- Ran Harpaz
SPEAKERS
Ran Harpaz, Will Bachman
Will Bachman 00:02
Hello, and welcome to Unleashed. I’m your host will Bachman. And I’m delighted to be here today with Ran Harpaz, who is the founder of lettuce, and you can find [email protected]. And they say, finally and accounting tax, and I’m sorry, an automated tax and accounting system for businesses have one. That’s us independent consultants. Ron, welcome to the show.
Ran Harpaz 00:30
Thank you very much. Well, thank you, good to be here. So,
Will Bachman 00:34
on your website, you say if you’re a business of one making over 100k, you could be overpaying your taxes by $10,000 or more. If you are a consultant creator, coach or professional services, business, lettuce is the only system you’ll need to save. So talk to us about the kind of service you have two levels let us Pro for 300 bucks a month, let us premium for 700 bucks a month? What? What? Tell me tell me what is the services that you offer? Is it accounting? Is it bookkeeping? Is it tax preparation? What is the product offer?
Ran Harpaz 01:10
Perfect. So let’s start with the fact that we are entirely focused on independent consultants. That’s who we serve that you know why we exist. And the main underlying understanding is that there is a growing population of independent professionals, consultants, executive coaches, marketers, data scientists, and they choose this way of living because they believe they better serves, you know, their profession and their lifestyle. And what happens is, most of them are great at what they do, and not as great at accounting, taxes, bookkeeping, and everything to go with that. So we are a FinTech software company that builds a solution to help take that off your plate. The idea would be, we help those independent professional, incorporate their business made the right S corp election with the IRS, we open a business bank account for them, we run their bookkeeping, we run their accounting, we predict and file and pay their taxes, everything done automatically through software. So that really what they need to do is bring in more clients and serve them well. And the back office should be handled automatically via software. And the reason we think this is so important, as you mentioned, people regularly overpay their taxes. And there is an ease. If you are an independent consultant making over 100k per year. And you’ll finally get a sole proprietor is a Schedule C as the IRS coordinates on the annual tax return. You are double taxed as a sole prop, and you’re not using the benefits of having a business. And that’s exactly where we come in.
Will Bachman 03:04
I’m sorry, you say that you are double taxed? I’m not sure if I understand why you would say that because my understanding is whether you’re filing as a sole proprietor, or if you file as an LLC, a straight up not an S corp LLC. The income is not double taxed. If you file as a C Corp, it’d be double taxed. But if it’s just a regular sole proprietor, LLC, just whatever, basically, you know, profit your business makes your revenue minus your costs. That is your income. And you’re taxed on that. Why why are you saying it’s double text? I
Ran Harpaz 03:38
love that question. So first of all, you’re right, C corporations have business tax, and then personal tax, which is a classic, you know, area for optimization. But if we stay with sole props, the way the tax code works, is that it’s designed mainly for employee employer structure. So normally what happens, an employee would would have seven point 65% of their taxes withheld for Social Security and Medicare taxes. And then the employer would contribute another seven point 65% For those, so a total of 15.3% taxes on that income. Now, if you are a sole proprietor with or without an LLC for tax, it’s the same thing. You pay the entire 15.3 on your entire income. And
Will Bachman 04:31
go ahead. Now your entire income, it’s just only up to a certain threshold like it’s up to 100,000 or something and above that, you know, right? That
Ran Harpaz 04:38
is correct. The Social Security has a cap around 131 42 changes, it changes annually. You’re correct, but you’re paying that 15.3 on on that on that amount. Now that the reason the IRS came up with the concept of an escort is that the entire system is designed, you know to me Oh effectively monitor and tax corporations. So the scope is a pass through model where basically you can have a sole prop corporation that, you know, would already be passed through to your personal entity when you file your taxes. Why is that interesting? Because what the well known prescription from the IRS on doing this right, is to set up your scope, then have that S corp, pay a reasonable salary, reasonable compensation to you as the employee of that scope, then withhold Social Security, Medicare taxes, all of that, on that reasonable salary. And the rest of the income is distributed as owner distribution, which is not subject to that extra Social Security, Medicare taxes, and, you know, at $100,000 $200,000, that is significant amount of saving each year.
Will Bachman 06:06
Okay, so walk me through the calculation on that. Let’s say that someone has an LLC, and today they’re filing as an LLC, you know, as a individual owner, LLC. And their profit was exactly $200,000. So, under their current system, they’d be paying 15.3%. On the first call at 130,000, right, which is going to be you know, I don’t know, 18 or 19,000. Something, I can’t do the math in my head. But 15% 130,000 Let’s call it 20,000, even though it’s not exactly right, under the S Corp. So let’s say their total profit was 200,000. They’re gonna have to pay themselves a reasonable salary and pay 15% of that. And then the rest of it is something else. How would the calculation work? How much taxes would they pay under the S corp election? Yep.
Ran Harpaz 06:56
So first of all, you see, this is the fun part, right? If you have to do it yourself, you’re now going into the beautiful world of tax calculators, caps, percentage points, some of us some of the audience listening to this, I’m sure love this. And some people don’t love it, and actually creates a bunch of anxiety for them. And what I’ve seen in so many interviews with people in this industry, is they just pick a number 20% 25, per se, and they put it aside. And then they talk about it in April, with whoever makes the taxes whether it’s, you know, on their own with with TurboTax. Or maybe they have their uncle’s CPA who does the taxes for them. But this is a scary moment, because you may have although withheld under withheld, who knows. So the math itself, to answer your questions directly and then go from there would be that if the business is making $200,000 in net income, you would pull out a reasonable compensation reasonable salary from that, let’s say $80,000 to $100,000 is a reasonable salary for any employee in that business. And you’re going to pay the 15.3% on that. So on 80,000, that would be some $12,000. The rest of the $120,000 that makes up the 200 would now be distributed from the business to the owner is an owner distribution that is not subject to Social Security and Medicare taxes, thus saving you 10 $15,000 A year we can do the math separately. Now, the reason let us exists as a software solution is to do this for you do. And the main idea is to do this man math every day on every dollar. Because if you think about it, all of us independent consultants know this, the income fluctuates throughout the year. Yeah, it may be 200,000 when everything is said and done. But there might be great month without income, there might be slow months, there might be mobile expenses, fuel expenses. So what you really want is an automated solution that has a bank account attached to it, that monitors every time you get paid monitors every time the business makes a payment, calculates and withholds the right amount automatically, every day of the year, and then keeps your balance to the IRS constantly eight or close to zero. So there is no such thing as tax day. You don’t sit down in April and say, oh my god, do I owe too much. Did I pay too much? What should I do? The whole thing has been done for you continuously with quarterly payments with rebalancing with prediction going forward. Does that make
Will Bachman 09:39
sense? Yeah, I understand that. But just just to close out the S corp thing, at least the way I understand the way you described it to me is that the advantage or like the arbitrage is instead of paying 50% up to that maximum number of 130k The benefit is you’re saying, Oh, well, my reasonable salary is something less than that. So you maybe you argue it should have been 100k as a reasonable salary or 80k, or something. And so you’re saving 15% on that difference. But if someone was, let’s say, independent consultant was, you know, having profit of 40,000, or 500,000, and a reasonable salary was 130,000 or more, there would be no arbitrage and no savings from the escort. Am I understanding that correctly?
Ran Harpaz 10:32
Partially, so let me now go into more advanced tax strategies, the S corp itself, the social and Medicare are just one component of this. For example, once you have an S corp, and you are now the employer, of your individual, you know, self as an employee, you can do things like retirement matching, you can have qualified business income deductions, you could have a better solution for healthcare premium payments, you now have a company, and you’re unlocking all the tax strategies that are typically available to corporations. One of the big ideas here is that the tax system, and everything that that works around it, are very well optimized for corporations, larger organizations have a finance department and FEMA and tax experts, etc. But the system itself allows you to take a lot of advantage of these benefits. Even you have a business of one. So yes, the savings specifically on Social Security and Medicare may be capped. But there are many other things retirement healthcare and other that open up once you have an S corp. Okay,
Will Bachman 11:51
so could we go through those a little bit? So one, I mean, if you just have an LLC, someone can get an s EPIR. A, and they can put up to something like 58,050 $9,000 away into that tax free. My understanding is that if you wanted to put more tax free, you could get a yourself a actually pre defined benefit plan, but you need a what do they call it an actuary and to set it up, you can basically set up a good defined benefit plan, write a defined benefit plan for yourself, and instead of a defined contribution plan, and then you could put up like, I don’t know, 1/3 of your income or something or something much larger number? Is that what you’re referring to? Are you talking about something else when you talk about retirement advantages.
Ran Harpaz 12:45
So that’s a very good example of the difference between having a SEP IRA, as you mentioned, defined benefit plan or follow on sort of 401 K opens up a number of limits that get higher and higher with the program that you choose. And for example, the SEP IRA, as you mentioned, has a cap, I think it’s 20% of the income, or an employer matching plan with a solo 401 K has a higher cap that keeps going higher every year. So that’s one example of where you could use retirement plans as a tax strategy to optimize your income. And one thing I want you to keep in mind is, this now becomes a multivariable optimization problem, because you may want to save more via retirement, depending on your age and preferences and plans, you may want to have more allocated to Social Security, if you believe that that’s how you’re going to retire. Or you may have another reason will you want to optimize for salary for owner distribution, you will maximize expenses, there are things like business use of home and mileage. I think my point here is, while each and every one of these tax strategies is well known, the recipes, you know published, it’s all available, you end up with a mishmash of do it yourself slash, you know, ask your CPA solution. And what we’re trying to say, if that’s not sustainable, that very few people are disciplined enough to go study all of this, then have the time to track and implement all of these and then have the control to change those numbers will anything changes. And that’s why, you know, as somebody with software and technology background, I come to this saying this needs to be solved by a software product, not by humans. And in humans, by the way I include you doing it yourself, but also relying on CPA or offshore teams, etc. You know, humans get tired, they make mistakes. AIX, they leave and you have to replace them. The knowledge is not sustainable. There is something about putting these very well known tax codes into a piece of software and saying optimize this for me. All
Will Bachman 15:14
right. So let’s talk about what led us does. First question is, is it a replacement for a QuickBooks accounting bookkeeping package? So to someone I mean, do you have basically replicate what QuickBooks does if someone wants to track all their expenses, and so forth?
Ran Harpaz 15:34
Yes, it is a replacement. The idea is that rather than having multiple software solution, QuickBooks, Excel sheets, or TurboTax, you would have one single solution from lettuce, we take you all the way from incorporating your LLC, making the S corp election, running your books, we open a bank account for you, you know, we hear from a lot of customers who actually have a commingled bank account, their business income and expense, their personal income and expense are all in one bank account, which is not a best practice not recommended and opens you up to IRS audit and questions. So we bring all of that to you. The business bank account is a dedicated one, the accounting software tracks every transaction, there is a tax Prediction Engine that tells you where you stand every day, you don’t need all of those other software solutions. We take care of that for you. We also include payroll processing. So once you know you decide with the systems recommendation, what’s your reasonable compensation, our system would run payroll for you and make sure that you get paid, that the federal government gets your taxes at the state government gets all of the pieces of that reasonable compensation that needs to be done things that are rather complicated to do on your own. With all of that. Yeah.
Will Bachman 16:58
Now, can you also let’s say that someone is not, you know, let’s say they start as a solo practitioner, and they end up hiring someone? Will you guys, will your product also do payroll for a employee? Number two? Or is it just they only do payroll just for the owner?
Ran Harpaz 17:17
Right. So technically speaking, we are able to do it for the extra employee, we see very often that that extra employee is a spouse, or sometimes a kid in the business. So we support that. But I would say that our focus is primarily on business. One, we see that most of our customers showing up are people who have a business of one, they run it, they are the essence of the business. That’s who we want to serve the most. Yeah. When
Will Bachman 17:44
you get the free business bank account, is that with one of the large banks, or is that a bank account? Like just with lettuce? Like what what’s the bank behind it?
Ran Harpaz 17:53
Yeah, so we have partnered with a FinTech company called unit that allows us to build, you know, more than banking. The underlying bank service itself is comes from Transpac. US Bank, which is a Texas bank, FDIC insured, and they’re providing the actual infrastructure, you know, keeping your money safe.
Will Bachman 18:15
So the account is FDIC insured? Yes, absolutely. Okay, up to the 250 cap or whatever, call
Ran Harpaz 18:23
it that with the 250 $1,000 FDIC insured and we are working, by the way on a program are probably going to launch later this year that allows you to sweep into multiple accounts and then get the FDIC insurance to go even higher, which is pretty common these days, with a number of companies will own it smart.
Will Bachman 18:43
There was few bank issues last year where a lot of people probably would have liked to have that in place for their peace of mind.
Ran Harpaz 18:51
Yep, that’s a trend that’s happening right now.
Will Bachman 18:53
Silicon Valley Bank, first republic, etc. Okay, so so your let us as the accounting and bookkeeping software that you need, it has the if you’re doing putting solutions together, you’d have to get a Payroll solution like gussto, and you guys have that your product. And you’ll also help with sort of automating or telling the person what they have to do for their estimated quarterly taxes, which is a requirement for people. So you’ll calculate those and and, and sort of just automatically deduct that from the business account and pay those taxes I guess, that
Ran Harpaz 19:37
is correct. Think about those quarterly taxes is a combination of, you know, prediction, to make sure that you’re constantly withholding the right amount, then the actual filing and ultimately making the payment we take care of all of those.
Will Bachman 19:51
How do you handle or so stuff that gets a little bit more complicated than can be just be easily done. where let’s say someone has multiple jurisdictions or because the Nexus issues, they’ve worked in multiple states, or, Oh, I have some income from Canada, because I did a project up there, or when things might get a little bit more complicated, and they need to talk with the human, talk to me about that a little bit.
Ran Harpaz 20:21
Yeah, so that’s exactly where we have the distinction between the latest pro program and the latest Premium Program, we have partnered with a company that has CPAs. And what they do is they serve this exact market segment. And when our customers need extra services, you know, we handle everything that is automated and repeatable and works, you know, according to the prescribed system, and they help us augment the service when you need something special. So some people have offshore investments, some people have, you know, rollovers from all kinds of, you know, k one investments they’ve done in the past. That’s, that’s why we partnered and serve those customers, we’ve really CPAs that’s
Will Bachman 21:10
very cool. But how many users do you have right now?
Ran Harpaz 21:13
We’ve just launched January 1, and in the last, I would say, eight weeks, we got over 100 customers. So we’re very excited about the growth. Very early stages, of course, but growing rapidly, nice.
Will Bachman 21:29
So far, what are your typical customer profiles? Like? Are these folks that are, you know, sort of freelancers earning 80k a year are they you know, independent? People earning like a million bucks a year? What sort of level? Are you targeting? Really? What what do you think is sort of the, if you had to define one profile as the ideal profile for lettuce? What’s that look like? Yeah,
Ran Harpaz 21:55
the ideal customer profile for us is an independent professional services consultant, management consultant, marketing, executive, executive coach therapist, making somewhere between 150k to 500k. That’s probably the sweet spot where there is enough in the business to make it worth your while. And there is enough tax strategies to unlock. Those are the people we see right now, you know, showing up at our door, and it’s in our services. It’s small people who have a business, they’ve been doing it for a few years, they’re no, they’re good at ease. They know that they want to stay independent, and they want somebody to take their financial stack off their plate. That’s our sweet spot.
Will Bachman 22:42
Very nice. As cool. What? What else about the product? Should people know that we haven’t covered so far?
Ran Harpaz 22:54
Well, we covered a lot, I would say, people should know that we are working to roll out an AI accountant. I know it sounds very common these days to have a chatbot for everything, but we took a different approach. We want to make sure that every question our customers are asking can be answered 24/7. So we are training and fine tuning in AI engine on specifically this area of the tax code with a lot of annotations and q&a, etc. So that they can get answers without hallucinations without going to YouTube videos without getting, you know, random Redditors input into that you we are curating that training set so that the AI answers you get are as good as human but much, much faster. So we’re going to roll that out in the next couple of months. And we expect it to have a lot of great feedback. We hearing people want guidance, they want to know more, and picking up the phone and asking the CPA is not within reach for most people. So we’re excited about that.
Will Bachman 24:06
That is fantastic. Ron, I will just mention here that the URL is lead us.co. So for listeners who are interested in check it out. Ron, thank you so much for being on the show today. This was very helpful.
Ran Harpaz 24:22
Thank you for having me. Really enjoyed the conversation with you
