Business Efficiency & Process Optimization Consultant 
A Couple of Business Tips for New Business Owners

Many people are transitioning over to contractor work, but what does that mean for you?  

Most people may know but many do not that you pay your taxes as your client will not withhold taxes and pay them on your behalf like your employer.  Instead of payroll, you pay self-employment taxes.  (FYI- it is the same tax the difference is how they are withheld and paid.)   How does submitting tax payments work?  First, you have to earn enough in the income (sales) to cover your taxes.  Learn more about pricing in my pricing course.  

Many people do not realize you have to charge enough to cover what you need to earn and self-employment taxes.  Many people who have a flow-through entity believe they do not have business income taxes but self-employment taxes are your business income taxes and you receive a minimum of 15.3% to cover FICA.  Even if you have a tax refund you will have a page in your tax return that calculated this amount and reduced your refund by this amount.  So most people do not realize they pay the tax and most say, "I do not have to pay taxes."  But you do.  

Determining your pricing is important to cover your taxes so do not charge like an employee.  Take my pricing course to learn more about how to create pricing.  If you want to charge a $30 fee, you can only pay yourself $10-15 an hour.  The rest needs to remain in the business.  Also, because you cover your supplies, you would either charge the client for the supplies (cost of goods sold) for that specific job.  However, if it is a general expense, such as your phone service, you cannot charge your client directly, but I will show you how to handle this issue in my pricing course.  Learn more over at the “Building A Fair & Profitable Pricing Plan.”

What if you say I will not pay myself and keep it all in the business. You will still be taxed on any net profit if you leave it in the bank.  Only C-Corporations, S-Corps, and LLCs that file as a C-corporation can take the retained earnings deduction.  Retained earnings mean you are not taxed on the income you did not spend.  You are taxed once you either pay yourself (via payroll or owner's draw) or you withdraw for other purposes not business-related.

You need to charge to earn a profit.  Yes, as a contractor, you need to make a profit so you can cover business expenses.  Gone are the days when we can earn $15 and do what we want, but business requires specific reporting steps.  If you say, let me keep it simple, you will end up on the profit loss roller-coaster of not earning enough to continue in your business, and this is where the struggle comes from for most small business owners.  

Please ignore people that say you do not have to report income until you earn a certain amount.  If those people are writing off your pay as an expense, the IRS will look for you to report that as income.  Expense for them, but it is income to you, and someone has to pay taxes on that amount.  If you earn a small amount of income, typically, there is no tax or a small amount.  

Business owners when you hire someone to work with you, are also business owners unless you hire them as an employee.  Hiring an employee comes with more requirements than working with another business owner so get clear on the differences for yourself and for the people you hire.  You cannot pay someone $30 an hour and expect them to live off that money, could you?  Stop thinking all people manage money poorly when the problem is they are not earning enough money from the start.  Also remember they are not an employee, and this may be their primary stream of income.  Remember, for many of us; our business is not a side income.  Beware of business owners that want you to treat them as employees. Also, set your number of hours worked.  Slavery is over, and working unlimited hours for no pay or small fee is costing you money.  Remember, time is money.  If a job takes 4 hours to complete, you need to charge them for each hour plus additional business costs and expenses.  Learn more in the pricing course, and we will work to increase profits together. 

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