Starting a New Business?

10 Things You Need to Know.

To be in charge of your own destiny – that is the dream of many would-be entrepreneurs.

For those trapped in an everyday open office existence – longing for a modicum of privacy, a raise, or even just flexible hours – the allure of business ownership can be strong.

Workers cited the chance to be their own boss (75%), not having to answer to a boss (64%), and increased flexibility (74%) as reasons for striking out on their own in a 2017 study.

It’s not a bad way to go, especially when you consider that the average income for the full-time self-employed was $65,300. About 20% of them make $100,000 or more. Meanwhile, the median family household income was only $56,516 in 2015.

Although entrepreneurship can lead to more freedom, financial and otherwise, it pays to learn all you can first.

Here are 10 things to consider before you make that move.

1. Think Before You Leap

If you start your business while still employed – or have another source of income – it will help you feel less financially vulnerable.

Or, spend some time building up a store of cash beforehand.

Either way, you’ll be more insulated from the unpredictable swings in income self-employment can bring. There’s also a lot of (unpaid) work you’ll be doing to get your business rolling.

Starting a business is hard enough without worrying about how to pay the bills each month.

2. Your Business Structure Matters – A Lot – When it Comes to Taxes

Pass-through businesses are sole proprietorships, partnerships, LLCs and S Corporations.

Thanks to the recently passed Tax Cuts & Jobs Act, these businesses are eligible for a new 20% tax deduction on qualified business income, within limits.

That’s if your income is $157,500 or less for single filers and $315,000 or less for married filing jointly.

If your income exceeds that amount, you may still qualify… if you have a certain type of business.

Generally, businesses that make a product are eligible for this deduction, regardless of income. Service businesses (with the exception of architects and engineers) are subject to the limitations.

This 20% pass-through deduction is available until 2025.

C Corporations, on the other hand, have experienced a significant tax cut that doesn’t expire.

Of course, taxes aren’t the only consideration in setting up your business, so it pays to get expert advice before you rush in.

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3. Be Aware of Quarterly Estimated Taxes – and the Self-Employment Tax

Employees have taxes deducted from their paychecks before they ever see the money.

This does not hold true for a self-employed business owner. (Unless you hire an accountant to take over and give you a paycheck each month).

In fact, our “pay-as-you-go” tax system requires that you pay taxes on income as you earn it… rather than waiting until the end of the year.

Since you don’t know what you will make each year, you will need to estimate what your tax bill will be and pay it in quarterly installments.

In addition to federal income taxes, there are also self-employment taxes attached to operating your own business.

Once again, employed workers have FICA taxes (Social Security and Medicare taxes) deducted from their paycheck; however, this is not so for the self-employed.

Also, when you are employed, your employer pays half of what is due for you (not so for business owners). It must be noted that if you elect for your entity (LLC or incorporated entity) to be taxed as an S-Corp, the working owner has to take a “reasonable” salary.

Currently, FICA is 15.3% of your income, subject to a limitation for Social Security. This is on top of your federal, state, and local income taxes.

However, you can deduct qualified expenses from your income.

This will reduce your tax bill… which (conveniently) brings us to the next point.

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4. Know What is Deductible (and what isn’t)

 The IRS has lots of rules when it comes to this.

Overall, you can deduct “ordinary and necessary” business expenses.

For instance, office supplies and equipment are deductible expenses. Your haircuts or general business attire are not. (There are some exceptions when it comes to clothing, your Enrolled Agent can explain more on this one).

Some expenses can be deductible depending on the purpose. For example, a meal can be a business expense if you are taking a client out.

Similarly, a trip is deductible if the purpose is exclusively for business (such as visiting a client). A trip with your family while you squeeze in that client visit? Not so much… but there are exceptions to this one too.

5. Keep Good Records

Make it a point to retain records of all your income as well as your expenses.

If you use your vehicle in the course of your business, track the beginning and ending odometer reading, the date, who you saw, and the purpose of each trip — each and every time. Doing this “as you go” will ensure your log is accurate, complete… and will (hopefully) pass muster with the IRS. This is called “contemporaneous recordkeeping,” and it will go a long way toward keeping you out of trouble.+

Whether you are attempting to complete your tax return yourself or you get professional help, you (or your Enrolled Agent) will be so thankful that you have kept good records.

6. Don’t Forget Retirement

It may seem like retirement is a distant – almost unreal – concept. But there may come a day when you are no longer able (or willing) to work.

Just as it takes discipline to pay your taxes on time when you own your own business, it takes that same commitment to retirement.

The self-employed are able to put as much as 25% of their net earnings  — or up to $55,000, whichever is lower – in 2018 into a Simplified Employee Pension (SEP).

And guess what? It reduces your taxable income, dollar for dollar.

If you have an S-Corp or a C-Corp, other options to save for retirement are available to you as well.

7. Invest Some Time in Marketing Yourself

Marketing does not always get the attention it deserves.

After all, you are busy choosing a business structure, an accounting method, and opening a bank account. Not to mention building the website and ordering those business cards. You could even be buying inventory, setting up drop-shipment arrangements, and negotiating with vendors.

Whew! That’s a lot of work.

But all of the great plans and wonderful work you do won’t mean anything if you don’t have clients.

You can start small, with a social media presence, perhaps, and invite all you know to like you or follow your business page.

What you really need to concentrate on is getting to know your target market and learning how best to approach those prospects.

Yes, we are all ultimately salespeople. Whether it’s from a distance through advertising or SEO or up-close-and-personal with cold calls, we have to somehow convince people to do business with us.

Every industry is different, and some experimentation will be necessary to find the right mix. Invest time each day or week toward building your business (and not just doing the work). Make time to analyze results and tweak your plan.

And don’t forget the wealth of information at your fingertips. Whatever you need to learn, there’s a YouTube video for it, an expert article to read, or an online course to take.

8. Get the Help You Need – and be Aware of the Tax Implications

In the beginning, you will likely use independent contractors to do things for you… from designing a logo to creating a website and writing blogs.

This is an efficient way to get things done. Just remember, though, that if you pay any one person or entity $600 or more, you need to issue them a 1099 by January 31 of the following year.  A copy of each 1099 also needs to go to the IRS.

If and when you grow to the point where you need help on a part-time or full-time basis, be aware of the tax laws surrounding employees.

A person is an employee if you dictate when, where and how the work gets done.

An independent contractor is responsible for getting work done – but how they work (at home, at the local café, in half-hour increments or all at once) is determined by them, not you.

If you do have employees, you are responsible for collecting payroll taxes and submitting them on time (and in the proper way). Penalties can really add up here, as they are assessed per occurrence.

If needed, you can enlist the help of an Enrolled Agent to be sure you comply with the law.

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9. Give it a Chance

Don’t expect to blow the doors off your new business the first day. Or even the first year.

It takes time to get the word out, to build a clientele, to increase traffic (especially buying traffic) to your website.

Many folks who venture out on their own have unrealistic expectations of what it takes to grow a business.

That’s why it’s crucial to have that nest egg you can draw from while you put in the hard work needed. One year may not be enough to experience profitability. However, you should start to see signs of life after a while, which can give you encouragement to keep going.

Your financial freedom and future can be worth the time it may take.

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10. It Won’t be Perfect

This is real life, after all. You can’t expect perfection.

Think about starting school or a new job, especially the first day.

It’s usually bumpy.

As much as you prepare, things will happen. The important thing is to learn from each mistake so you don’t repeat it.

It’s like the old saying, attributed to various people throughout history:

“Someone who never makes a mistake will never make anything.”

 You can choose to wrap yourself in a cocoon of blankets on the couch. You will avoid making mistakes… but you won’t get anywhere.

In fact, your muscles will atrophy and your bank account will run dry. That counts as a mistake, by the way.

So if mistakes are unavoidable, we might as well embrace them as the stepping stones they are.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as an Enrolled Agent and Certified Tax Resolution Specialist.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.

The book is available in paperback and ebook on https://Amazon.com
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For more on SFS Tax & Accounting Services, visit https://sfstaxacct.com/
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