Ian R: Welcome back to Inspector Toolbelt Talk. We have what I’m anticipating to be one of our favorite guests here on the show today. I don’t call him a friend. He’s my brother. Basically, Tom Kubiak is a brother from another mother. How are you, Tom?
Tom Kubiak: Great Ian, and it’s so good to be with you. Thanks for having me on.
Ian R: Yeah. Thanks for being on. So we’d like to introduce Tom, as he’s an accountant extraordinaire. He’s been my friend and accountant for I don’t know, 20 years, Tom?
Tom Kubiak: More than 20 years, I think. Yeah.
Ian R: More than 20 years. Yeah. Oh, wow. Yeah, I know, every time when Beon is here, I’m like, oh, man, remember this? It was like five years ago is like, No, that was like 20.
Tom Kubiak: Time goes by faster than you think.
Ian R: Yeah. You are an accountant extraordinaire, and probably gonna laugh at me for saying that, because you’re also humble about it. You work with a lot of home inspectors because you work with me and other home inspectors in my market. You kind of know our deal pretty well.
Tom Kubiak: A little bit. Yeah, I’ve gotten to, I’m certainly not the person to talk about the home inspection side of it but I have talked to and helped a lot of home inspectors with the accounting and tax side of it.
Ian R: yeah, well, I know you’ve helped me. So how long have you been an accountant?
Tom Kubiak: So I’ve been in the accounting field for a little over 30 years, I graduated from college and worked with an accounting firm right out of college. Then after that, worked, in developing my own practice, and built my practice into a pretty good size, actually, we were actually the largest accounting independently owned tax preparation firm in the Capital District of New York. Then, over the past few years, I’ve kind of been managing it down a little bit to be able to focus on some volunteer activities that my wife and I like to get involved in.
Ian R: Yeah, well, your guy’s volunteer service is extensive and impressive, too. Right now, your accounting firm is Owlview. We’ll put a link to that in the transcript of the podcast here. If you do live anywhere near our area of New York, the capital district, Tom’s the guy to go to he really is. Many years ago, we were just joking before the podcast started, about how I am a financial doof. That’s how I describe myself. I’m good at making money but it’s not on purpose. I like to do things and make things work, and money happens and then I have it, I’m like, What do I do with it? You’ve always been like, okay, Ian, just let’s take that jar and put the money from the jar into something real.
Tom Kubiak: You know, Ian. We actually have that discussion with clients all the time because oftentimes, people, especially self-employed people, and professionals, they’re good at what they do. They’re not good at the other side of it, which is the business side of it, that, you know, they can make the money, but they don’t often know what to do with it, or how to how to make it last longer. How to finagle things so that you don’t lose as much taxation. That’s where, you know, partnering with a good accountant really makes a huge difference for a small business.
Ian R: Yeah, and actually kind of want to jump to that point a little bit because a lot of times we as independent business owners, which is a lot of who we are as home inspectors, a lot of small businesses, we tend to think that we can do it because we’ve done it. That’s what I used to think I keep my ledger on a spreadsheet. I know what’s going on. I don’t miss a receipt. Yeah. It’s kind of like the weekend warrior father-in-law’s coming to a home inspection saying, I know how this should be built. I’ve built a house. I know how this works. We get frustrated by it because we don’t know what we don’t know.
Tom Kubiak: I can guarantee you that’s true because I’ve followed you around home inspections for properties that I’ve bought. I think of myself as a halfway decent homeowner but I know nothing when it compares to walking behind a trained home inspector. So you can say the same thing about accountants, you know, even even if a home inspector is able to balance their checkbook or keep the records appropriately, tying in with a good accountant really is going to make a huge difference and let them tweak what they’re doing.
Ian R: Yeah. To kind of put that in perspective. A lot of times we’re like, Well, what can an accountant tell me that I can’t learn on my own? There’s going to be nuances, there were nuances that you showed me that you were like, Oh, here’s a little tweak. It’s just like $8,000 I’m like, that’s not a little tweak, man. That’s true. How did you know to do that? You’re like, Well, I’ve done it for 500 people this week. So it’s really important to have a good accountant like Tom here. Yeah. If you don’t have an accountant, it pays for itself and then some.
Tom Kubiak: That’s very true. Yeah. I could say, you know, when your listeners are looking for an accountant, try to find a small independent accountant look at the guy who’s got one office or the woman who has one office and just can focus on her clients to stay away from the big firms like Jackson Hewitt or H&R Block, you’re gonna get a lot better service from the independent accountant.
Ian R: Why do you say that just because they’re more homegrown and less about volume?
Tom Kubiak: Yeah, less about volume, more customer service oriented, more design. It’s more of a relationship. So similar to what you have with other professionals, a lawyer or a doctor for that matter when you develop a relationship with an accountant, that accountant learns about your business and is looking out for you. As a result of that, you’re gonna get good advice. So it’s more than just the books. It’s the advice the accountant can give you.
Ian R Yeah. I can add to that, because, you know, there have been times when it’s not tax season. Yeah, we’re, you know, we’re not communicating a lot about anything except maybe Star Wars or something like that. Also, just shoot me a text. You’ll say, hey, Ian, you should do this real quick. I just learned about it. It applies very specifically to me because you know me, you know, my business. If I’m with a Jackson Hewitt or h&r block or at Walmart, you know, they’re not calling me mid-year to say, hey, hook yourself up with this.
Tom Kubiak: That’s exactly true. Yep. Okay. Yeah, exactly true.
Ian R: Well, and actually a good example of that, we’re gonna jump ahead just slightly, you were actually just telling me about something called I bonds. We’re going to talk about, you know, business setup, and all sorts of things but this was something we’re talking about ahead of time because ties in with a podcast that we had a couple of weeks ago with Nick Gromicko. about investing and putting money, places, and inflation. What am I bonds?
Tom Kubiak: Yeah, that’s a great question, Ian. Many people right now are nervous about the economy. I’m not a financial advisor. So you know, take everything that I say with a grain of salt and run it by a financial adviser if you want. The reality is we open up our investment accounts, our 401k, or, or any type of account you might have that has investments in it or for that matter, you watch what’s happening with the stock market, and people get nervous. They’ve saved, you know, diligently possibly for retirement, and they’re seeing the value of their accounts whittled away by the declining market and some financial pressures that we’re under. So safer investments oftentimes can provide a little bit of stability. The government offers savings bonds, most people are familiar with savings bonds, you might have received them from your grandmother as a gift when you were growing up but right now, there are options for savings bonds that are really actually a good option. There’s a normal Series E savings bond that pays a fixed rate of return based upon when you buy the bond. There’s also what’s called an I-bond and inflation-adjusted bond and that bond pays up also a fixed rate of return. It’s 0%. Right now, actually, but then it’s adjusted by whatever the rate of inflation is. So since the inflation rate is so high, right now, I-bonds are actually paying a very high rate of return, it will change over time but in the short term, it’s a safe investment that has a very high rate of return. A little bit under 10% right now. So it is a good investment, for the short term, if you have cash sitting around and you’re not sure, really what to do with it. I-bond, especially if you can afford to leave it there for about a year is a good option for that.
Ian R: I thought that was really cool because we were just talking with Nick Gromiko, about how fiat currency basically is just a nosedive to zero over the years, you know, it’s going to inflation is going to happen, it’s going to devalue. Basically, that bond is saying, whatever devalues will compensate for you. So you’re not going to make a ton but you’re also not going to lose any.
Tom Kubiak: You’re not going to lose. That’s the key.
Ian R: Yeah, there’s a $10,000 cap on it right?
Tom Kubiak: Exactly. $10,000 per person. So annually, and there is a little bit of a twist to that if you use your tax refund to buy savings bonds, you can get a little bit more than 10,000 but normally most people think of 10,000 as being the limit annually.
Ian R: Okay. So here’s a little side point, again, like Tom said, we’re not giving anybody financial advice, but and I-bond seems pretty good to me if with all the inflation that’s going on, you know, $1, from two years ago was now worth what 76 cents. I know. Yeah, that’s the cost. Yeah, yeah. So, unfortunately, that is a good place to put a little bit of our money, possibly, in my opinion. So good idea. So there are some questions, some questions that inspectors are always asking. We have a lot of Facebook groups and things like that, that you wouldn’t necessarily be part of Tom. A lot of them ask a lot of questions. The first one is business structure. I put this one first because you helped me with this years ago, I remember I started my first sole proprietorship, when I was like, I was 19. I was all proud of myself. I’m like, I’m a big boy now. Then I realized later on, because you told me, Hey, you know, things can happen and you also have some advantages if you switch to an LLC, but things can happen when you’re a sole proprietor and you’re not really protected. LLC gives you protection but I also see guys say, well, what’s the difference between an LLC sole proprietorship corporation or an S corp?
Tom Kubiak: Okay, Yeah, very good questions. You’re exactly right. When most people start a business, they start off as a sole proprietor, you think of what the, it’s commonly called a Schedule C business, which is the form that’s used on your tax return to report the income. That’s the easiest to do. You oftentimes don’t need to do any registration. Sometimes if you want to register the business under a name other than your own name. You get what’s called a DBA from the county clerk, and that’s a very low cost but those that are the simplest form, the disadvantages are it doesn’t allow any liability protection and it’s a high tax cost because Schedule C or self-employment has an extra level of taxation beyond just normal federal and state income taxes called a self-employment tax. So most people, start off in that type of business but then as they build their income a little bit, they start to think, hey, are their ways that I could change the structure of this business, and maybe grab some advantages. As you mentioned, we have an LLC, and we have a corporation. Those are the next steps for business complexity.
Ian R: So let’s step back for a little bit to the sole proprietorship and the tax implications of that. So let’s say I am a newer inspector, and I’m starting on my business, and I make 50 grand in my first year, and I’m pretty excited about that. What would be the tax difference just from between if I had started off as an LLC and a sole proprietor?
Tom Kubiak: Okay, Yeah, great question. So the normal taxes, you think of our as a self-employed person, your self-employment tax, and then your federal tax, and if you live in a state with state tax, so in the case of we’ll just talk about federal taxes, because state taxes generally are the same no matter what type of business you have, but in the case of a self-employed person, they have 15.3%, self-employment tax, and then they have their variable rate for federal tax. It’s that 15.3%, that’s, that’s the one that we have some negotiation on, or some ability to be able to, to change. So when you’re self-employed, you got to pay that 15%. When you’re an employee, it’s called FICA tax, which is a combination of Medicare and Social Security. You pay half of it and your employer pays half of it. That’s the cost sometimes when individuals start a business, they forget about that extra tax, and it ends up catching up with them at the end of the year. So a self-employed person. Generally, what we’re going to look at is the differential is the 15.3% self-employment tax. Now you transition to another type of entity, and you could possibly change the amount of tax that you pay. Primarily, the biggest reason you want to form an entity like an LLC, or a corporation is a liability, like you mentioned, being concerned about somebody attaching or suing you.
Ian R: So I guess, hypothetically, just for my mind, if the 50 Grand as a sole proprietor at 15.3%. But if I started off as an LLC, I could have saved a couple of grand out of that. Well, yeah.
Tom Kubiak: So the LLC, here’s what’s called a default, LLC. That is a Schedule C, a single-member LLC, it’s called. So you wouldn’t save any with that, okay. If you formed a corporation, you potentially could save some of that 15%. So we say that 15.3%, works out to be about $7,500. If you form a corporation, it’s involved some complications, but if you pay yourself a wage through the corporation, then that 15.3% is only going to be applied to the portion that you pay as a wage, not the profit from the corporation. So normally, what people would do to strategize that is they’d say, Okay, I make 50,000. I’m going to pay myself half of that as a wage. That makes 25,000 and that turns my self-employment tax from 7500. To half of that, 3750. No, and then it saves you about $3,700.
Ian R: Which is a big deal. What is that? Seven 8% of your gross income. That’s, that’s pretty intense. So I guess that ties back to filing as an S corp because you don’t have to have a corporation to benefit from that.
Tom Kubiak: Well you do, you have to form a corporation that happens at the state level. So normally, you’d go to your Secretary of State, and then each state has different requirements for what’s involved with forming a corporation. Once you form the corporation, then you go to the IRS and you tell the IRS, I’ve formed a corporation and the IRS issues the corporation, an identification number. Once you have that, then you have to choose at that point, how the corporation is taxed. There are a couple of options but the one that would involve the most benefit is what’s called an S corporation. That’s a small business corporation that has the simplest filing structure and allows you to take advantage of that opportunity to split your profit between wages and direct profit.
Ian R: So I guess that’s where the confusion comes in. A lot of people say I want to start an S corp. You don’t really start one, you file as one. Correct?
Tom Kubiak: Well, you form a corporation by telling the state that you live in, I want to form a corporation, they give you back a Certificate of Formation. Then from there, you start with your filing process. Yeah.
Ian R: So when you say Corporation, like an LLC.
Tom Kubiak: Yes. So an LLC is a type of corporation. It’s called a limited liability company but it’s not it doesn’t have the same filing requirements. Tax filing requirements that a corporation does. So an LLC can file as an individual, just like a DBA would file in a Schedule C, if there is more than one partner in the LLC, it files as a partnership. That LLC can choose to be taxed as a corporation rather than LLC. If that’s the case, then it can file as a corporation. So the LLC has the most flexibility but a little bit of thought has to go into which option you want to take and what’s going to be the best.
Ian R: You know, it gives what you’re saying a lot more authority to is you’re wearing a suit. If you aren’t watching the video version of this, he’s got like, he’s got a suit and tie a fancy mustache, which he’s had some has a lot of weight to his argument here.
Tom Kubiak: I had to dress up for a meeting before this meeting.
Ian R: Okay, otherwise you weren’t gonna.
Tom Kubiak: I would say this is why to sit down with an accountant, you know, before you make a decision as to what to do, talk to an accountant about what the various options are, and what is going to be the best for you based upon your circumstances. Because I found at least you know, from my practice, a lot of people will come to me with a very small business and want to form a corporation or an LLC. The costs of doing that outweigh the benefit but as your income starts to go up, then the benefit outweighs the cost. Then it makes it worth doing.
Ian R: So. That’s a good point. That’s why you need an expert in the field just like, yeah, we’re buying a home, we need a home inspector to come and say, yeah, the chimney looks okay but when you look inside of it, you know, the damper and all this stuff. Okay. He knows what he’s talking about. So would you say the most common way of going about that is an LLC, filing as an S Corp, and paying the owner as an employee?
Tom Kubiak: That’s the most common way, in the end, there are some reasons for that. The first one is LLCs typically have the best liability protection right now under current laws. So when you form an LLC, and you operate inside of the LLC, that gives you a little bit of shielding from lawsuits that can come against you. So some, let’s say you do something wrong, and your company is found liable. Well, the individual can sue you and your company and get what your company has, but many times they can’t get your personal assets. That’s the reason really, you want this liability shield. Secondarily, the LLC is depending upon what is involved, they can allow for a little bit less corporate maintenance. So you probably, your listeners may have heard of annual meetings that corporations have to have. Well, when you have a corporation, you have to do those things. Otherwise, the government will say, Well, you are saying you have a corporation, but you’re not really treating it like a corporation.
Ian R: Piercing the corporate veil?
Tom Kubiak: Exactly. Yeah, an LLC doesn’t have a lot of those requirements. So it’s a little bit easier to operate ongoing. Now, there is a disadvantage in many states, LLC is a little bit more expensive to set up. So you have some additional hoops you have to jump through. For instance, in New York State, there’s a requirement to publish your articles of incorporation. So that is an extra cost that a normal corporation doesn’t have but once you reach that hurdle, then maintaining it is much easier.
Ian R: Yeah. When I had to publish my LLCs each time I have to do it. It’s a huge pain in the butt. You have to get papers within a certain radius. It’s like it’s a newspaper. I mean, there are not many of them out there.
Tom Kubiak: It has to be so many times. Yeah, exactly. Yeah. Yeah. Some of those newspapers, the only reason they’re in existence is to do those legal notices.
Ian R: They’re pretty archaic laws for if you’re requiring a written publication. It’s an archaic law. Yeah, exactly. So and then paying yourself as you mentioned, you basically take on the weight of taxing your own self, like you’re paying your own FICA. Yeah.
Tom Kubiak: You’re being an employer. Yeah. So it’s, it’s similar to if you worked for somebody, and you got a paycheck, well, you would be working for your LLC or your or your corporation, and you’d get a paycheck. So, you know, normally the payroll taxes and payroll operations are complicated, I don’t recommend that people try to do it themselves. So there are lots of options out there, you know, there’s the big firms like ADP, and paychecks are all the way from them down to options that are available online. My firm personally uses a website called Gusto. It’s really, really good. There is also Intuit has all kinds of products. I’m not a huge fan of Intuit, but they do have lots of offerings.
Ian R: Yeah, I know your feelings on Intuit. I personally use square payroll. I like that it’s simple for me, but Gusto is a great option. I looked into that you told me about that actually. Gusto is pretty awesome. The tax benefits that I’ve seen since we started and you called it a pass-through entity filing as a pass-through entity, there are huge tax benefits to it. Yeah.
Tom Kubiak: Especially as your income goes up and you’re splitting it so that half of it is going as a pass-through right to your normal income, and half of it is getting taxes wages, you’re saving, you know, 15% on all the money that you’re not paying yourself in wages, and that can get pretty significant as the income goes up.
Ian R: Yeah. So if we’re doing, you know, a single person filing as an S corp and an LLC, who has a good year and does a couple 100 grand, yeah, that can add up to quite a bit, you know, yeah, easily. I’m not going to do the math off the top of my head. You probably can.
Tom Kubiak: $15,000 right in your pocket. Yeah.
Ian R: Oh, man. So almost 15 grand in your pocket for just talking to a guy like Tom, preferably? Then just getting that in gear? So that’s a big question, again, that we see in the Facebook groups with home inspectors, you know, how should I form my company structure? So tell me if I’m wrong in a summarization that talks to an accountant, and see what’s best for you. But a popular option is going to be LLC and filing as an S corp and paying yourself as an employee.
Tom Kubiak: That’s the most common option. That’s what I would typically recommend, you know, based upon the client, yeah.
Ian R: I do like using payment services, like square payroll, and Gusto. They kind of help you also be in line with your state’s regulations. Exactly, yeah. Which I love with all the people that work for me and everything. It’s like, oh, hey, here’s a new regulation, here’s a notice, nothing you have to do, we’ll take care of it, as long as you just give us this bit of information.
Tom Kubiak: It’s worth the cost. That’s where, you know, there’s a break-even point the with strategies like this. So when you switch over to using doing a strategy like this, where you’re taking an LLC, you’re filing as an S corp and paying yourself, there are costs that come along with that. So you figure I have to pay now, for my payroll cost every month, I have to pay for a corporate set of tax returns, which is a little bit more expensive, you know, those things add up, and you have to get to an income level enough to where your tax savings is more than what it would cost you to do that. So normally, in my firm, I’d like to shoot for about $25,000. If you have an income, of around $25,000, that’s probably the breakeven point where your costs are going to be equal to what you’d save, as you get above 25,000. Now you start to reap some of the benefits of it, and you pay less in overall tax than you would spend.
Ian R: I am super glad you brought up that number because I was thinking at one point, do you really start thinking about that for 25 grand, that’s not a lot of home inspections, it’s not really, you know, that’s 50 inspections a year on average. So if you’re charging 500 bucks for an inspection, that’s pretty good. So you’re probably looking at a first or second-year home inspector should really start considering you’re gonna want to start thinking about it. Okay. Great, fantastic. Here’s another one that you have always tried to help me understand over the years. A lot of home inspectors are starting multi-inspector firms. So years ago, it wasn’t common to have a lot of multi-inspector firms. There were some big guys but most markets were made up of one guy, maybe two or a team, and some family businesses. Now the markets are consolidating a bit, and you have a lot of multi-inspector firms. So a guy will ask, Hey, should I pay my guys as 1099? worker or a W-2? What are your thoughts on that?
Tom Kubiak: That’s a very good question. It is actually a hot topic. It’s called worker classification. You can obviously understand that as a business owner, you don’t want to have to pay them as an employee, because there are a lot of costs that come along with that the insurance is the regulations that payroll requires. So your goal, most small businesses would much prefer sending out 1099. The problem is, that the government doesn’t think that way. They treat the vast majority of those payments as employment payments. So there’s a lot of work on the part of a small business to make sure that you’re crossing all your T’s and dotting your eyes so that if you ever run into a situation where you had what they call an employment audit, you’d be okay. So the first thing you want to do is you want to make sure that if you are going to be hiring a person as a subcontractor or a 1099 engagement, you want to make sure to have a contract that says the person’s self-employed, and you want to make sure to issue 1099. Don’t just pay them and never report it because that issuing of 1099 is you saying, I’m definitively taking the position, this person is an independent contractor. Secondarily, you want that person to do work for other people, not just you because that’s an argument that they are really self-employed. If you run into a problem where those things don’t match, you know, or they’re only working for you, and it really an outsider is going to look at it and say yeah this person is really your employee like you’re setting their hours, you’re giving them the leads, you provide them, time off those type of things. You’re giving them their equipment. If all those things happen, you really have an employee. You don’t have a subcontractor.
Ian R: Yeah, and I think a lot of guys don’t think about the ins and outs of that. Yeah, like I don’t like my guy working for another inspector, they say, well then give them a W-2. Exactly. That’s key. There was some tourney one time talking about that, saying how if the guy only works for you the whole year, his whole income comes from you. Yeah, that is big in the government’s eyes, he didn’t do anything else except work for you. He’s not a subcontractor. Yeah, he’s an employee.
Tom Kubiak: This is actually becoming a pretty good size issue. There are states in the United States that have passed what are called ABC laws. They are a standard test that can be applied to any circumstances to determine whether the person is a contractor or an employee. Unfortunately, those tests are hard to pass, to get to be a contractor in some states, like California, and I think Vermont is another one, the default is that you have an employee, not that you have a contractor, you have to prove that you have a contractor. So and then there are really significant hurdles to get over to be a contractor. So it is something that you know, your listeners should pay attention to. You know, employment audits are not fun, and they are costly, and you don’t typically win them. So it’s better to be proactive.
Ian R: Yeah, from what I’ve heard, you’d rather deal with the IRS than an employment audit. Like it’s, it’s pretty rough. Yeah. So I guess that kind of comes down to a couple of things. So like my payroll software, I have contractors, and I’ll pay them, but they also work for other people. It’s like, I need you for a specific thing. Here’s what we need, do this. Here’s your money and here’s your 1099 at the end of the year. Yeah, I’m sure Gusto does. 1099 is automatically like square payroll does. It’s very, like, they’ll remind us like, Hey, make sure that this person doesn’t receive regular payments from you, etc. It’s, it’s a lot to think about because the laws were intended more for, Hey, Guy building a house? Oh, well, I’m not going to do the HVAC. I’ll hire a guy to come and do the HVAC, and I can finish exactly now he wasn’t intended for him to do every house that that guy does and not get the benefits of being an employee. Right. Yeah. I think probably the government is more worried about losing out on money.
Tom Kubiak: Yeah, yeah, true. Considering when you when you have an employee, there’s a lot of things that come along with that there are OSHA rules, there are, you know, employment insurances that come along with that, and a lot of the states that have laid down pretty significant laws have really strong worker protections. They want their workers to, you know, to be shielded from a lot of the, you know, effects that would be on the market, normally. So you made a good point about, you know, an HVAC contractor that gets hired to do one job. That is actually one of the tests that happen at some of these states, is this contractor doing something that is part of your normal business operation. So as an example, if your normal business operation is an electrical contractor, and you hire an electrician to do work, the odds are that person is going to be an employee. On the other hand, if you hire someone to pave a driveway, that’s not part of your normal everyday business activity. As a result, that would be much easier to classify that person as a contractor.
Ian R: Yep. Also too, I mean, as you mentioned before, you made a good point. Are you providing their tools? Are you setting their schedule? Are you What about the vehicle? Yeah. Which, generally speaking, most inspection companies are that have employees like be at these eight inspections from Monday through Friday? Here’s your vehicle. Here’s your logoed shirt. Here are all your tools. Yeah, yeah.
Tom Kubiak: That’s another one. Who’s shirt are you wearing? Yeah, there’s a pretty hard-cut test that can be done. If you’re, if you lose these tests, you know, you have an employee.
Ian R: Yep. So basically, it’s kind of like, you know, if I hire a guy and I have, we do our own sewer scopes, but by hiring a guy to do a sewer scope inspection, we don’t do them, but my client wants it. I hired him to do a sewer scope, that person’s gone. They drove off in their own truck with their own logo, their own bill will not their own bill, but you know, now they are a contractor. If I have them doing inspections with me and only working for me that where my logo, kind of a different story in the government. Exactly. Yeah. Okay. So now, how would you do it as a W-2 because to kind of explain our industry a little bit a lot of guys work on commission? So hey, you get 50% of this. You know, this inspection. Yeah. So can you do a W-2 like that?
Tom Kubiak: You can, each state has its own rules with regard to how you can pay a person, man, sometimes minimum wage requirements come into play. You know, there is what’s called piecework or commission pay. That is perfectly possible even with employees. So as long as you’re not running afoul of minimum wage laws, where you know, you’re at least paying them enough so that it represents the hours that they’re working. You can pay them a commission and just have the taxes withheld from that commission as an employee.
Ian R: Again, a good payroll service, it’s going to be able to do that. pretty easily. It’s like, oh, cool, you know, here’s $500 from our $1,000 inspection, oh, you up-sold a sewer scope for, you know, 400 bucks, here’s 200 extra dollars as commission for that. Its commission base pay is kind of like salesmen. Right?
Tom Kubiak: Yeah, exactly. Exactly.
Ian R: Okay. Great. So that’s fantastic. I loved your explanation of that because that’s a big one. Yeah. I think a lot more inspection companies do 1099 and probably safe too.
Tom Kubiak: Oh, and that’s actually common in almost every industry because 1099 is much easier. Yeah. You know you get around all the complication that comes with payroll. But one good thing is if you’re taking advantage of the LLC strategy, where you’re putting your income through an entity like an LLC, or an S Corp, and you’re paying yourself and payroll, well, you’ve already started the payroll process. So adding another employee to that process is not as complicated as starting payroll up from the beginning.
Ian R: Yeah, and that’s a good point. Because, like, for me, I just, it’s a couple of clicks and there you go. Now I have a new employee. Yeah.
Tom Kubiak: It doesn’t change the cost much either because you’d have an add-on for one extra employee, but it’s not like double the cost.
Ian R: Yeah, exactly. So great stuff. Awesome. Yeah. So one final thing, this isn’t the question that home inspectors asked, but I feel like they should, okay. It’s one that I didn’t ask until I thought about my own mortality. You know, that’s like, when your 20s you’re like, I’m immortal. I’m gonna go do something stupid. Then you’re 30 you’re like, boy, why does that hurt you? Then at some point, you’re like, Oh, I’m gonna get oh, this is not going to feel good. moves pretty fast. Yeah. So saving for retirement? What are some things because it’s not like somebody’s matching our 401K? To be perfectly frank, I still don’t 100% Understand a 401K, I think I kind of like 80% Got it? What are some things that we can do to save for retirement, whether we’re that new guy making 50 grand a year and gross, or a big-time, you know, 10 Inspector company out there, what are some things we can do?
Tom Kubiak: Great question. This is something so important. We talked to all of our clients about saving for retirement, even from the time they get their first job, we encourage them to start saving for retirement because retirement savings really has the biggest benefit if you do it over a long period of time. For self-employed people, there are a lot of options and they can be a little bit confusing and intimidating. So that kind of starts off some people on the wrong foot. They don’t do it because they’re intimidated by the decision but the basic thing is, that the self-employed person has the same options that a normal person does with regard to IRAs. So you have what’s called a traditional IRA. And you have what’s called a Roth IRA, the traditional IRA, you can oftentimes take a deduction on your tax return. So if you put $1,000 in, and you’re in the 20%, tax bracket, your $1,000 would save you $200 in tax, and only end up costing you 800 but then in the future, when you take that money out, you have to pay tax on it, then. So you’re just delaying your tax payment to later on a Roth IRA, on the other hand, you don’t get a deduction for putting the money in. So you put in $1,000, and it costs you $1,000. As long as you meet certain requirements, in the future, when you take that $1,000 out, you don’t have to pay tax on it or any of the earnings that it creates. So if that $1,000 turns into $10,000, you can take that all out with no tax on it. So really, that’s a really powerful savings goal, especially over a long period of time. Now, for self-employed people, there are lots of other little options that can allow you to be able to make larger contributions. There’s what’s called a single-member 401k. There’s a simple IRA, there’s an SCP or Keogh plan, and other types of investments, strategies, and retirement plans that allow you to contribute potentially up to $50,000 or more. Some of them require some advanced planning. So again, sit down with an accountant, and talk about your options. Don’t wait until April 15 To make a retirement contribution. Do it proactively.
Ian R: Okay, so you lost me as some of those other ones, the little retirement, there’s an SCP and the CRA and some other an ABC, XYZ. So let’s say I’m going to completely ignore your advice, and not talk to an accountant. What would be kind of like a safe bet for those of us who are just kind of like, I’m going to do this anyway, you know, what would be a safe bet, maybe?
Tom Kubiak: the safest and easiest thing to do is either an IRA or an SCP. Those are the two easiest types of retirement accounts. The problem is that both of them have limits and as a result of those limits, you can depend on what your income is, and what your situation is, you could be boxed out of making the contribution in some cases. So if you’re not going to talk to an accountant beforehand, but you do want to make a retirement contribution, the best thing to do is to wait until you do your tax return. Then your accountant can tell you, yes, you can make a contribution or no, you can’t make a contribution. Once you know that, then you can put the right amount in.
Ian R: But don’t wait till April 15 to do that.
Tom Kubiak: Yeah, if you wait till April 15, you’re gonna be behind the eight ball, do it, you know, as your tax returns getting prepared.
Ian R: I like how you told me one time, just turn it on. Yeah. Automatic contribution. Yeah. So think about it is just, it’s just like rent. Yeah, it’s, it’s your mortgage. It’s just going out that month, and you don’t think about it.
Tom Kubiak: Correct. So you could, you know, for most people, the IRA contribution limit is six, or $7,000. So if you want to reach that IRA contribution limit, you say, All right, if I contribute $120 a week, I’ll get to my contribution limit for the year. So that’s your goal to shoot for, if you can’t do that, put in $25 a week, or put in $10 a week. Then every couple of months, raise it by $10. It’s out of sight, out of mind. Over a long period of time, you’ll save a lot of money. I usually tell my clients when I talk about retirement, to start a contribution and raise it by 1% each year. Then they owe dinner when they retire because they’ll save a lot of money without even knowing that they’re saving it.
Ian R: How many dinners Have you gotten?
Tom Kubiak: Nobody’s retired yet, so… You give me all the time.
Ian R: Yeah, I’ll give you dinner this Friday. There you go. That’ll work out great. So, but that’s awesome advice because a lot of times we’re not thinking about that. Retirement accounts also are a good safety net for other things. Like, if we get seriously injured, the government will say, you know, we don’t make exceptions in certain cases. Right?
Tom Kubiak: That’s true. Yeah. Even during the pandemic, the government waived the early withdrawal penalty. So that allowed people to access retirement funds that normally they wouldn’t have been able to.
Ian R: Yeah, so it’s not like, man, that’s just completely gone. If something big happens, I can’t touch it. It’s a safety net in a lot of different ways.
Tom Kubiak: The other challenge, you know, as you mentioned, we oftentimes don’t think of retirement because we consider it to be far off, but the reality is, it’s not. If you start saving early on, you can save a lot of money over that period of time you’re working. If you wait until you’re older, the amount you have to save each week starts to get pretty big. You know, then it becomes challenging to save that much. So the earlier you start, the better off you are.
Ian R: You know, I’m going to digress into something weird and crazy but I was watching this documentary about how we don’t recognize our old self and actually talked about retirement. They said not enough people retired and they went to psychologists to say why can we get people to retire? Actually came back and he said, it’s a psychological condition where we don’t recognize our old self. We don’t know him. It’s just like, yeah, we look back on ourselves. I remember when I was 20, I remember when I was 30, but none of us think I know that guy at 65 with the bad back and the extra belly. It’s like we put that off in our minds. As you said, it seems far off. It’s not that far off.
Tom Kubiak: Yeah. Yeah. Social security alone is not going to be enough to pay for your retirement. So don’t count on that.
Ian R: Yeah. If you’re counting on Social Security, you might be Yeah, betting on a bad horse there. I tell you what, this was one of my favorite podcasts so far. You gave some fantastic information Tom.
Tom Kubiak: Thanks for giving me the opportunity to be involved. I love it.
Ian R: We’ll have you on again, because anytime you have some fantastic stuff, and maybe we’ll have you on two before tax season starts. So you can help us to understand some things that we can do to get ready for it.
Tom Kubiak: Yeah, happy to. Actually, November December is a good time to think about how you can end your year. So plan on that we could talk about it next time.
Ian R: Perfect. So everybody listening, know that Tom will be back. Tom, thank you very much for being on and your busy day and we’ll talk soon.
Tom Kubiak: Thanks for including me, Ian. Talk to you soon.
Ian R: See you Friday.
Tom Kubiak: Sounds good.
Outro: On behalf of myself, Ian, and the entire ITB team, thank you for listening to this episode of inspector toolbelt talk. We also love hearing your feedback, so please drop us a line at info@inspectortoolbelt.com.
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