BIRD WILLIAMS: You're listening to Bird Means Business Episode 25. 

Well, hello there! How's it going today? I mean, I know I can't hear your response. But, I kind of just imagine you all like washing dishes or folding laundry, while listening to the pod and I just want you to check in with yourself. It's been such a hectic, up and down, crazy, crazy time, especially for us business owners out there. When this episode airs, I could be preparing to reopen my gym business that would have been closed for two months by that point. Which is crazy to even say out loud. So in the busyness and craziness of the day. Here's a moment for you to just check in with yourself. How are you? Who do you need to ask for help? Maybe it's asking your spouse for like 15 minutes in the evening just to sit and be still. Maybe it's asking a friend to give you some grace, as your life has been turned completely upside down, and you kind of just need more space to process things. Whatever it is, just check in with yourself and take note of it. I don't mean to get super-duper hippy on you, even though I'm low-key a closet hippie. So, yeah, I just want to put that out there. 

Let's go ahead and jump into the episode. This is part two of the “Bookkeeping, Payroll and Taxes in your Small Business” series. This is a mini-series that was inspired by questions I received from one of you on Instagram and also a client that had some questions around these types of things at the end of our online course that we did back in January. So I can't wait to get into the episode and again if you missed part one, which is Episode 24, go ahead and jump back there and listen there first. 

So I'm going to say that same disclaimer I said last time to make it super-duper clear. I am not a tax professional, a financial advisor, or an accountant. And you will want to consult with a professional on any of your personal or business financial matters. But it's okay, it's okay that I'm not because there's Alby Abraham. Today's episode is sponsored by my very own accountant, Alby Abraham of Abraham Professional Services. Y’all he is the bomb.com. I'm always hyping him up because I share even in Episode Two, which is “Secure Your Money Team”, how he saved my first business from so much crapola. It was a hot mess, and I'm very grateful for him. I will say that when you're launching your business, the second thing you need to do after developing a profitable business plan is to hire an accountant. And I say that because your accountant is going to ask you questions, that if you haven't gone through the process of developing a business plan, you won't know how to answer. But if you are filing your taxes yourself before having a business, you will now need to hire a professional to file your taxes for you. There are so many tax advantages and things that you won't know but an accountant will. So, if you have an accountant that you're already working with, but you kind of feel like, uh. You need to get a new one. Because this person, this accountant, is on your money team. Like I say, they're like your BFF in your business. And I'm so intense about this because they really play a big role in your business, especially as you grow. So, you will hear me recommending very few people or businesses because I'm very careful about who I refer. I think on the podcast I've only promoted like three businesses so far. And when I say that, Alby is exceptional, y’all he is. We worked with three other accountants before finding him. So I'm just saying I've kind of done the vetting process for you. If you need an accountant, at least go chat with him. So go to birdwilliams.com/alby. You'll get his contact information and mention to him that you heard of him through the Bird Means Business podcast, and you'll get your initial consultation, absolutely free. Okay, so we're gonna pick up right where we left off. Last week we were talking about bookkeeping and separating your bank accounts. And I also mentioned that some people were hesitant about separating their business and personal bank accounts because they didn't know how it would work when they needed to take money. They're like I'm so used to the business money just coming into my personal account. That's how I pay my rent and stuff. Which, if you haven't listened to the episode, listen to it. But I'm gonna say it again here, it is very important that you separate everything in your business. Only business. Only personal. Two separate accounts. Okay? 

So let's start right there with payroll and paying yourself. So payroll. First off, it is important that you pay yourself, okay? If you're stressed out over your rent or your light bill and not being able to pay, then it's going to be very hard for you to be focused on the health of your business and making long-term healthy business decisions. We're not going to be the ones that are saying, “I'm going to put everything back into the business”, because that's not practical. And also because everything flows from you. Your business will reflect you. So if you're not doing okay personally, if you're not able to meet your basic needs, then it's going to show up in your business. Your team is going to feel stressed. Your business is going to look stressed. It doesn't have to be a lot of money. It just has to be enough. You know you don't have to be fancy out here. But you want to make sure that you have your basic needs covered. S

I remember finding out, back in the day, I happened to ask another business owner and actually, they told me what they paid themselves. I about fell out of my chair, because me and Terry took a very small salary and it really just covered our basic needs. But that was good. That was all we needed and, you know, I felt like I wanted to be able to put as much as I could into the business. So you just want to make sure you balance that. I said it before, I'll say it again. Your personal finances and business finances are completely separate. And I want to just say a side note here. There are some expenses, depending on how you work in your business, that can be business expenses. And I won't give a whole lot of info here because it really just depends a lot on your business and a bunch of other stuff so you'll need to talk to your accountant. But I will say this, my dad owns multiple residential and commercial properties. And so I went to set up business entities to protect his personal assets so that if someone in one of those properties got hurt and tried to sue, they couldn't come after him personally. And I thought, oh okay well since he now has a business entity, then x and y and z expenses can be written off through the business just like with us. So I went to Alby and I asked him about it and kind of told me what my plan was and he was like, Oh no, you know your dad is different because a significant amount of his income doesn't come from those entities. So he can't write off the same expenses that Terry and I do, from our gym business because a significant amount of our income comes from the gym business. You know when my dad retires this could change. But I just wanted to point out a little bit on business expenses. And again, really stressing why you need an accountant to advise you because there's so many different things that really just depend on your specific situation. 

So all that to say you have to keep your personal and business financials separate. And you can't have business income coming into your personal bank account that you pay your rent out of and such. You actually can't have any personal expenses come out of your business bank account or again, you're going to pierce the corporate veil, and now you're personally exposed. And if your business were to get sued, you're kind of screwed. It kind of undoes what the LLC protection does. So a lot of you have LLC, and that's going to limit the liability to your business and not to you personally. But if you do something like spend you know go on vacation and try to say it's a business expense but it's really not and can't prove it in court. Then now you pierced the corporate veil and now you are personally liable for a lot of other things. So make sure you get that piece right. I know I keep saying it, but it's important. 

So if everything has to be separate, how do you pay yourself? There's two different ways that I've paid myself in my business. Again I'm always sharing how I've done it, but again you want to talk with the professional to see if there are other options for you. Two ideas. One is an equity distribution, and two is payroll. In the beginning, Terry and I were just doing an equity distribution, where we took money from the business into our bank account. It was simple because it was two separate accounts. So we would just do a transfer from one account to the other. That was an equity distribution. And there are other names for it as well. But basically, we made it very consistent. So let's say whatever the amount was, it was that every single two weeks or every single month or however you want to do it. That's what we did in that business initially. But over time and again I'm going to let an accountant or Alby fully explain this to you. But we got to the point where we realized that we needed to be an S-corp because of how much money the business was bringing in and on and on. And so we changed our filing status to S Corp. And that's when we began taking an actual payroll, where you know you take all the taxes, social security, and all that out of a check, just like all of our other employees. So that's how we do it now. We actually do both. Now, we do regular payroll, and then we also take equity distributions that are regular as well. 

Again, I'm not gonna get into all the nuances of it. So let's say you don't have payroll setup for yourself, yet and you're not ready to tackle that. You can simply have a business bank account, and take an equity distribution. Every time you'd make a transfer, it's the same account, it's the same online login. You just make a transfer from one account to the other. Every time you do that, that's going to be an equity distribution. 

Now let's say you want to put money into the bank, which you're going to do when you open up this bank account, typically. Then that's going to be equity like you're going to be investing in your business. Again you're going to open up that bank account let's say you personally invest like $5,000 in your business. $10,000, $50,000, whatever it is you're going to put that in there as an equity investment. And then you'll be able to use the money as you need from there. Anytime you take money out of the account into your personal account, that's going to be an equity distribution. 

All right. There's so many benefits of payroll. For us, it saved us a lot in taxes. It was one of the things we didn't know. And again it's complicated with like, how you know your tax filing. We'll talk about that a little bit under the taxes section. But payroll is another one of those things that Alby handles for us. We do our payroll through him to all of our employees. He processes the payroll and it's super-duper easy. 

Now, I want to point out one thing about payroll versus equity distribution There are tons of benefits. One is that if you need to kind of prove your pay, like if you're buying a home and they ask for your pay stubs or how much you're paid. Or if an organization were to ask you for your payroll history, you have that if you are actually taking payroll from the business and not just doing equity distributions. So, for example, many small businesses you know applied for the paycheck Protection Program is the PPP program which is a part of the Cares Act that whenever COVID-19 hit, the government funding. But if you had a business that you were just taking equity distributions, you cannot qualify or as easily qualify for these programs, and many of the other COVID-related grants, as far as I understand, because you don't have any record of actual payroll. You can go and say, oh well these transfers from the bank, those are equity distributions, and that is how I pay myself. I'm not saying that no one did that but as far as I understood it's a lot harder. A colleague of mine tried applying for this Spanx grant. There's just and she couldn't. She didn't have any payroll records to send so she couldn't qualify. So when it comes to these sorts of things, it's just an example of why it's a whole lot to think about and you really want to have someone like an accountant to guide you through all of that. Right? 

Okay. So when we talk about employee compensation outside of you, and payroll just for your employees and how you kind of think about how you compensate them. A few things. There's different ways to compensate them or ways to think about your employees. One is an independent contractor, they're not technically an employee. Now be careful with this. I have had friends who had businesses that were literally really messed up over improper classification of independent contractors versus employees. If they're an independent contractor, there are a few tests and you can just Google it and see. I'm not going to be able to remember them all right now. But it's like, do they use their own equipment? Can they work from wherever they want? Do they use their own process? They're not being trained by you, or you’re not telling them exactly what to do. That's an independent contractor. 

Whereas an employee is someone who has to come to your office to work. You train them through a specific thing. They use your equipment and on and on. So like if I were to hire a graphic designer which I really do want to do soon, they could be an independent contractor. I'm telling them hey I want x, y, and z in my business. Show me what you got. Do your magic. Make it happen. Or a web designer, like a one-off thing. That's more of an independent contractor. Whereas with The League, we have employees. Instructors and service reps, we train them. They have to come use our computer, use our weights at the gym. So they're actually employees. So there's a difference there. 

With an independent contractor, you can just pay them out of your business like with a check. And if you pay them I believe it's more than $600 a year, then they have to have a 1099 form filed with their taxes. If they're a part-time employee or a full-time employee you might pay them hourly or salary. That is when you'll need a payroll processor. We initially used ADP, which was fine. But Alby’s rates were a lot lower and I like the idea of having it all in one. He did my taxes, and my bookkeeping, and I wanted him to do my payroll as well. So it was just a lot simpler. 

But you also want to consider benefits, and it's different for every state and jurisdiction. But in terms of like what's required in terms of benefits and that sort of thing. But if you do have someone on your team that's a big contributor, and that you can see, you know, even a position that you see, being there for the long haul and your business can support it, like provide benefits. And you want to really think about hourly versus salary in terms of like I thought about this for my business. If I hire someone on hourly, it's a little bit more tense right because you're like wanting to make sure that you're getting the work out of the time that they're spinning because they can say oh well this would be like eight hours and you're like, what, that wasn't, you know. Whereas, if it's salary, it's more like this is your job and make sure it gets done. And they also have a set income. It's good for both. So, again, you start small. If you have to, you start small and you grow up to wherever you want to ultimately do, whether that's having salaried employees with benefits and on and on. 

Another thing to consider is equity opportunities for your employees. That could be a part of a benefits package. Or it could be something that you just discuss with them initially. So I know that before I launched The League, I worked for some small businesses. Both of them mentioned that at some point in the future, there could be a potential of equity. You know me, owning a percentage of the business. It was going to be a really small percentage, maybe like 1%, less than 5%. But that was exciting just because it was like, Okay, well that means that you think of me as like a long, you know, you want me in for the long haul. And you know I have ownership in this company. You want to treat your team well. You want them to feel invested. You want them to be as excited about your growth as you are. And the way to do that is to really just show them with how much you're interested in them with things like compensation. Of course, that's not the only way. It's so much more than just the money. But money definitely talks. And benefits definitely help. And telling someone you're going to give them equity helps.

Now I will also say be very careful with giving equity out in your business. Terry and I are 50/50. We've not given any equity out in our gym business. And we haven't given any equity on any of our businesses. We try to keep that as tight as we can. But if there were an employee who was like in it for the long haul and really invested, and that felt right for both of us. That would definitely be something we would consider. You know what I'm saying? Okay, just want to kind of give you some thoughts around employee compensation. But whenever it comes to payroll, you will also be an employee in that pot with the rest of your team when it comes to your payroll. 

Alright so let's move on to taxes. So first, I would not advise that you file your business taxes by yourself. Nope. Unless you are an accountant, just don't do it. Don't do your own business taxes. It’s one thing if you have, you know, personal tax situation that it's very simple and you can go to TurboTax or somewhere, and get them done. But if it's more complicated you have a business, you want to make sure you have an accountant file them. Okay? 

Now, if you're asked about your tax filing status. Remember, it's not an LLC. That's more about your liability and your business formation. And I'm not going to get into the weeds here because it really does vary state by state. But what I understand is here in Texas if you don't do anything at all, you'll be considered a disregarded entity and you'll need to file a Schedule C on your personal income tax. But if you've elected S-corp status, like we did years in, whenever Alby got us right. It's a separate situation. That’s far as I'm going to go on that one. But again, that's why I have Alby. He helps me think through all that and you should get an accountant that can help you do the same. Okay? 

Let's talk a little bit about estimated quarterly tax payments. So, initially, I was told that this is something that was optional. That you don't have to pay these estimated tax payments, each quarter if you don't want to. Well, I found out the hard way that was not true. Let me break down what it means. So when you work for a company, what's happening is your employer's taking money out of your check every pay period, right? And they're actually going and making the quarterly estimated tax payments for you. And depending on how much you're paying out of your check, you might at the end of the year have a tax refund or you might owe in taxes. Well, as a business owner, no one is taking out the estimated tax payments for you, so you should do it yourself. Now, let's say you launch your business in October, and you spend more than you brought in, before the end of the year before December 31. Your expenses were higher than your revenue. Well, you're likely not going to owe anything in taxes because you'll have a negative net profit and this is a super simplified example. But factors like these will determine if and when you start paying estimated quarterly tax payments. So there's a lot to think about. And I'm not going to advise you here on when to start paying estimated tax payments. But I will say this. I've heard that if you make more than $5,000 a year that you need to be paying quarterly estimated tax payments. So you're basically saying, I should have probably explained this earlier. Estimated, how much did I make in the last quarter? Okay, maybe I'll add a little bit to it if I think I'm gonna make more, take a little bit from if I think I'm gonna make less. That's going to be my estimated payment that you're going to make. So you're going to get with your accountant, to understand exactly how much you need to pay every quarter and when all that due. Alby is so good about just giving me a whole email with exactly when I need to go online to do it and on and on. So, ultimately, these are questions that you want to ask your accountant, but you should think about paying your taxes quarterly so that you're not surprised at the end of the year. 

Overall, the way taxes work is, depending on how you do your bookkeeping, which you're going to want to go to Episode 24, which is part 1 of this miniseries to hear more about the bookkeeping process. Depending on how you do that, you're going to send over that information to your accountant at the end of the year. Because remember, we're not filing our taxes ourselves. So they're going to file them for us. We're going to send them everything, along with any of your other tax documents, like if you have forms, or donations, or what have you. They'll ask for all of that. Then your accountant is going to review everything with you. And if you've been making estimated tax payments, each quarter, you won't be surprised with this huge tax time, like we were. Lord, it was like, I really fully understood y'all what Biggie meant when he said, “more money, more problems”. It was terrifying, honestly, and it got worse and worse and worse. Until Alby was like, look how much you'll save if you switch this over. So that's why he's great. I'm not really trying to pub him that much. I'm kind of being funny with it. But you know what I'm trying to say. 

That sums it all up in terms of taxes and payroll. And I want to make sure that I fully answer my friend's question on Instagram. It was @nikeairdvid who reached out with the question that really sparked this episode. So I'm going to break down his question into three parts. He said, what did I learn from the first couple of years when dealing with year-end taxes?

What I learned was that I need to hire an accountant that I trust and enjoy working with from the very beginning. Again, it's okay if you don't get it right the first time like if you already have been operating your business and you don't have an accountant you love. But you want to get it right as soon as possible. 

Second part of his question was, should we be educated on that subject? My answer to that would be yes, to an extent. So you don't need to know as much about taxes as Alby does because that's why you're hiring him to do it. Okay? But you absolutely need to understand the numbers in your business. You need an accountant patient enough to walk you through what you don't know. And remember I talked about this in Episode 15. It was the episode on what to know whenever you're signing a commercial lease agreement. So either you or your business partner, need to be able to talk with your accountant and your attorney and know the implications for your business when it comes to this sort of thing. So you cannot just say, oh my accountant’s handling it. I don't really know what's going on. I'm just going to entrust it to him. No, you as a business owner, one of you, you know someone in your business who has a vested interest, needs to understand the numbers. 

And then the third part of his question is, how do I need to account for taxes when business planning? So this is a great question. And this will be included in the financial section of your business plan, in the financial projections. You're going to include a line or the line item for taxes. Typically it’s 20% of your income is going to be saved for taxes. And again, this 20% rate isn't standard. Some people need to save more, some people need to save less. You're going to want to ask your accountant, “How much do I need to save for taxes each month so that I can make those quarterly payments or so that I can pay it off at the end of the year”, however you end up doing it. And I love the profit first method. It's a book that I read called, “Profit First”. It's amazing. It's something I wish I would have read in the very beginning of launching my businesses. And I've talked about it on Instagram before. They have this method of transferring the money that you save for taxes each month into a separate bank account. You actually do this twice a month, you go in and you say okay how much have I made. I'm going to take out the 20% or however much it is for taxes right away. And it helps because you make sure that you don't accidentally spend the money and get surprised at the end of the year when again. Or, like I said when it's time to pay your quarterly estimated tax payment you don't want to be like, “Oh man, I thought I had the money, but I don't and now what are we going to do?” If you've been saving the money in a separate account that you don't touch, then you're going to be good to go. 

So another thing in terms of financial planning is to just make sure you add in the cost of your accountant or whatever services you might use related to your bookkeeping, payroll, or taxes. Go ahead and add that into your financial projections. Because remember when you're projecting out your expenses in your business plan, you want to get as granular as possible because this helps you make sure that you're super conservative with your estimates. That you're thinking of everything. You don't want to be like, oh I think this will cost this and I think this will cost that. And you want to make sure that it's as tight as you can get it. 

So remember, Alby does all of this in my business. The payroll, the bookkeeping, the taxes. And I love that it's just a one-stop-shop. I don't have to be going all over the place for all these things around the money in my business. I also love that he gives me financial advice on how to structure multiple entities and things like that. Just like a CFO would. It's so comforting to know that I can grow with someone who knows my story and really understands the vision for my businesses. So again you can go to birdwilliams.com/alby to get his contact information. And make sure you mention Bird Means Business when you call him to get your initial consultation, absolutely free. 

All right, well this has been fun. Well, I hope it's been as fun for you as it's been for me. But I'd love to know what you think. You know I'm an open book, I always want to know and make sure that I'm serving you and know that I'm giving you what you want. And I'm not just you know making stuff up myself. So make sure that if you have any suggestions for the podcast or any questions at all, you could always DM me on Instagram. I'm @heybirdwilliams. 

Alrighty, well thank you so much for following along with Bird Means Business on Spotify, for subscribing on Apple Podcasts, and for telling your entrepreneur friends about the pod. Talk to you next week.