Some time ago, I started a subscription-based website that has slowly gained momentum and revenue. Currently, my monthly recurring revenue from this site is about $45k USD per month. I’m taking ~$14k/mo salary (which is far more than enough for my needs) and I’m paying one other dev part time about ~$6k/mo. My other expenses to keep it up and running are only ~$2k/mo. That leaves quite a bit leftover and I don’t know what I’m supposed to do with it. I have no desire to expand the operation for many reasons. I’m perfectly happy working on it full time myself and don’t want to change anything. My question is what am I supposed to do with that profit? Claim it all myself as income? Let it accumulate in the business account? The company is formed as an LLC and I am based in the US, for reference.
[+] [-] meetingthrower|4 years ago|reply
Top of mind, what you should really consider is: a) setting up a 401K under the business to shelter some of the income tax free (you can also contribute a significant portion of profit tax free.) Vanguard and Fidelity have no cost single member LLC 401ks that are super simple to set up.
b) thinking of your strategy to invest in this business, or grow another one. Because any expenses are deductible, this is like having ~30% off any business investments courtesy of the federal government.
c) relative to a) above, is if you have a spouse, employ him / her in the business to the extent that you maximize their 401k contribution. (I did this for my spouse and even at $18K a year compounding the 401k has $300K bucks in it!) Again, a small business accountant will be super familiar with how this works.
[+] [-] cashsterling|4 years ago|reply
I would only add that you should consider maxing out your Roth IRA contribution every year (6k USD per year), particularly if you are young. You use post tax dollars to fund your Roth IRA, but all of the funds in your Roth IRA, including all gains, are tax free when you retire.
[+] [-] Serenacula|4 years ago|reply
I would suggest giving it to charity, OP. My mother always said even poor folks should be giving at least 15% of their income to charity, but if you have more than you need, no reason not to increase that number.
[+] [-] ryanjmo|4 years ago|reply
If you have an s-corp, you won’t have to pay self employment tax, which is 15% on all of your profit and all of your salary if you just stay an LLC without an s-corp election.
With an s-corp you are advised to pay yourself a reasonable salary as a w2. That salary is the only thing you will need to pay that self employment tax on. That salary should be as low as you can justify. Here is info from the IRS about how to go about calculating that.. https://www.irs.gov/pub/irs-news/fs-08-25.pdf
I would imagine you could easily justify $50k-$75k as your salary, but you’d have to put the time in to calculate it.
If you were to do this based on $54k a month, you are saving about $90k a year on your taxes. The less you pay yourself a w2 the more you save.
If you set up like this, which is the way you will save the most on your taxes, then the amount you can contribute to your retirement account, ie solo 401k for you in this situation is approximately 50% of your w2 income because how much you can contribute is tied to your salary. For a $75,000 salary that max you can contribute is $38,250. Sure feel free to put that into your Solo 401k.
But that should be an after thought to saving the 15% self employment tax.
By putting money into a 401k it is not tax free only tax deferred, this means you will pay taxes on it eventually. If you think you may make more in retirement than you are now it makes this deal way less sweet. I know I’m planing on making more then.
Also, hiring a spouse is again a terrible idea here, because you are going to then pay 15% self employment tax between the two of you. 7.5% each.
Sure if you are an LLC and didn’t take your s-corp election then this makes sense. But if you did, hiring your spouse will be an extra 15% tax on his/her salary, since all of your profits won’t have that 15% tax on them.
And for what reason.. so you can put it into a tax deferred account you will need to pay taxes on eventually.
The very first thing you do when you start to make real profit is to take an s-corp election. There isn’t even an argument to this.
Telling the poster to do anything beyond taking a s-corp election first is doing him a huge disservice and costing him around $90k a year.
[+] [-] nodesocket|4 years ago|reply
Second, buy yourself work equipment (write offs). Buy that top of the line new MacBoom Pro and ultrawide monitor. These are business expenses and write offs, but still assets.
Finally, open up a health savings account and stash as much as the limit allows (it’s not a lot), but better than nothing. Also tax free in.
[+] [-] calchris42|4 years ago|reply
Thank you!
[+] [-] dr_dshiv|4 years ago|reply
[+] [-] vmception|4 years ago|reply
With $45k/mo income self employed, you can contribute to a self directed Roth 401k as both the employee and the employer. This boosts your maximum 2022 annual contribution from $20,500 to $60,500. You can only contribute with 20% of the revenue, so you need around $300,000 to pump the max of $60,500 into one of these. It is slightly lower if you do this through an S-Corp. So everyone is correct that you need a CPA, now that you can afford to have some real fun. There are some things that are almost impossible to do alone, or actually impossible.
Unlike corporate 401ks, you can invest the money almost any way you want - from a passive vanguard fund to the sketchiest and most exciting crypto assets - all the money grows tax free in there and is tax free upon withdrawal when you reach certain age thresholds.
Your work is just beginning!
- CPA versed in personal, business and retirement accounts
- 401k Compliance company
- Payroll company to process W-2’s
- 401k Bank account
- 401k Traditional brokerage
- 401k Crypto brokerage
- Separate wallets to never intermingle assets
I think this is achievable for ~$1200 first year with ~$900 annual fees. Split between the Compliance company, payroll company and cpa.
Eventually you’ll have enough in those to invest in private equity funds
If you’re worried about making money for the sake of it, you can always set a few foundations or charities as the beneficiary of the 401k plan, in event that you die. Or just pay a boatload in taxes for not making the transactions that Congress prescribed.
Once you get that on autopilot, then you can work on ensuring current year tax deductions. Are you getting the research tax credit due to your US-based (?) software engineer? For example. Maybe relevant for you, maybe not. CPA.
[+] [-] brightball|4 years ago|reply
[+] [-] nodesocket|4 years ago|reply
[+] [-] markvdb|4 years ago|reply
Your accountant or tax adviser should have advised you about this ages ago. Either improve communication with your current accountant or fire him and get a new one able to properly answer this question.
[+] [-] qzw|4 years ago|reply
[+] [-] ryanmercer|4 years ago|reply
[+] [-] ryanjmo|4 years ago|reply
The reason is money that goes through an s-corp you don’t pay self employment taxes on. Salary you do. That is 15%.
You wouldn’t need to pay yourself more than $54,000 without the government getting upset.
Right now, based on $54,000 a month you are losing about $90,000 a year not being structured like this.
The rest of the money, you can just transfer to your personal account and do whatever you want with. It is all your money as a solo owner, so if you want it just send it to yourself.
I’ve been through this exact situation before and I’m currently a tax strategist and help people with this type of stuff everyday.
When we had all that extra money, I moved to Asepn Colorado and had a bunch of fun skiing and living it up.
You can do whatever you want with the money, but please get your s-corp election set and stop paying yourself $14k a month.
If you want help reach out. I think my email is still in my profile.
[+] [-] WORMS_EAT_WORMS|4 years ago|reply
I'd take the advice here of what dictates a "reasonable salary" with grain of salt however. $54k is not some magic cut off. Income only a factor in calculating it.
Here is official document. Purposely vague of course so it can be the IRS s discretion or a legal battle: https://www.irs.gov/pub/irs-news/fs-08-25.pdf
Just get an accountant. Pay yourself as low a salary as they recommend and document how you arrived there.
[+] [-] oliv__|4 years ago|reply
[+] [-] taxcoder|4 years ago|reply
[+] [-] throw1234651234|4 years ago|reply
[+] [-] Asking__HN|4 years ago|reply
I love the wide range of suggestions I received as this is exactly what I was looking for and the HN community didn’t disappoint.
Aside from tax/accounting/business stuff, here are some great takeaways/ideas I got from you all:
- First and foremost, and I’m extremely embarrassed to admit that it hadn’t even occurred to me, I want to start sponsoring folks working on open source projects. I definitely make considerable use of such projects and will definitely start supporting them monetarily.
- Related to the point above, I like the idea of sponsoring artists—-musicians, local museums, etc. I don’t have Muskmoney to throw at the community to make all artists rich, but I can definitely help fund a project or two for a year or something.
- I love the idea of sponsoring some local sports teams.
- “Pay for Sublime Text” made me chuckle.
- I’ve tried offering more money to my other developer, but they already have a well-paying job and this person was more of a mentor to me through the whole process and they are just happy to see the project succeeding.
- Donate to charity. Love the idea, but as others pointed out it’s hard to figure out where to put that money. I’m thankful for the givewell and charitynavigator links and will check them out.
- Assume it won’t last forever. This I know, and it’s part of the reason I wanted to ask HN. It’s operating profitable enough to get me set for life, so once I’m there, I now have a lot of good resources to turn to to see what else I should focus attention and money on.
Thanks again HN!
[+] [-] notRobot|4 years ago|reply
[+] [-] w3news|4 years ago|reply
[+] [-] dazc|4 years ago|reply
I'm in the UK, so can't really advise in your case, but here you can invest £40k in a pension fund per year as a business expense.
[+] [-] tomcam|4 years ago|reply
Bearing those things in mind it was enormously helpful for me to pay off my mortgage ASAP.
The next step is certainly overkill for most. I also bought a farm nearby with cash in case of... more global problems, which have concerned me since my childhood in the turbulent 70s.
The farm is surpassingly tranquil and beautiful. It has made my life much better and has coincidentally extended my working life enough to launch a third career in my 7th decade.
I made all of these choices out of insecurity but we had consciously chosen an economically diverse enough place to live (Seattle area) that they also turned out to be sound investments.
[+] [-] DoreenMichele|4 years ago|reply
Instead of (or in addition to) supporting charity, I will suggest that you set some aside for supporting "starving artist"/open source developer types via Patreon and similar. Find a few whose work you think actually has some value and kick a few bucks their way. For every rolling-in-dough business like yours, there are many more people trying to add value who aren't good at monetization and it's a serious problem.
Don't assume this will last forever. Take all the advice from knowledgeable, experienced people to invest, fund your retirement, etc.
[+] [-] mooreds|4 years ago|reply
Since you are US based and have minimal employees, you may want to look at either a SEP-IRA (which lets you save ~$50k a year pre-tax) or a individual pension (less experience with that, but have read about it).
From a strategic point of view, I'd sit back and consider your goals. What do you want to do with that cash? Save for retirement, sure. It sounds like you've ruled out expanding the business, but there are other things you can do:
Any advice I give you on those paths won't be worthwhile since I don't know your goals. But that discussion is worth having, even if it is with yourself.[+] [-] anemic|4 years ago|reply
Spend some time to verify that your money goes to a good cause and not to scammers.
You could start by donating to a local sports team to buy equipment to those who can't afford if, for example. Then go see their games to see what you've accomplished.
[+] [-] TradingPlaces|4 years ago|reply
[+] [-] dchuk|4 years ago|reply
Plus, if you do the above, you still have the option to be charitable with your assets, but in an even more sustainable way than if you were to be charitable with the "extra" now because of the beauty of compounding.
[+] [-] gpvos|4 years ago|reply
Think of how to make your business, house, transportation, etc., more energy efficient and less polluting.
For the rest, get an accountant and/or tax adviser. Or get two or three and compare their initial advice; it looks like you can afford that now.
[+] [-] martincmartin|4 years ago|reply
https://www.bogleheads.org/wiki/Three-fund_portfolio
[+] [-] ColinWright|4 years ago|reply
Extract half for yourself. Invest half of that in stocks and share, put the other half into a pension fund.
The half that's in the business, keep 1/3 as liquid assets, invest the remainder.
Buy advice from a decent investment advisor, pay a proper accountant, put the money to work.
Others will probably respond here with radically different suggestions and tell you why all the above is dangerously wrong, so above all, be aware that you are taking free advice from random people on the internet. It's probably worth what you're paying for it.
[+] [-] allendoerfer|4 years ago|reply
The next logical step would be assuring it stays that way. You are basically done creating and earning, you are defending and securing it now.
Get help from an accoutant to legally get as much money out of the company as cheap as possible, so you can diversify it. If you want to keep your money, you do not want to have all your eggs in one basket. Read up on personal finance and once you understand how these things work and believe in them, invest in world wide portfolio of stocks through ETFs.
Even if you do not want to invest further into your company, I would consider also switching modes there: How can you defend it? What are scenarios how you could lose it all? What happens if several failures happen at once? Say you are sick for two weeks, your employee wants to quit, but your server just got hacked. I would work on automation of critical routine tasks, failovers, security, backups and so on to make this thing as solid as possible.
If I were you, I would see myself as the most critical part: What if there is suddenly trouble with your family and you are unattentive for a few weeks or months? Can your business sustain that?
Only after I would have created a good level of confidence in all of the points above I would think more about what to actually do with the money. That's a good problem to have, which also requires creativity again, once you are sure it will actually stay there with reasonable probability.
[+] [-] saati|4 years ago|reply
[+] [-] pyrrhotech|4 years ago|reply
It sounds like a lot of money now, and if it never goes away, is completely autonomous someday, or you never want to retire, it is. But if this business were ever to fail or you want to retire it someday (if it requires a lot of active involvement), to replace 170k/year in income, you need a minimum of $5.6M in retirement savings using the 3% rule. That will take quite a long time to save, even with your income.
Not to mention, if you ever have lifestyle inflation and want the whole 45k/month some day without relying on this website, you'll need a whopping $18M which will likely take you most of your adult life to acquire unless you grow the business substantially. Check out /r/fatfire that has a lot of advice and resources for wealthy people. And if you happen to be looking for some alternatives to passive ETF investing, check out my site grizzlybulls.com to learn about algorithmic trading. Congrats on your success!
[+] [-] alfor|4 years ago|reply
1-What is a good use with excess money?
2-How to manage the money?
For (2) I would hire someone good with tax optimisation and also try to understand it myself and I would invest in the stock market.
For 1, you can look into effective altruism and see if it resonate with you. It might be possible to make 1 and 2 work together ex: micro lending, investment in renewable company, etc
You can see the capital as a way to accelerate the change you want to see in the world.
[+] [-] toss1|4 years ago|reply
Here's the rough picture from my experience as part or full owner of several corps in my career, "S", "C", and/or LLCs (I'm not a lawyer or tax attny, so this is just experience to give a rough idea, not advice):
My experience has been that the profits from LLCs and "S"-Corporations go to your personal bottom line. If you are the sole owner, there's essentially no difference for tax purposes between you being a sole proprietor. So, it doesn't matter where you keep the money (biz acct or yours) or for purposes of the amount of tax you'll owe that year.
To retain earnings in the corp, you'll likely need a "C" corp, and then pay taxes at the corp level. This is often sub-optimal, as you'll pay taxes on a corporate level, and then to yourself as dividends when you later take money out of the corp.
You definitely need to GoTo Line 10,20 and 30. Things will definitely differ depending on what stare you are in, and with your particular situation. There may be many optimizations that are available to you. In your situation, it would be good to talk to several and interview them.
Also, if you continue to do that well, start talking to good trust & estate attnys, especially if you have a family. When I say good, I mean good - seek out the top in the industry. The top ones are fundamentally better than the typical local T&E shops (these will give you a far better plan than nothing, but...).
Congratulations on your good skill and fortune, and I hope you do well!