What tax & financial tips should I know for my business?
Below are some tips we put together to help your small business.
1. Business Structure Should you be a sole proprietor, or are you going to incorporate? Do some research and decide what's best for you. You can find more info on our website in this article, and also the IRS website. You can also speak with an attorney (let us know if you’d like a referral). This will help you understand how to handle the books, which is mentioned more in Step 3 below.
2. Tax ID Number (EIN) Regardless of your business structure, it’s advisable to get an ID Number, specifically an EIN, separate from your own Social Security Number. That way you aren’t giving your Social Security Number out when providing tax forms to employees, vendors, etc. Find out more about applying for an EIN at this IRS site.
3. Tax Implications As a small business owner, you likely receive pay differently than regular employees. This means no deductions are taken out from the money that comes in; which can surprise those who aren't prepared for the corresponding taxes. This is why business owners often make estimated tax payments on a quarterly basis (discussed further in #4 below). Also, taxes are different for business owners than they are for employees. It's important to understand self-employment taxes, as well as being familiar with sales taxes and local business licensing/tax certificate requirements.
4. Estimated Tax Payments Estimated tax payments are a business owner’s version of paycheck withholdings. However, not all business owners are required to make estimated tax payments. Click here to see if this applies to you and your business.
5. Deductions Business owners are allowed many deductions regular employees aren’t allowed to take. Consider the following questions. Do you use your vehicle for business? Do you have a uniform you can deduct? Do you have a cell phone that doubles for personal and business use? Do you understand depreciation for assets you use in your business? It pays to understand the different deductions you can use to offset income and lower your taxes. Our website has many helpful worksheets for logging these expenses (home office, business use of vehicle, etc.).
6. Retirement Plans Self-employed folks don't have conventional 401k retirement options like employees. However, business owners can look at Solo 401k's, SEP IRA's, and Simple IRA's, in addition to other commonly-used Traditional & Roth IRA possibilities.
7. Record Keeping We highly recommend you don’t comingle funds, which means you should have a separate bank account for your business. Then be sure to deposit all business income into that business account. For any expenses that require you to write checks, use checks from this same business account. Also, have separate debit/credit cards solely for business transactions. Only charge business items on those cards. By not commingling business funds with personal funds, you’ll make life much easier for yourself come tax time, or in the event of an IRS audit!! To help with your deductions and categories, you can view our listing of business expenses categories/budget items. Also, you can view IRS record-keeping tips.
ADDITIONAL ITEMS: The items below are all things we’ve seen work for successful businesses.
Don't Go Into Debt The above section provided info on the benefit of taking as many tax deductions as you can for your business. However, we want to be sure we’re very explicit in saying that tax deductions are never a direct reason to go into debt. In other words, you want to take all deductions available to you, but you don’t want to spend money just to create deductions. It’s important to understand that deductions are different than credits. So if you can, fund your start-up and ongoing costs with savings, not debt. We highly suggest that you don't use credit cards or home equity on your primary house to run a business. Statistically, most small businesses will fail. If you unfortunately end up joining that group, you don't want to find yourself with $50,000 in credit card debt. Or worse, you don't want to lose your house!
Understand How To Budget Irregular Income Owning a business means you likely don't receive regular paychecks like you do as an employee. How you handle your business income largely determines if your business will survive. For that reason, we have a practical guide we've prepped for folks looking to understand more about handling irregular income.
Start Small - It's okay to start small; after all, if you're reading this article you're likely a "small" business owner. This means being particular about every expense. Consider printing your own letterhead and labels at first. It often doesn’t make sense to buy in bulk while you're still making constant changes with branding, business location, etc. It's no fun throwing away 10,000 sheets of letterhead because your address changed! Out-of-control expenses will ruin a business faster than anything. All businesses begin somewhere. Walmart, Home Depot, and Apple each started in garages.
Be Realistic With Profits & Money-Making Potential - Can this business truly earn the money you need to survive? We recommend most small business owners keep their "day job" until their small business is sustaining itself financially. Know the difference between inflow and actual profits (inflow accounting for expenses). We’ve seen many get into trouble blindly chasing a pipe-dream without doing diligence first!
Prospecting Is King - Without sales, nothing else matters. If you know how to cure cancer but nobody else is aware of it, your knowledge is useless. Most businesses we see that become successful did so because they understood this point.
Learn As Much As You Can – We highly recommend reading "E-Myth Revisited" by Michael Gerber. It will guide you through the many pitfalls that crush most business owners. We also suggest checking out “Entre-Leadership” by Dave Ramsey. Constantly learn from others!
Know Your “Why” - We may have saved the best for last here. Why are you in business? Is it to change lives by making finances simple for people? (Okay, you caught us...that's actually our "why"!) Is it to have freedom from a regular 9-5 job so you can be at home more with your children? Knowing why you are in business will get you through those tough times. Write your "why" down; and check it often!
Contact us with any questions...we’re here to help!