If you work in a traditional job, managing your finances and taxes can be relatively easy. You collect your W-2, write off a few deductions, and you’re done. Your retirement account is being managed by an employer-sponsored retirement fund and your investments are automatically being taken out pretax. Sounds easy enough.

There’s a rising trend in America, however, toward a more independent workforce. Self-employment is a growing sector with more and more people opening their own business, launching startups, and freelancing valuable skills.

If you’re self-employed and own your own business, that’s where things can get tricky. Not to mention, running your own business doesn’t give you a ton of extra time to keep up with ever-changing tax laws and investment strategies.

The hallmark of any small business owner is the ability to wear many hats and multi-task dozens of responsibilities needed to run a successful operation. While this is invaluable, in order to scale any business or free up some of your time, outsourcing certain functions could greatly benefit the success of your business.

Here’s a few common mistakes we’ve seen over the years to be aware of when running your own business.

1. Write Offs

When it comes to understanding tax deductions and business credits, many business owners under-deduct because they’re uneasy about making a mistake or fear opening themselves up to an IRS audit. Business owners can deduct much more than your average taxpayer. If you’re self-employed, you can deduct a portion of your car, cell phone, home, computer, marketing, state + local taxes, and the list goes on. Be sure to consult with an advisor to take the appropriate deductions to lessen your tax burden.

2. Tax Payments + Financial Contributions

Don’t forget about those quarterly estimated tax payments. Why? Because similar to an employer taking out taxes each week from your paycheck, small business owners also have to pay as they go. A good tenet to live by is the 30 percent rule; save thirty cents for every dollar earned. This allows business owners to gauge and budget appropriately for their tax obligations.

Additionally, those who are self-employed should be contributing regularly to a retirement fund. Oftentimes, we see business owners focusing so much on running their business in the present that they forget about saving for the future. There are five types of retirement accounts for small business owners to choose from: an IRA (traditional or Roth), a Solo 401(k), a SEP IRA, a SIMPLE IRA, or a defined benefit plan. Figure out how much you’d like to save for retirement, and then begin contributing a percentage of your earnings to the account.

3. Record Keeping

When in doubt, keep it. It can be challenging to maintain good records and efficiently manage your books because of the time-consuming nature of the task at hand. We’ve seen it lead to missed payments and hefty fines. In order to stay organized and compliant, you’ll need receipts, banks statements, invoices, payroll records, contract, etc. to do your taxes, keep accurate financial statements, and be prepared in the event of an audit. Financial records are one of the most important aspects of any business, so be sure to record what money is going in and out of your business.

4. Mixing Personal and Business Expenses

It’s always a good idea to avoid mixing personal and business expenses. When you’re a sole proprietor, it’s often overlooked that the money needs to be managed separately, but it’s a huge red flag for the IRS. This is considered “comingling your books.” Personal expenses are not eligible business expenses deductible against taxable income. We recommend opening up a separate bank account for your business with a debit card to make separate purchases.

5. Managing Multiple Types of Transactions

With so many simple online payment services, transactions can be all over the place. PayPal, Venmo, Zelle, Square, among others, are convenient ways for businesses and customers to quickly exchange financial transactions. These transactions, while on different platforms, should still be treated similar to bank transactions. Money payable to the company should be recognized as income, and money paying out of the account should be recognized as an expense. Between cash, checks, credit cards, and online platforms, keeping everything straight can make your head spin, and some business owners prefer to outsource it all together.

Whether you’re just opening the doors to your new business or have been in operation for years, it’s a good time to check in on your financials, organize your books, and ensure that your investments are working for you.

 

 

Stu Steinberg, CFP, CPA, MBA has been working with families and their businesses since 1988. He can be reached at 61 Water Street, #2, Newburyport, MA  01950 and at (978) 864-9581 and stu@eaglerockwealth.net

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.

Securities and Financial planning offered through LPL Financial, a registered investment advisor. Member FINRA www.finra.org / SIPC www.sipc.org.