LUTZ BUSINESS INSIGHTS
Finance Basics for First-Time Business Owners
MISSY JACKSON, TAX MANAGER
When starting a business from home, you need to know a few finance basics that will help you grow your business. The finance basics you need to know include paying taxes every quarter and keeping separate accounts for business and personal funds. Here’s a look at these essentials and two more.
1. Paying Taxes Every Quarter
If you are traditionally employed, then you’re used to your employer dealing with your payroll taxes.
For business owners, taxes are more complicated. That said, if you’re still traditionally employed, you can increase your withholding at work so it is approximately equal to the amount you’d pay quarterly for your new business.
Estimating your taxes can be tricky, and there’s the pressure of the IRS rule that you must pay at least 90 percent of what you owe or be subject to penalties. In later years, you can use previous years to better guess what you owe. In your first year, though, you can estimate what you owe the IRS by taking your income for the quarter and multiplying it by 20 percent.
2. Keeping Separate Accounts for Business and Personal Funds
Many, if not most, at-home businesses start as sole proprietorships, so this article assumes you’re operating as a sole proprietor. When you operate in this capacity, your business and personal income, assets and debts are treated as the same for legal purposes and for taxation. For example, if you file for bankruptcy due to personal debts, you may also have to sell business assets to make good with some creditors.
In any case, just because your income, assets and debts are all legally in one pot doesn’t mean you should treat them that way. Keeping separate accounts for personal funds and business funds streamlines accounting and other tasks. It also reduces stress and increases efficiency. The same idea applies to having business credit cards and personal credit cards. Of course, when you’re just starting, you may need personal funds to get your business going. As soon as possible, though, start separating.
3. Finding an Accountant
Accountants can be your best friends in business. You may be reluctant to hire one before your business has made significant money. That’s understandable because you can probably do the basics yourself. The more complex your business becomes, though, the more complicated your accounting will get.
Accountants also tend to pay for themselves. For example, they can spot ways for you to save more money and take advantage of more tax breaks.
4. Starting Small Can Mean the Most Money
The reality is that you won’t necessarily earn more money by investing a lot at the beginning of your business. In fact, you could be throwing good money after bad because of what you’ve already spent.
It’s often best to test a business idea before jumping in with both feet and risking a spectacular fail. To give a simple example, say that your idea is selling handmade jewelry online and in various local stores and markets. One way to go is to max out your $15,000 credit card, spend weeks building a large stockpile of inventory and spending a decent amount of money on designing a website and e-commerce platform.
Another way to go is to handcraft a few pieces, take them to local shops or show them on social media, and gauge if customer interest and the sales are there. If they are, you can proceed on a slightly larger scale and so on, making adjustments on the fly and learning from your mistakes. You also avoid wasting the many thousands of dollars and hours of time you would have with the first strategy if the idea doesn’t pan out.
Each of the recommendations above should keep your business in the best financial shape possible. It’s an exciting time to be starting out, and being financially savvy pays off in multiple ways.
ABOUT THE AUTHOR
MISSY JACKSON + TAX MANAGER
Missy Jackson is a Tax Manager at Lutz with over 6 years of related experience. She specializes in the review of corporate and multi-state returns, maintains and manages client relationships, and assists with international compliance.
AREAS OF FOCUS
- Corporate Returns
- Multi-State Returns
- International Compliance
AFFILIATIONS AND CREDENTIALS
- Certified Public Accountant
- BSBA in Accounting, University of Nebraska, Omaha, NE
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