5 things to know when starting a business
By GinaYoung on July 03, 2014
Being a business owner and working for yourself has many rewards… and many risks. While the thought of not having to punch a clock for someone else is exciting to you, competition in the marketplace and inconsistent income streams can be substantial challenges for any new business. If you have been thinking about starting your own business, there are five things that you should consider before taking the plunge.
1) Initial Investment—Do you have enough money set aside to live off of while you get your business up and running? Or will you be continuing to work your current job while starting a side business? Depending on the type of business that you choose, you could have little or no start-up costs. For instance, taking a hobby, such as photography, and turning it into a side business would not require a huge initial investment.
2) Business type—What service will your business provide? What product will you sell? Will your business primarily exist online, such as an e-commerce store, or will your business primarily operate through a brick-and-mortar storefront, such as a medical supply store or beauty salon?
Certified Public Accountant, former IRS agent, and author of Outsmarting the System: Lower Your Taxes, Control Your Future, and Reach Financial Freedom, Anthony Campidonica, offers the following advice to clients regarding the tax implications of starting a side business:
3) Tax Benefits—A side business can present you with favorable tax opportunities. Business owners are allowed to convert personal expenses into legal business deductions if those expenses are considered ordinary and necessary expenses related to the operation of the business activity. These expenses include, but are not limited to, cell phone bills, computer, and meals and entertainment.
4) Tax Obligations—As a self-employed individual, you are generally required to pay quarterly estimated taxes for your self-employment tax and income tax.
- Self-Employment Tax - Self-employment tax (SE tax) consists of Social Security and Medicare tax. It is similar to the Social Security and Medicare taxes withheld from the pay of most employees. You are generally liable for SE tax if you had net earnings from self-employment of $400 or more. Self-employment tax is a percentage of your net earnings from self-employment. Net earnings are calculated as the gross income you derived from your business less ordinary and necessary business expenses.
- Income Tax - You are required to pay income tax, which is in addition to the SE tax, on your net earnings from self-employment. This is a tax imposed on your income from your business, which is determined by applying a rate to the net earnings.
- Quarterly Payments - Because you do not have an employer withholding Social Security and Medicare taxes, and income tax for you on your earnings, you make estimated payments to pay these taxes. Speak to a tax professional or use the worksheet in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax payments and if so, the amount of the taxes.
5) Recordkeeping—Typically, taxpayers who are the most organized with their records pay the least amount of taxes because they are able to fully and accurately account for their income and expenses. Learning how to properly substantiate your expenses can save you both time and money. There are many software programs that can help you maintain your records in an orderly and consistent manner.
Photo by reynermedia via Flickr
**The advice shared in this article is for informational purposes only. Before starting a business, you should talk to a tax professional and fully research the tax implications and/or tax obligations that come with it for your specific situation.**
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