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Should I start my own business?
As a Tax Adviser, I’ll tell you that there can be tax advantages to being self-employed. As a business owner, I’ll tell you that I wouldn’t rush to start a business if you’re doing it solely for tax reasons. Starting a business will take a good bit of your time and energy and there are no guarantees that your returns will be worth your expenditures. MORE... Is this a good time to start a business?
It depends on your situation. More and more people are leaving corporate America and are trying self-employment. Is it right for you? The decision may be easier if you have a spouse who earns wages that allow you to take a chance without the worry of where income will come from. And there are many businesses you can start without immediately quitting your “day job.” What if I work out of my house?
Working from home can have its advantages but the IRS requires that the rules are followed. Deviations from the rules are grounds for audits and tax penalties that no one wants to endure when starting a new business. It's important to understand the rules for use and for deductions before you are too far into your new office space. MORE... How do I know if my spouse and I can actually work together?
As a tax advisor, my first thought is, “How the heck would I know? You look great together and I’m sure you’re both very good at what you do … but how do you determine if working together will bring you peace, profit, and paradise?” One thing I recommend is that you put together a family plan, just as you would a business plan, to help protect your family and your relationship with your spouse from the hardships (expected and unexpected) of small-business ownership. What if I have a partner in my business – and it’s not my spouse?
If you are going to go into business with someone else, it is strongly recommended that an operating or shareholder agreement be created before business starts. A buy/sell agreement is also recommended to map out how one partner or shareholder can buy out the other partner or shareholder should they part ways. It should be created when the partners or shareholders are amicable. An attorney can draft any of the agreements and can ensure the proper language is included in the documents. Can I turn my favorite activity into a business?
Wouldn’t it be great to be able to deduct the cost of all of that yarn you use making sweaters for your family and friends? Or all of the wood and tools you use making those coveted cutting boards? Well, that’s how many a successful business has been started. Make a living and build a company doing what you love. And now that I’ve planted those dreams in your head, it’s time to talk about the “Hobby Loss Rule” before you quit your day job. If your business is not “legitimate” (IRS term), your business will be considered a hobby by the IRS and your expenses will not be deductible. The IRS created the “Hobby Loss Rule” which states that “an activity is presumed not to be a hobby if profits result in any three of five consecutive tax years ending with the tax year in question, unless the IRS proves otherwise.” How will our taxes be affected if my spouse and I are both employed and one (or both) of us owns a business?
Of the total labor force, more than 3.9 million people—less than 3 percent of total wage-and-salary earners and more than 32 percent of total self-employed workers—took both self-employment and wage-and-salary work in 2004. Moonlighters accounted for about 2.9 percent of the male labor force and 2.4 percent of the female labor force. CHECK OUT THIS SCENARIO... |
Top 10 ways to tell
if you’re in a "Mixed Marriage" 10. You receive mail (and plenty of credit card applications) in the business name.
9. You wonder if you should save all of your receipts from your daily expenditures. 8. Your housework stops getting done. 7. You start dipping into your personal savings to help the business out. 6. You may not be able to take money out of your business to pay yourself. 5. You use household items such as furniture and office supplies in your business. 4. You wonder how you will get all of your work done. 3. You attend networking functions to represent your business and find new clients. 2. You worry more about taxes. 1. The self employed spouse NEVER stops working. |
My business is growing and I need help. Should I hire my spouse?
When should your spouse quit his or her job and join your business? Is this an option? Considerations include:
Another consideration is whether the marriage can survive with both spouses working together in the same business. If not, it may not be a good idea for the spouse to leave his or her job. The answer may be to hire an employee. Are independent contractors an option?
Now, here’s an idea that can pay off for everyone if you have children. Children of age may work for the self-employed spouse. This is a win-win for both you and your child. You will be able to deduct the payroll expense paid to your child; however, Social Security and Medicare taxes do not need to be paid if your child is under 18. Since this income is earned, the Kiddie Tax rules do not apply. Please be aware of your state’s labor laws.
When should your spouse quit his or her job and join your business? Is this an option? Considerations include:
- How good are the benefits from the wage earner’s employer?
- Can the business earn enough to cover the wages plus benefits, including the cost of insurance, now that both husband and wife
are self-employed? - Is the potential there for growth or increased capacity or increased sales/income with the spouse joining the business?
Another consideration is whether the marriage can survive with both spouses working together in the same business. If not, it may not be a good idea for the spouse to leave his or her job. The answer may be to hire an employee. Are independent contractors an option?
Now, here’s an idea that can pay off for everyone if you have children. Children of age may work for the self-employed spouse. This is a win-win for both you and your child. You will be able to deduct the payroll expense paid to your child; however, Social Security and Medicare taxes do not need to be paid if your child is under 18. Since this income is earned, the Kiddie Tax rules do not apply. Please be aware of your state’s labor laws.
I need help, but I can’t afford to hire someone.
Good news: You might not have to!
I know business owners who have all the help they need when they need it and have been operating for years without a single employee. Here’s how they do it: they work with other self-employed people. When you contract with someone who is self-employed, you’re hiring an independent contractor. This person is responsible for his or her own taxes including Social Security and Medicare. Because of this, the IRS is especially prickly about the differences between independent contractor status versus employee status.
The question of whether someone is an independent contractor or an employee is not the business owner’s decision. This has been outlined by the IRS in order for businesses to not avoid paying payroll taxes when the employee acts and looks like an employee.
Here are some guidelines if you’re considering working with independent contractors and want to steer clear of IRS ire:
Good news: You might not have to!
I know business owners who have all the help they need when they need it and have been operating for years without a single employee. Here’s how they do it: they work with other self-employed people. When you contract with someone who is self-employed, you’re hiring an independent contractor. This person is responsible for his or her own taxes including Social Security and Medicare. Because of this, the IRS is especially prickly about the differences between independent contractor status versus employee status.
The question of whether someone is an independent contractor or an employee is not the business owner’s decision. This has been outlined by the IRS in order for businesses to not avoid paying payroll taxes when the employee acts and looks like an employee.
Here are some guidelines if you’re considering working with independent contractors and want to steer clear of IRS ire:
- Prior to working with an IC, discuss the business arrangement so both parties are on the same page.
- Give the IC a job to do but do not request a rigid schedule or set hours.
- Give the IC a deadline and allow him/her to finish the job.
- Contract (do not say “hire”) with various ICs to do various jobs.
- Just because the hours are not full time does not necessarily mean IC status. Remember, employees can be part time.
- Make sure there are no steadfast rules for the contractor, simply
guidelines that should be followed. - The IRS focuses on the substance of the arrangement – whether the person the work is being done for exercises “sufficient control”.
- Do not overly rely on industry practice when making the classification
(one case called a golf caddie as an employee)
If my dog greets my clients, can I write off her food?
Let’s talk business for a moment. Your business. In your business, you’ve set prices and policies that work for you and your client, right? While your client would probably love to receive your services or products for free, you just haven’t been able to see the upside of doing that (at least, the upside for you) up to this point, am I right? Well, the IRS is pretty much the same way. Rates … and policies. We’d all love to get the infrastructure without the taxes, but the government just hasn’t found a way to do that yet. Until then, you might as well get to know someone (like, for example, me) who knows the IRS rates and policies inside out and who considers it a worthy challenge to help you pay not a penny more than you absolutely must without getting on the wrong side of the IRS.
That said, I’m going to attempt to encapsulate 16 years of professional accounting experience including a Masters Degree in Taxation into one word in the hope that it will help us to have quality conversations as we discuss tax strategy for you and your business: the word is “reasonable.” You and I will use that word as a guideline. I’m the one with the toughest job with regard to the term “reasonable.” I know what it means when the IRS uses it, and that may be different from its meaning to you (especially when it comes to taxes). But I’ve been walking that tightrope for a long time and I’m more than willing to walk it for you.
MORE...
Let’s talk business for a moment. Your business. In your business, you’ve set prices and policies that work for you and your client, right? While your client would probably love to receive your services or products for free, you just haven’t been able to see the upside of doing that (at least, the upside for you) up to this point, am I right? Well, the IRS is pretty much the same way. Rates … and policies. We’d all love to get the infrastructure without the taxes, but the government just hasn’t found a way to do that yet. Until then, you might as well get to know someone (like, for example, me) who knows the IRS rates and policies inside out and who considers it a worthy challenge to help you pay not a penny more than you absolutely must without getting on the wrong side of the IRS.
That said, I’m going to attempt to encapsulate 16 years of professional accounting experience including a Masters Degree in Taxation into one word in the hope that it will help us to have quality conversations as we discuss tax strategy for you and your business: the word is “reasonable.” You and I will use that word as a guideline. I’m the one with the toughest job with regard to the term “reasonable.” I know what it means when the IRS uses it, and that may be different from its meaning to you (especially when it comes to taxes). But I’ve been walking that tightrope for a long time and I’m more than willing to walk it for you.
MORE...
Can business owners have 401Ks?
“Oh my gosh! I’ve quit my job and started my own business – how am I going to save for retirement?”
Retirement options available for self-employed individuals include:
Traditional and Roth IRAs have contribution limits of $4,000 (or $4,500 if over 50 years old). However, 401Ks have contribution limits of $15,000 (or $20,000 if over 50 years old). You must plan your retirement with the employed spouse’s options and the self-employed spouse’s options.
If you are self employed you do not receive a paycheck, so you would not be able to contribute to a 401K. You can incorporate in order to be able to be treated as an employee.
You can also set up a SEP IRA to save for retirement. The great thing about SEP plans is that you have until the following year to create the plan and contribute (must be done by the due date of the return or the extended due date) to the plan.
“Oh my gosh! I’ve quit my job and started my own business – how am I going to save for retirement?”
Retirement options available for self-employed individuals include:
- Solo 401Ks
- SEP IRAs
Traditional and Roth IRAs have contribution limits of $4,000 (or $4,500 if over 50 years old). However, 401Ks have contribution limits of $15,000 (or $20,000 if over 50 years old). You must plan your retirement with the employed spouse’s options and the self-employed spouse’s options.
If you are self employed you do not receive a paycheck, so you would not be able to contribute to a 401K. You can incorporate in order to be able to be treated as an employee.
You can also set up a SEP IRA to save for retirement. The great thing about SEP plans is that you have until the following year to create the plan and contribute (must be done by the due date of the return or the extended due date) to the plan.
What about benefits?
Health insurance from an employer is usually cheaper than paying for health insurance as a self-employed individual. Normally, employee benefits are cheaper than providing your own benefits if you are self-employed.
Self-employed individuals can have their insurance paid for by their company. If an S corporation has been created, the cost of health insurance may be included as an expense. You must be cautious, however, because the rules relating to the deductibility of self-employed health insurance have become more stringent. It is urged that the insurance is paid by the company itself rather than the shareholder paying it personally.
Health insurance from an employer is usually cheaper than paying for health insurance as a self-employed individual. Normally, employee benefits are cheaper than providing your own benefits if you are self-employed.
Self-employed individuals can have their insurance paid for by their company. If an S corporation has been created, the cost of health insurance may be included as an expense. You must be cautious, however, because the rules relating to the deductibility of self-employed health insurance have become more stringent. It is urged that the insurance is paid by the company itself rather than the shareholder paying it personally.
What else do I need to know about being self-employed?
Estimated tax payments:
Typically, self-employed individuals must make quarterly estimated tax payments when the business is profitable. If the spouse is a wage earner, the withholding can be adjusted to take additional withholding to cover the increase in income tax. Therefore, no estimated tax payments are needed since W-2 withholding can be increased.
Personal loans to your company:
If you contribute or loan your company money, please keep track of this since this is money owed to you personally and should be paid back to you once the business’ cash flow situation has improved.
Estimated tax payments:
Typically, self-employed individuals must make quarterly estimated tax payments when the business is profitable. If the spouse is a wage earner, the withholding can be adjusted to take additional withholding to cover the increase in income tax. Therefore, no estimated tax payments are needed since W-2 withholding can be increased.
Personal loans to your company:
If you contribute or loan your company money, please keep track of this since this is money owed to you personally and should be paid back to you once the business’ cash flow situation has improved.