BARRY: That’s Top 10 List number 2: not planning for taxes. I’m sure you may have seen this before once or twice. What’s that all about – not planning for taxes? Why is it on the list?

CHAD: It’s on the list because most business owners, especially in the startup stages before they’re developed, only think in terms of federal taxes. Well, there’s two sides to that. One, they think in terms of federal taxes and forget something called payroll tax, because they’re not employed by a company anymore where it’s done automatically for you most times. So they’ll forget to make their quarterly payments. 

But the flip side of it is, even if they structure to do it all at the end of the year and account for all those taxes, their paychecks have been bigger throughout the year, and they’re not remembering, “I’m going to have to pay the government at one point in time.” And so they spend their cash flow as if they’d already paid taxes and kind of forget that they’re going to come due.

BARRY: Isn’t failure to pay payroll taxes a crime?

CHAD: Yes. And that’s interesting in light of the political landscape and the discussions around payroll tax right now. Actually, we had talked about these top 10 before the potential suspension or elimination of payroll tax even came up in conversation. But yeah, businesses do forget to make these payments.

BARRY: I probably should have mentioned in my intro that I have a Master’s of Law in taxation, but I kind of messed that one up. Next video, I’ll make sure to mention it.

CHAD: You gave me all the designations, Barry — you forgot all of yours.

BARRY: I did. You know what? You weren’t thinking about me. That was selfish. Well, hopefully we’ll do another one of these. We’ll get it right. We’ll get it right.

So, yeah, planning for taxes is significant. And you’re right: startups focus on treading water, they’re focused on just surviving and extending the runway as long as possible. The last thing they’re thinking about is taxes, because they’re not thinking, “We’re a formal organization. We’re sophisticated in our planning.” They’re just not thinking that way.

And I guess a line that gets crossed when you do become successful in that business – in the entrepreneurial world. When you develop a repeatable, profitable, scalable model, it’s at that moment that that happens, you really gotta get that team in order. They have to have you and I on the team or else they’re gonna–

CHAD: CPAs as well. We always discover a good team of CPAs that we work with well because that really completes the trifecta that you mentioned earlier on.

BARRY: Yeah. We’re going to have a video with you and I and a CPA or two – and other guests in other videos – and I think that will be a really nice way of continuing to expand the knowledge and discussion over these areas.

CHAD: A side note or subtopic is,I find a lot the improper classification of your employees as to whether they’re 1099 or W-2. There are specific rules regarding that. Don’t hold me to it right now, because I don’t have the laws in front of me. A lot of times people classify everyone as 1099s because they don’t want to deal with the payroll tax side of things, but that can come back to bite them.

BARRY: Let’s talk about that for a minute, because that really should be number 2A / number 11. It’s not on the list.

CHAD: Yeah, we’ll see how far deep our numbers go today.

BARRY: It looks like we’ll probably have to cover this over a series of videos. But that’s good, because I think we’re having a nice discussion about these areas and I don’t want to rush it just for the sake of time. But you mentioned a really good point–

CHAD: Hey, if there’s one thing we have on our hand right now with everything going a certain way.

BARRY: In certain ways, except my kids are going to start screaming soon.

So, you mentioned the payroll tax. Putting aside the political nonsense about payroll tax, just kind of assuming that things are normal for the purpose of this discussion, the payroll tax in part goes towards health insurance, Social Security. There are obligations under the Affordable Care Act that organizations that have a certain amount of employees have to pay into the system.

And so naturally, the response by organizations was, “Well, let’s recharacterize our employees.” I think the number was 50 or more. Don’t hold me to the number.

CHAD: I believe you’re correct.

BARRY: So say you have 55 or 60. You might just want to start saying, “Oh, these people are really actually 1099 contractors. They’re not employees. I don’t have to pay into that system.” That’s kind of what happened. I get a lot of calls from people telling me how they’re characterized–

CHAD: Real quick before you go on. From a financial and retirement planning standpoint could really affect the business owner. Because if they were incorrectly classifying their employees as 1099s, they didn’t have to make 401(k) contributions for them. Maybe the business owner’s only doing a SEP IRA for themselves or something like that.

If the IRS were to come back and reclassify those employees, it could cause not just a payroll tax issue but also a potential issue in the 401k retirement planning landscape as well. 

BARRY: Because there was discrimination, and you can’t discriminate among employees.