Are you considering making the transition from the role of employee to small business owner in this evolving economy? Start by strategizing and prioritizing your financial planning responsibilities.
With the collective guidance of a qualified tax adviser and Certified Financial PlannerTM professional from the Financial Planning Association, you can assemble a well-organized system of tracking what you spend to produce income. In addition, you can sensibly save money by learning more about eligible tax deductions you should take for your self-employed business.
Apply the following pointers and perspectives to efficiently develop and manage your new business:
• As a small firm owner, you are accountable for the accurate and timely filing of all taxes owed on income and employment taxes for your workers. Use financial management software, such as Quicken or Quickbooks, to help you with implementing an ongoing system that captures income and expenses. Remember to document all cash transactions and stash receipts in an identified file folder or in labeled envelopes (marked with the month and year).
• Paying additional taxes and being able to claim tax deductions are both new challenges and opportunities for you as a self-employed business owner. Make sure that you file quarterly federal and state estimated taxes. Further, if you have employees, you will need to withhold taxes from each paycheck they receive and make timely payments to the IRS and the proper state authorities. Verify that you also send payments to cover Social Security tax, Medicare tax, and any other mandated local payroll taxes withheld from your paychecks.
• How can you optimally plan for taxes while protecting your business and personal assets against potential liability? Consult with a seasoned attorney or tax professional specializing in risk management to figure out the type of entity (i.e. Subchapter S Corporation, C Corporation, Limited Liability Company, etc.) that would be most appropriate for your business activity and financial situation.
• Do not commingle business income with your personal spending. Open a separate banking account in the name of your business and obtain an accompanying Federal Employer Identification Number (EIN). Establish credit now with this EIN in your business name apart from your own personal credit.
• What types of retirement plans are available for you to allocate a substantial portion of your net income on an annual basis? Realize that you have a diverse array of choices for tax-deferred savings of self-employed earnings contingent on your needs. You can decide to significantly fund a Simplified Employee Pension (SEP-IRA) plan or Keogh plan up until the tax-filing deadline and deduct these contributions on your personal income tax return. Alternatively, depending on your level of self-employment income and tolerance for administration expense, you can set up a Solo 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE IRA) with the total funding amount comprised of employer and employee contributions. Be certain you understand the rules and penalties that apply to taking your money out of these plans early.
• Can your children set up a Roth IRA to contribute wages from a job and begin saving for retirement? Employ your kids and encourage them to fund a Roth IRA with their earned income. Keep organized records of earnings, including a log of the dates and hours your children work.
• With health insurance, you can elect to continue your existing Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage from your previous employer's plan for as long as possible (up to 18 months, or more in some states). Be cognizant that you can deduct 100 percent of your health insurance premiums up to your self-employed business' net profit. Recognize that this deductibility is not permitted if you are eligible for health care coverage through other means, such as your spouse's employer. For family members who work for your small business, you may be able to deduct full medical premiums, including some long-term care insurance.
Reap fulfilling professional rewards and achieve lifelong dreams by utilizing these beneficial tips to launch a successful small business.
(Charles Sims Jr. is president/ CEO of The Sims Financial Group. Contact him at 901-682-2410 or visit www.SimsFinancialGroup.com.)