Everything Liz, Jaci, and Sarah Wanted to Know About Tax

Introduction:

This week, we brought in a tax expert, Juliann Rowe of CRI Simple Numbers, to explain everything Liz Picarazzi, Jaci Russo, and Sarah Segal ever wanted to know about tax (but weren’t sure whom to ask). For example, should owners run their own compensation through payroll? Well, maybe, maybe not. We quickly learned that the answer for Sarah is different from the answer for Liz, which is why a lot of owners get this one wrong. Among the other issues we cover: Isn’t it easier for owners to pay themselves through payroll so they don’t have to worry about paying quarterly estimates? Can the owner take a draw to cover her income tax payment? If the owner isn’t running her own compensation through payroll, how much can she contribute to her 401(k)? Is it even a good idea for owners to tie up their money in a retirement account? What’s the best way for an internal bookkeeper and an external CPA to work together? And also, why did Liz, Jaci, and Sarah ask me to bring in a tax expert who is a woman? I kind of knew the answer to that one, but I decided to ask anyway.

— Loren Feldman

Guests:

Juliann Rowe is a partner with CRI Simple Numbers.

Liz Picarazzi is CEO of Citibin.

Jaci Russo is CEO of BrandRusso.

Sarah Segal is CEO of Segal Communications.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome Liz, Jaci, Sarah and especially our special guest, Juliann Rowe. As the three of you regulars know, we are here because we were recording a podcast a few weeks ago, and we were discussing a very good question that Sarah raised about how to decide whether to take compensation as a draw or as salary, and we quickly realized that none of us was entirely confident in our knowledge of the tax code. So we agreed to reconvene when I was able to arrange for an expert to join us, and that, of course, is Juliann. So welcome. Thank you for being here, Juliann.

Juliann Rowe:
Thank you so much. I’m looking forward to talking with everybody today.

Loren Feldman:
Well, let’s get started. Sarah, can you tell us what you were thinking about and what brought this issue up?

Sarah Segal:
Yeah, so thanks for bringing in expertise here, because, yeah, my knowledge of tax code? Not so good. So toward the end of the year, every year, I look at my numbers. And I like to keep money in my accounts, because I have this constant fear that I won’t be able to make payroll. I think that that’s just ingrained in who I am. But at the end of the year, my bookkeeper was asking me whether or not I would be taking money to bonus myself, right?

And I’m used to bonusing my employees and this and that, and what I ended up doing is I bonused myself through payroll, because just for my own benefit of being able to pay the taxes through my payroll was more desirable so I wouldn’t have to think about it and owe the government money. But could I have just done it through a draw instead? And I didn’t really know what I was supposed to do, if I did it correctly, or if there’s a benefit of doing it through payroll or just a draw in general. And I would love insights on best practices.

Loren Feldman Voiceover:
Okay, so at this point we got into the weeds a bit, so I’m going to summarize what you need to know. The first thing you need to know to answer Sarah’s question is that her corporate structure is an LLC, or limited liability company. Because LLCs are pass-through entities, Sarah pays taxes on all of her earnings whether she takes them out as compensation or whether she leaves them in the business. That means that when she ran her own bonus payment through payroll, she subjected it to an unnecessary additional round of taxation. She could and should have just pocketed the bonus without paying additional taxes.

As we’ll get to later, the situation is a little different for Liz. Her corporate structure is a subchapter S, which is also a pass-through entity, but with an important distinction. It requires owners to pay themselves a fair-market salary and to pay that salary through payroll, where the usual payroll taxes are deducted. That said, Liz can supplement her fair-market salary with bonus draws that should not go through payroll. Liz—just like Sarah—can take those draws without paying additional taxes because she’s already paid them on all of her pass-through income.

It’s worth noting that the reason the IRS requires Subchapter S owners to pay themselves fair-market salaries is to prevent them from avoiding paying payroll taxes on their own compensation. That means the goal for an owner with an S corp is to try to keep their salary as low as possible to minimize the payroll taxes paid but high enough to satisfy the IRS that its fair-market value.

All right, so now, back to Sarah and her question about whether she should run her bonus through payroll.

Sarah Segal:
Okay, so if I take a draw, you’re saying that that’s not taxed?

Juliann Rowe:
Correct.

Loren Feldman:
Let me ask a question: To use Sarah’s example, she asked if she took a draw, if that meant she didn’t have to pay taxes on it. And you said: Yes, that’s right, she does not. But it’s actually that she’s already paid taxes on it. She doesn’t have to pay taxes twice. She’s paid taxes on it because she pays taxes on all of her income as a passthrough. So she can take that draw and not pay additional taxes on it.

Juliann Rowe:
She is done with that distribution, because at the time the income is earned and it’s reported on the tax return, then the income tax, the self-employment tax, is all calculated and paid in at that point. So then, when you have the cash available to take out and to take that distribution, then that’s just you writing yourself a check. There’s no additional income tax or self-employment tax on that.

Sarah Segal:
Okay, but if I were to do that through my payroll system, and I put it in the column on my payroll system as a bonus, does it do the same thing? Does it recognize that?

Juliann Rowe:
If you show it through your payroll system and you call it a bonus, it will take out Social Security taxes, Medicare taxes, and the federal and state withholdings.

Loren Feldman:
So she will be paying twice, unnecessarily.

Juliann Rowe:
Yes.

Sarah Segal:
What about my employees? Like, if I give them a $5,000 bonus, should I be writing them a physical check? Or should I be doing it through payroll?

Juliann Rowe:
No, the bonus to employees should go through payroll. That is compensation to them, and it needs to run through the system to have the appropriate taxes taken out. It’s you as the owner that’s a little bit different. And if you are a single-member LLC reporting all of the income on your personal return, then you technically don’t qualify to even be on payroll. So you would not get a W2 because, again, all of the income is flowing through to you personally. And then you just take those distributions as you can.

Sarah Segal:
Okay, can I ask another question?

Juliann Rowe:
Sure.

Sarah Segal:
We were acquired by another company for a couple of years, and then I bought myself back. That other company had a policy of trying to reduce all of their revenue by the end of the year. So they would stop at the end of the year with a zero. I’m not comfortable with doing that, necessarily.

Loren Feldman:
Wait, I’m not sure I understand what you mean by that, Sarah. What do you mean by “reduce all of their revenue to zero” at the end of the year?

Sarah Segal:
So, say they had a really great year, and they had $100,000 in revenue—not revenue, profit. So they made $100,000 after they paid everything off, and they have $100,000 sitting in their account that is just gravy, right? And so they would pay out bonuses with that. And then—and don’t quote me on this—I feel like they would pay out the ownership. And then by the end of the year, the account was zero. And then on January 1, ownership would add back into the coffers to make first payroll before retainers came back in. So according to the government, there was no profit. Is that bad?

Juliann Rowe:
From a business perspective, that’s probably not the best thing to do, again, because you’re taking all of those resources away that you need to run your business, and then you have to make that capital contribution back in. I suspect what was happening is that you also have a type of tax entity called a C corporation, and that’s what all the publicly traded companies are. So what happens if you are a C corporation, there’s double taxation.

So you earn the money inside the company. The company pays income tax, but then you have to get that money out of the company. And when you write the check to get the money out, it’s either salary or a dividend, and the dividend is not deductible, but the salary or the bonus would be. So a lot of times, what we see with C corporations is they do that very thing. They’re trying to minimize that internal tax, if you will—that first level of tax—by bonusing out the excess to the employees and to the owners, and so that brings their tax liability to zero for the company.

But then, of course, now they’ve gotten rid of all their core capital that they needed to run the business. So now then you have to turn back around and put a capital contribution back in on January 1, and then you start the process over again. And that is something that’s very common. The type of business that we typically have seen that in over the years would be medical practices. The doctors would do that. And again, they were trying to take that double-taxation structure and try to make it a single-level taxation by doing that. And that’s the thing that when I talked about with the S corporation, you only pay tax one time. And so that’s kind of the beauty of having that S corporation to not have to play the games, if you will, to control the taxes in that manner.

Loren Feldman:
I want to give Jaci and Liz a chance to ask questions. But before we leave this, I want to clear up one thing: It sounds like Sarah might have been paying taxes that she didn’t need to pay, if she has, in fact, been operating as a passthrough and also running her own compensation through payroll. I guess, first, is there a way to get that money back? Can she reclaim that from the government? And two, what would you suggest going forward if she wants to maintain a process of paying herself regularly, and not just waiting to see if there’s money left at the end of the month or salary period?

Sarah Segal:
Should I take myself off payroll, also?

Juliann Rowe:
As a single-member LLC, you should not be on the payroll, because you’re already paying income tax on everything that you earn. Plus, you’re paying self-employment tax. So you don’t want to double up on the payroll side, because when you get a payroll check, you’re having the Social Security and Medicare taxes withheld at roughly 7.65 percent, and then you, as the employer, match that. Self-employment is the combination of those two. So, you would want to stop going forward in doing that.

Now, you do want to be paid on a regular basis, but you can just do a distribution to the equivalent of what you’ve been doing. You know, if you do a bi-weekly or a monthly paycheck, then you can just do that as a draw and not do any taxes coming out of that. You still need to monitor what the company’s doing and make sure that you have the appropriate taxes paid in. And I’m not going to argue with you. Having withholding is an easy way to do it and not have to think about quarterly estimates. But when you have these types of business structures, that’s just kind of the process that you have to get into on a quarterly basis to make those estimated payments.

And one thing that we do is we monitor, as we’re updating a model every month. There’s a section that’s for an income-tax calculation. So each month, when you’re closing your books, there would be a calculation, a very quick calculation, that you could go through to say, “I’ve earned X amount and I need to set aside Y to pay the taxes.” And we have our clients, many of them have a separate tax account. So every month, they just transfer money into that savings account, and then they pay it in as those quarterly estimates become due. So it’s always having that right in front of you, so you know that, “Yeah, I’ve got to pay these taxes.” And you’ve got the money sitting there. And again, that’s the number one thing from cash flow in a business: You must pay your taxes. So you’ve set that money aside. It’s out of sight, out of mind, and it’s there to pay the taxes when they become due.

Loren Feldman:
Can she get back the money that she overpaid?

Juliann Rowe:
You can amend the payroll tax returns and amend your personal returns. I guess when I step back, at the end of the day, maybe it’s not worth doing that. Because, again, trying to think through how the pieces are going to work here: As part of your sole proprietorship or your single-member LLC, you have taken a deduction for your salary against your total income. So you’ve reduced the amount that’s subject to income tax and that self-employment tax.

So yes, you could get back a little bit, if we undid everything. But going back to correct it may be more trouble than it’s worth. It’s not so difficult to amend income tax returns, but payroll tax returns cause a whole other area, because it’s the monthly payroll tax returns. It’s your W2, some state withholding. It’s just a lot of things that, at the end of the day, yes, you’ve paid a little bit too much. It probably isn’t as bad as initially we might have made it sound.

Sarah Segal:
Jaci and Liz, do you draws regularly, or do you have payroll that you’re part of?

Loren Feldman Voiceover:
Let me jump in here again with a reminder: Liz’s corporate structure is a subchapter S, which requires owners to pay themselves a fair-market salary through payroll, where the usual payroll taxes are deducted. That said, Liz can supplement her compensation with a draw. And in that case, Liz—just like Sarah—can take the draw without paying additional taxes because she’s already paid them as pass-through income.

Liz Picarazzi:
So, I do payroll. I’m an S corp. I didn’t really pay myself for quite a few years. So then once we became profitable, I was able to pay myself—but figuring out still: if you’re paying yourself well and you have profit at the end of the year, what do you do with that? Like, that’s sort of a new thing for me in the last two or three years. I never had enough profit to have to think about that too much.

But we really kind of determined that the only way we would know for sure if we were a profitable business was to pay ourselves market rate. And I’ve been told that over the years, and I always kind of said, “Well, when I get to the point when I can pay myself a market rate, I will.” But until then, okay, shut up all you people who say that I’m not really profitable unless I take a market salary. So, that’s definitely how we do it.

Loren Feldman:
You’re paying taxes on everything, but you’re also running your own compensation through payroll. Is that right?

Liz Picarazzi:
Yes, I am. And you know, one thing that I learned was that whoever creates the tax pays the tax. So I’ve had years in the past where, if I had profit, I was like, “Oh my God, I haven’t been paying myself enough, and I owe this in tax. How in the world am I going to pay this?” Well, you can take a distribution to pay your taxes. And I also thought, “Well, maybe that would be taxed again,” because it’s going out from the business to me personally. I learned from them recently that that’s not the case. But getting the business to pay my personal taxes that are generated from the business, it’s a pretty new discovery for me. And it makes me feel a lot better going into end-of-years again.

Juliann Rowe:
Right, and that’s one of the things that we always try—if you think about different buckets as you earn money, so all of these—the S corp, the partnership, the single member LLC—those are all what we call a passthrough, or a flowthrough, entity. Again, you have a legal structure that’s earning the revenue and earning the profit, but it flows through to your personal return, and you individually write the check. But that doesn’t mean that you have to take resources from other places to pay the taxes.

If your business generates X amount of the tax liability, we want a tax distribution to occur from that entity. If you have a salary from your business, then, in theory, you should be doing enough withholding on that salary to cover the taxes. If you have investments, you know that maybe the money is coming from there. Obviously, it doesn’t have to. That’s not a legal requirement. But it is a very good way to line up where the tax implication is coming from and take the funds from that particular resource to pay the taxes.

Loren Feldman:
So do you think Liz is doing it correctly? Or should she stop running her own pay through payroll?

Juliann Rowe:
Liz is actually doing it correctly. She’s the example of the S corporation, where we talked about setting a reasonable salary, a market-rate salary, and it has to go through payroll. The thing that would happen for an S corporation is that if you do not run your salary through payroll, then that raises the red flag to the IRS to say, “I’m taking distributions, but I don’t have any payroll.” And that’s the thing that they really don’t like to see. And we would never recommend that, because you should be paid for what you do in the company, and then you earn a rate of return on the profits and the value that you generate in your business.

Sarah Segal:
I don’t even remember why we decided that we were going to be an LLC. That was so long ago. But is there a time when you’re—like, I hate it going into my personal taxes. I just hate it. It stresses me out. Is there a point that you just decide, as an owner, that you’re going to be a C corp? Does that take it out of your personal taxes? Because it sounds like S corp goes through personal as well.

Juliann Rowe:
It does. C corps are those things that we rarely recommend, again, because they’re double-taxed. You pay tax at the entity level, and then you pay the tax to get it out of there. So like I say, the only two ways to get it out would be pay yourself salary, and that’s taxable on your personal return, or you pay a dividend. Dividend income is taxable on your personal return.

So what happens with the C corporations, forever and ever, they had a graduated rate. The top rate ultimately became 34-percent federal. Let’s say you earned $100,000 of profit. These weren’t quite the exact numbers, but for math purposes: If you had a 34-percent tax rate, then you paid $34,000 of corporate income tax. So then that leaves $66,000 of available cash for you to try to get out so you can touch it and use it personally.

Well, when you do that, if you pay salary, whatever your individual tax bracket is, you’re going to pay tax again on that $66,000, plus payroll taxes of another potentially 7.65 percent. And then if you said, “Okay, I don’t want to do a salary or a bonus. I just want to do a dividend.” Well, in that case, you could be at either a 15- or a 20-percent tax rate on that dividend. So now, that $100,000, you’ve lost a lot of it. It’s been a very high tax rate.

So back up a minute. With the 2017 Tax Act, they ended up reducing the C corp rate to 21 percent. So, you know, that sounds good. We had a lot of clients who said, “Hey, I want to be a C corp.” And it’s like, well, no, you probably don’t, because all they have to do is, with the stroke of a pen, they can raise that corporate rate to whatever they want it to be. They can raise it back up. I mean, I doubt it would go much lower, but all it is is a negotiation of a rate. The structure, and how C corporations work, are going to stay the same. So we very much discourage our clients from being C corporations. Again, there’s always a few exceptions to that, but primarily from a tax perspective, it’s better to be one of those flowthrough entities: LLC, S corp, or just a sole proprietor.

Sarah Segal:
Okay.

Loren Feldman:
Jaci, how is this hitting you? Where do you stand in all this?

Jaci Russo:
I’m taking notes like a crazy person! So we had a CPA for many, many, many years. Come to find out, there were a number of things that were not being done in our best interest that have cost us a lot of money. Our new CPA is digging us out of some holes, and getting some things amended, and fixing some stuff. And if I could sue for malpractice, I would have. That’s how bad it’s been.

Loren Feldman:
Can you give us a hint as to what was wrong?

Jaci Russo:
Well, I don’t know that I’m going to use all the technical terminology, so Juliann can correct me as I go. But here are a few highlights: They said, “Hey, there’s a thing you can do where, because you work out of your home office X amount of time, you can declare X percentage of your mortgage.” Juliann, does that sound like a real thing?

Juliann Rowe:
A home office? Yes.

Jaci Russo:
Okay, and so I’m like, “Okay, that sounds great.” New CPA says, “Yes, but they did it to the tune of $80,000.”

Juliann Rowe:
My goodness.

Jaci Russo:
Did you see Julian’s face? Did you watch her face? You should have seen my new CPA. They were like, “Uh, uh, uh.” So there’s a whole amendment there.

Liz Picarazzi:
It depends on where you live, Jaci. $80,000 for a home office in New York City is not a lot.

Jaci Russo:
Right, right, right. So in Lafayette, Louisiana, the average home—I’m gonna say 5,000 square feet, four bedrooms, on a half an acre land—is $250,000.

Sarah Segal:
I’m moving. [Laughter]

Jaci Russo:
I knew that would get you, Sarah.

Sarah Segal:
In San Francisco, oh my God, you can’t get a toilet for $250,000.

Loren Feldman:
I want to hear how Jaci’s paying herself.

Jaci Russo:
Okay, so as you know, in the original podcast [episode], when we all realized we didn’t know what we were talking about, and we waited for Juliann to join us, one of the things that I said was: I had done math. Automatically, y’all should just tune out anything that follows after that. Because there’s about to be some bullshit that follows. [Laughter] I had done some math and decided I was paying myself too much, and I felt like I’d found this sweet spot of where it was a fair and equitable salary, but I wasn’t overpaying into Social Security, taxes, and all of that stuff.

And so, I had done some numbers and changed my payroll. And so then I messaged my CPA—they love when I do the thing, and then tell them what I did. They love that so much—and they were like, “That’s cute. Right idea, wrong answer. This is what your math should have actually shown you.” And I have since adjusted to that. And so, yeah, now I pay myself way less than I used to, but it is a fair salary, especially for my market, and I’m saving a ton of money in payroll taxes.

And so one of the things I’m going to be asking them is: If payroll tax is 28 percent, and the tax that I pay on profit is 30 percent, that’s kind of the same thing. So does it really make that big a difference?

Juliann Rowe:
Typically, we’re not seeing a huge difference, because the income tax is going to be the same no matter what. So that’s a given. It just comes down to the payroll tax. And typically, for what most of you are doing, you’re going to need to be above the Social Security maximum amount. And right off-hand, I don’t have that number: 160-ish, 165-ish. So if you’re over that magic limit that changes every year in that 160-ish range, then you’ve already paid the maximum 6.2. You’re not going to pay that again.

So now you’re really only looking at the Medicare portion, which is 1.45, that’s collected from the employee, and then another 1.45 that you match. So you’re really looking at 2.9 percent. But they have added, a few years ago, what’s called an additional Medicare tax. Once you’re over $200,000 in salary, then they start taking out an additional amount for that. So it’s .009 percent, so it gets the total from the 2.9 and it makes it a total 3.8 percent. So really, you’re talking about an additional 3.8 percent on that difference.

Where we see where that difference really can come into being is the difference between being a limited liability company, an LLC, and an S corporation. That’s really the place where you can see a difference whether you make that election or not. Because if you’re an LLC, you’re paying, we’ll just say, that additional 3.8 percent on every dollar you’re earning above that $200,000. So if you’re an S corporation, and you can say, “My salary is $160,000, and that’s reasonable, that’s fair-market rate,” then profit over and above that number, you’re saving 3.8 percent.

So again, many times it doesn’t really make much difference at all, but other times, depending on the profitability of your company, it can definitely add up and probably really doesn’t bring that much additional administrative burden into it. Because to get to that level of profitability, you probably already have employees. You’re already processing payroll.

Sarah Segal:
I have a question. So because I’ve been paying myself through payroll—I’m looking at my pay stub right now, and it takes out federal, Medicare, Social Security, California, SDI, and state, and then my healthcare benefits—like anything above and beyond the base that my company pays is subsidized—and then there’s HSA, and then there’s an employer-sponsored 401(k). Would I want to continue to pay myself just enough to cover some of those things, because those are pre-tax dollars?

Juliann Rowe:
Well, there are limitations on when you can participate in an HSA, if you’re an owner of the business. So the fact that you’re on payroll might be causing some issues with some of those other benefits. You’re not supposed to be entitled to those. From your 401(k), what you would do there is, you look at the type of plan that covers your employees, but it also covers you as a self-employed person. So what it allows you to do on the 401(k) side is that your contribution is now based on the profitability of your business, as opposed to just what you’re paying yourself in salary. So it could allow you to put more money actually into the plan than the way you’re currently doing that.

Sarah Segal:
Well, this has made me feel like I’ve done a lot of things wrong. Thank you for that. [Laughter]

Juliann Rowe:
Sorry. I’m sorry.

Sarah Segal:
No!

Liz Picarazzi:
Sarah, I’m actually very surprised that your accountant wouldn’t have told you.

Sarah Segal:
No! We asked my accountant. So I have a CFO, who’s my bookkeeper guy, and he reached out to my tax accountant and said, “Is there a difference in whether or not she should take a draw or do it through payroll?” And they said, “There’s no difference.”

Loren Feldman:
You might need another firm.

Sarah Segal:
Well, yeah, that’s why I’m trying to find that email.

Juliann Rowe:
Well, I will say that it has been pretty common over the years, and as we’ve brought in new clients, we get to see it a little bit more. We have clients from all over the country. We’re sitting in Huntsville, Alabama, but we have maybe five clients in Huntsville. Everybody else is spread out throughout the country. So we see a lot of preparation, and this is one of the things that we see pretty frequently: Owners of LLCs, whether they be single-member or multi-member, many times they are on payroll, and they should not be.

So, it’s one of those things that we try to get them off. And again, the reason comes back to kind of what you were saying initially. It’s easier that way. You’ve got employees, their payroll runs through there, yours runs through, withholdings come out, you don’t have to worry about quarterly estimates. So, it just kind of becomes that thing that’s a little easier. I would argue maybe it’s not easier, truthfully.

Sarah Segal:
I mean, I don’t care about easy. I don’t want to pay the government more than my fair share. I just don’t. And like, I’m pissed off right now.

Loren Feldman:
Well, the good news, I think, is that Juliann said you probably weren’t paying that much more.

Sarah Segal:
I’m a small business. Any amount is a lot.

Loren Feldman:
Fair enough. Fair enough.

Juliann Rowe:
And certainly, one of the things—I mean, I’m happy to have a call with you and kind of look at the details and give you an idea.

Sarah Segal:
Your services have been sold. [Laughter]

Jaci Russo:
I have a question. Juliann, what do you think is the best division of responsibilities between an outside CFO, or agency like yours, and then inside—whether they actually sit inside your building or whatever—bookkeeper? How do they divide and conquer?

Juliann Rowe:
Many times, you do need that in-house, day-to-day bookkeeper. Or maybe not every single day, but a good bit of the time. And so, it makes sense for you to have that person because they may be tasked to do other non-accounting type things. But the thing that’s always been very helpful for our business owners is that we do a lot of what we call a month-end close. And what that’s doing is, it’s taking the financial information, the balance sheet, the profit and loss, and it’s tying that down. It’s letting us do the bank reconciliations every month. We’re reconciling the credit cards, and so those are places where you can see fraud pretty, pretty frequently.

And so that gives that outside look at those types of things, so that there’s somebody coming behind who’s not sitting in the office every day. And so, if something looks out of line, then we can ask those questions. And then we’re doing a tie-down, making sure that all the loan balances, if you have debt, agree to what the bank says, taking that balance sheet again, making sure the cash is right. Do we have all the accounts receivable booked? Have we added any new fixed assets for the month? So just looking at that, taking a quick look through your profit and loss, and saying, “You know, it looks like you purchased, I don’t know, a copier for $5,000. We need to put that on the balance sheet.” Making sure that meals are handled correctly. Making sure that if there’s something that you’ve provided—we’ll say that year-end bonus, Sarah, that you talked about giving to employees—making sure that that has been run through payroll and that it’s included on the W2.

So, that’s kind of where we’ve seen a real benefit to our clients, is just from that one touch a month, having somebody else look. And then many times, that also prevents the person who may think about fraud to know that somebody else is looking, and they’re looking on a consistent basis. And then, with most small businesses, sometimes you think you’re ready for a CFO, but you really don’t need a CFO every single day of the month. You may need them one day a month. You may need them two days a month. You might need them one day a quarter. And that’s kind of where the Simple Numbers, a piece of what the consulting team is doing is, even though they’re meeting, typically, on a monthly or sometimes quarterly basis, they still can kind of act in that role, so that you’re getting that CFO information without paying the cost of having somebody on staff full-time who really isn’t needed.

Liz Picarazzi:
I just want to make sure that we can get in a question about 401(k), any sort of retirement savings, and how that goes into your tax planning.

Juliann Rowe:
One of the things that you will hear Greg Crabtree, my partner, talk about: From the business owner’s perspective, he’s not always real keen on the 401(k) and the retirement plans. Because you’re putting in your money, and it’s being trapped in there, basically, until you retire. And so, if you’re growing your business and you need capital, then it’s okay to use those extra dollars to invest in your business. Because at the end of the day, you will more than likely get a much better return on your business than you will ever get in the market in a retirement plan. And again, that doesn’t apply necessarily to the rank and file, but as the business owner, it is something to think about.

Also, at your death, that money becomes taxed to your beneficiary. If you’ve got money in a brokerage account or in your business and you sell it, your beneficiaries—and these are all general terms—will get what’s called a step-up in basis for the value of your business. And they won’t pay income tax on that step-up. If you hand that 401(k) balance to your beneficiaries, they’re going to pay income tax on every dime of it. So it’s things to look out for in the future. It’s what resources you have available and how you use those. And again, you definitely want to save for the future. We’re not saying not to do that, but you may not want to do it via, necessarily, a retirement plan. You may just want to invest in a brokerage account. Things can be invested in gross securities where it’s not kicking off current income.

Liz Picarazzi:
Yeah, a couple of follow-ups on that. So with the employee 401(k), deciding whether to match it or not, I have been advised that you should start out not matching it, to be able to kind of get it started and be able to see. You don’t want to set the expectation that it’s going to be matched if you’re facing some volatility. So, for me, I’m a manufacturer. I have pretty incredible volatility right now with my tariff situation, but I also don’t want to seem like I’m not generous, because everybody knows that the employer has the ability to match. So how do you advise when you’re rolling out a 401(k) to employees?

Juliann Rowe:
Yes, one of the things that we’ve always kind of thought about from a retirement plan is that you want to reward those employees who are willing to defer their own money. I kind of look at it: If you’re not willing to defer your own money, then maybe I’m not as willing to give you part of that. Again, there’s different circumstances, and it’s not that cut and dried, but we do see some plans that they just automatically do 3 percent. It’s a safe harbor. You don’t have to put in a dime of your money, and you still get 3 percent of a company contribution. And so, we’ve kind of done that as a way to reward our employees. But then we’ve also looked at it from: Again, if you’re not willing, then maybe I don’t want to contribute as much.

Every employee population, if you will, is a little bit different, but we have had many that the employer would put in the company contribution at the end of the year, and the very next day, as soon as that money posted to their account, they went and got the withdrawal—even though it cost them the income tax and the 10-percent penalty. They just wanted the money. The retirement, it made no difference to them that 15 years from now, they weren’t going to have anything to retire on. They just don’t think in that regard.

So it does very much depend on what your labor force looks like and how much they appreciate that. I think before you implement those types of things, take a survey of what your team says. You know, are you interested in this? How much do you think you might contribute? Would you contribute more if we contribute more? Just kind of see what’s out there and what they think that they might want to do, as a way to handle that.

Liz Picarazzi:
I’ve got another follow-up question. So if we did the 401(k), and a third of the employees opted in, and the others didn’t—or let’s say it’s a quarter—is there that threshold that you need to meet? Is that something that would hurt my ability to even have a 401(k), if I don’t have enough employees participating in making their own contributions?

Juliann Rowe:
It depends on the provisions of the plan. And several years ago, they implemented some plans that are called Safe Harbor retirement plans. And those, you still do have some minor testing that has to occur, but typically, if you have adopted those, you’re not looking for a certain percentage to participate. But the kicker of those is that they’re requiring you to match a little bit higher percentage or to do a flat percentage that everybody gets, whether they defer or not.

I guess that’s kind of the slap on your hand for years ago, because the owners really didn’t want to put in for the rank and file. And so they implemented these types of rules to prevent you from doing that. That’s what those testing rules were about. So now they’ve said: If you’re willing to be a little more generous to the rank and file, then we’ll let you have these types of provisions. And it doesn’t matter what the rest do. You can do the max, and things like that.

Loren Feldman:
I have a question. When we had that original session—Jaci, Liz, and Sarah—and we agreed that I would try to bring in some outside expertise, one of you made a request. I forget who it was, but one of you suggested: If possible, could you try to find an expert who happens to be a woman? I think you all agreed when the suggestion was made. Why? What were you thinking?

Jaci Russo:
I didn’t make the original request, but I agreed because sometimes—and Loren, it’s like Loren and the ladies, it’s not you—but sometimes, some men talk down to women. And so, you know, Taylor Swift has some thoughts she can share, if you’d like to know more. And so did the Barbie movie. And so, sometimes it’s nice to talk to somebody who speaks the same language we speak.

Loren Feldman:
Let me just say this. I think there are a lot of men who would have been equally interested in hearing this conversation and would have had just as many questions to ask. And that’s why I’m asking, but were you starting to say something, Sarah?

Sarah Segal:
I don’t know, my mother was a corporate tax accountant. She died a long time ago. Women and numbers? I trust—I don’t know. I think that Jaci has a point about mansplaining. And whether or not it’s done with intent—sometimes my husband even does it. And I’m like, “Yeah, I don’t want to hear that.” I don’t know.

Also, women don’t get, necessarily, the opportunities that some men get. So I think highlighting a female professional is a priority to me, and I try to do that when I hire people. I’m a female-owned and -operated business. And I feel like that’s my responsibility and my passion to support other women who are doing interesting things with their profession. So, when I have the chance to hire somebody or work with somebody who is female, I’m going to take it—not that I won’t consider a male candidate as well.

Liz Picarazzi:
I didn’t make the request to have a woman here, but now that I’m reflecting on it, I think it was a good thing. Because Jaci, Sarah, and myself all had, I have to say, they were somewhat elementary questions. And if Juliann were a man, it could very easily come off as mansplaining, because there’s three women who are receiving the advice. And so, maybe for me, a little bit was a perception of: I don’t want to seem like a woman who doesn’t know her numbers and needs to have a man explain it to me. Again, it’s probably not a truth, but it is a perception and, so I’m really glad, Juliann, that you’re a woman.

Juliann Rowe:
Well, thank you. I appreciate that. [Laughter]

Loren Feldman:
My thanks to Jaci Russo, to Liz Picarazzi, to Sarah Segel, and especially to Juliann Rowe. I appreciate your taking this time to help us out.