In the second episode of our podcast series, Trucker CFO Colton Lawrence joins PodWheels Executive Producer Greg Thompson for a round of frequently asked questions. As you will hear, these are among the FAQs that Colton and his team at the Trucker CFO receive during tax season. For those new to the industry, the adjustment to self-employment tax is a topic that Colton and his team are often asked to address. You’ll hear Colton’s perspective on this topic and much more in Episode 2 of the Trucker CFO Podcast Series.
TRANSCRIPT
Announcer:
Coming up next on PodWheels, you'll hear the second edition of the Tax Bootcamp Podcast from Trucker CFO. We'll be talking once again with Colton Lawrence, The Trucker CFO. Colton will be discussing several topics of interest during the 2020 tax season. Here's a preview...
Colton Lawrence:
The self employment tax is calculated before some of your other what we call above the line deductions. For somebody who feels like they didn't make a lot of money, they've got the 15% coming off the top of the little bit of money they did make and it ends up resulting in owing a tax liability. It does come as a shock to many people.
Announcer:
Welcome back to the Tax Bootcamp Podcast from Trucker CFO. Thanks for connecting again with us on PodWheels. PodWheels is proud to have this opportunity to partner with Trucker CFO on the Tax Bootcamp Podcast series. During its many years of service in working with owner-operators and independent contractors, Trucker CFO has become a trusted resource and a leader in the trucking industry for providing tax and accounting services for professional drivers. In this second edition of the Tax Bootcamp Podcast, you'll be hearing the observations of The Trucker CFO Colton Lawrence. PodWheels asked Colton to give us some of the most frequently asked questions that Colton and his team at Trucker CFO received during tax season.
PodWheels Executive Producer Greg Thompson led the discussion with Colton. Now as you listen to the discussion that Greg has with Colton, please keep in mind that every tax situation is unique. And the perspective shared on this podcast should not be considered as tax advice. If you have questions regarding your specific tax situation, you should consult a qualified tax professional. During the podcast, we’ll be sharing information and how you can connect with Trucker CFO. Now, let's join the conversation with Colton Lawrence and Greg Thompson.
Greg Thompson:
Hello again everybody and welcome back to the Tax Bootcamp Podcast from Trucker CFO as we go from the white lines of the highway to your bottom line right here on PodWheels. We’re once again joined through a Zoom meeting audio connection by The Trucker CFO Colton Lawrence. Now one of the things that we did in our first podcast, as you and our listeners know, is that we talked about things that people need to consider early in the year. Now we'd like to drill into some frequently asked questions that you and your team get. So Colton, welcome back to the podcast.
Colton Lawrence:
I'm happy to be here Greg and I'm excited to share this information on our frequently asked questions.
Greg Thompson:
Let's start with the first one that we have for you. New clients that are lease operators and these are folks that are coming from a company driver perspective. A lot of times you might not know all of the nuances about taxes going from being a company driver to an independent contractor or owner-operator. So can you walk us through some of those questions that you get particular to this issue?
Colton Lawrence:
Absolutely Greg. One of the most common misunderstandings for owner-operators or independent contractors that are new. They're coming into this from a company driver type position. They're used to receiving a W-2 from their motor carrier or from other employers. They receive that W-2. They take it to one of the flag waving tax preparation companies on the side of Main Street USA. They get their taxes done and it's pretty simple. There's not a lot that goes into that. They just provide a few forms. It's done lickety splits and they walk away probably with a refund. What happens when you become an owner-operator, independent contractor, is now you are receiving a 1099 which most of you are probably familiar with. That 1099 is going to be reported differently on your tax return than it is from a W-2. One of the biggest misunderstandings is that individuals think that their business income and expense is going to be reported separately from their personal income and expense. For most people, that's just not the case. Whether you are a Sole Proprietor or a Single Member LLC, your taxes are going to be reported on the same Form 1040 that was used when you file your taxes as a company driver. That tax return does not change at the highest level. What does change is how that income is reported. It goes on what's called a Schedule C where we take that 1099 income and we deduct from it your business expenses. And after we've done that, we have more or less net income at a taxable level that then flows through to your 1040 and is combined with any other W-2 income that you or perhaps your spouse may have. Too often we see people that will file their taxes at a personal level thinking that all they need to do is report their W-2 income and then come to us wanting us to file their business taxes. When that happens, we have to file an amendment and adjust that tax return that was previously filed and reconcile it with all of the business income and expenses that also needed to be provided on that tax return.
Greg Thompson:
It's one of those things that when you're getting into business, you probably should look at that. But we know that a lot of people get excited about having the opportunity. Looking at I just want to get going. What you're talking about is having your own business or being an independent contractor. Being a 1099 is one thing but it's also tied to your personal side because you have to tie it to your 1040. correct?
Colton Lawrence:
That's correct. And it's not until you get into some of the more complex business entities that you are going to have a separate tax return for your business. Examples of that would be a Partnership, a C-Corp or perhaps an S-Corporation that result in that separate business tax return. And those business entities kick out a schedule that reports the income from their business over to their individual tax return. So even with those types of business entities, you cannot file your personal tax return until the business return is complete. If you do, we are again stuck in a situation where we have to amend and reconcile those two together and resubmit the tax return to the IRS and to the state.
Greg Thompson:
One of the popular forms of business that independent contractors and owner-operators in particular seek out is the LLC. What is unique about the LLC and why is it so popular within the trucking industry?
Colton Lawrence:
So right off the top, I do have to provide the disclaimer that I'm not an attorney. I'm not providing any legal advice. If you are looking to set up any type of legal entity, we recommend that you do speak with an attorney to get that proper legal consultation for your specific situation. The same goes for any tax information we're providing. We're not giving tax advice for your specific situation. But in general, the LLC does provide some legal protection for individuals. That is one of the reasons it is a popular choice for owner-operators and independent contractors. The LLC itself is not actually taxed any differently than a sole proprietor. As long as you are a single member LLC. A single member LLC simply means that you, as the individual, are the owner. A single member LLC does also apply if you are married. You can still be a single member LLC if your spouse is involved in that LLC with you. The taxation of an LLC again is not much different than a sole proprietor. The income and expenses are reported on the Schedule C. They flow up to the 1040 and are reported there where the tax is calculated. When you are self employed, whether it be Sole Proprietor or LLC, you do have what's called self employment tax. That self employment tax is effectively the way that you, as a self employed individual pay into Social Security and Medicare. So as an employee, when you receive your paycheck, you have a roughly 7.5% deduction that comes out for what's called FICA and then your employer matches 7.5%. And that is going into Social Security and Medicare. When you become self-employed, you are the employee and the employer and the IRS still wants you to contribute to Social Security and Medicare. They accomplish that through what's called the self employment tax. Again, that applies to Sole Proprietor, LLC. That actually applies to partnerships. To most pass through entities, that concept is going to apply. This is where we start to then look at the S-Corp election. The S-Corp is an election that can be made through the IRS that changes the way you are taxed. In and of itself, It is not a business entity. You set up your business entity at the state level and then you tell the IRS how you want that business entity to be taxed. If you make the S-Corp election, a couple things happen. One, the self-employment tax is eliminated, it's no longer going to impact your tax return. However, there are some additional responsibilities that come your way as an S-Corporation. The first of which is you have to take a paycheck. You have to become an employee, receiving a paycheck from your business. Once you've done that, that paycheck is subject to payroll tax, which is going to include Social Security and Medicare at both the company and employee level. The great part about this is once you are taking that salary and no longer paying self employment tax, you don't have to take a salary of 100% of what your business earns. As an example, if as an owner-operator, your business is bringing in $100,000 net. After all of your expenses. As an LLC or sole proprietor, you're going to pay income tax on that $100,000 and then you're going to pay self-employment tax at 15%. In addition to the income tax, you've got $15,000 of self employment tax. If you make an S-Corp election, you pay yourself, let's say $50,000 a year. It needs to be a reasonable salary. That is the IRS guideline, a reasonable salary. Your $50,000 of payroll Is going to be subject to payroll taxes. But the other $50,000 that you did not pay yourself is no longer subject to self employment tax. So you're getting a 15% savings on the $50,000 and you are still able to take that extra $50,000 as an owner draw if that's what you choose to do.
Greg Thompson:
How do you go about working with folks on determining what they should pick?
Colton Lawrence:
In terms of making a choice for entity structure, it's important to keep in mind that we are consulting our clients at a tax level only. We can help with the business entity set up and we work with attorneys to make a proper legal choice for business entity. But in looking at it from a tax perspective, it comes down to a determination of return on investment or ROI. And whether there is going to be an ROI in making an S-Corp election. I mentioned that that S-Corp election is going to result in savings at the self employment tax level, but it also results in additional expense. Those expenses come from the fact that you have to have a payroll service. You have to be taking a paycheck. You can try to do that on your own. I wouldn't recommend it. Whether you use Trucker CFO. Whether you use Quickbooks or some other payroll provider, those services usually have a fee. It also results in a separate tax return. So as a Sole Proprietor or Single Member LLC, you have one tax return, your 1040 with a Schedule C that's reporting your business. Once you make an S-Corp election, you now have a second tax return that is reported on what's called an 1120-S and that additional tax return also has a fee component. Again, whether it's Trucker CFO or somebody else, you now are paying for your business tax return as well as your personal tax return. So we weigh all of those things and look at the additional cost and weigh that against what the savings for that individual will be on their S Corporation and help them in making a determination.
Announcer:
You're listening to the Tax Bootcamp Podcast from Trucker CFO on PodWheels. We'll get you back to the Tax Bootcamp in just a moment. Right now, we'd like to take a moment to talk about Trucker CFO. Through its many years of service working with owner-operators and independent contractors, Trucker CFO has become a trusted resource and a leader in the trucking industry for providing tax and accounting services for professional drivers. Tax season is here. Trucker CFO is ready to go to work for you. Do you have a team of tax and accounting professionals who understand the complexities of the trucking industry? There are a number of ways you can contact the team at Trucker CFO. Visit the company's website at TruckerCFO.com. From the home page, you can fill out the get started form which will send an email to a Trucker CFO representative. If you'd rather email equinox directly, you can reach out to the company through the following address info@truckercfo.com. That's info@truckercfo.com. You can also call Trucker CFO toll free at 1-800-533-4230 and hit option two for sales. That toll free number once again 1-800-533-4230 and choose option two. At Trucker CFO, we understand the importance of being able to go from the white lines of the highway to the bottom line of your business. Now let's rejoin the Tax Bootcamp Podcast from Trucker CFO. Here's PodWheels Executive Producer Greg Thompson and The Trucker CFO Colton Lawrence.
Greg Thompson:
Hello again everybody and thanks for making the Trucker CFO Tax Bootcamp Podcast part of your day. I'm Greg Thompson from PodWheels and The Trucker CFO Colton Lawrence is joining us through a Zoom meeting audio connection. And Colton, one of the things you mentioned is a self employment tax and for new owner-operators, new independent contractors, that is kind of a shock. Now, do you have folks that walk into your office or contact you and say, hey, I didn't make any money? How do I owe something? You get that sometimes?
Colton Lawrence:
Yeah, we get that oftentimes and self employment tax is calculated before some of your other, what we call above the line deductions. For somebody who feels like they didn't make a lot of money, they've got the 15% coming off the top of the little bit of money they did make and it ends up resulting in owing a tax liability. It does come as a shock to many people and so we work with them in exploring other avenues to minimize their tax liability. Most importantly as an owner-operator, you need to prepare for income tax and unless you're an S-Corporation you need to prepare for self employment tax.
Greg Thompson:
One of the things from my experience and running my own LLC, is that you do have the self employment tax and you've got estimated tax. Which then helps to address that self employment tax because your estimated tax if I'm correct, and please stop me if I'm not, it's based on what you project you're going to make in the year. That's at least one way to do it, right?
Colton Lawrence:
Yeah, that's right. With your estimated taxes, If you are a first year new business owner, you are not actually required by the IRS to pay estimated taxes in that first year. Now don't take that as me telling you not to pay estimated taxes. You will still have a tax liability at the end of the year. But from the IRS perspective, because you're a first year business owner, they don't know how much you should be paying them. And so you have a waiver in that first year. Again it does not mean that you don't have a liability and you will still have to pay it. After your first year, after the IRS knows what your income is. The requirement is that you pay 90% of your prior year's liability at a minimum. So the 90% rule. So long as you pay at a minimum 90% of your prior year tax liability, then you will not be hit with any estimated tax penalty and you won't be hit with any interest. And that's important because for those owner-operators that don't pay their estimated taxes and they're beyond year one, we oftentimes do tax returns and the independent contractor gets hit with additional expense from the IRS that they did not need to incur.
Greg Thompson:
One of the things that occurs to me is if we've got folks that are listening to this that they're thinking about becoming an owner-operator or independent contractor at some point during 2020, I think it's probably a good idea for them to sit down with you and your team and talk about what they need to do in terms of tax planning. And one of those things is probably going to be self employment tax, it's probably going to be paying estimated taxes if you can go ahead and start working on getting an estimated tax payment, say in June or September. Get those things going during that first year. It's very important.
Colton Lawrence:
Yeah Greg, when we work with our clients, we always encourage them to pay their estimated taxes, whether they're in year one or beyond. The reason for that is we would much rather see somebody contributing throughout the year to their tax liability so that when the time comes to prepare their annual tax return and that liability is determined, they've at least paid some amount towards it. Oftentimes we see drivers who have not contributed to their estimated taxes and they get that final annual tax liability bill and they just can't afford it. Because the fact is, most of us aren't walking around with 5, 10, 15, even 20 or $25,000 in our pocket depending on what your operation is. When you get that bill, you can't afford it. And that leads to a whole nother set of problems that we can help you with, but that is easy to avoid simply by making those payments on a quarterly basis. If you are a first time owner-operator and you don't know what you need to be putting away, our recommendation out of the gate is 20% at a minimum. 25% if you want to really kind of protect yourself. Keep in mind that 20% to 25% that you need to put away is covering your 15% self employment tax as well as your income tax. And most income tax is going to come in at around that 10% level. If you are making somewhere in the range of 50 to $60,000 a year. If you are in the 60-70 $80,000 year range, you're probably going to need to be closer to that 25 to 30% range just to cover yourself.
Greg Thompson:
Can you tell us precisely when those estimated taxes are due?
Colton Lawrence:
Estimated taxes are often thrown out as quarterly estimated taxes Greg. That oftentimes leads to confusion. The IRS does not like to do anything simple. That's why they've got mountains and mountains of tax law. There's a lot of confusion about many things with the IRS. And estimated taxes are no exception to that. Normally a quarter would be every three months. You take 12 months of the year divided by four and you come up with three months and so oftentimes people think their estimated taxes are due every three months. And unfortunately that is not the case. First quarter estimated taxes are due at the same time as the annual filing for the prior year which is April 15th depending on weekends, maybe a day or two before or after. But April 15th is first quarter. From there we actually go two months to June 15 is when Q2 is due. After Q2, we go three months to September 15 and from there we go four months to January 15 of the next year. So it's two months, three months, four months, three months is the way it works. As I said, that brings a lot of confusion. At the end of the day just make sure you've got a tax professional that is working with you, making sure that you know when those are due and how much you need to pay and Trucker CFO is here to help you with that as well.
Greg Thompson:
One of the things that's nice about the estimated tax schedule is that typically your tax preparer and I'm sure you guys do this, you provide them with the form. It's filled out with the date where it needs to go. A lot of times it has the amount and if you're just starting out or you're varying a little bit, you can write in the amount, correct?
Colton Lawrence:
That's correct. There is a component to the Trucker CFO service where we will upon your approval as the independent contractor, make a payments out of a type of escrow account that we can hold for you. We will match that payment up to the coupon for the IRS as well as for your state if applicable and mail that payment in for you. If you don't use that component of the Trucker CFO service, we will tell you how much you should pay and then it will be up to you to send that payment into the tax agency.
Announcer:
That's Colton Lawrence, The Trucker CFO. Everyone at PodWheels would like to thank you for listening to the Tax Bootcamp Podcast from Trucker CFO. As we noted in the opening of the podcast, please keep in mind that every tax situation is unique and the perspective shared on this podcast should not be considered as tax advice. If you have questions regarding your specific tax situation, you should consult a qualified tax professional. The clock is already ticking on tax season and Trucker CFO is ready to go to work for you. Do you have a team of tax and accounting professionals who understand the complexities of the trucking industry? There are a number of ways you can contact the team at Trucker CFO, visit the company's website at TruckerCFO.com. From the home page you can fill out the get started form which will send an email to a Trucker CFO representative. If you would rather email Trucker CFO directly, you can reach out to the company through the following address info@truckercfo.com. That's info@truckercfo.com. You can also call Trucker CFO toll free 1-800-533-4230 and hit option two for sales. The toll free number once again is 1-800-533-4230 and choose option two.
Once again, thanks for connecting with us on PodWheels. You can stay up to date on the latest from PodWheels by downloading the PodWheels app. It's available in the Apple store and on Google Play. Just search PodWheels in either store and download the app. Be on the lookout for the next edition of the Tax Bootcamp Podcast from Trucker CFO and as always stay safe out on the roads.