Q: My husband and I are starting up a new home inspection business. What are the most important tax aspects we need to be aware of? I have been reading up on SE taxes, etc, but I am just not sure exactly where to start. Any advice will be gladly accepted!!!!
A: Starting a new business endeavor is fun and exciting, but also stressful, scary, and a lot of work. The initial start-up phase is critical to future success. Unfortunately, some of the important administrative tasks often get neglected.
Recently I was talking to Jed Reese, a wealth advisor with STRIVE Wealth & Protection Planning, and Alex Kincaid, an attorney with 3G Law. We were discussing what we as professional advisors from differing disciplines believe to be the most important steps for any business owner to take to protect their business. We took marketing and sales as a given and ended up with ten action steps which address administrative matters. Some of our steps probably don’t apply in your case, but here are a few (not all) of our action steps for you to consider:
• Determine the form of your business entity. You may operate as a sole proprietorship, but wrapping your business in a Limited Liability Company (LLC), S Corporation, or other structure can offer a degree of liability protection should anything bad happen. You may have also developed a business or trade name that needs registration and protection. The form you choose can also have an impact on your taxes, but more about that below.
• This may be premature for your start-up company, but if you use contractors or hire employees be sure to follow all the rules. The IRS is very fussy about the classification of contractors and employees so become familiar with the difference when hiring workers. Set up payroll accounts with the IRS and the State of Idaho if needed, withhold the proper taxes, pay those taxes timely, and prepare the proper quarterly and year-end reports.
• Keep a good, current, and complete set of books. I have a formula that for every hour spent avoiding accounting in your business seven hours will be needed to catch up. Most entrepreneurs find bookkeeping tedious at best, but failing to keep your books current will cost time, money, and much aggravation. So plan time each day to get this task done. And by the way, budgeting is also a part of keeping your books so don’t forget this vital step.
• If you are not familiar with the basic financial statements take time to learn how to read and use them. Part of the value in keeping a good current set of books is using them to tell you how you are doing financially.
• Review your insurance coverage. Liability insurance, life insurance, disability insurance, medical insurance, vehicle insurance, business interruption insurance, and many more forms of insurance protection are often looked at as one more task to avoid. The reality is that running a business without that protection is foolish and can lead to disaster.
• Taxes, taxes, taxes. You have obviously considered this not-so-fun subject based on your comment about self-employment (SE) tax. The form of your business entity and the accuracy with which you keep your books will be critical in controlling your tax bill. Assuming you are self-employed you will need to make quarterly estimated tax payments based on one of several methods. If you form a corporation and pay yourself a salary you will be able to withhold taxes from your paycheck and possibly avoid some of the SE tax. But this will all be specific to your entity and your financial success with the business.
• Although it may seem funny to think about when you are just starting out, consider where you will be years from now when you are ready to retire. Start planning for that now by establishing a retirement plan and consider what will happen to your business when you call it quits.
I wish I had space to offer more. This is an exciting time so enjoy it. Take time to seek advice and get comfortable with the administrative side of running your own business.
Congratulations and good luck!
The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation. Peter Robbins is a principal in the Boise office of CliftonLarsonAllen LLP, specializing in tax matters for small businesses, individuals, and trusts and estates. Have a question for Robbins? Email your question to [email protected] Enter “Talking Tax” in the subject line.