start filing taxes jointly, how's that going to affect the amount of money I'm saving or if I spend on this major expense in my business,

00:52:01 what does that mean for my taxes? Is that a good tax decision? And ultimately the question or the answer is we really, shouldn't never be making business purchases just for the tax deduction. That doesn't make sense, but that's something that I explained in the book. Yep, totally. Yeah. The book is really detailed and helps you to kind of keep up to speed even on things like local business licenses that you should be checking off.

00:52:24 I mean, a lot of things I think no one gives you the checklist when you start a business, right? I mean, you can, some people like you might get a little from your account and a little from your attorney, maybe some from your real estate agent, but nobody sits you down with this checklist. If your book is that checklist,

00:52:41 like all the things you need to make sure you're on top of yeah. Challenge was, was I wanted it to be like technical and helpful, but I didn't want it to read like one of the dummies books, like, have you ever bought those? Or like the Nolo books where they're very, very helpful, but it literally, it just, it reads more like a textbook.

00:52:58 Whereas I wanted this to be a combination of the two. So it's, it's giving you a checklist and telling you what to do in some circumstances, but it's more contextual than that and provides a lot more examples to help you actually understand why you have to do certain things. Yeah. I love it. And I would say to our owners, if you,

00:53:17 if this all is like, you know, repeat for you, remedial, whatever you want to call it, I was listening to, and maybe it was an audio book and the guy was talking about this. I can't remember what it's called. It's like this bias where we assume that if we know something, everyone knows it. Yeah. Which is not the case.

00:53:34 So if you are listening and you're like, yeah, I got this down. I got the systems in place, help your members with this. Because I think, you know, Braden, you said, you know, a lot of your audiences like service professionals and solo preneurs, and folks who like really, maybe don't have a trigger to be thinking about these things,

00:53:54 but could be making some mistakes along the way. And they don't have the right systems in place. They don't have the right context contracts in place. They don't have an LLC and maybe they need it. And so thinking about, you know, ways to, to educate your members, buy them all want to Brayden's books. Yeah. You, you actually know this,

00:54:11 but I used to be a member at w we worked. So in downtown San Diego, I know they're like probably the evil, corporate Starbucks giant and your space, but I was there, but I also did. I did a lot of lunch and learns at we work. And I also did a lot of lunch and learns at all of our surrounding coworking spaces because I had business friends who worked in all different coworking spaces here in San Diego.

00:54:34 So I will offer myself to any of you. I don't like if they do, I don't know if like zoom, lunch and learns are a thing, but if you ever want someone to come in and talk to your members, I'm more, I know. Right. A lot of I've I've, I've really built up a niche in the wedding industry,

00:54:51 but I also work with a lot of like coaches, consultants, like a lot of one-on-one service providers is really like what the bulk of my audiences. Yeah. Awesome. Okay. Braden, I've taken up a lot of your time and then we didn't even get to talk about the container store yet. That's okay. I'm well, you saw, you probably saw Jamie.

00:55:11 We bought, we bought a house. So I moved here. You know what I saw your, is it fine? Is it the it's it's yours? Yeah. I mean, we have like the contingencies and all those kinds of like little things, but pretty much. Yeah. Yeah. So that'll be, I was actually thinking that I was like,

00:55:30 is it appropriate if next year for Christmas, I ask people to give me container store gift cards. Cause I only get like the Amazon gift cards. I'm like, I want to go straight to the container store. It is, I will say I am by no means an environmentalist, but I do have environmental guilt. So I will say that's like,

00:55:50 my only regret is like, I I'm doing all of these things like theater, like really didn't make my home more beautiful. And you kind of trick yourself into thinking you're being eco-friendly. But really I just spent like a thousand dollars on more plastic goods that are one day gonna land in the landfills. So just be careful, you know, there, I,

00:56:06 I probably, if I started over again, I'd buy a lot more glass. That's a good point. Okay. Fair. Yeah. Good, good advice. Speaking of advice, thank you for sharing your advice and your experience and your expertise with us today. We really appreciate it. So if you to follow Brayden, so I'm a big podcast fan of Braydon's.

00:56:26 He covers a lot of Britain. You're kind of on a finance kick right now. Yeah. I'm in a, I'm in like a two month. I'm calling it the money series, but basically we cover tax law and business finance. I'm trying to brand it as like all the stuff that people typically want to ignore. Like that's the scope and topic of what I talk about.

00:56:45 Yeah. I, I love it. I've appreciated your episodes. I think my listeners would too. So it's same name as the book, the unfuck, your biz podcast, Make sure you put the asterisk for the you or else it won't show up in the search results. Right? Okay. Good point. You can, if you want an easy link,

00:57:04 his website has a link to the podcast and the book Braden, is it better if they ordered the book directly from you versus Amazon or does it not matter? Yeah, it's actually not even on Amazon yet. So you have to go to unfuck your biz book.com for now. I'm waiting until I record my audio book before I put it on Amazon. Okay,

00:57:23 perfect. And then Braden also has a Facebook group called Brayden's besties. Yes. And you can follow his bar, muscle ups and tos. What is that on your purse? That might be your personal, your business has your container store. Yeah, I found no one on my business page wants to see my workouts. So I stopped posting. They don't want to see mine either.

00:57:44 I know I don't post mine either, but Brayden's also super active on Instagram. So we'll put all those links in the show notes, which speaking of confusing terms, people have been emailing me and saying, what's a show note, which is I get it. It's another one of those, like things like a term that we think is normal, but it's not for everyone.

00:58:02 So the show note, if you go to everything, coworking.com and you click on podcast and you scroll to the bottom, you can find detailed notes on every single episode and the links to resources and the guests. So that is where you find those. So Brayden, thank you so much for taking the time today. Super appreciate it. And again, go to the show notes.

00:58:24 If you want to reach out and find, follow Brayden's journey and learn more about your tax and legal shit. Thanks Brayden. Thank you.

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