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.

 

Parenting, don’t fool yourself, it never ends – and you don’t want it to!

Good parenting never stops. You can always have a positive impact on the lives of your children, if you pay attention and employ good thinking. This remains true after they leave home, after they graduate college, after they get their first job, after you get a divorce, after they get a divorce, after they have kids, and so on.

Loving them no matter what

My divorce was quite unpleasant. After my ex-wife and I separated, my children were upset. One expressed anger and wanted little to do with me. I made clear that I cared and wanted to be in his life. So, over time, that attitude changed.

After some time, we met for dinner. The evening seemed to be going calmly, but then I said something that brought out his anger. I sat and took it. Because I listened to his anger, and continued to make clear that I loved him no matter what, this was a turning point. We have grown much closer since that evening.

Celebrating holidays

Holidays are always challenging. One year, in September, I asked about Thanksgiving. The response was, “I thought you said seeing us on Thanksgiving was not important to you.” I said that I had feelings that made me realize that was not completely true.

However, I backed off and I sent an e-mail saying that what was really important was to see my children together on any day, regardless of what day was. A few days later, I got an email saying that they wanted to join me for Thanksgiving. Messages like that will bring tears to your eyes! (And that was the best Thanksgiving ever!)

Finances

As an attorney and financial planner, I try to make sure my children plan well. On the other hand, I know saying too much turns into prying into their lives when they are striving to be independent. It can make them feel badly, as if they are not doing well or as if I am being critical.

After the divorce, my daughter needed some support from me. I asked if her mother was helping. She said yes, so I never asked again and provided what she said she needed.

Much later, I learned that she amassed several thousand dollars in credit card debt during this time. When she told me this, she also told me that she paid it off. Such an impressive accomplishment; you have to be proud of that!

Conclusion

So, my learning never stops, because I want to be better as a parent.
I count myself very fortunate for the close relationship I have with my children.
And what I can do to help my children continues!

Cancer, I try not to talk about it

I had cancer. If you have had cancer, or know anyone who has, you know it changes your life – forever.

If you are lucky, and you live, each day is special in a new way.

When I first wrote this, I had just attended a wake for a friend who was 51 and in great health, or so we thought. He played basketball, rode a mountain bike, trained in karate … then died from heart attack.

It’s over a year later, so why am I talking about this now? I don’t want anyone to starve themselves today for a future they may never see.

I am not saying spend everything living today. But I am saying find a balance!

Yes, “balance,” that mindfulness term that applies to financial planning. Enjoy what you can today without making your future a mess, and make your future good enough so you can enjoy today.

Got it? I hope so.

P.S – please see my Pan-Mass Challenge profile for more on my response to having had cancer and losing a dear friend. (The answer is obvious: I ride to raise money to save others!)
Great photo of some young PMC riders!

What I learned with my website failure

Yes, robo-advisors are coming. But, I seem to have missed that boat, er self-driving car.

In the effort to design and launch a financial planning website for young people, I learned quite a lot. One thing I learned is that a good idea, even one that many people think is up and coming, is not enough by itself. In fact, it takes a great deal of effort plus substantial capital to launch an effective site. And even then, there is no assurance that you have a successful business.

We did preserve the content that we created and used it to launch a financial literacy website. We hope that people can use this site to better understand their finances. But it will not be a source of revenue: too few want to pay for financial planning advice. It may be the same phenomenon as people searching online for medical questions instead of paying to see a doctor.  Who knows?

Another thing I learned over the last couple of years is that I really enjoy human interaction, helping people solve problems. Creating a robo-planner website wasn’t going to satisfy that need.

So what am I doing? I’m back to concentrating on my law firm, providing financial planning and related legal work plus adding divorce mediation to my business.

Before concluding this post, there are so many to thank. The list of advisors, consultants and friends includes, in no special order: Joseph B. Lassiter, III, Francesca Bartholomew, Shannon M. Bénay, Sima Patel, Jeff Benson, Carl Muscari, Howard Zaharoff, Elliot Sloyer, Peter Demuth, Mark J. Deck, Elliot Kaztman, Catalina Gorla, Meredith McPherron, Jason Yarrington, Ron Aines, Chris Lovell, Amanda Cripps, Adam Weisman, Alyssa Windell, Beth Marcus, Mary Anna Mancusco, Scott Branson, Marissa Branson, and so many more!

Thank you all so much for a great adventure!

Steven

Before you take advice on your finances, ask this question

As I review posts for our sister website on financial literacy, this seemed to be a great post to repeat:

If you want financial advice, before listening to someone, ask yourself one simple question:

“If I’m not paying this adviser, who IS paying them?”

If you don’t know the answer, you may have a problem.

Think about it ….