Saturday, May 30, 2015

Planning for Tomorrow

When you’re a corporate employee – if you’re lucky – you have a company-matched 401K and maybe even a fully funded pension plan. When you’re self-employed, saving for retirement is all on you. And unless you want to still be working when you’re old and gray, it’s a good idea to start saving sooner rather than later.  Granted, if you have the right type of business, then working past traditional retirement age may be something you choose to do.  But a good retirement plan can mean the difference between working by choice or working from necessity.
The good news is, the government makes it easy – and tax free – to build up your own personal retirement account.

401K or IRA
A 401K is a special type of retirement fund set up and administered through an employer. Some companies offer to match a percentage of every dollar you contribute, making this a nice, pre-tax benefit.

IRAs, or Individual Retirement Accounts, are set up with the help of a bank or financial planner, and are also non-taxable. That means that if you’re paying 30% of your net income to the IRS (not uncommon for self-employed folks) you can save 30 cents on every dollar you contribute to an IRA.
There’s a limit to how much you can invest in a retirement account. For individual 401Ks (available only to self-employed persons with no employees), the maximum you can stash away pre-tax is $17,000. For IRAs, it’s $5,000.

Before you start stashing money away, though, remember that this tax savings does come with a price: You can’t touch the money you invest until you’re 65, or you end up paying not only the income tax, but penalties as well. In addition, you will have to pay income tax on that money when you retire. There’s no escaping the tax man entirely, unfortunately.
A Sound Investment?

There’s another benefit of a retirement savings account: the potential to earn substantial interest rates. Because you have the flexibility to divide your IRA funds up among various investments, you can potentially see returns as high as 10 or 12%. That’s a far cry from the 1% your savings account is offering.
Of course, there’s no guarantee that any investment will earn money. Just talk to anyone who was close to retirement age when the economy took a downturn in the early 2000s. Many people saw their 401ks and IRAs dwindle away to nearly nothing, while they stood helplessly by and watched.

But for saving on your income tax as a small business owner, an IRA or individual 401K is ideal. They’re easy to set up and have few costs involved, plus they give you the freedom to invest your money in high-earning stocks or to choose safer bonds.

We have been building our retirement savings for years.  It is comforting to know that if we should ever want or need to stop working altogether, we will still be able to live quite comfortably.  If you are unsure how to get started planning for your tomorrow, contact a trusted financial advisor for help. 

Monday, May 25, 2015

Choosing Your Business Structure

Chances are, when you started out working online, you didn't put much thought into your actual business setup. You probably just set up a PayPal account, added some “buy” buttons to your website, or maybe created an invoice or two for clients. Before you knew it, though, you were thinking about quitting your job, and suddenly, filing taxes was a huge concern. 
The truth is, many new entrepreneurs are well on their way to having a full-blown business long before they put any thought at all into legal business structures, and that can really mess with your tax bill. In most states (and we’re speaking of the US, here) you have three choices when it comes to business entities:

Sole proprietor. This is where you started when you sent your very first Pay Pal invoice. When your business is structured this way, you are your business, and your business is you. There is no separation of funds, either for tax paying purposes or in the event of a law suit. You file your taxes just as you always have, but you’ll also need to add a Schedule C to record your business profits and losses.

Limited Liability Company. A small step up from a sole proprietor, the limited liability company (or LLC) affords you some degree of protection from debts incurred by your business. However, you still file your income tax return as if you and your business are the same – because as far as the IRS is concerned, you are. LLCs are regulated by the state, and not recognized by the federal government.  This is the structure I chose for my company, Boomer Businesses LLC. 

When you operate as either a sole proprietor or an LLC, you are responsible for paying the entire amount of your taxes. That means that the percentage of Social Security tax your employer used to pay is now your responsibility.
Corporation. When you incorporate your business, you are saying that your business is completely separate from you as an individual. So separate, in fact, that you’re actually an employee.

The good news is, corporations don’t file income tax returns, and you won’t receive 1099 forms from your customers. The bad news is, you will be required to pay yourself a salary. That means that every month, you (the corporation) will be required to send withholding tax to the IRS
This can mean savings for the entrepreneur, because now the corporation has to foot the bill for half your social security tax. But the added burden of dealing with payroll and even more government paperwork means it might not be worth it to you. 
The best advice? When your business turns from a hobby – meaning you’re earning more than pocket money – into a real business, it’s time to talk to an attorney or qualified accountant. They’re the ones who can best advise you about the business entity that makes the most sense for you, your financial situation, and your business goals.