Becoming Your Own Boss (BYOB, 6.1)

In the first series, Becoming Your Own Boss (BYOB, 1.x) "Introduction, Today's Employment Picture", you learned some of the facts related to the current employment picture and examined some of the choices that were available to you. In the second series, Becoming Your Own Boss (BYOB, 2.x) "Examining Your Situation", you answered some key questions to figure out if starting as an independent contractor was a good idea for you. In the third series, Becoming Your Own Boss (BYOB, 3.x) "Preparing for Business", you examined the numerous topics (from taxes and insurance to your need for equipment and an office) that need to be considered before you take the step to establishing an independent contracting business. In the fourth series, Becoming Your Own Boss (BYOB, 4.x) "Establishing Your Business" you learned the many requirements involved in operating a business from the business name and structure to the business forms you will need once you establish your business. In the fifth series, Becoming Your Own Boss (BYOB, 5.x) "Marketing Your Services" you learned many of the aspects of the critical subject of marketing your services as an independent contractor.

In this article you learn about the topics of bank accounts (checking, debit, savings, and charge) and taxes as they apply to the independent contracting business.

Bank (Checking/Debit/Savings/Charge) Accounts

Open a business checking account upon launching into business. Use this account for all business activities. Do not use it for personal activities. Likewise, do not use your personal checking account for any business purposes. Indiscriminate use of either account will needlessly complicate your bookkeeping.

Open a savings account in the name of the business. Deposit several hundred dollars into this account at the start and add to it regularly. This account is for the possibility of extra taxes and other unforeseen business expenses, such as legal advice, litigation, et cetera. It is not necessary to let this account build very high, but several thousand dollars would not be inappropriate. A serendipitous advantage of this account is that it can be used as collateral for short-term borrowing if such would be permissible in your financial plan. Many banks charge only two percent or so above the earnings rate on the account if the funds in the account are pledged. Just remember that this ties up the funds, so the account cannot function as a safety net to cover those unforeseen expenses.

Obtain at least one major company credit card (Master Card, VISA, et cetera) for business use only. If you obtain the card in the name of the business, it is likely that it will be of the type that does not allow a continuing balance. For many business purchases, this is an appropriate arrangement. However, if you intend to use the card as a regular charge account for short-term financing of small-to-medium purchases, it is probably appropriate to obtain the card in your own name. Dependent upon your business style, volume, and complexity, and your discipline in judicious card use, it might even be appropriate to have one card of each type.

Obviously, interest rate and services provided are the primary features on which the choice of a particular card for this purpose will be based. In addition, determine if the card that you have tentatively selected allows a grace period for new purchases even if there is a continuing balance. This is a desirable feature that is not offered by many card suppliers. It can save you substantial interest expense in an active year.

Do not charge personal items to this account. Doing so will needlessly complicate your bookkeeping. Charge all possible business expenses to this account. This is especially important for mail-order items because of the extra protection offered by the card supplier against non-delivery or unacceptable merchandise.

Although you will be offered charge accounts at various stores and supply houses, and it will be very tempting, resist all such impulses until you are firmly established and are successful. It is entirely too easy to accumulate obligations that are beyond your means to pay if you have multiple charge accounts. If at all possible, keep all expense items on a monthly-cash basis.

Taxes

When most people think of taxes, they automatically think of April 15th and federal and state income taxes. Unfortunately, for the small business person, there is much more. And most people need help to get it done properly.

It is possible to prepare your own annual and quarterly tax returns, and many people do, but it is far better to engage a competent tax accountant to prepare the annual and assist you on the quarterlies. All it takes is saving you from making one relatively minor mistake to pay for such service. But filing those quarterlies and that annual tax return is not the real value of a tax specialist - tax planning is far more important.

Tax planning is an on-going activity. Obviously, the plan that is devised at the start of business is an estimate that will be fine-tuned as you accumulate financial history. It will change according to increasing (or decreasing) income, buy/lease decisions, large purchases, financing, borrowing, et cetera. It will also be dependent upon your business structure. If you are incorporated as a C corporation, your plan will include withholding, quarterly returns, and so on. If you are incorporated as an S corporation, your planning will deal primarily with compensation paid as wages or dividends and the associated tax returns. If you operate as a sole-proprietorship, there are still quarterly returns and other details to be filed. Follow the plan carefully for all appropriate taxing agencies, and consult with your tax specialist on any important change in business.

Don't attract the attention of the IRS.

The next series (BYOB, 7.x) is the final one in the Becoming Your Own Boss group of articles. It covers topics that will hopefully not be needed for you and your independent contracting business, namely what to do "If Things Go Wrong".

To read the rest of the series click here