Home-based businesses can be financially rewarding and provide a certain amount of flexibility with your day-to-day schedule. Here are some tips to keep your business running at full steam.
- Stay on top of accounts receivable. It’s easy to get caught up with fulfilling your business obligations while invoices you’ve sent out go unpaid. Agree to payment terms in advance with new customers and immediately – but politely – communicate with them as soon as they miss a payment deadline. Keep current with regular invoicing and collections.
- Keep your bookkeeping records up-to-date. You may not realize you have an unpaid invoice that’s several months old unless your bookkeeping is up-to-date. Keeping accurate books involves more than balancing your bank accounts once a month. In addition to your monitoring your bank accounts, also consistently look at your accounts receivable, accounts payable, any debts (credit card, car loans or other borrowings), and all money you invest in your business. Ask for help if you don’t have enough time to do the bookkeeping yourself, or if you need help properly setting up your bookkeeping software.
- Check on permit requirements. Depending on what type of home-based business you have, you may be required to obtain various permits, licenses or other registrations. If you have not already done so, check with your town or city for local requirements. The Small Business Administration is also a good source to research information on permits.
- Get insured. Obtain adequate insurance for the type of operation you’ll be running. Besides the insurance required for business activities, you might consider adding a rider to your homeowner’s policy for liability protection should an accident occur on your property.
- Stay on top of technology. While you may not need a top of the line computer, be sure that the technology equipment you use can handle the bandwidth of everything you’ll ask it to do, including video calls, software apps and data storage. Also consider scheduling a time for your internet provider to visit your home to make sure everything is in working order and your security protocols are top notch. Have a back-up plan in place for when a device breaks down, including where you’ll go to have it repaired.
- Cash in on tax breaks. Take advantage of the tax breaks available to home-based businesses, including deductions for supplies, equipment and vehicle expenses. You may even be able to deduct the cost of your home office, including a pro-rated amount of your real estate taxes and utilities, if certain conditions are met.
- Set aside money to pay your taxes. Ask for help to calculate how much of your incoming cash you should be setting aside to pay your federal, state and local taxes. Consider opening a separate bank account to transfer your tax money into.
Don’t get shocked by a high tax bill! Be prepared for these pandemic-related tax surprises when you file your 2020 tax return. Please note: This information may change with ongoing legislation.
- Taxes on unemployment income. If you received unemployment benefits in 2020, you need to report these benefits on your tax return as taxable income. Check to see if either federal or state taxes were withheld from unemployment payments you received. If taxes were not withheld, you may need to write a check to the IRS when you file your tax return.
- Taxes from side jobs. Did you pick up a part-time gig to make ends meet? Payments received for performing these jobs may not have had your taxes withheld. If this is the case, you’ll need to pay your taxes directly to the IRS on April 15.
- Unusual profit-and-loss. If you run a business that was hit by the pandemic, you may find your estimated tax payments were either overpaid or underpaid compared to normal. Now that 2020 is in the books, run a quick projection to ensure you are not surprised with an unexpected tax bill when you file your tax return.
- Underpayment penalty. If you did not have proper tax withholdings from your paycheck or your estimated tax payments weren’t enough, you could be subject to an underpayment penalty. While it’s too late to avoid a penalty on your 2020 tax return, the solution in the future is to make high enough estimated tax payments each quarter in 2021 or have the appropriate amount withheld from your 2021 paychecks.
- A chance to claim missing stimulus payments. (A good surprise!) If any of your stimulus payments were for less than what you should have received, you can get money for the difference as a tax credit when you file your 2020 tax return.
Please use these examples to prepare yourself for a potential tax surprise during the uncertainty caused by the ongoing pandemic.
When tracking and planning your business objectives, it’s easy to focus your analysis on two reports — the income statement and balance sheet. But one of the primary keys to your business’s success relies more on how you handle the money flowing in and out of the business. The appearance of a solid profit can hide a lurking cash flow problem.
Here are practices to help you give your cash flow the attention it deserves:
- Understand your cash position. Start with simply getting in the habit of monitoring your bank account activity daily to watch for mistakes or unforeseen charges. Then look at each business process that involves cash — purchasing, inventory, collections and payroll are good examples. Consider extending terms for paying vendors, establishing shorter terms for customers to pay and implementing a review process to ensure accurate payroll calculations. Also explore opportunities to turn over your inventory faster.
- Create a cash flow statement forecast. With your knowledge of cash, create a forward-looking statement of monthly cash flow. It will reflect the ebbs and flow of cash throughout the year and identify times of cash crunch. You can then see the impact of changes you are making on your company’s cash position.
- Identify relevant ratios. There are many helpful cash flow ratios. Identify ratios that are especially helpful to your business. Have debt? Consider the cash flow coverage ratio (operating cash flow ÷ by debt) to help plan for scheduled debt payments. Making a lot of capital purchases? Use the free cash flow calculation (operating cash flow – capital expenditures) to determine how much cash will be left over after the purchases.
- Build in some contingencies. Most businesses experience seasonality. Understanding your business cycles can help you strategically manage cash in high cash months to cover shortfalls that come in low cash months. Set up a line of credit so it’s available in the case of an emergency, or as a bridge during short-term liquidity needs. A line of credit only charges interest only when used, so it’s a perfect tool to have at your disposal.
- Watch for hidden cash hijackers. Oftentimes, large cash expenditures can be hidden on your income statement or balance sheet. A few examples are payments on capital purchases, debt obligations, dividends, guaranteed payments to partners and taxes. Income taxes, when not accounted for correctly, can cause a twofold problem — a large lump sum that is due in a short amount of time, plus a larger obligation to account for going forward. Don’t wait until the end of the year to project your tax provision.
- Appoint someone to manage cash. As with many business processes, important details can fall through the cracks if there is not clear accountability as to who is responsible for the task. So assign yourself or someone you trust to manage the company’s cash flow.
When businesses fail, it’s usually because they run out of money. By making cash flow a central part of your business plan, you greatly reduce this risk.
Be Proactive!
Earlier this year, hackers were able to breach the security of Equifax, one of the three national credit reporting agencies. More than 143 million Americans — nearly half the country — were exposed to the attack, and may have had their personal information stolen, including names, birthdates, and Social Security and driver’s license numbers.
Equifax is still determining exactly whose data has been exposed. While you wait to find out, it’s worth taking a few proactive steps to make sure your info isn’t misused by hackers.
Start checking. Visit Equifax’s website at www.equifaxsecurity2017.com and enter your last name and last six digits of your Social Security number. The site will tell you whether it’s likely or not your data has been exposed, and put you on a list to get more information. You can also sign up for a year’s worth of free credit monitoring.
Watch your statements. Start checking your credit card statements, and pay special attention to cards you don’t use often. The initial reports from the breach were that hackers may have been making charges on underused cards.
Check your credit reports. You can look for suspicious items on your reports, such as new accounts being opened in your name, at all three credit report agencies: Equifax, Experian and TransUnion. Free annual reports are available at www.annualcreditreport.com.
Freeze your credit. If you suspect you may become a victim of identity theft, you can place a credit freeze on your profile at each of the three credit reporting agencies. This stops new accounts from being opened in your name. Note that you’ll have to unfreeze your accounts if you want to apply for new loans or make your credit accessible for things such as job applications.
File your taxes early. One of the most common ways identity thieves use your information is to try to claim a tax refund with your data. This was the most common scam in 2016, according to the Better Business Bureau. If you file your tax return as early as possible, you shut down this opportunity for any would-be thieves.
Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.
The basics
As the worker. If you are a contractor and not considered an employee, you must:
- Pay self-employment taxes (Social Security and Medicare-related taxes)
- Make estimated federal and state tax payments
- Handle your own benefits, insurance and bookkeeping
As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:
- Payment and penalties related to Social Security and Medicare taxes
- Payment of possible overtime including penalties for a contractor reclassified as an employee
- Legal obligation to pay for benefits
Things to consider
When the IRS re-characterizes an independent contractor as an employee, they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker’s independence. Here are some guidelines:
- The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee
- The more the financial relationship is controlled by the employer, the more likely the relationship will be seen as an employee and not an independent contractor To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner
- The more businesslike the arrangement, the more likely you have an independent contractor relationship
While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.
As school winds down, a number of students will hit the job market for summer employment. When this is a first job, it is often one of the first times you experience the world of taxes. Please use this information to help make the move to the workforce a little more understandable.
Form I-9 – When you get the job, your new employer will have you fill out tax form I-9, Employment Eligibility Information. This is a legal requirement to show you have the right to work and it confirms your tax information. You will be asked to provide proof of identity, including showing your Social Security card.
Form W-4 – You will also be asked to fill out a tax withholding form. This form gives employers instructions on how much they should withhold from your paycheck to send in to taxing authorities like the IRS. By filling out the form correctly, enough will be withheld from your pay to ensure you do not owe too much in tax when you file your tax return.
Other Taxes – You will notice your check amount is also reduced for your contributions to Social Security and Medicare. Your paycheck will be reduced by 6.2% for Social Security and 1.45% for Medicare payments. You are not in this alone. Your employer matches your payments and sends both of them to the government.
Self-employed? – If you start up your own summer business like mowing lawns or providing nanny services you will have tax obligations similar to those as an employee. In addition to income taxes, you will need to file estimated tax statements to cover Social Security and Medicare taxes. These two taxes amount to 15.3% of your net income, so plan accordingly. But also remember to save receipts for your job related expenses. They can help reduce your taxable income.
Tips are taxed – If you receive any tips, these too are taxable. Most employers that have tip-earning employees will help you file the appropriate forms. If they do not, you will need to ask for help to ensure your taxes are paid on your tip income.
Review your pay – Remember to review your initial paycheck. There are often errors in setting up employee records. Should you find an error or need an explanation, feel free to ask your employer for help. Errors not caught early can become expensive surprises later on during the year.
Know someone getting married? Here are some quick tips for the newlyweds to start them off on a secure path to financial bliss.
Notify Social Security – Notify the Social Security Administration (SSA) with any name changes. The IRS has a name match program with the SSA and will potentially reject deductions and joint filing status if the name change is not made timely. You do this by filing Form SS-5.
Selling a home? – If selling one or two residences, review the impact of capital gain tax laws and how they apply to your situation. This is important if one of you has only been in a home for a short time or if the home has appreciated in value.
Update your address – Update your address with the IRS if either of you is moving. You do this with IRS form 8822. Also, change your address at the postal service and DMV.
Notify your employers – Change your name and addresses with your employer to ensure your W-2’s are correctly stated. Recalculate your payroll withholdings and file a new Form W-4.
Beware the marriage penalty – If both newlyweds work, your combined income could put you into a higher tax bracket. This phenomenon is referred to as “the marriage penalty”. On the other hand, marriage could also reduce your tax burden. Because of this, now is a good time to conduct a tax forecast.
Review legal documents – Ensure legal titles are as you wish them after you are married. This includes bank accounts, titles on property, credit cards, insurance, and wills.
Beneficiary statement update – Review any retirement savings plans like 401(k)’s and IRA’s. The beneficiaries on these accounts must also be updated.
Review employee benefits – Review your employee benefits and make the necessary changes in health care, insurance, employee retirement accounts, pensions, and tax-preferred spending accounts. Marriage is a qualified event for most employers to allow you to make mid-year changes.
Talk about it – If you have not already done so, spend some time talking about how you will be managing your financial affairs. Who will be paying the bills? Who will be managing retirement accounts and investments? How will spending be managed? What bills and debt exist? Developing a plan and understanding how this will be handled can help reduce misunderstandings and future disagreements.
Since you can’t get away from taxes, the best thing to do is be prepared for them. If you own a small business, taxes become a bit more complicated, but there are several ways to make sure tax time is less stressful. Here are tips 3 and 4 for small business owners.
3. Leverage Tax Preparation Tools and Expertise
Most of the personal income tax preparation software applications include business tax options as well and are typically geared for small business or self-employment. The IRS has also gone to great lengths to provide material on its website that is easy to find and understandable by non-tax professionals.
However, tax laws are complex, and it can take time to become proficient. Hiring a tax professional may be in your best interests since this person could identify tax breaks and deductions you may miss.
Whether you use software or hire a pro, keeping a checklist while you are thinking about taxes throughout the year can help you get ready for tax time. There are online and print resources that show you what records and information you need, any tax guidelines geared toward businesses, and the all-important filing and payment dates.
Some things to keep track of include:
- Filing payroll tax forms
- Sending 1099 forms to your contractors
- Assembling income and expense records
- Renewal for liability insurance
You can find tax organizers and worksheets online, or your tax professional may have one for you to use.
4. Avoid These Common Mistakes
There are a couple of mistakes small business owners tend to make that can cause trouble down the road.
- One is thinking your tax professional will assume responsibility for all your tax needs. You cannot assume everything has been done appropriately because, again, you know what they say about “assume.” No matter who prepares the taxes, you are still responsible for all the information on the return and the taxes owed.
- Another mistake is allowing fear of the IRS to keep you from taking legitimate deductions. If you work with a reputable tax professional or online tax preparation service, you should be given appropriate guidance on your eligibility for each available write-off.
There you have it. Keep taxes in mind all year, keep up with changes and news, leverage reputable tax tools and professionals, and avoid common mistakes and your tax time stress should be reduced significantly. As a bonus, you will save yourself some money, and maybe receive a refund.
Since you can’t get away from taxes, the best thing to do is be prepared for them. If you own a small business, taxes become a bit more complicated, but there are several ways to make sure tax time is less stressful. Here are tips 1 and 2 for small business owners.
- Think Taxes Year Around
Thinking about your taxes all year does not seem to be a way to avoid stress, but in reality, tax planning is a year-round activity when you run a small business. If you keep up with documentation and recording requirements throughout the year, you are more likely to arrive at tax time with the right paperwork ready to go.
It is also easier to take advantage of tax savings and deductions over the course of time instead of trying to put together a package of write-offs at the last minute.
- Keep accurate records all year
- Save all business related receipts, both paper and electronic, and log them for easy access
- Keep mileage logs and other expense records so they are accurate
You will find tax time much less stressful, and you will be set up to monitor changes from year to year.
- Keep Up with the Tax News
It may seem that the legislature does nothing, but laws do get passed every year. You need to keep an eye on happenings in the federal government that can impact your tax liability and business organization.
For example:
- The Affordable Care Act is still rolling out. As of 2015 it applied to businesses with 51 to 99 employees and carried stiff penalties for failing to provide health insurance to employees. Penalties also applied if you did not report the type of coverage you provided.
- Taxation of online sales is still winding its way through Congress. You need to monitor the situation, so you know if it becomes law and how it could affect you if you are an online seller if you gross more than $1 million annually.
- The Section 179 Property Deduction was extended but not made permanent. It allows business to deduct the full amount of eligible property as expenses in the year the business began using it. “Property” includes any property used in manufacturing, transporting, and producing goods, any facility used for business or research, or any buildings used to hold livestock or horticultural products.
Tax laws change all the time; keep up with the business news for ongoing legislation or last minute tax breaks.
Over the past few years, state revenue departments have been getting creative in making new tax laws to capture non-resident income taxes. If you are an individual operating as a sole-proprietor consultant or service provider to customers out of your own state, here is what you need to know.
This could be you
- You could owe state income taxes to a state you never visited or worked in.
- Non-resident employees doing the same work you do as a consultant may not have to pay state income taxes while you must.
- Federal law protects non-residents from state revenue attacks, but only if you sell tangible property (like pencils, watches and other physical property). It generally does not protect those who provide services.
- Every state can be different. Just because you know your state’s rules, do not assume other states follow the same guidelines. Nor should you assume other state laws are logical or reasonable.
What can you do?
If you are a consultant providing services to out-of-state customers, here are some tips.
- Research the states rules – Research your customers’ state tax laws for non-resident service businesses. Also review that state’s non-resident employee wage rules. See if they treat them both the same way.
- Become a temporary employee – If non-resident rules are different for consultants versus employees, consider becoming a part-time employee or temp employee. Adjust your bill rate to allow for the employer paying half of your Social Security and Medicare.
- Physical presence – If you conduct your work in the out-of-state location, a non-resident tax return is usually due. But this is not always the case.
- Service or product? – Remember, selling product across state lines is different than providing a service. Nexus laws and tax cases make physical presence required. But here too, there can be exceptions.
- If in doubt, ask for help – The best advice is to ask for help. This area of tax code is rapidly evolving. There are no national guidelines and states like California and Michigan are very aggressive. Exceptions in state rules make mistakes easy to happen. This can lead to you owing taxes to another state based on your out-of state activities.
Small service businesses cannot readily defend themselves against large state revenue departments so they are becoming victims as one state tries to take another state’s income tax revenue. While you may receive a credit in your home state for taxes paid to another state, it is not always easy to do and penalties are often applied. Your best defense is knowledge.