Monthly Archives: November 2016

Should You Know About Income Tax Basics

We live in the post-recession economy. Along with more skepticism over the future of the economy, many have bought into the gig economy—where people take individual contract jobs rather than working for a larger company. Some might call it the American dream but if you don’t plan correctly, it could turn into something of a nightmare.

The Facts

A study by authors from Princeton and Harvard Universities found that the number of freelancers grew from 10.1% in February of 2005 to 15.8% in late 2015. Computer jobs hold the most freelancers but customer service, medical, and writing industries attract many as well. Freelancers beware—you might be setting yourself up for financial turmoil if you don’t think of yourself as a business owner. It has to do with taxes.

Taxes

As a freelancer you have to pay taxes just as you would if you worked for a larger company but with one important caveat. You’re responsible for all of the taxes. What you may not know is that when you are an employee, your employer pays half of your total Social Security and Medicare taxes. Thus, as an employee of someone else’s business, you paid 6.2% of your salary (up to the taxable maximum) for Social Security tax, and a 1.45% Medicare tax, (combined total, 7.65%.) Your employer was required to match those payments. Thus, your total contribution for Social Security and Medicare (your payment plus the employer’s) was 15.3%. And, of course, you also had money withheld from your paycheck for income taxes calculated based on the information you provided your employer on a W-4 form. As a freelancer, you have to pay both parts of the Social Security and Medicare taxes. Instead of paying the government your income tax plus 7.65% (combined Social Security and Medicare tax), you pay income tax plus 15.3% (minus any deductions or credits) That 15.3% is called a self-employment tax.

Determining the total amount of income tax, Social Security and Medicare taxes you’ll owe for the year isn’t easy. You have to take into account your income, your tax bracket, deductions, and credits. If your business is relatively stable, simply look at last year’s tax return and take numbers from there. Or, a very rough estimate is to take 35% of every dollar you make, put it in a separate account and use it to pay taxes. If you are required to pay state and city income taxes, don’t forget to calculate their cost for the year, too.

Tip: When determining the rates you charge your customers, don’t forget about those extra taxes you’ll owe. Too many freelancers don’t charge enough for their services because they don’t take taxes into account.

Estimated Taxes

The IRS isn’t going to allow you to hold onto the money you owe them until tax time. In most cases if you will owe more than $1,000 in taxes at the end of the year, you have to make quarterly estimated tax payments. If you file as a corporation, your threshold is $500 but most freelancers should pay attention to the $1,000 number.

How Much Should I Pay?

If you owe estimated taxes, how do you know how much to pay? If you use tax preparation software like TurboTax, it will tell you what it believes your estimated taxes will be based on your previous year’s tax return. The IRS also has forms and worksheets to help you. Aim for 100% of your previous year’s taxes or 110% if you will earn more than $150,000.

Estimated taxes are due quarterly—April 15, June 15, September 15, and January 15 of the following year. There are exceptions to these dates but you would almost certainly have an accountant advising you of those dates if that was the case. Be sure you pay your estimated taxes on time. If you don’t, the IRS will charge you a penalty.

If you don’t want to pay your taxes in 4 quarterly installments, there are a few other ways. First, if you receive a refund on your taxes, apply it to your estimated taxes. Second, if you or your spouse are employed by other companies, you can ask your employer to withhold additional taxes from your paycheck each week. (You’ll need to file a new W4 and fill in line 6 to indicate the additional amount you want withheld.) To come up with the amount to withhold, divide your estimated tax by the number of paychecks you will receive and have them without that amount. For example, if you plan to have a tax liability of $7,000 but you get paid from an employer once per month, have them withhold and extra $583.34 from each paycheck.

Learn more about estimated taxes at the IRS website.

Deductions

The great thing about owning a business is that your expenses are deductible. Nearly every purchase you make that directly goes to the operation of your business will reduce your taxable income. Everything from office supplies, to mileage, to the use of a home office will land you deductions and reduce your tax burden. Beware—you don’t want to exaggerate or take deductions you can’t prove. If you’re audited, the IRS will ask for receipts and substantiation of all of your deductions. Learn more here.

Employees

First, let’s be careful with that word. An employee is somebody on your payroll. You have to withhold taxes and even pay part of their tax burden. Remember the self employment tax above? You have to pay it. When possible, freelancers prefer to hire contractors (other freelancers) because the employer doesn’t have to worry about the taxes. It all falls on the contractor.

Simple Ways To Reduce Attorney Fees for Your Business

Whether you are just starting a business and need to form an entity, have an existing business and are negotiating contracts with third parties or are in the process of selling your business, an attorney will undoubtedly play a critical role. It’s important to keep in mind, however, as vital as an attorney’s advice is in these situations, it doesn’t mean you have to pay an arm and a leg for it. Set forth below are three strategies to minimize attorney fees and stay within your budget:

1. Know What You Need

The first step to ensuring you receive quality legal services for an affordable fee is to know exactly what you need from your lawyer. Prior to seeking out a lawyer, write down any questions you would like to ask and take notes of your situation. Will you need help with specific documentation or just need more general legal advice? The more organized you are before you speak with a lawyer, the better off you’ll be.

2. Negotiate Fixed Fees

Small business owners are particularly sensitive to costs associated with hiring counsel when they have a legal need. For this reason, business owners should negotiate fixed fees for their transactional needs rather than paying an attorney on an hourly basis. This is because with fixed fees both the client and attorney are very clear on what the intended objectives of the engagement are. An experienced attorney will know what needs to be done and how much time they will likely spend on the matter and will be able to (more or less) accurately price it upfront.

Sometimes attorneys are resistant to provide fixed fees on the theory that a matter is too complicated to price it up front, say for instance, when purchasing a business. If you do receive pushback, break down the matter into discrete tasks. You could agree to pay (i) a fixed-fee for initial legal due diligence, (ii) a second fixed-fee for the initial drafting of the purchase and sale agreement, and (iii) another fixed-fee for revisions, negotiations and finalization of the agreement. Structuring attorney fees this way ensures that you have control over your costs and clearly defines the scope and involvement of the attorney throughout the process.

With hourly rates, on the other hand, even the most well intentioned attorneys could be inaccurate with their time-keeping, which may ultimately result in unexpected costs for the client. Take for example an attorney that charges $300 per hour and bills for 10 hours of work, for a total of $3,000 at the end of the engagement. If the attorney billed in increments of 6 minutes (which is customary) and is off by 6 minutes in tracking for each hour spent, that would mean an additional hour’s worth of work (or $300.00 in this example) is charged without any actual value in return. Simply put, inaccurate timekeeping can add up if you are on a budget. That said, if you are unable to negotiate a fixed-fee arrangement, you should request that the fee based on the hourly rate is capped at a set amount so that you at least have a sense of the outside cost.

3. Using Legal Forms

One method small businesses often utilize to save on costs is downloading a legal form and filling in the blanks. This certainly will reduce your legal costs since the business owner is deciding to forgo counsel. While it is true that most forms contain “standard” or “boilerplate” provisions, it is the non-standard provisions that really require an attorney’s attention. Instead of just using a stock document form without any modification, a better approach would be to use the legal form as a starting point and have an attorney tailor the form to your particular needs. This should save you significant fees as the attorney can concentrate on the customization and reworking of deficient provisions in the “standard” form rather than starting from scratch.

Best Tips To Start a Business with No Money

You have a dream but no money to put toward the dream. That’s not uncommon among entrepreneurs. Don’t let the lack of money deter you from a business you know other people would find benefit from. Here are a few ideas of how to get your business off the ground with no money.

1. Some are Easier Than Others

If you don’t have any startup capital, service-based businesses are perfect. Product based businesses require you to purchase and then resell. Service-based businesses like consulting, advising, or things like content creation or web design, only need equipment you probably already have.

2. Get Creative with How You Raise Funds

Consider the story of how Outbox Systems started. The founders had a dream of connecting two software applications together but didn’t have the money to build it. Instead, they worked out a deal with another company where they would build a similar product for a discounted rate yet retain the rights to sell the product to others. That’s creative financing. How can you get creative with how you raise money?

3. Sweat Equity is Free

Starting a business is hard. It’s not comfortable. Expect long days, a lot of hard conversations, and plenty of people telling you it won’t work. You don’t have the money to hire people to do tasks like cold calling and door to door sales so you have to take on the task. If you commit to being the person that does just about everything in the beginning, startup costs are much lower.

4. Creative Fundraising – Part 2

Yes, there’s friends and family but today we have crowdfunding, local and national incubators, accelerators, and microfinancing. If you don’t know what these are, do some Googling and learn about them. Look for communities of investors in your area and tell others about your business. There’s plenty of funding that doesn’t involve banks and credit cards.

5. Start Simple

Your dream might include a pretty big business offering a wide variety of products and services but for now, keep it simple. Sell a single product or service. Build your customer base and later branch out into other products and services.

One of the most expensive parts of running a business is acquiring customers. If you gain their trust with one product or service now, selling something else later is much easier.

6. Start as a Hobby

At some point you’ll have to quit your day job but that day isn’t today. Hobby businesses often come from the person’s love of something. Maybe you have a corporate job during the day but you love to bake when you come home. Start with people you know and allow your network to grow from there. Your marketing costs are zero and you still have money coming in from your day job.

7. Work for Somebody Else

Although they may not admit it, most business owners became entrepreneurs thinking they knew more than what they did. In fact, many businesses fail because the person was ill-equipped to build a successful business.

Before you start your own business, work or intern with somebody in the business already. The experience you gain will allow you to start your business knowing what you truly need to spend money on and what you don’t. You’ll also gain insider knowledge of the industry and possibly a healthy customer list from the beginning.

8. Use Free Services

The Internet is full of high quality services you can use for free. Mailchimp is a powerful e-mail marketing platform that’s free for the first 2,000 e-mail addresses. Wufoo allows you to make online forms, and although Facebook and other social media platforms won’t put your ad in front of large amounts of people unless you pay, you can still gain some traction by telling people what you’re doing.

There’s also freelance platforms like Fiverr, Elance, and Upwork that have quality freelancers willing to help with logo and web design, and other service for cheap. You could get a logo made for $5!

9. Barter

Don’t have any money? Offer to barter your services in exchange for somebody else’s. There aren’t many small business owners that aren’t looking for ways to get quality services for little or no cost. What you have, they want, and they’re willing to trade for it.

10. Hustle!

Finally, go into your business endeavor with a hustling mindset. Be ready to do anything legal and ethical to get your business off the ground. Don’t like cold calling? Do it anyway? Not a graphic designer? You can find templates online for just about anything. Don’t want to do any free work? It might be worth it to get your name out there. If you don’t have the money to pay for services, you have to do them or find somebody who can and will do it for free.

Just as you would do just about anything for your family, you have to have the same mindset about your business.