Tax 101 with Travis Watkins

In this week's episode, Travis is interviewed by Jake Kelley from the "Build with BBB Podcast" produced by the BBB Serving Central Oklahoma.

Transcript

Jake: My name is Jake Kelly. I'm the Video Production Coordinator here at Better Business Bureau Serving Central Oklahoma. And today we have a very exciting, very informative series on taxes and tax resolution for large and small businesses alike. And we have a very exciting guest with us today. Travis Watkins of Travis Watkins Resolution and Accounting firm. How are you, Travis?

Travis: I'm doing great, Jake. Thanks for having me on. And we'll, we'll try to not make it so “taxing.”

Jake: Yeah. Well, we had a brief, we had a brief conversation before and, you're incredibly personable. I love hearing you talk about taxes and tax resolution and you seem to really care about what you do and your clients. So if you don't mind, let's hear a little bit about your business.

Travis: Yeah, you bet. Well, I've been an attorney, I'm a tax attorney by trade. I've been an attorney since 1999 and, somewhere around 2005, I guess I took some continuing education with a CPA out of the state of Colorado. He was offering some kind of new stuff, as it related to this tax resolution niche. And what that is, just so that we can kind of clear those things up from the start, tax resolution is not necessarily like tax planning. That's what a lot of tax attorneys and CPAs do is ongoing tax preparation, per se. But, it's really folks that are in trouble with the IRS. Yeah, you know, it's like the die is cast, the planning is over and now it's time to make sure that we're not being completely mistreated by the Internal Revenue Service. So, I started that in about 2005 and that quickly took over my entire practice in 2011. Then, we started doing just nothing but tax resolution.

Jake: And you are an accredited business, which we're excited about, obviously! How long have you been accredited with the Better Business Bureau?

Travis: Yes, it was one of the first things that I did right out of the gate when I went on my own. I was a mid-size law firm. And then when I went out and on my own incorporating my business and setting all things up for financials and tax things. That was one of my first calls was to get set up and accredited with a Better Business Bureau.

Jake: Yeah, that's great. And you know, we really love to provide all of our accredited businesses with as many resources and information as we can. And I think it's great that we have you here today to talk about tax and tax resolution, because I think that's something that stresses a lot of small business owners out, especially. And even people who are thinking about starting a business in general. So I think today in Episode One of this tax series, we're just going to kind of briefly go over some of the general types of taxes and how you form a business and things like that. So, could you tell us a little bit about some of the different types of taxes there are and how businesses might form around those?

Travis: Absolutely. Well, the backdrop to all of this right now is, I think, very timely because I have some statistics here. Nearly 5.4 million applications were filed to form new businesses in 2021, the most of any year on record, based on the latest data from Census Bureau's Business Formation Statistics. Wow. The exceptional pace means there were roughly 1.9 million more business applications in 2021. That's a 53% increase. Oh wow. From 2019 and a notable improvement on that, especially strong year for economic performance, nearly a third or 1.8 million applications were for likely employer businesses, the subject of total applications, capturing those most likely to hire employees if, and when a business becomes operational. In other words, application for businesses likely to hire employees rose in every single state in 2021. 

Jake: That’s really incredible. I know that we've seen a lot of growth in the people that have becoming accredited with us. And I'm sure that you've seen this yourself, people coming to you asking for help with their taxes or help with the IRS.

Travis: Yeah, absolutely. And kind of the stressful thing about that is, you know, a lot of these employee or employers now, are newfound employers. They don't have that backdrop, you know? They've been employees themselves. They don't really teach this in school. A lot of folks in the pandemic were doing jobs for hire and you know, drop shipping and things like that. They don't tell you all those plethora of taxes that are due and compliance issues. You just find out about them and get caught up on the fly. Yeah. And it's overwhelming, I think, for a lot of businesses. Some of these are designations from the IRS and other ones are just more things that I've just put together of the plethora of taxes that could be due for a company. But sole proprietors are a big one. Those are single member, LLCs partners and LLCs, freelancers, independent contractors. If you are one of these people, it's probably the least complicated one. By default with the IRS, that's what you are, you file on a Form 10 40, that's an individual tax return and you file what's called a Schedule C. And those are your business expenses that you get to take off from your gross, received monies. So, those are filed on April the 15th or a lot of folks file a timely extension. October the 15th, for those folks and you pay self-employment tax with this deal. Okay. Mm- So it’s like I said, it's kind of just the default.

Jake: Yeah. And I actually have a question on that, and it'll probably bleed into some of these other things when you are starting a business or a business that is trying to get started. Trying to estimate those taxes and trying to figure out how much of this, how much of my revenue do I need to set aside for those quarterly taxes that I'm eventually going to have due…how would one do that?

Travis: Right. And that's a tough act to do on your own without any bookkeeping that is going on at the time. So usually your quarterly taxes are just what they sound like: one fourth of what you owed last year for a sole proprietor. However, you've got this new element here, which is business expenses that are being taken away from that. And probably more income if things are going well for you than you've had to deal with before. So, yeah, it's difficult to do to eyeball that. There's a good rule of thumb to, you know, a lot of professionals say, you know, maximum 37%, because that's the top tax rate.  There, that's not a bad rule of thumb, but it's not, you know, it's not perfect. Yeah. Especially when you're just starting out. That's interesting because I think that, like we've been talking about, it's a little overwhelming if you're thinking about starting a business. And it's like, how do I prepare myself for all of all of this that's to come and, and especially if you're a sole proprietor? Or you're a contractor? You're worrying about other things, other than making sure you're paying what you owe the IRS.

Jake: Absolutely. And, and this will really come home as we can go through these other ones that I'm interested to hear about.

Travis: So, the next most popular one is pass through or subchapter S and that is just like it sounds: the money that comes to the business. It passes through after expenses to the individual and the taxes there are filed on an 11 20 tax return. That's a business tax return. And you get whatever monies that are going directly to the owner, via dividend or a draw or anything like that, is all reflected in what's called a K-1 statement. It's like a W2, it's the employer's version of a W2 for other employees. Now, lots of tax benefits to this one, too many to go through in this, in this quick fly by. But it's the one that you probably want to be in, unless maybe you're in real estate where you don't pay social security on rental income, things like that. There's lots of tax benefits, but virtually every service and goods or company, of any magnitude whatsoever is probably going to want to be a subchapter as it's called, single taxation. It's only taxed one time and that's on its way through to the individual, whereas that other one that I talked about sole props and C Corps, same thing, it's taxed. It’s taxed at the company level. It's also taxed on the individual level as it goes down to the owners and shareholders, so that’s a big difference there.

Jake: So, that one's due March the 15th, a lot of people get confused about that one.

Travis: You can extend it, but it doesn't extend to October to extends to only one month to April. Yeah. The 15th. So a lot of people get stuck with that deal too. So just know that, that there's a difference there. Other taxes that you're going to get as a business owner: sales tax on goods and likely at some point they're going do services too. Our sister states of Kansas and Texas, they do service tax sales tax. Which is brutal.

Jake: So what would be included in some of those services that you're talking about?

Travis: That could eventually mean anything really. I mean from contractors, to physicians, to lawyers, to accountants, to anybody. Yeah. Services are going to be pretty broad if Oklahoma were to ever adopt that. And we know that because of Kansas and Texas.  So that's something to look out for property tax. And that's real and business property. So not just real property. But your business assets as well, excise tax, federal and state based on use or consumption like fuel tax, transportation, communication's another one and be on the lookout for that. And now the big one. If you have employees you're going to be facing employment or payroll taxes and this is a pretty big one.

Jake: So I think a lot of people are going to be interested in this because this can trip a lot of people up.

Travis: For sure. And let me kind of to circle back to, on subchapter S so if you're a subchapter S corporation, there's this new deal now that they've changed in the last decade, where you've got to pay yourself a reasonable salary. So you are going to become an employee of your subchapter S of your own company. For some aspect of that you pay yourself. So you're going to have to pay payroll taxes on that portion. The other part dividends, that's a different matter, but just know that payroll taxes are a big deal. It applies to employees, including yourself at some level, as an owner and not to get too complicated, but there's really two parts of payroll tax. There's the employer portion. And that is what the employer pays and then there's withholding portion, which is what, the employer is holding on behalf of the employee. So just know that generally, it's federal income tax withholding from the employees FICA- those taxes are for social security and Medicare, half by the employee withholding half by the employer. Federal unemployment or FUTA by employers only. And this has a personal liability element. If you get behind on these things, they can come after the owner for a portion of that tax and they can come after you individually for that. So these are things that nobody teaches you about. This is one what I was talking about, and you have to be aware of those things, because they come with severe, severe penalties. Each business can have a different type of or time period when they have to pay these things. Most of it, they like to see it electronically paid, so just be aware. Yeah. That's a, that's a big deal. And like you were saying, like, nobody teaches people, these things. No. And if you are  somebody who's passionate about something and, you know, going back to some of those service taxes that could be on the horizon.

Jake: Yes. Usually, a lot of times those are people who are passionate about something. I myself had tried to start a videography business and had learned that those services could be taxed. And that was a shock too, because I had no idea because all I wanted to do was make videos for people, and tell people's stories. And then I'm introduced to all of these taxes. And what a shock, you know, and I didn't learn about any of those. And so if somebody is wanting to get more information, get some resources to kind of help navigate through some of these things, what are some things that you recommend people do?

Travis: I would think with the end in mind, so to speak. We know that these taxes, like those deadlines I went through, those are going to be due every year. So take it upon yourself early to get yourself a professional on these. That's going to be filing those business returns, especially They should have some type of a bookkeeping element to them, so that that you can keep and track and be able to not only know about what your taxes are going to be looking like every period, but also what your profitability is going to look like and sustainability. As a new business owner, you have  to pursue your passion because the IRS doesn’t  care about the passion, unfortunately.

Jake: Right. They’re like, hand me that money. 

Travis: Exactly. So, yeah, I think it'd start with the end in mind and get yourself a licensed, local tax person to help you out with not only the taxes, but the bookkeeping, the profits and losses. That's a big part of every viable business. If you don't know these numbers, you're setting yourself up for failure. So there's so much more that goes into some of that preplanning than people even realize. A lot of our clients come in and I can tell you from the tax problem perspective, they always say, I don't know what the number is, but, I'd say at least 80% of them aren't in the right type of corporate form- they're not being taxed properly. They're in incorrect form. Most of them are running things as a sole prop, not doing things correctly. They’re paying that double taxation where they don't need to be paying double taxation. They don't need to be paying self-employment tax, you know, they pay themselves a reasonable salary. As I mentioned, the rest is dividend profit, taxed in a different manner.

Jake: Well all of this is incredible and it's so useful, all this information. I'm sure that there's so much more that we can talk about even as businesses think about getting themselves set up. And as they're moving forward and we'll get to talk about some of those things and, get to talk with you, Travis in a couple of other episodes of this, this podcast. But before we head out, where can people find you if they have questions about any of this?

Travis: All of this is broken down in blog form or some type of an article or video even. We've got a YouTube channel out there that's under Travis Watkins www.traviswatkins.com is our website, where there are blogs, articles and tools to help you with these things that we're talking about right here, or give us a call. 844-958-1178.

Jake: Well, Travis, thank you so much for sitting down and talking with us about all this. I look forward to continuing the conversation on the next couple of episodes. And thank you for joining us. And, we will, we will talk to our audience and everybody on the next episode.

Travis: Sounds great, Jake, thank you so much.

Jake: Thank you, sir. Bye.