Retirement Planning for Self-Employed Entrepreneurs

April 30, 2013 By 2 Comments

self employed 401kWhile there are many amazing benefits of working for yourself, there is one big pitfall compared to people who work for large companies: retirement plans. Small business owners don’t have 401(k) plan matching, but you do have some options to put away money in a tax advantage account.  Find out more about the best self employed retirement plans.

 

Defined Contribution vs. Defined Benefit

In the old days, most big employers would offer defined benefit plans, most commonly in the form of a pension.

Employees did not have to worry about contributing. Everything was just taken care of. Pensions are quickly becoming a relic of a different era in retirement planning. Nowadays, most employers choose defined contribution plans.

A defined benefit plan means you are required to pay X amount per period while your employee, or you in the case you are the only employee, are in retirement. The plans below are all defined contribution plans, where the amount you save or contribute is defined up front and your business has no long-term requirement to pay.

 

SIMPLE IRA

A SIMPLE IRA Plan, Savings Incentive Match PLan for Employees, is like a 401(k) for small businesses. They are easy to start and take little work on the employer side. You can run a SIMPLE IRA for your employees including yourself and your spouse.

A SIMPLE IRA has a few options for funding, including a percent match between 1% and 3% or a non-elective contribution up to 2%. The maximum contribution from the employee is $12,000 per year in 2013, though there are some exceptions for people 50 and older. There are also some aggregate limits if you have other retirement accounts.

The IRS provides all of the details for how the plans work and how to start one at the SIMPLE IRA plan page.

 

SEP

An SEP, or Simplified Employee Pension, is similar to a SIMPLE IRA, except the contributions do not have to be fixed to a pay period.

In a SIMPLE IRA, the employer match must be made within 30 days of payday. Assuming a regular pay schedule, as an employer you have to ensure you have the cash on hand to deliver. That includes deposits for your own contributions.

With an SEP, you just have to make the contributions whenever you want up to 25% of the employee’s annual pay. This plan does not allow for employee contributions.

Because of the flexibility of this type of plan, it is the easiest for most small business owners to maintain to contribute to their own retirement from their business earnings.

You can learn more about running an SEP plan from the IRS website.

 

401(k)

As a business, you are able to establish a 401(k) plan for yourself and any other employees. A 401(k) works similarly to a SIMPLE IRA for most businesses.

401(k) plans have more regulations than SIMPLE IRAs, so they are generally not preferred for small businesses with employees. However, if you are the only employee, or if the only employees are you and your spouse, you can open a solo 401(k) plan that has fewer rules.

With a solo 401(k), you can contribute up to $17,000 per year, plus up to 25% of your net business income with a limit of $50,000 per year. That is a huge tax benefit if you choose either the Roth (taxed up front) or traditional (taxes upon retirement) plan.

The IRS provides the formulas to calculate your eligible contributions into a 401(k) plan for the self-employed.

Other Options

While the most common options are outlined above, you can also check out the plans below:

A profit-sharing plan is flexible and allows you to decide what to contribute annually up to 25% of your compensation with a $51,00 limit in 2013.

Money purchase plans require a fixed percentage contribution up to 25% of your annual compensation according to a pre-determined formula.

Do you have a self-employed retirement plan?

The Benefits and Risks of Outside Investment

April 23, 2013 By Leave a Comment

outside investmentAs your business grows, you may decide it is time to scale up and grow. To do this, you need capital. You can fund the growth from your business earnings, your personal money, or outside investors.

 

The Grass is Always Greener

If an investor is ready to put capital into your business, they usually paint a great picture of what the relationship will be like. They will lend their expertise to help the company grow, you still maintain independence, and you are free to run the business as always.

That is not always how it works.

These are not the super busy “sharks” from TV, you are more likely working with professional investors that like to control their money, ownership stake, and direct the business.

 

Investors Want Control

If you work with an angel investor, venture capitalist, or other professional investor, they are going to want control. In many cases, those investors will want a large ownership stake in your company in exchange for their capital.

If you agree to give away more than 50% of the company, they are your new boss. If you give away exactly 50%, you have a partner you have to consult with when making big decisions. Any less, you still have technical control over the company.

However, that doesn’t mean no stress and no worries. Your investors will likely want constant updates, have suggestions, and will want you to report to them regularly and expect action on their requests. This is not always a friendly, cordial experience if you are not blowing away their expectations.

 

Take Advantage of Investors

If an investor has money in your business, they have something at stake too. When that is the case, they are going to be happy to help you where they can.

Expect industry connections, best practices ideas for your operations, and a sounding board for new ideas. While they do want to control their investments, they do so because they want to succeed (or because they have a big ego).

Just watch the show Shark Tank, and see how these investors act.

 

Understand What You Are Getting Into

This post is not designed to discourage you from taking investments, it is to make sure you are aware of the benefits and risks. It is not all bad news, and it is all good news. The key is to understand the benefits and risks before making a decision and leveraging the knowledge to take advantage of the resources at hand.

If you take an investment from an outside investor, leverage the investor to help the business grow. Build your relationship for long term success and you will both succeed, as long as you have the same goals.

If you don’t take the investment, look to other companies that have succeeded in your industry for a model with which you can succeed.

What are your thoughts on takin on outside investments?

Cash Basis vs. Accrual Basis Accounting

March 4, 2013 By 3 Comments

When you are starting a new business, accounting may be one of the last issues on your mind. However, when you are getting setup for the first time, it is important to think of the long-term consequences of your accounting method.

 

Cash Basis

Cash basis accounting works like it sounds, you recognize income and expenses as you receive and spend the cash. When money comes in, it is recognized as revenue, when money is spend, it is recognized as an expense.

For most small businesses, cash basis accounting makes the most sense. Matching your cash flow to your accounting periods is by far the easiest way to track your income and expenses.

 

Accrual Basis

Accrual accounting is more complex, but can lead to better tax situation for larger companies. In accrual accounting, all revenue and expenses are matched to the period when the service takes place.

To really understand how accrual accounting works, let’s use a concert planning business as an example to help you understand how it works.

When you plan a concert, some of the cash is received months before the date of the show, cash trickles in as the show approaches, and some people buy the day of the show.

Expenses are also incurred over a long period of time. Some expenses are paid months ahead of time, and some are paid after the show. The expenses for a major event can easily cross multiple months. For a show in December or January, expenses, or revenue, can easily cross into multiple years.

If you are a cash basis business, you may have to pay taxes on the revenue on one year’s taxes and deduct the expenses the following year. That doesn’t make sense when you know the expense is coming.

To adjust for that, the IRS allows you to recognize all revenue and expenses in the same period. It has to be the period when the service took place. To ensure your tax reporting matches the actual revenue and costs, you (or your accountant) accrue for the revenue and expenses. An accrual is an accounting entry that acts as a placeholder on your books.

 

Accounting Periods

For some companies that are seasonal in nature, it could make more sense to operate on a cash basis but adjust your fiscal year.

Most companies use the calendar year for tracking business revenue and expenses. According to IRS rules, companies are allowed to adjust their fiscal year as long as it is consistent and defined.

Companies that are very busy during the holiday season, for example, may want to have a fiscal year that begins July 1st rather than January 1st so they don’t have to worry about year-end accounting during their busy season.

 

How Should You Deal With Accounting?

That is best decided by you and your accountant. Make sure to really understand the implications of your accounting method and plan out to decide what is best for your business, especially since many free online accounting programs don’t always allow you to choose what method of accounting you prefer.  Only complex accounting programs like Quickbooks let you choose.

Be Creative to Save on Office Supplies

February 19, 2013 By 1 Comment

Extreme Couponing has become a popular show that shows people how you can save big on things like groceries and household items with coupons. Did you know that deals exist far beyond the grocery store and your company may be able to take advantage?

 

Search Online

Start you search for office supply savings online. The easiest thing to do is just head to Amazon or Google Shopping to search for the items you want. I recently bought a backup network hard drive for my business online because it was more than 10% cheaper than the local store.

You can almost certainly find lower prices for items online than in the local store, and your items will most likely not be subject to sales tax. Also, make sure you are getting free shipping on your purchases.

 

Find Coupons

Great sites like RetailMeNot allow you to find deals and coupons that are site specific. You can also visit one of the dozens of other reputable coupon sites or search online for coupons for your product.

Sites like Amazon will accept some coupons, so even if you are shopping online, don’t discount the idea of saving even more.

 

Printed Coupons

If you get the Sunday paper or have a printer, you can comb through the ads and the web to print-out coupons good for in-store use.

If you find an item, like printer paper, on sale in the store and find a manufacturer’s coupon to use together, you can sometimes get an item for free or close to it.

 

Mail-In Rebates

When you go to shopping for office supplies, you will likely find two types of rebates in addition to sales and coupons. Those are in-store instant rebates and mail-in rebates.

Instant rebates work just like the name implies. The rebate is applied to your order in the store at checkout. Mail-in rebates are a little more complicated but should not be disregarded.

In the past, I have saved hundreds of dollars on purchases using mail-in rebates. The secret to mail-in rebate success is to meticulously follow all directions.

The rebate issuer, usually the manufacturer, will provide instructions for the rebate on either a printed receipt or attached paper. Read the instructions carefully and follow them step-by-step. They look for any reason possible to avoid sending you money, and if you miss a step, make a mistake, or provide a response with bad handwriting, you may not get a rebate check at all.

 

Be Vigilant and Shop Smart

You can’t find coupons or discounts on every item you purchase for your business, but you can always shop smart. Make sure to shop around and get the best prices available. Anything you can do to save money is a good idea.

 

Save the Receipts

No matter what you spend, remember you can save on your taxes by deducting any expense your business incurs. Good record keeping is important!

Form W9 and 1099 For Indepedent Contractors

February 12, 2013 By 2 Comments

As a business owner, you will inevitably have to go to outside vendors for products and services. Whether you hired someone to work on your website or provide an outsourced service to a customer, it is important to track and report outsourced costs appropriately.

 

Get a W9 from Each Contractor

The IRS form W9 is used to ensure you are contracting with a legal US person or entity. It is a short form that includes name, contact, and tax ID information.

As a business owner bringing on an independent contractor, it is your responsibility to collect a form W9 and maintain a copy of it for future reference if needed. This form is not sent to the IRS, it is for business owners to hold for future tax reporting purposes.

 

Not For Employees

A W9 is only for contractors, not employees. If you hire an employee, you are required to collect a W4 and I9 form.

To determine whether you hired an employee, you can use the common law rules published by the IRS.

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

     

Issue a 1099

If you paid a contractor more than $600 in a calendar year, you are required to report that income to the IRS and issue a form 1099-Misc to the vendor.

Your tax software most likely has everything needed to issue a form 1099. If you have any questions about W9 or 1099 forms, it is always best to consult with a professional business accountant.

 

On the Other Side of the Table

If you do work for another business as an independent contractor, it is your responsibility to furnish a form W9 and report your income on your taxes, usually on a Schedule C or business tax return.

Even if your income falls below the $600 threshold, you are required by law to report the earnings to the IRS and pay taxes.

 

Be Safe, Report Everything

You don’t want to end up with fines, or even worse, jail time, for avoiding taxes. Penalties for tax evasion are stiff. The IRS considers any income taxable. While some professions, particularly ones where you are paid in cash, are popular for tax evasion, it is a bad idea.

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