Updated: May 6
Do you know any truckers whose CPA set up a corporation for them right when they started their business, who then had to close it down a year later because it didn’t make sense for their situation? Or, maybe it made sense to set up the entity - like an S-Corp - but their CPA didn’t tell them they needed to utilize payroll services to take advantage of the tax benefits. Or, maybe their CPA established a partnership for their business without coaching the driver on the importance of a strong operating agreement… and the driver paid the price when their partner left the business and hung them out to dry.
These situations are very common in trucking, but they are also very easy to prevent with a little planning and some trucking-specific knowledge. At ATBS, we speak to owner-operators who paid the price for bad advice about setting up an entity for their business nearly every day.
Today, we’re going to highlight some of the most common mistakes CPAs make for their owner-operator clients and how those mistakes can hurt a driver’s business and income.
We are not lawyers, and so we won’t (and can’t) give any legal advice related to business structure. However, we are a tax company, so we’ll highlight how these mistakes impact the taxes of your business. We’ll also talk about some general, non-legal issues that we tend to see, and we’ll talk about some common solutions for those as well.
If you find yourself falling into any of the categories we’re about to discuss, it might be time to think about vetting a different tax professional for your business. The business structure you choose is incredibly important, and it’s also fairly simple to get it done the right way. If your tax professional made a poor decision about your business structure - before they ever even touched your taxes! - that’s a red flag that shouldn’t be ignored.
Ready to learn more? Let's discuss some common mistakes CPAs make regarding setting up business structures for owner-operators.
First things first, if you are unsure about the differences between LLC’s, Partnerships, C-Corporations, and S-Corporations, please stop reading and go check out our article regarding Owner-Operator Incorporation to learn more about the different structures and which one may be the best fit for your business from a tax standpoint.
Mistake #1: CPA sets up an S-Corporation for a driver as soon as they start their business.
Why is this a mistake? Simple:
You should wait until you get a full 12-months of experience - and 12 months of income - while operating your business before you establish an S-Corporation (or, an LLC elected to be taxed as a Subchapter S-Corporation).
We believe it’s critical that you have a full 12-months of income to review prior to making this switch in your business structure. The reason is, it’s expensive to keep an S-Corporation open each year! You have annual State fees, additional annual tax filing fees, and extra fees related to running payroll for your business each month. Those fees add up quickly.
Every business has a breakeven point where the money they save in taxes by using this business structure is more than the cost to use this business structure in the first place. Until you know for sure that you will save more than you spend, we recommend waiting to choose this structure!
Don’t let a CPA tell you that this structure is right for you unless they can run the numbers based on your actual business income and show you the tax savings! If they push you into this type of business entity without hard data to back it up, that’s a major red flag.
For new owner-operators especially, you have enough on your plate just learning how to run your own business in a profitable manner. You don’t need the added stress of an extra level of business structure complexity. Perhaps a sole proprietorship or LLC will fit your exact needs!
Mistake #2: CPA sets up an S-Corporation for a driver, but doesn’t help them run Payroll.
If you are trying to save money on your taxes by operating your business as an S-Corporation, you must run payroll! If you want to learn more about why, here is an ATBS article that explains why payroll is required.
The single biggest risk you can take as an S Corp owner-employee is to take no salary at all!
It is relatively simple for the IRS to develop a report of 1120S tax returns with no owner’s compensation that also have net profit or distributions, which means it’s hard to hide from the IRS if you aren’t paying yourself a salary. This is a red flag for the IRS and creates an easy court case for the IRS to win if you happen to get audited.
If a CPA recommends a S-Corporation for your business structure but doesn’t educate you on using payroll, it’s another major red flag. They either:
A) Don’t know you need to run payroll (lack of knowledge)
B) Just want you to pay them to setup the S-Corp and aren’t concerned about how you operate it (not concerned with your future success or fail