Tag Archives: taxes

Self Care: The Self-Employment Tax

If you work for yourself, it doesn’t take you long to figure out that the American Dream has a few strings attached. One aspect of self-employment that people hardly ever talk about is the self-employment tax. Yes, you already pay income taxes, and depending on how you structure your business, you may be paying them quarterly.

But what about FICA? It’s not the government’s job to make sure that you, as a self-employed individual, are paying the proper amount into Social Security and Medicare.

That’s part of your job.

This is what we mean by the self-employment tax. According to the IRS , the self-employment tax “is a tax consisting of Social Security and Medicare taxes primarily who work for themselves.”

The first thing to remember that unless you make more than $400 in a year, you’re not required to pay the any self-employment taxes.  You’ll notice that the threshold for requiring to pay is lower than the amount required for a client to provide you a 1099.


You’ll also notice that there are two options for figuring your earnings to base your tax payment on: one for farmers and one for other kinds of self-employed individuals (the nonfarm optional method). The nonfarm optional method can be used if net profits are less than $5,457 and also less than 72.189% of gross nonfarm income, but you had net earnings from self-employment of at least $400 in two of the prior three years.

Please keep in mind, however, that the nonfarm income optional method can only be used five times by a self-employed individual.

When determining your income, make sure to clearly delineate between what you’re paid as a self-employed individual and any money you earn as the result of investing in something else – especially if the business you end up investing in is in a similar line to what you do. You also need to be aware of the IRS and court rulings regarding monies paid out as retirement. Retirement is just taxable income (depending if from a tax-deferred vehicle) not self-employment, and no FICA or medicare is taken out, just income tax based on your tax bracket.

Even if you’re not bringing in a lot of money yet as a self-employed trailblazer, you may want to consider going ahead and paying some self-employment tax voluntarily. Although you may not be legally required to pay, there is an advantage. You will be able to earn Social Security credits, which translate into higher benefit when you retire.

To LLC or not to LLC: that is the question

Being an artist or working in a creative industry as a freelancer isn’t always easy. Unless you’re fortunate enough to find steady clients and gigs, you feel like your professional life is forever going in a circle of feast and famine.  And, if you have worked as an artist of a creative freelancer, you know that being talented at what you do isn’t enough. That myth of the carefree artist with his head in the clouds and no notion of how the business world works is simply that – a myth. Being a great artist goes hand-in-hand with being a savvy businessperson, because as much as you love your art, you need to eat and keep the lights on, too.

One thing every entrepreneur thinks about eventually is whether to operate as a Sole Proprietorship or to form a Limited Liability Corporation (LLC).

In most cases, you’re probably going to start with and stay with a Sole Proprietorship. This is the easiest business to start because there isn’t much set up required. Although you may be required to get a business license, there isn’t any paperwork you need file unless you choose to “Do Business As” (DBA) a name besides your own. You may also want to consider going ahead and applying for an EIN (Employer Identification Number. While it’s not necessary for a Sole Proprietorship, it will help protect your social security number. It also legitimizes that what you are doing is more than a hobby. You report your earnings annually and you are responsible for paying self-employment taxes as well as covering contributions to Social Security and Medicare.

If you’re fine with all of that, and you’re careful with your accounting practices, then you will probably want to form a Sole Proprietorship.

Keep in mind though, that if your business should ever be sued, then you are personally liable for everything. And if you should lose, your house, your property, and other assets will be at risk.

Forming an LLC takes some legwork, preparation, and money. After you chose a name and make sure it’s not already being used, it’s time to file articles of corporation. Depending on the state you live in, expect to pay between $100 and $800. In Kentucky if you forgo the ease of having someone else do the heavy lifting for you, it will only cost you a $49 fee paid to the State Treasurer to file your articles of corporation.

Some states also require an operating agreement that outlines how your business is run; Kentucky, however, does not. You’ll then need to get an EIN (Employer Identification Number), which is free and can be obtained online at the IRS website. Keep in mind though, that you can only register for one EIN at a time. At this point, you can separate your personal and business assets. This is the main advantage for forming an LLC as an artist or freelancer.

Finally, you’ll need to register for state tax and unemployment insurance. Even if you happen to be your only “employee” you will still need to do these things in order to be in compliance of state law.

Depending on the nature of your work, forming an LLC might be overkill. Many artists and members in what is termed the “creative class” keep it simple. And, unless the kind of work you do expands to the point that you need to bring in extra help, you will want to seriously consider keeping your work life as least complicated as possible.

If you’re reading this and your business or business concept doesn’t fall under the umbrella of the “gig economy” or you don’t identify as part of “the creative class,” keep in mind that every entrepreneur has to make the decision at some point whether to operate as a Sole Proprietorship or as an LLC.

Marbles and monkeys: tracking your hours and expenses

Even though Richard Florida’s 2004 brain child, “the creative class”,  has come under fire in the last few years, many cities trying to redefine themselves in the wake of an increasingly dominant technological economy have still spent considerable time and capital trying to accommodate young urban creatives – freelance writers, graphic designers, computer programmers, artists, and media workers, as well as people working in healthcare, business and finance, the legal sector, and education.  As a matter of fact, a 2010 report predicted 40% of American workers will be earning their living as part of the “gig economy” by 2020.

 The next few blog posts will be focusing on accounting issues and challenges that face entrepreneurs whose work falls under the category of “the creative class” in a “gig economy.”

So either you’ve been sucked in by allure of being your own boss or you’re unable to find a single, stable job in your chosen career field. Now here you are. You are part of the gig economy. You have several clients with rotating deadlines, or you have a slew of single-project clients.  You get to work from home. You get to work in your pajamas. Sometimes you can grab your laptop and go to your favorite coffee shop and work. You might even be able to work from the beach! You have more control over your schedule than your parents did. And it’s awesome being your own boss.

But unlike the days of The Organization Man, you also have to shoulder the responsibility for tracking your hours and being more aware of your expenses. Even though sources like Forbes Magazine and Investopedia praise the gig economy and the idea of a mobile creative class, you know there’s a large part of your job that isn’t creative even if it is mobile.

Depending on the client, you will charge for your time differently: by the hour, by the project, or even by the word if you are a copy editor/copy writer. There are a lot of marbles to keep track of when you work for yourself. Different hours worked on different projects on any given day. Different hourly rates for different clients. Record keeping is essential. If you’re good with spreadsheets, that’s helpful. If not, consider finding some accounting software, cloud accounting, or — if you have a large enough client base – find an accountant to take the guess work out.

Not only do you want to keep a precise record of your work hours so you can bill your clients correctly, you also want to keep track of any taxes you will be required to pay. Why? Because now you’re now your own boss, without anyone in human resources or payroll to arrange for deductions. You are responsible for making sure Uncle Sam gets his cut. With all the joys and challenges of being your own boss in the “gig economy,” you don’t want that big angry monkey on your back weighing down your success.

GrinchtoGlee

From Grinch to Glee – Make year end easier with these bookkeeping tips

It’s not that your heart is two-sizes too small like the Grinch, but rather that your head might explode from all the year-end bookkeeping tasks on your list. While these to-dos could certainly put your holiday spirit in short supply, we know how and Who can help.

It’s essential that your data is accurate, complete and organized for tax time and the year ahead. But where do you begin?

Like the Whos in Whoville helped Grinch, we offer tips to keep you and your books on the nice list.

  • Evaluate your financial standing

Review profit and loss, your balance sheet and general ledger. Make sure they aren’t mangled up in tangled up knots by checking that all transactions have been recorded and posted to the proper income, expense, asset or liabiity accounts. Also check the accuracy of your accounts receivable and accounts payable, and write off uncollectible debt so as not to overstate your income (especially if accrual based), and overpay the You-Know-Whos.

  • Complete bank reconciliations

Make sure your checking, savings and credit card accounts have been reconciled. Loan interest should be separated from the principal and accurately logged. And a decidedly, non-grinchy trick: reconciling monthly makes it easier to catch errors.

  • Review Personal Expenses

You shouldn’t, wouldn’t, oughtn’t, mustn’t mix your personal and business expenses (although for the Sole Proprietor it’s often a necessity), so look at your expenses closely and if that’s the case find receipts and/or cancelled checks and log the expenses in your books. Then watch your heart grow because you avoided paying extra taxes.

  • Review Subcontractor Services

If you’ve hired any Whos who are Sole Proprietor’s or LLC’s, for contract services totaling more than $600 during the year, you’ll be required to send them a 1099 Misc form. It’s a best practice to send each new subcontractor or vendor a W9 at the time of hire to ensure you have complete address information and either their Social Security Number or Federal ID Number information on file.

  • Take Inventory

Review your inventory during the last month of the tax year and make necessary adjustments to align the inventory account of floofloovers and whowonkas to match the items in stock.  Your inventory value should show the cost price or price paid rather that the selling price for your items.

  • Create a Filing System

It may sound overly simple and antiquated, but we know an organized system for easily accessing the documents you need, when you need them come tax time will make you happy as a Who.

As you celebrate the close of 2016, it’s also time to look to the year ahead. If one of your goals is to have more flexibility and time to achieve your personal and business goals, consider the advantages of having a Bookkeeper. Not only an excellent resource to simplify your financials and ensure accuracy, a Bookkeeper can also be a personal advocate, a partner as loyal as Max, and someone to help you make your Holidays mean a little bit more for years to come.

Spring Cleaning For Your Finances

OK, now breathe! That’s it, take a deep breath in and slowly release it… tax day is over, spring is in the air and summer is just around the corner. LIFE IS GOOD!

That is until you take a good look at the mess around your computer… the strewn trash piles along with the old financial records and leftover coffee cups and who knows how long that box of chow mein noodles has been siting there… right?!

But remember, it’s SPRING and what better time than to get started on a bit of spring cleaning? I’m not just talking about cleaning up from your deadline with the IRS or cleaning out the closets and under your bed, I’m talking about your financial spring cleaning.

Now, don’t get me wrong, spring cleaning your house goes a long way in helping you spring clean your finances too. By organizing your home, you are much more likely to know what you need to buy and may prevent you from purchasing something that you don’t need, simply because you misplaced it. Listed below are a few other ways that you can spring clean your finances:

  • Check Your Credit Score – Is there any incorrect or misleading information about you that could hurt your score? What can you do to improve your score?
  • Organize and/or Shred Old Financial Documents – Clean up your files and shred any old or no longer needed information.
  • Re-balance and Diversify Your Investment and Retirement Accounts – How are your investments doing? Are you on tract with your retirement goals?
  • Review Your Insurance Coverage – has there been any life event changes? Do you need any additional coverage or is any coverage obsolete?
  • Review Your Expenses and shop for better rates – Can you pay less if you switching to a different company? Are you using what you paid for like that gym membership?
  • Set up Automatic Bill Pay – Late fees undermine your financial goals, therefore put regular payments on automatic bill pay so this doesn’t happen.
  • Save without Thinking – How is your emergency fund? Are you saving enough each month?
  • Revisit Your Budget – Once you have reviewed your finances ensure that the new numbers are worked into your budget.
  • Record Your Financial Passwords and Store Records in a Safe Place – Or better yet, use a trusted online password storage system and be sure to use a different password for each of your financial sites changing the password on a quarterly bases.

Knowing where you stand with your finances will better enable you to make wise and prudent money choices and as a result, you will be better prepared for your next tax deadline in 2017.

Need A Raise? Then Read This…

What would you do with an extra $500 – $1500 of free money each year? Take a family vacation, put it in savings, add it to your college/retirement fund, pay down debt etc… In other words, there would be many uses for that money, right? OK, so now you are probably wondering, where do I go to find this “free” money?
Well let me start by telling you a story that I’m sure we can all relate too. Last January, my friend received a flyer in the mail from her cable company stating that because she was such a “loyal” customer, she was going to get 3 months of HBO for free! Well she thought, “How cool is that? I’m definitely going to take advantage of this and then I will call back and cancel it before my “free service” is up”. So for the next 3 months, she totally enjoyed “free HBO” and by the time came to cancel, she kept saying, “I’ll do it tomorrow”… even after she was sitting there watching the 110th viewing of “Grease” with John Travolta and Olivia Newton John! Then, life stayed busy and she just never got around to canceling, so over the last eight months she ended up adding $80 to her account… and they said it was free HBO!?
Almost every company that we have an account with, entices us with these low cost items throughout the year and we honestly think that we will try it “only once” and then we ultimately forget about cancelling, so much so that by the end of the year we are spending hundreds of dollars that we had no intention of spending in the first place! Plus, trying to remember everything that we signed up for gets so complicated that we just throw our hands up in the air and go on paying and paying…
Instead of giving up, there are two things you can do right now to stop putting money into their pockets and start putting it back into your own pocket:

  • Call your service providers and simply ask them to review your account to determine if there is any way you can reduce your bill. Most representatives tend to be very helpful with finding ways to reduce the money that you are spending because they want to keep your business.
  • Do a little research on how much you may be able to save by switching to another company. By knowing the competition’s rates you can either switch and save or you can let your company know that you want to stay with them but you may have to switch if they cannot offer you the same rates or find some incentive (less money) to keep your business.

By doing these two simple things with all of your accounts (phone, internet, auto insurance… etc.) you will be able to save some money. It took my friend about an hour to call both her cable and cellular company and when finished, she was able to get her bills reduced and will now be able to save a total of $250 over the next 12 months! By tightening up your budget, you will be able to put that extra money to better use… maybe even get out of debt that much quicker.

Make it a great day!
Marla J. Blanchard
MJB’s Bookkeeping Solutions

Don’t keep me a secret, if you know someone who could use a bit of Bookkeeping TLC let them know that they are not alone and have them call me 805-764-1MJB (1652).

Healthy Finances = Living Debt Free

A few months ago, we discussed how maintaining a “healthy budget” can keep everyone on course in reaching the lifestyle dreams of their future. It is also a great tool to help you get out of debt too, since debt is the primary reason that prevents most people from reaching their financial goals. So today we are going to discuss 2 types of debt and then go over 3 strategies that will help you stay on track towards eliminating that debt for good.

All debt is not the same and understanding the difference between secured and unsecured debt will help you prioritize your payoff strategy.

  • Secured Debt: Any money that is borrowed is attached to an asset that is considered collateral, meaning that if you don’t pay back the loan – the asset/collateral will be taken away and sold off to pay your debt. In addition, if the asset/collateral is sold for less than what you originally borrowed, then you may still owe the difference. Your home and car are examples of secured debt.
  • Unsecured Debt: Any money that is borrowed is not attached to an asset therefore you will not lose any tangible items – However, you are still held accountable for what you owe and creditors have a number of tools at their disposal to get their money paid back such as, reporting to the credit agencies which will lower your credit rating, garnishing your wages or by hiring a debt collector. Credit cards and medical bills are examples of unsecured debt.

Now that you understand the difference in each type of debt let’s look at a few strategies for paying down your debt.  But first, a must do before you add any new strategy…

            PAY YOUR MINIMUM BALANCE ON EACH OF YOUR BILLS EVERY MONTH!                                        

By paying your creditors the minimum balance each month, let’s them know that you are staying on track and it keeps your accounts from receiving any negative feedback with the credit bureaus. Once you have paid your minimums you can then take the extra cash to pay down your debt in one of the following ways.

  • Snowball System: In this plan, you will organize your debt from smallest to largest then pay any extra money toward the smallest debt each month. Then once you have paid of that bill then start paying down the next largest and so on. The benefits here are that you will see one of your debts being paid of sooner which is a great boost to your financial goal.
  • Avalanche System: This plan is much like the ‘Snowball” method instead you arrange your debts according to the interest rates from highest to lowest then pay the highest rate bill first until it has been paid off then move on to the next highest, and so on. By taking the interest rates into account, you are putting more money toward your higher interest rate debt first. Not only does this approach save you money, “it gets you completely debt-free faster.
  • Financial Fast/Debt Detox: Since we have been discussing how to get financially fit, why not take it a step further by doing an actual spending fast? With this method you will be required to honestly ask yourself, “What do I really need?” – vs – “What do I really want?” Then make a list for each question. Once you have your two lists… then for the life of your fast (1 yr.?, 18 mos.?, you decide), spend your money on only what you really need each month and then use the rest of the money to pay down your debt until it has all been paid off. Once you have accomplished paying off your debt, but your spending fast isn’t over yet, then start putting the monthly income into a savings account and continue this habit until your fast has been completed. At the end of your financial fast, I am sure that you will be super impressed on what you have accomplished!

As with any goal that you are trying to achieve, be it financial goals or health and fitness goals, you’re more likely to succeed if you have a good plan in place, a fair amount of willpower and a desire to change your habits.

Make it a great day!
Marla J. Blanchard
MJB’s Bookkeeping Solutions

Don’t keep me a secret, if you know someone who could use a bit of Bookkeeping TLC let them know that they are not alone and have them call me 805-764-1MJB (1652).