Ask HN: How do I manage the profit of a successful website?
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.
142 comments
[ 166 ms ] story [ 2644 ms ] threadExtract 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.
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.
Kudos on the decision of “this is great the way it is”; just make sure you’re stacking firewood for the winter. (Contact the advisor soon, so you might be able to make a 2021 retirement contribution before the filing deadline.)
Specifically ask your advisor is there’s a way you can make these contributions under Roth treatment and what their advise is there. Personally, I’m shooting to have at least 30% of my retirement investments at retirement be Roth so I can control some of my tax exposure then (and I don’t expect taxes to go down in the next 10 years), but if you’re paying for pro advice to your specific situation, pay attention to it not an internet comment based on a few hundred words of unrelated context.
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.
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.
Anyway, to answer the OP's question, you need to save at least some of it. Just because you are making money now doesn't mean you will make it in the future. Plan for a life-changing event where you are unable to make money, or even worse, you are reliant on others to take care of you. Best to have something stored away, preferably an appreciating liquid asset so you can get to it fairly quickly.
Thank you!
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.
Do, do, do read up on "pro-rata" considerations because the regular->Roth conversion of post-tax contributions is definitely not tax-free if you have any other pre-tax dollars sitting about in any IRA.
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.
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.
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.
I don't donate to international/national organizations but local ones, or even local businesses I like but who struggle with something. My tip for finding those is to participate in the local business/events landscape in your province/city/neighborhood, and talk to people.
If your company's name is on the jersey of the Little League team, for example, it's an "advertising" expense, and the team gets jerseys.
I highly doubt, nor expect, the OP to divulge the information you're asking for. Would you welcome 100's of new entry copy cat competitors?
However if anyone is curious about other people making this much per month and what they are doing check out the indiehackers website.
Find a dedicated small business accountant and explain your situation and your desires.
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.
Obviously, different forums are helpful for different things. But I would do both, utilize the power of the internet community and the services of a professional.
You can twist the villa however you want. It can be an investment through an SPV and you pay rent. To be clear, arguing (and using) something as a business expense or an investment is not fraudulent.
I don’t know who in their right mind would take out a million in salary and pay 50% of it and then buy a villa with $500k, rather than directly investing in a villa either for the appreciation itself or to use for business events, branding, whatever
And this is just one very simple way. there are countless permutations. You can go as complex as you want. You can mix and match around with credit and exotic laws and exotic countries and exotic legal structures all day long.
Sorry if reality upsets you: the world is setup by lawyers( and/politicians) for shareholders, and that's because they're the richest and capital=power.
This is just bad advice for two reasons: (1) Teslas and jets are terrible investments for someone who’s less than filthy rich. (2) Tax fruad is when you claim business expenses and then use items for personal activity. It’s only not fraud if the things you buy are used exclusively for business reasons. If you start buying lavish things and use them for yourself, it is fraud and you are subject to a Tax audit that could land you fines or jail time. Happens all the time. You shouldn’t listen to stories of people gaming the system and getting away with it.
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.
1 - https://www.mysolo401k.net/solo-401k/mega-back-door-roth-usi...
This can be done strategically, such as one year where you need traditional pretax 401k / IRA tax deductions you just contribute to those. And in a future year you convert those to Roth and report the income that you reduce with expenses
Talk with a CPA about it to make it make sense. People act like a random person on the internet mentioning something about legal/taxes is the most heretical thing possible, but the point is to point you in the right direction and bring up the same topic with licensed professionals. Lawyers and CPAs aren't going to procedurally generate all possibilities to get you the best result, you have to inspire them to look in particular directions and verify along with implement if it checks out.
Do note that there is a super confusing "after tax 401k" as well as a "roth 401k" which is also after tax but different. Search engines have trouble with this, and it also confuses gurus. But neither of these reduce a 401k contribution down to $5k, and the roth 401k is all taxed now and tax free later exactly like a roth ira with 1,000% higher contribution limits.
Sources for my world:
https://www.nixonpeabody.com/en/ideas/blog/trusts-and-estate...
My CPA
https://www.nerdwallet.com/article/investing/roth-401k
https://www.irs.gov/retirement-plans/roth-comparison-chart (only details the employee contribution here)
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.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!
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.
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'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.
https://www.investopedia.com/terms/s/subchapters.asp
Is "any money the company makes past $54,000 annually is tax free?" Not even close!
You have to pay income tax (federal, possibly state) on _all_ the money you make. That's very important. Like, "at best a fine, at worst jail time" important.
I was a solo S-Corp for three years and had to learn all this stuff. Here's a breakdown:
Payroll taxes (federal) are taken only out of your salary. If you work for a business as a W2 employee--hourly or exempt--you pay half your payroll taxes, and the business pays half your payroll taxes. The 15% total in payroll taxes (SS, Medicare, FICA) is 7.5% paid by you, and 7.5% paid by the business on top of the salary they are paying you.
So, for example, if your salary is $50,000 per year, you will have $3,750 deducted from your paycheck for payroll taxes and your employer is responsible for an additional $3,750 on top of that. Disregarding income tax, taking a $50,000 salary means getting paid $46,250. But to pay you that $46,250, it costs the business $53,750.
All well and good if you and the business are different people. It wasn't your money to begin with. But if you are the employer and the employee, which is the case for solo S-Corp structures like this, then the whole 15% is coming out of your pocket.
Let's say your business earns $120,000 a year and you decide to pay yourself a $100,000 salary. That costs $107,500 (gross) and you keep $92,500 (net). If you decided to pay yourself a $54,000 salary instead, that costs $58,050 and you keep $49,950. Your profit is ($120,000 - the cost of your salary) and your total earnings are net salary + profit.
In the first case, (120,000 - 107,500) + 92,500 = $105,000. Congrats, you made $105,000! That's a lot of money. Now you pay income taxes on it.
In the second case, (120,000 - 58,050) + 49,950 = $111,900. Congrats, you made $111,900!
Thus, you took home $6,900 more this year because you paid yourself a lower salary, all due to payroll taxes.
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What's the catch? Why not pay yourself $1 a year and increase your stacks?
The IRS has a rule for S-Corporation employees that says they must be paid a "reasonable salary" (https://www.irs.gov/pub/irs-news/fs-08-25.pdf). Ultimately they get to decide if you are taking as a payroll-taxable salary is "reasonable".
The way I had it explained to me is that I would need to be able to testify before a judge that whatever salary I picked is "reasonable" (not necessarily market rate) for a person with my skills in my location. $1 a year isn't even minimum wage, so that's out. Minimum wage is out because I can't argue with a straight face that the local minimum wage is a "reasonable salary" for a software developer. So it's up to each individual S-Corp owner to pick a number that they could argue is a "reasonable salary". In this case, $54,000 is probably safe because the IRS has bigger fish to fry.
As in all matters of legal and financial decision making: talk to your lawyer, talk to your accountant, don't talk to cops.
It also has implications for unemployment insurance and SS calculations.
Your social security payout will be lower if you spent 20 years earning $50,000 than if you spent 20 years earning $100,000. Unemployment checks (which you can receive even if you're a self-owned s-corp) will be smaller too.
The long-term benefit assumes you weren't an idiot with the extra income. Even if it's post-tax, tucking the extra $$ away in your favorite safe investment vehicle will probably leave you better off over 20 years than whatever extra Social Security you would've made when you hit 65.
https://www.bogleheads.org/wiki/Three-fund_portfolio
If you get fined by the IRS for taking their advice, can you actually sue them for damages for being wrong?
Or if a lawyer gives bad legal advice, can you sue them?
I always thought the responsibility stayed with the person, even if they paid for professional advice.