7 things to do when starting a business to avoid nasty surprises

The only thing that hurts more than paying an income tax is not having to pay an income tax. Thomas Dewar

When you decide to start a business, taxes may be the last thing you think about. However, not realizing that you owe the self-employment tax as well as income taxes can lead to a nasty surprise when you file your taxes. This post is aimed at avoiding that costly surprise.

But, before we discuss the self-employment tax, there are other important steps to take when you become self-employed. Here are the 7 things to do after you start your own business to avoid nasty surprises:

Avoid nasty surprises – set up bookkeeping, form your entity, get licensed, buy insurance, and pay taxes

Bookkeeping – set up bookkeeping using software like QuickBooks (either online or on your laptop). You don’t want to be scrambling to find receipts at tax time or not be able to tell somebody if you are making money or not.

You can save time by downloading from your bank and credit card companies. If you set up things well, all income and every expense will be properly categorized for your profit and loss statement, or P&L. The P&L and balance sheet help you monitor your business to see how well you are doing and are essential for preparing your tax returns. The balance sheet will also come in handy if you need to apply for financing.

For all these steps, you may want to hire an accountant or speak to an attorney.

Entity – for many small businesses, being a sole proprietor is appropriate. You avoid paying corporate excise taxes and filing annual reports. However, if you have partners, you may want to form a partnership, corporation or LLC (details on choosing are beyond the scope of this post).

If your business involves risks that could lead to law suits, form a corporation or LLC to shelter your personal assets from liabilities of the business that insurance may not cover. Make sure that any actions you take for the business are in your capacity as an officer or manager – i.e., never sign personally.

Remember, you may want to consult with an attorney.

Get licenses, file annual reports and pay local taxes – certain businesses require a license to operate. Most entities are required to file annual reports. And, your city may impose taxes on the personal property in your business. Be sure to find out so you don’t owe penalties for failing to file and pay.

Buy health and other insurance – in addition to liability insurance, you will want to obtain health insurance if you are no longer working for another employer. You may get favorable treatment for this expense on your income taxes. You can also purchase insurance to cover damage to equipment, loss of data, identity theft and so on.

File payroll taxes – if you hire people to work for you and pay them over $600 per quarter in any year, you need to report the compensation. If they are independent contractors, you file a form 1099 with the IRS. If they are employees, you file a W-2 with the Social Security Administration. You also provide these forms to your people for the income tax filings.

You may need to withhold and remit FICA and Medicare taxes. Also, your employees may request that you withhold and remit federal and state income taxes (unless you live in a state that does not impose income taxes). Failure to withhold and pay to the IRS and state can lead to serious penalties.

Pay your income tax – one big shock for many who start a business is how much they owe in taxes. When you received a paycheck, you probably did not focus much on the fact that your employer withholds federal and state income taxes and FICA and Medicare taxes. And, you never had a chance to spend what was withheld.

However, when you run your own business, you have full access to the pre-tax income, so you must diligently allocate funds ahead of time so that you don’t come up short at text time. To avoid owing interest on the taxes due, you make estimated tax payments each quarter to the IRS and state.

Pay the self-employment tax – when you were an employee, your employer withheld FICA and Medicare taxes from your paychecks. The employer also contributed FICA and Medicare taxes on your behalf

When you become self-employed, you are responsible for both the employee and employer amounts. This tax is based on your net self-employment income

A lot to remember, right?

Maybe, but knowing and planning is far better than trying to scrape together money in April to cover taxes you did not expect.

Good luck with your new business!

In future posts, we will examine partnering with others, assessing your profitability, rules on deducting expenses, and entry into the real estate market.

 

Steve Jobs said: “Stay Hungry. Stay Foolish” – so how does that help your career path?

Michael Simmons recalled the impact of Steve Jobs last January in Top predictor of career success 2015.

Simmons then says: “We think we understand what caused his success. We don’t. We dismiss usable principles of success by labeling them as personality quirks. What’s often missed is the paradoxical interplay of two of his seemingly opposite qualities; maniacal focus and insatiable curiosity. These weren’t just two random strengths. They may have been his most important as they helped lead to everything else … Jobs’ curiosity fueled his passion and provided him with access to unique insights, skills, values, and world-class people who complemented his own skill set. Jobs’ focus brought those to bear in the world of personal electronics.”

In the post, he quotes Steve Jobs form 1995: “Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something.”

How does any of this relate to you and your career? Simmons reports from his 2013 interview of an expert on networks that a key indicator is being in “open networks.” He then indicates how that is beneficial:

• More accurate view of the world. It provides them with the ability to pull information from diverse clusters so errors cancel themselves out. Research by Philip Tetlock shows that people with open networks are better forecasters than people with closed networks.

• Ability to control the timing of information sharing. While they may not be the first to hear information, they can be the first to introduce information to another cluster. As a result, they can leverage the first move advantage.

• Ability to serve as a translator / connector between groups. They can create value by serving as an intermediary and connecting two people or organizations who can help each other who wouldn’t normally run into each other.

 • More breakthrough ideas. Brian Uzzi, professor of leadership and organizational change at the Kellogg School of Management, performed a landmark study where he delved into the tens of millions of academic studies throughout history. He compared their results by the number of citations (links from other research papers) they received and the other papers they referenced. A fascinating pattern emerged. The top performing studies had references that were 90% conventional and 10% atypical (i.e., pulling from other fields). This rule has held constant over time and across fields. People with open networks are more easily able to create atypical combinations.

Here is a quote that I find interesting (and can relate to):

This is challenging in that it can lead to feeling like an outsider as a result of being misunderstood and under-appreciated because few people understand why you think the way you do. It is also challenging, because it requires assimilating different and conflicting perspectives into one worldview.

And this really does ultimately get back to Steve Jobs, who said “Stay Hungry. Stay Foolish” If you have not read, or better yet, watched this, find time to do so: The 2005 Stanford commencement address Jobs – “Stay Hungry. Stay Foolish.”

Michael Simmons is a bestselling author and the co-founder of Empact, a global entrepreneurship education organization that has held 500+ entrepreneurship events including Summits at the White House, US Chamber of Commerce, and United Nations.