Hitting The Books
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They say no one gets rich working for someone else. Now that the"someone else" is you, will the same theory hold true? While corporate employees have benefit packages designed by their companies, you have the responsibility of crafting your own. Happily, you can tailor it to your needs and make the most of your money. Here are some tips on how to get paid and get organized; budget and save; set up a retirement plan and pay taxes.
Lorayne Fiorillo is a financial advisor at Prudential Securities.
Get Paid Now
Unlike cubicle-bound employees, those of us who work on our own don't have to worry about punching a clock to earn a paycheck. But what about getting that paycheck? Just because you've completed a job doesn't mean you'll be paid right away. If you're waiting for that check so you can pay your mortgage, the bank may not be as understanding with you as you are with your clients. To make sure you get paid on time, follow these tips:
1. When you accept a job, confirm payment terms in writing.
2. Bill every two weeks instead of every 30 days. This may expedite payments.
3. Accounts payable departments often need a vendor number before invoices can be paid, so provide them with one when you're hired. It takes time to get into the system, so get in early.
4. State on your invoice that payment is expected when invoiced and that a late fee is calculated on accounts in arrears over 30 days.
5. If a client is consistently delinquent, you may have to take stronger measures, including not accepting further assignments.
Kim Cook, president of 2K Productions, doesn't have any trouble getting paid--his big challenge is finding time to invoice clients. "It's not that people don't want to pay you, it's just that they have their own ways of doing it," says Cook, whose Charlotte, North Carolina, company shoots TV commercials, documentaries, videos and TV spots. "Trying to keep up with invoicing is my most difficult [task]. I let things pile up, and when I set aside time to get caught up, I get a call [for work] and that day is shot for billing." What's a homebased businessperson to do?
You could hire a service to do your billing and follow-up, but then you'd have to pay that service. We asked Michael Magdalani, president and CEO of Compustart, a New York City company that provides computer-based solutions, what to do. Magdalani recommends software from Intuit: QuickBooks or QuickBooks Pro. These programs are business-oriented, user-friendly and inexpensive. With them, entrepreneurs can track time for fee-based consulting jobs, do project-costing, monitor accounts payable and receivable, track invoices, calculate overdue fees, do online banking, and make payments and deposits. And that's just for starters.
Paying The Piper
So you're set on building your business . . . so set, you plan to live off your savings for a while and put everything back into your company. That's fine for those with a big nest egg, but most advisors suggest you pay yourself just as you would any creditor.
How much should you pay yourself? Consider taking a minimum of 10 percent of your receivables as salary. If you don't need it to live on, stash it in an interest-bearing account until you need it. Use it to build your business, hire help, go on a well-deserved vacation or add to your retirement fund.
Studies show that homebased business owners cite retirement as a top financial goal, yet few actively save for it. Instead, many entrepreneurs are counting on proceeds from the sale of their business to fund their retirement. Most business owners are familiar with the traditional IRA (with its $2,000 maximum annual contribution, tax-deductible if adjusted gross income thresholds aren't exceeded) and the new Roth IRA (its $2,000 maximum annual contribution is not tax-deductible, but it grows tax-deferred and is withdrawn tax-free at retirement if certain conditions are met). Many, however, have never heard of another type of IRA that allows many small-business owners to save much more for retirement: the Simplified Employee Pension (SEP) IRA.
Unlike traditional IRAs, SEP plans are easy to establish and maintain. SEPs allow business owners to deduct up to 15 percent of their annual compensation up to $24,000, indexed for inflation. Plan contributions are flexible, so if cash flow is a problem, you aren't required to make one. Best of all, if you're a bit late with your taxes, SEPs can be opened and contributions made until your taxes are filed.
What's the minimum you should contribute to a retirement plan? That depends on your age, earnings and financial goals, so get additional information from your tax and financial advisors before taking action.
Mac Willet, a CPA in Charlotte, North Carolina, says, "If you're a self-employed unincorporated business, you'll probably be required to make quarterly estimated payments, because, unlike the paychecks from your employer, taxes won't be withheld on what you've earned." You can estimate the amount by using what you made in the first quarter of the year as a baseline. Another method is to pay 100 percent of the tax shown on the prior year's return. No one wants to overpay, but underpayment can be costly. According to Willet, the penalty for underpayment of estimated taxes is based on the short-term applicable federal rate plus 3 percent, adjusted quarterly. Between 1995 and 1997, the rate fluctuated between 8 percent and 10 percent.
Self-employment taxes are paid at a rate of 15.3 percent of net earnings from self employment (what you make after specified expenses) up to $68,400 for 1998, and at a rate of 2.9 percent on any amount over that. Fortunately, half your self-employment taxes are deductible against gross income as a business expense.
Keep accurate records of all your expenses. Without written records, you may not be able to take advantage of all possible deductions. For certain expenses, such as automobile, travel, entertainment, meal and home office, special recordkeeping requirements and limitations exist. Talk to your tax advisor for specific information.
One key to success in your homebased business may be the "time vs. money factor." At first glance, paying an accountant to figure your estimated taxes may seem like a waste of money. But if it takes them an hour and it takes you a day, couldn't you have made more money talking with existing or potential clients? The key to financial success in your homebased business is thinking like a big business: Do what you do best, and get others to do the rest.
By Cynthia E. Griffin
When it comes to money matters, homebased entrepreneurs constantly face tough decisions. Brad Snyder (right), founder of Strategic Advantage Inc., is a prime example. After much thought, he elected not to pay himself a salary. "[The money is] reinvested into the business, and on occasion, I still infuse some of my own money into it," says Snyder, who expects his management and technology consulting firm to break even this year.
While he decided not to take a salary, the 41-year-old did establish a Simplified Employee Pension (SEP) retirement mutual fund. This way, the Lee's Summit, Missouri, entrepreneur can withdraw payments from the business account--since Snyder's company is a subchapter S corporation, income is usually taxed at an individual rate. And while he anticipates profitability soon, maintaining that profitability may require further delaying his salary and outsourcing more. If so, it's a sacrifice Snyder is willing to make.
By Cynthia E. Griffin
Rusty Jackson Productions (RJP), with four employees and $300,000 in annual sales, could not be described as a big business. But Rusty Jackson (pictured at right) is determined to create a company that takes care of her employees the way a major corporation would.
The primary method she's using? "I started my 401(k) at the beginning of 1997, because as I get older, retirement is a concern for me. It's important to offer that benefit to those who work for RJP for the same reasons," says Jackson, who started her event management firm in 1996 with money from savings.
Although the cost to start a 401(k) plan initially gave Jackson pause, she was able to find a plan with a mere $300 annual fee. The result, says the Mitchellville, Maryland, entrepreneur, is happy, satisfied employees, which translates to a healthy and growing company.
2K Productions, 2812 Arnold Dr., Charlotte, NC 28205, (704) 568-7396
Compustart, (212) 873-0954, firstname.lastname@example.org
Rusty Jackson Productions, 1502 Fairlakes Pl., Mitchellville, MD 20721, (301) 333-0003
Strategic Advantage Inc., (816) 246-0399, http://www.strategic-advantage.com
Mac Willet, (704) 529-0099, email@example.com