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.
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.
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.
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.
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!
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.
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.
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.
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:
* start a new business
* start a foundation
* save for the future (non-retirement)
* optimize the business even more
* buy alternative investments (real estate, for example)
* buy a hobby farm
* work less hours
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.
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.
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.
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.
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!
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.
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!
> 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.
This is a GREAT attitude. Don’t let others sway you from it. When seeking advice about situations like this, it becomes very common for folks to recommend what is typically taught of them in a growth-oriented society like we have. You’ll get lots of people telling you why you should grow, expand, reinvest, etc.
This has meant the death of some really terrific products. Growth for growth’s sake is a tempting dragon (I’ve fallen for it!) but stick to your guns here. You’ve got something great, so keep it great just the way you like it.
Do take note that complacency can be risky though - another commenter pointed out that situations like this don’t necessarily last by default, so stay aware of your competition and don’t fall behind. But congrats on building something profitable and great, and I wish you the best in keeping it that way!
Find a dedicated small business accountant and explain your situation and your desires.
You aren't going to find a better investment. A well performing mutual fund might get you 10% a year. Something riskier could get you up to 15%. I'm willing to bet you can make much more than that just by re-investing in the asset you already have. You can also avoid paying taxes on that money in the short term.
If you don't want to do any of that, just leave it in your business account until you do.
Since you are based in US, the advice there will fit you better. I'm based in Singapore so advice like taking yearly dividend from the company is not feasible for me.
https://www.schwab.com/small-business-retirement-plans/perso...
- Sponsor GitHub open source projects you used to build your business
- Invest in a diversified portfolio and live using the “4% rule”
Second, make sure you have your taxes straight. The S-corp thing is a reasonable idea, but only touch that if you have an accountant doing it for you. The IRS is less forgiving with bad S-corp filings than they are with normal schedule C filings. Also, if you've only been paying taxes on what you took home rather than the total profit of the business, get an accountant and a lawyer ASAP and fix the tax situation. (I doubt that's what happened, but one could infer from your original post that it's possible you mistakenly thought that leaving money in the business account means that it's not taxed that year. Even if you didn't think that, there are probably people who do think that and might be reading this thread.)
As far as your actual question, here are some notes: a) Remember that income from a business is fickle. Operate under the assumption that this income could disappear at a moment's notice. b) If you have a spouse, their opinion is as important as yours, and statistically, they relate to money differently than you. (One stereotype that I've seen played out many times in real life is that men tend to think of money as a scoreboard, and women as safety and security. If a husband and wife ignore those differences, it can lead to intense marital strife.) c) Your stage in life makes a difference. At an early stage in your career, it might be acceptable to swing for the fences, strike out, and start from 0. (That is, reinvest all the money in business growth, grow huge, and eventually implode, failing to gain any profit, but knowing that you at least tried to 100x the business.) In other stages of life, that's not an acceptable risk. d) Regardless of life goals, I think keeping huge amounts of money (more than 18 months of salary and expenses) as cash in your business account isn't wise. It's not doing anything there, and inflation is currently high and will likely stay that way, so it's probably better to have excess money in an asset that matches inflation. e) Don't over-fixate on taxes. Be sure to pay as little tax as you are obligated to pay doing what you want to do, but don't let your decisions be steered excessively be taxes. For example, a 401(k) is a fine way to reduce taxes if you aren't planning on using the money until traditional retirement age anyhow, but perhaps you want investments that can throw off current income, not for some time in the future when your bones hurt and all you want to do is sit around and drink martinis. You have enough income that you can take a mild tax penalty to actually do what you want.
So, as far as what I would do, I would probably buy real estate in a growing area with low to moderate real estate taxes and a good ratio of rent to house cost. (So, San Francisco and New York are out because rent is cheap compared to the value of the unit, and Illinois is out because property taxes are so high that vacancies will cause you to burn cash.) Some states that I've been looking at include the Carolinas, Georgia, Florida, Texas, Tennessee. You're throwing off enough cash, that in a few years you can buy enough housing stock with cash to replace your $14K/month salary with rental income (remember to include the cost of management, maintenance, taxes, and insurance when calculating potential rental income!). At that point, you've bought yourself full flexibility, and then you can swing for the fences as hard as you like, and if you strike out, you're already so far ahead that it'll be an annoyance rather than a catastrophe.
Anyhow, the above is what I would do (and am in the process of doing - my business isn't throwing off as much cash as yours is, but it is exceeding my income requirements). Alternatively, you can do the Silicon Valley approach - pour all your excess cash back into growing the business. Ask yourself: what would it take to 10x the business from here? Is it just that customers don't know about your business? Hire a marketing guy and get after it. Are people not converting from trial to paid accounts? Hire a sales person to hold the customers' hands. Is the market fairly well captured already? Think of adjacent markets to expand in (either similar markets in the US, or localize the product and sell abroad). Take the $23K/month that the business is throwing off each month, and spend it as hard and fast as you can. Or better yet, turn yourself into a Delaware C-Corp, write up a pitch deck, go out to investors, and raise $4 million at at $30 million valuation, and devise a plan to spend $200,000/month on growth. Triple, triple, triple, double, double, double! In 6 short years, your business will have $45,000333222=$9,720,000 in monthly revenue. Then go public! Or more likely, watch it crash and go to $0! Dust yourself off and do it again! (This part of the comment may sound snide, but it's not actually intended that way. The venture capital path is the path that was taken by most of the super-successful recent tech businesses. It works for many people and many businesses.)
Best of luck!
Depending on where you live, you might be able to get a sense of whether or not there's a dominant firm that is handling financial matters for local businesses. I switched from using a single guy someone recommended to a real accounting firm years ago. The guy was good, no question about it, however, the accounting firm has far more depth. They also have a deeper/wider network through their client base that has come in very handy at times.
Don't pay more taxes than you are legally obligated to. Don't pay less either. Many people confuse tax optimization strategies with greed or some other derogatory term. When you order a pizza or buy a laptop you optimize for obtaining the computer you want at the lowest possible cost. Taxes are no different from this, the laws (federal and state) establish a procedure through which you calculate how much you owe. These laws are so complex that most people and lots of businesses pay more than they should. That is wrong.
A good accounting firm, and, perhaps, a tax attorney, can guide you on how to apply federal and state tax codes to determine how much you owe. Pay what you owe, no more, no less.
While you run a web-based service, you can still take advantage of Section 179 deductions. Make sure to discuss this with your accountant and understand how to use this valuable tool.
As someone else mentioned, don't assume this will last forever. Do not give away piles of cash recklessly only to find yourself in trouble years from now. I am of the idea that what philanthropic billionaires do is the right approach. Accumulate wealth over time. Maximize this for as long as you can. Use the time to learn and understand where you might be able to have the most impact if you put a non-trivial amount of money on the table. Then, once secure in your convictions and with your financial future on a solid footing, became the person who supports the worthy causes you identified and studied while you put money aside.
You can't create a great building without a large and solid foundation. Build that foundation first. Don't be in a hurry to burn money just because you don't currently know enough to know what to do with it. And please, pretty please, with sugar on top, do not give a dime to politicians --of any political party-- they are all a waste of time and money. What to support is a personal decision that will likely benefit from reflection and learning over time. Imagine a day, several decades from now, when you might be able to support a worthy cause with millions of dollars. That would be something, wouldn't it?
If you have a need to help out today, here's one suggestion: