How you set up your business will determine how much of your income will be paid to the IRS in taxes.
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Read Transcript for “How Do I Pay Income Tax On The Money I Make Without An LLC?”
“Hi Joe. I’ve got a quick question. I’ve never owned a business. My question is, when I get rid of a home, how do I pay the taxes on that money? Do I need a bank account or accountant or what?” – Kwame Williams
Joe: When you buy a property, and let’s say we do a for rent deal and you make $5,000 as a lease option fee and that’s your profit in the deal, all you have to do if you don’t have a business set up is create a Schedule C. And if you have somebody preparing your taxes for you, they can do this for you, and if not, you can get one of the Turbo Tax or one of those types of programs and it’ll ask you if you’ve got a business of your own and you just say yes and how much money did you make and you put in the amount of money you made, and if you made $5,000 you show that you made $5,000 worth of income.
Joe: Now, on a business like that, you can reduce your income by all of the expenses that you’ve got. So any of the expenses that relate to your business can reduce your profit and then you only have to pay taxes on the amount that you made.
Joe: But you do have to pay taxes on profit; that’s the situation here. You want, as you build your business, to find the best way to protect your business and to keep your taxable profits down. You can do that by owning property, you can get depreciation on a property that’ll reduce your taxes and you can make sure that certain expenses that you have can be applied to your business.
Joe: Keep in mind, for example, if you went an d got the mentor program, in most cases you can deduct the cost of the mentor program from your profits in your deals so that you won’t have to pay taxes on any profit up to the cost of what you spent on the mentor program or on your “Automarketer” or your websites or your car to go to talk to sellers; any of those things.
Joe: You’ll want to set up what’s called a Schedule C and if you just type ‘Schedule C expenses’ into Google, you’ll find out a lot about how Schedule C’s work, or if you just again, get Turbo Tax and follow the prompts that’ll take you through it, or easier yet, pay an accountant $350 to do your taxes for you (H & R Block). As you get more advanced, you’re going to want to get a good CPA to do this for you.
Joe: The thing you do not do is not declare your income. If you don’t declare your income, they can put you in jail for it. The IRS will come after you and they’ll try to put you in jail for not declaring income. If you take too many deductions, that’s a better problem to have. All they’ll do is they’ll charge you the tax and they’ll charge you a little penalty on top of it if they think that one of your deductions is not allowable.
Joe: So yes, be aggressive on your deductions. Do not ever lie about your income – always put that on your tax return and then always figure your costs based on that. And as you go through this process, learn how to put money aside so that you’re paying quarterly taxes.
Joe: It took me a long time to figure out how to do that, but you can do it. If you have a good CPA, they’ll help you. And it’s really not a big worry until you start making a lot of money. But I’ll tell you – it’s really painful if you made $100,000 and you owed $20,000 in taxes and you didn’t pay them at the end of the year and April 15th comes by and you give that stuff to the CPA and they do your taxes and they say, ‘Hey, you’ve got to pay your taxes on April 15th – 2 weeks from now. That’s $20,000 and you don’t have that money’ – it’s a little bit stressful, so don’t put yourself in that situation.
Joe: My guess is, if you’ve made that kind of money, and if you have come to that situation, you have put yourself in that situation before and hopefully you won’t do it a second time. I certainly did it and I hope you guys will pay attention and not do it so you don’t run into that situation.
Joe: You can always get extensions on your taxes. You can’t get extensions on what’s supposed to be paid so they’re going to start charging you penalties against that money and eventually you’ll have to pay it. But if you’re making $100,000 you’re going to be able to pay those taxes. I think I had an effective tax rate of 14% because of the houses that I own and the other expenses that I had. It’s really nice when you start building a business and you have a lot of assets and there’s a lot of ways to protect the income that you make without having to pay taxes where somebody who’s making $50,000 a year may be paying 25% of their income in taxes.
Joe: Alright, I hope that answers the question. Good luck.