Category: Home-Based Business

Cash In Minus Cash Out Does Not Equal Profit

Post author By Pamela Swift
Post date May 4, 2008

You’ll pay too much in taxes if you don’t understand that cash in minus cash out does not equal profit.
This is the most important thing you need to know before you start keeping records for your business…cash in minus cash out does not equal profit. It simply equals cash left over. Or, in many cases, it’s a negative number, so it equals cash you owe somebody.
What this means is that you’ll need to understand the IRS rules and keep your records according to those rules so you report your profit correctly and take (and be able to prove) all the deductions you’re allowed to take. Because you want to pay the least amount of tax possible, right?
The way you’ll need to keep your books will be different depending on whether your business is a sole proprietorship, a partnership or a corporation. The rules for calculating income and deductions (and therefore profit) and the forms used for reporting to the IRS are different for the different business types.
What counts as income? Most or all of the money you take into your business will count as income. This includes fees for services and/or product sales.
But not all the cash that comes into your business counts as income.
If you get a rebate for a purchase you made at your local office supply store, that’s cash in, but it’s not income. It’s a reduction in your supplies expense.
If you get a refund of part of your insurance premium at the end of the year, that’s cash in, but it’s not income. It’s a reduction in insurance expense.
If you borrow money (and it doesn’t matter if it’s from your brother or the bank), that’s cash in, but it doesn’t count as income.
What counts as expenses? Most of the money you spend for your business will probably count as expenses. This includes advertising, postage, office supplies, and similar items.
But not all the cash that goes out of your business counts as expenses.
When you buy business property like cars, computers, and furniture that will last longer than a year, you’re not allowed to deduct their entire cost as an expense in the year of purchase (except in special circumstances).
These items are called capital assets. Sometimes they’re referred to as fixed assets.
You have to depreciate them over several years. Basically, depreciation is a process of spreading the cost of an item over its useful life.
You might have cash of several hundred or thousands of dollars go out the door when you purchase fixed assets, but you can’t deduct the entire amount of the purchase price as an expense when you buy them.
Some things that your business pays for might only count as partial expenses. An example of that is business meals and entertainment where you can only deduct half of the cost.
That doesn’t mean that your business can’t pay for 100 % of the cost, but only that you’re limited in the amount of the tax deduction you can take. This is another example of cash out that doesn’t translate directly to expenses.
Some things your business pays for might not be tax deductible at all.
An example of this would be a contribution to a Political Action Committee. That doesn’t mean that the business can’t pay for it, just that it’s not a deductible expense on your tax return.
Some more examples of cash that goes out the door that doesn’t count as expenses are: draws for sole proprietors and distributions for partners or S corporation shareholders.
There’s also one type of expense that can be more than the amount of cash that the business actually spends. It’s the home office deduction that some sole proprietors can take.
So you see why it’s so important to understand that cash in minus cash out does not equal profit.
Unfortunately, the IRS rules and regulations don’t always make logical sense; they might seem complicated and unfair. One thing is certain. They are the way they are, so we have to deal with them. Learn what you can. And get help when you need it.

Sheryl Schuff, CPA, is a Certified Public Accountant, author, and consultant who teaches entrepreneurs how to get their businesses organized, keep good accounting records, and maximize their business tax deductions. She is President of Schuff & Associates, PC and has been in private practice for over 30 years. She recently started an information products company www.TaxesForSmallBusiness.com to provide individual training materials for small business owners.

Tags bookkeeping, business startup, entrepreneur, Home-Based Business, recordkeeping, small business tax

Entrepreneurs Entrepreneurship Finance & Capital Home-Based Business Starting Up

Ouch! There’s a Lot More Than Income Taxes

Post author By Pamela Swift
Post date April 29, 2008

When most small business owners think about taxes, they think about Federal income taxes. But there are other taxes that I want to let you know about, so you’re not surprised if you have to pay them.
The first is self-employment tax. If you’ve ever worked for someone else, you know that social security and Medicare taxes get deducted from your paycheck. When you’re self-employed, you don’t actually get a paycheck.
Here’s what happens if you’re a sole proprietor. Following the IRS rules and regulations for calculating income and expense, you report your results for the year on your personal 1040 by filling out Schedule C.
Then you take the net profit and put it on Schedule SE for self-employment tax. After a small deduction, you calculate 15.3 % as your self-employment tax. This is double the rate of 7.65 % that’s deducted from employee paychecks because as a sole proprietor you’re both the employer and the employee so you have to pay both parts.
You get to take half of the amount of self employment tax as a deduction from your income on the front of your 1040. This has the effect of reducing your taxable income.
The self employment tax itself goes on the back of the 1040 in the section called Other Taxes on the line that says self employment tax. For the 2006 filing year that was line 58. This tax gets added to your Federal income tax and any other taxes you owe and is paid when you file your 1040.
If you (and/or your spouse on a joint return) have had Federal income tax withheld during the year that adds up to more than your total taxes for the year (which includes self employment tax), you’ll still qualify for a refund.
If your business is operated as a corporation AND you’re active in your business, you should receive W-2 wages and you won’t be subject to self employment tax on your earnings. Distributions from S corporations are generally not subject to self employment taxes.
If your business is operated as a partnership, you might have some items of income that are subject to self employment tax and some that are not. These items will be reported to you on a schedule K-1 that is part of the business tax return.
Sales tax
Many States have sales taxes. If you sell products to customers, you’ll have to charge them sales tax and pay it to the State. In some cases, digital downloads are considered products as far as the sales tax rules are concerned and certain services might also subject to sales tax. In Indiana, where I live, the rules are put out by the Indiana Department of Revenue. There will be a similar agency in your state who you can contact to find out the rules.
Local Taxes
Some cities and school districts have local taxes that you might have to pay. Some of these depend on your type of business. There might be additional sales taxes, property taxes, innkeeper’s taxes, or food and beverage taxes. Check with the authorities in your area for details.
And then there’s the often dreaded Estimated Taxes
This is a subject that confuses many people.
First, let’s try to understand the reason that the estimated payment system exists. Our system of Federal taxes is a “pay as you go” system. When you think about it, that makes sense. The government needs money all year long to pay for various things.
When you work for someone else, taxes are withheld from your paycheck each pay period, so the government gets its money over the course of the year. If you’re a sole proprietor, this doesn’t happen, so you’re expected to make estimated payments.
As with many IRS rules, there are some exceptions, and some penalties if you don’t pay enough or pay on time. There are some cases where you might not be required to make estimated payments (and you won’t have a penalty if you don’t), but it would still make sense to make them anyway, to avoid having to pay a large amount on April 15th.
If you have another job in addition to your self-employment, you can increase your Federal withholding on that job to cover the amount of the estimated taxes that you would otherwise have to pay. And if you’re married and file a joint return and your spouse has wages from another job, he/she can have additional Federal withholding taken out to cover the estimated payments.
Or, you can make quarterly payments using Form 1040-ES. You can also sign up to make the payments on-line. You might also need to make estimated payments towards your State taxes.
Payroll
If you have employees, you’ll need to pay various Federal, State, and local payroll taxes. But we’ll have to save that conversation for another time.
The most important thing you need to understand is that it’s your responsibility to find out what taxes your business has to pay. And that the laws vary from place to place and by type of business.
A good source of information is an accountant who specializes in consulting with small businesses.

Home-Based Business

Working from Home: Creating your first website

Post author By
Post date April 9, 2008

Starting a home-based business is a huge undertaking. Creating an online presence for your business can be equally overwhelming. Where do you begin to learn the basics of creating your first website? It’s actually much simpler than you’d think. Listed below are a few tips and tricks to make your first website pain-free.

First, you’ll need a Domain Name. A domain name is what your website visitors will type in to visit your website. For example, the domain name that you would type in to find Christian Work at Home Moms is www.CWAHM.com – “CWAHM” being the actual domain name portion of the website address.

You can purchase a domain name for less than $9.00 a year at places across the internet, such as www.GoDaddy.com. On the main page of GoDaddy.com you’ll find a spot where you can search to see if the domain name that you’d like to purchase is available. You want the domain name that you choose to be descriptive and easy to remember.

Next, it’s time to create your website. Sit down and write out everything you want your website to include. Make a list of all the products, details, prices, and options your customers will want to know. The more information you give the customer upfront, without making them search your website, the more sales you’ll make. Customers like clean, warm websites where they feel that they have all of the necessary information and can trust the person they are purchasing from.

Now it’s time to plan out the design and layout of your website. This aspect is very important. You will need to make sure that your layout is clear and easy to navigate. If possible, include a menu that is easy to find and contains all of the different sections you’ve included on the site.

Also, consider a “site map”. A site map is a page or section of the website that contains a full layout of every page and topic on the website.

Many small websites overlook this, but it is a very simple way to give your visitors an overview of all that you offer. Almost all large websites use site maps to aid their customers. Consider eBay – what website do you know that makes as much in profit as eBay? There aren’t many out there. When you visit eBay, the third link on the website, right up by the logo is “site map”.

Why do you think eBay put their site map in such a prominent place? They know that the visitors to their site get easily overwhelmed. When you click on the eBay “site map” link, you get a complete overview of the all that eBay offers – from registering on the site to contacting their customer service departments.

When planning out the layout of your website, there are, of course many aspects to consider. A few of the most important things to think about are:

How many pages will your website be?

Will your website be showcasing your products or a business opportunity? Or both?

How well do you know your demographic? Will your website be geared toward women or men? What age group are you targeting? What are their interests? What will catch their eye?

Compile this information and start to map out the graphics, pictures and text that you want to use on your site. You want the text on your website to be clear, concise and to the point. Your website visitors will want to be able to easily scan your site for the information they need in order to make their purchase. Use bulleted lists when possible and keep your paragraphs to a maximum of a few sentences.

Finally, you are ready to put your plans into action. The easiest way to create your website is by using a website template, such as Google Pages, http://pages.google.com. The template will give you a framework and allow you to somewhat “fill in the blanks” with the text and graphics that you’ve chosen.

You’ve done it. You’ve created an online presence for your business. You’ve picked a meaningful domain name; researched the demographic that you’re trying to reach; and thought out the layout and other aspects of your website in order to create a meaningful website that will be easy for your visitors to use. You’re now ready to direct traffic to your website and make sales.

Home-Based Business

Jumpstart Your Business

The beginning of a new year can be a great time for your home-based business. There are many ways that you can use this time of year to begin new growth and continue the rush from the holiday season.

For many people, January is the time of year that they reflect upon their lives. New Year’s resolutions are made and goals for the New Year are set. Many women in our society are unhappy in the corporate world and seeking to make a change and enter the home-based working world. What better time of year to be presenting your home-based business opportunity as often as possible?

There are many ways to go about the task of increasing your business and recruiting. Take time before the New Year begins to make a list of strategies that you can implement to get your name out there. Also, think about what small changes you can make to increase customer loyalty, repeat business and other business aspects like these.

If your goal is to increase recruitment for business partners, consider finding a Leads program in which to take part. Many times these programs can provide you with interested home-based business seekers with which to share your business opportunities. Look for a program that is suited to your particular business or beliefs. There are many different types of Leads programs available on the internet – take the time to find the one that suits you, your business and your budget best.

A great recruiting tool is to sponsor contests. You can do this both online and in your local area. This can create a “buzz” about your business and provide you with names of people who might be interested in your business opportunity. One “out of the box” way that I have heard of the contest sponsorship idea being done is to put contest entry boxes in local women’s fitness clubs or places that would fit your particular business. Use “Customer Care Cards” as the entry forms so that you can collect the name, address, phone number and email address of the person entering your contest. Follow up with a phone call to each and every entry. Some may be interested in hosting a party for you or in hearing about your business opportunity.

Maybe your goal this New Year isn’t recruitment, but sales growth. Make a list of creative ways that you can encourage customers to consider your products. You can jumpstart this year’s sales by offering “After Christmas” specials, after-purchase freebies, contests and more.

One way that many home-based business owners online neglect to take advantage of is the signature line in emails and when posting in forums. This can be a great tool to advertise your business, specials and contests. I receive many emails from business owners who do not include a signature line with their business name, and sometimes they fail to even put their name at the end of the email! This is not only unprofessional, but makes it much more difficult to find out more about their business. Every email sent this way is a potential sale lost.

The “freebie” is another great sales booster. Everybody (especially women) loves to get something for nothing. Consider offering a small thank you token when a purchase is made. No matter how inexpensive the value of the “freebie” may be, it can still be a great incentive! It can also foster customer loyalty and repeat business.

If you have an online business reciprocal linking can be a great way to jumpstart business. The more sites that link to yours, the more visits your website will receive. Linking also helps you place higher in Search Engine listings. Take the time to search for sites with similar content and request a link exchange. This is almost always a win-win situation for both sites.

Jumpstarting your business for the New Year can be a challenge, but if you take the time to be creative and put some effort towards it, it can be very rewarding. Use the resources available in this information age: Leads Programs, Link Exchanges and signature lines. God Bless you in the New Year!

Home-Based Business

Is It Possible To Work From Home?

Post author By
Post date March 26, 2008

working%20from%20home.jpg

Have you ever wished that you could work from home? According to the Bureau of Labor Statistics, over 19 million people worked from home (either part-time or full-time) in 2001. It’s a growing trend in our society with the number steadily rising as many people are leaving the workplace in favor of a work-at-home career.

There are four main ways to make working from home possible:

1. Telecommute for your current employer
Many employers are beginning to see the benefits of allowing their employees to work from home. If you have a job that would be possible to do from home ask your employer to consider it. More and more employers are allowing employees to telecommute. This is an easy way to work from home while maintaining the security of a stable career. You must realize, though, that working from home may limit you in terms of advancing in your company. It’s important to think through the sacrifices that you may need to make in your situation to work from home.

2. Telecommute as an independent contractor
There are many companies that hire independent contractors to do work such as data entry, transcription and customer service from home.

This can be an incredible opportunity as long as you’re willing to keep track of your own taxes and aren’t relying on the employer for insurance and other perks

There are many benefits to the company also, such as lower wages, not needing to provide insurance, or being able to offer a commission based position. The company may also choose to hire home workers so that they do not need to pay for space to house an office full of employees.

3. Own a direct sales/MLM home-based business
Many times these types of home-based businesses are overlooked, but they truly can bring an income and allow you to work from home. However, doing your research before joining a company is very important. Look for representatives of the company to speak with and, if possible, try to find someone who has been a representative for the company, but is no longer. They may be able to share some of the negative aspects of the business with you.

Also check with the Better Business Bureau and make sure that the company that you are considering has a good reputation. You can also go to websites such as CWAHM.com and sign up to speak with current work at home moms (CWAHD.com for dads) who can answer your questions about owning a home-based direct sales/MLM business.

4. Begin your own home-based business
It can seem overwhelming to start your own business, but if you start small and have a good business plan it can be a very rewarding decision. You are able to be your own boss, have a very flexible schedule and work only when it is convenient for you.
When considering beginning your own business, make sure that you have found a niche that will allow you to serve customers that no one else is serving. When I began searching for a way to work from home, I spent time researching the different work at home websites available and realized that there was not a place for Christians to network and help one another work from home. I filled this niche with my website, CWAHM.com, and the response has been amazing. If you take your time and find a niche or unique product, you will have a much higher chance at success.

If you decide to begin your own business, you must also check your state and city about zoning laws, licensure requirements, etc. Contact an accountant to find out what percentage of sales you need to set aside for taxes as well as whether or not you’ll need to make quarterly tax payments.

Working from home is a big commitment and it can take some time to get started. It’s important to take the time to research what type of at-home position will work best for you. If you would like to telecommute, speak with your employer to see if it is a possibility. If you are looking into a home-based business, speak with others from the company or find a niche that you can fill with your own business.

Working from home can be a rewarding choice and it IS possible.