How To Save Money On Taxes By Incorporating Your Family
There is one reason that you should at least consider incorporating your family: TAXES!!!
In 2013, my husband and I had the rudest of rude awakenings with our federal tax bill: $40,007.90. To be exact.
I nearly went into labor and I was not pregnant. We had to sell off stock to pay this bill.
Then we decided to stop effing around with our tax strategy!
My husband heard a podcast featuring Tom Wheelwright, the tax advisor to the famous investor Robert Kiyosaki. He had me listen and I immediately bought Wheelwright’s book, Tax-Free Wealth. Cannot recommend this book highly enough! EYE! OPENING!!! Start with the podcast if you don’t believe me.
One of the most valuable lessons I learned was this: The tax code is written for entrepreneurs. Everyone else can bend over.
Did you know that the government takes every cent you earn from January through May each year? What you make from June-December is what you actually see in your bank account. It sucks.
For businesses, it does not work this way. Businesses are not taxed on what they make. They are taxed on what they net. To illustrate, I made this graphic ←. Allow me to explain:
- You as an individual make $1,000, but it costs you $500 in expenses. The government still taxes you on the $1,000.
- A corporation makes $1,000 and spends $500 in expenses. The government taxes the corporation on the remaining $500.
Why this disparity? The government wants you reinvesting your money to grow our economy. There are big tax perks for doing so.
What do you mean by incorporating my family?
I mean that you submit a business filing with your state as an LLC, S-Corp, C-Corp, or whichever suits your needs. This is super easy and I’ll discuss below.
Your business could be anything: selling crocheted socks on Etsy, dog walking, hair cutting, art selling, consulting, babysitting, music lessons, lap dancing… Wait is that legal? Yes, it’s legal. No judgement. Any legal entrepreneurial corporation qualifies you for the tax rules above.
In my house, we have three corporations:
- Natali Morris LLC. I am a freelance broadcaster, speaker, and host. If I ask my gigs to pay me, Natali Morris the lady, not only do I miss the chance to deduct expenses, I also have to pay a self-employment tax of 15% of what I make. So I get paid in the LLC and pay fewer taxes on what I make.
- ReadQuick LLC. This is the speed reading app my husband designed, for sale now on iTunes.
- We also have a real estate investing LLC where we own rental properties. Our rentals are owned by the LLC for two reasons:
- Limited liability: If something were to happen to those properties that the insurance did not cover, we are not personally responsible. We cannot lose any more than what the LLC owns. This is a safety measure as well as a tax strategy.
- We also don’t want to pay tax on the entire rental income. We want to be able to deduct all expenses related to those properties and only pay tax on what we net.
What are the other benefits of having an LLC?
Because we are small business owners, and because my husband and I are in business together, much of what we do is a legitimate business expense. We do not eye-wink the IRS and try to sneak past expenses. We can make a legitimate case for these expenses as business-related. I learned this from Wheelwright! The guy is genius!
This may sound unromantic, but even our date nights are write-offs because we legitimately talk about growing our business every time we go out. We can’t talk business in a house with a 3 and 5 year-old interrupting every half sentence. Date nights are strategy meetings. We’ve even planned family corporate retreats where we strategize next steps. We’ve made really big breakthroughs on these retreats! We recently figured out how to pay off a rental property so that it is free-and-clear based on one of these times away. It is not a gimmick. Gimmicks get you in deep doodoo with the IRS.
Also, we employ our children in our LLC. If you have not read my post about paying the children for administrative work through the LLC, which qualifies them for an IRA, please read it! This alone is another reason to consider incorporating in your house.
What if my family business doesn’t make money?
A loss is a good thing on a tax return! You can apply that loss to other taxes that you would have otherwise had to pay as the owner of the LLC. But let’s stick to the spirit of entrepreneurship here: You eventually want to make money in your corporation!
How do I incorporate then?
You submit a business filing with your state and then apply for an Employer Identification Number (EIN) with the IRS. This takes about 10 minutes on your state’s website. If you do not want to do all of this yourself, there are services like LegalZoom and Clerky but they cost nearly twice what it would cost to do it yourself. Seriously this is easy. My 62 year-old mother-in-law did it.
Is incorporation for everyone?
No. Not everyone can be entrepreneurial and for those families, a paycheck is what they live on and that’s it. I get that. I don’t judge or disparage people with those tough choices but I will just remind you that sadly the tax code does not favor them. It’s not fair. Not by a long shot. But this is the system we play and asCHOs, we play it the best we possibly can.
What else do I need with an LLC?
You need a bank account to deposit the money you make on behalf of the LLC. You take your incorporation paperwork to your bank to do that and then you try your damndest to pay your expenses out of that bank account. As many as you can legitimately quantify!
How you manage that money is a subject for another post. As you can imagine, I have A LOT to say about that too. Stay tuned for updates!
Can you stop now? You’re overwhelming me and I think I might go into labor too?
Yes okay I’ll stop. This is a lot for a Chief Home Officer to digest, I know. But I want you to have all the information that I have to rock the system we live in.
So what are your thoughts? Questions? Concerns? I’m all ears!
And as always, click here to join my mailing list for updates!
NOTE: This post originally written on my personal site, www.natalimorris.com.