their own to put plans in place that will create security. “So many small business owners are so focused on the survival piece of the business that many times they don’t plan for the future,” says Brenda Ross-Dulan, senior vice president and regional president of Wells Fargo’s Los Angeles Crossroads Division, which has an African American Small Business program that offers seminars and other resources.
Separating Business andPersonal Expenses
Independent contractors will have fewer headaches at tax time if they separate business and personal expenses. “If you comingle business and personal expenses in an audit, the IRS may make assumptions,” said Marvin Kingcade Jr. of Philadephia-based Kingcade & Kingcade Tax Service. “If you pay for a personal expense out of a business account, and that’s detected, they might find some of your legitimate business expenses questionable.”
Kingcade recommends setting up a checking account in the name of the business, using inexpensive bookkeeping software such as QuickBooks, or setting up a system using a spreadsheet program such as Microsoft Excel to record every financial transaction related to the business. Enrolling in a financial services program such as Open: Small Business Network from American express, can save you time and money because it automatically separates and itemizes your personal expenses from your business purchases. Receipts related to the business should be stored in one place. If a receipt doesn’t clearly show that it is a business expense, attach it to a sheet of paper that explains it, he says. Independent contractors should plan to set aside an hour a week to keep finances organized, he says.
Getting All the Tax Breaks You Deserve
Independent contractors are eligible for many tax deductions. Childress is able to deduct a portion of his mortgage because his salon is in his home. Swilling often has to have business meetings to generate leads, so she can deduct meals and entertainment expenses related to her work. “You have to think about everything that you do that relates to your business. For example, if you were to have a meeting in your office and you have expenses for refreshments and setting up, that’s really a valid expense — you would certainly want to document that,” Kingcade says. You might even consider having people who attend the meeting sign in or staple the meeting agenda to the receipt to avoid questions regarding the expense, he says.
Most independent contractors will file IRS form Schedule C and Schedule SE for self-employment taxes. It’s also a good idea to file quarterly tax estimates, especially for payroll and sales. While some independent contractors believe it’s a good idea to incorporate or set up a limited liability company, it’s often not necessary, Kingcade says. The main advantage of setting up an L.L.C. for the independent contractor is that it protects personal assets if the business is sued.
Planning For Retirement
The easiest way for an independent contractor to fund a retirement plan is to set up a Simplified Employee Pension (SEP) IRA plan or a one-person 401(k) plan, says Crystal Alford-Cooper, a