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Small Biz Questions
Posted on 10/19/16 at 8:50 am
Posted on 10/19/16 at 8:50 am
I've been in operation since mid-July (as a side business; I am still working fulltime and intend to do so moving forward) with really positive results. I've exceeded my expectations and have spent zero money thusfar on marketing/advertising. It's all been on overhead/business expenses (office supplies, Professional Liability Insurance, etc).
How much of my gross income (generated from the business) should I withhold in anticipation of taxes? I know this is an extremely broad question and I'm not providing anywhere near enough detail, but is there a good rule of thumb? I'm W-2'd and so is the wife and we both earn middle-class salaries in full-time positions.
Would 10% be sufficient in the MT's opinion? I have approximately 30% of my total income there now but I'm just wondering what I should hold-back each time an invoice is paid.
Also...As I said I haven't had a need to invest any money into marketing or advertising as of yet. The companies I do business with and find business through are in the dozens so far. So I'm not sure that I need to diversify the way I generate business leads, etc. But is there a good rule of thumb for how much I should reinvest back into the company for things like a solid website, small-scale advertising (business cards) and the like?
At this point I haven't needed anything to generate business and I'm really pleased. Hell I don't even own a laptop and have been able to track expenses, invoices and scheduling through iOS devices. I'm running really really lean. But I want to make sure that I make hay while the sun shines if that makes sense.
Thanks in advance for any advice, critical, constructive or otherwise.
How much of my gross income (generated from the business) should I withhold in anticipation of taxes? I know this is an extremely broad question and I'm not providing anywhere near enough detail, but is there a good rule of thumb? I'm W-2'd and so is the wife and we both earn middle-class salaries in full-time positions.
Would 10% be sufficient in the MT's opinion? I have approximately 30% of my total income there now but I'm just wondering what I should hold-back each time an invoice is paid.
Also...As I said I haven't had a need to invest any money into marketing or advertising as of yet. The companies I do business with and find business through are in the dozens so far. So I'm not sure that I need to diversify the way I generate business leads, etc. But is there a good rule of thumb for how much I should reinvest back into the company for things like a solid website, small-scale advertising (business cards) and the like?
At this point I haven't needed anything to generate business and I'm really pleased. Hell I don't even own a laptop and have been able to track expenses, invoices and scheduling through iOS devices. I'm running really really lean. But I want to make sure that I make hay while the sun shines if that makes sense.
Thanks in advance for any advice, critical, constructive or otherwise.
This post was edited on 10/19/16 at 8:53 am
2
Posted on 10/19/16 at 8:57 am to GFunk
You should be paying a quarterly estimated tax of approximately 25% each quarter of what you will owe. Do you not have a CPA? The first year is a not a huge deal as you don't really know, but it's not that hard to calculate. Remember that you have to add The 15% social security/ Medicare to your unemployment earnings so your income tax will likely be in the neighborhood of 30% for your self employment earnings.
Posted on 10/19/16 at 9:04 am to baldona
quote:
baldona
quote:
You should be paying a quarterly estimated tax of approximately 25% each quarter of what you will owe.
First off, thanks for the response. I really appreciate it.
I'm a one-man operation working nights and weekends. Do you think that is necessary? I apologize for not providing more up-front info.
quote:
Do you not have a CPA?
I do. I consulted her shortly before I launched the business but I got a 50,000 foot overview and not necessarily the drill down that I'm searching for here. Obviously I should call her.
quote:
Remember that you have to add The 15% social security/ Medicare to your unemployment earnings so your income tax will likely be in the neighborhood of 30% for your self employment earnings.
I have to pay social security and Medicare taxes? I am covered for insurance through my existing job and also contribute to their retirement plan which is a defined contribution plan through a state pension system. Would this impact your advice?
Again I know I am not giving you anywhere near enough info on the front end.
Posted on 10/19/16 at 9:09 am to GFunk
Yes you still have to pay SS/ Medicare. When you are an employee your employer pays half of the Social security of 6.2%, then you as the employee pay 6.2% and you as the employee pay 2.9 Medicare. When you are self employeed you get to pay the entire thing!
I have an Llc I make half of my income through as well as a W-2 job similar to you. I do all of this. The 2nd year of being self employed you owe 90% of what you payed the previous year in estimated taxes. The first year is not a huge deal but I'm not a CPA and I don't know the penalties I think they are very small. But you should be paying some sort of estimated income tax every quarter.
I have an Llc I make half of my income through as well as a W-2 job similar to you. I do all of this. The 2nd year of being self employed you owe 90% of what you payed the previous year in estimated taxes. The first year is not a huge deal but I'm not a CPA and I don't know the penalties I think they are very small. But you should be paying some sort of estimated income tax every quarter.
Posted on 10/19/16 at 9:23 am to GFunk
quote:
I have to pay social security and Medicare taxes? I am covered for insurance through my existing job and also contribute to their retirement plan which is a defined contribution plan through a state pension system. Would this impact your advice?
Your side income is self-employment income. You have to pay self-employment tax. (more on that in a minute)
Ask your CPA (or look at your tax return from 2015) and determine what your marginal tax rate is for federal. As well as state (although if you are in LA, it's going to be 6%).
I am going to assume you and your wife's other tax situations (your W-2, her W-2, your other income streams and other tax deductions) remain relatively the same.
Let's say it's 28% fed and 6% state. That would be 34%. This is not exact since you can get a federal deduction for state income tax paid if you itemize, but it's close enough for what you need. So say 34%. However, this is on net income, not gross revenue, but it doesn't sound like you have a lot of deductions so those numbers may be different. Also, keep in mind tax bracket bend points, where your marginal income jumps up.
Assuming all of your other stuff stays the same, every dollar of net profit from the business (taxable net profit) would be taxed at roughly combined 34%.
Self employment tax starts at 15.3% of 92.35% of net business income. It is the 6.2% FICA insurance for employee and employer share (12.4%) and 1.45% medicare tax for employee and employer share (2.9%). You have to pay the 2.9% medicare tax no matter what. However, the 12.4% of social security tax is still based on an overall max earnings of $118,500. You combine your W-2 social security earnings with your business earnings (but ignore your wife's W-2) and if the total exceeds $118,500, you don't have to pay the 12.4% on the amount that exceeds it.
It's going to be some trial and error, and need for projections.
Posted on 10/19/16 at 9:39 am to LSUFanHouston
quote:
LSUFanHouston
quote:
Your side income is self-employment income. You have to pay self-employment tax. (more on that in a minute)
Ask your CPA (or look at your tax return from 2015) and determine what your marginal tax rate is for federal. As well as state (although if you are in LA, it's going to be 6%).
I am going to assume you and your wife's other tax situations (your W-2, her W-2, your other income streams and other tax deductions) remain relatively the same.
Let's say it's 28% fed and 6% state. That would be 34%. This is not exact since you can get a federal deduction for state income tax paid if you itemize, but it's close enough for what you need. So say 34%. However, this is on net income, not gross revenue, but it doesn't sound like you have a lot of deductions so those numbers may be different. Also, keep in mind tax bracket bend points, where your marginal income jumps up.
Assuming all of your other stuff stays the same, every dollar of net profit from the business (taxable net profit) would be taxed at roughly combined 34%.
Self employment tax starts at 15.3% of 92.35% of net business income. It is the 6.2% FICA insurance for employee and employer share (12.4%) and 1.45% medicare tax for employee and employer share (2.9%). You have to pay the 2.9% medicare tax no matter what. However, the 12.4% of social security tax is still based on an overall max earnings of $118,500. You combine your W-2 social security earnings with your business earnings (but ignore your wife's W-2) and if the total exceeds $118,500, you don't have to pay the 12.4% on the amount that exceeds it.
It's going to be some trial and error, and need for projections.
Awesome information. I can't thank you enough. Much appreciated!
Posted on 10/19/16 at 9:47 am to GFunk
FYI, when you pay quarterly taxes you don't get a tax refund. Any overpayment (refund) amount is applied to your 1st quarter payment for the following year.
Posted on 10/19/16 at 1:33 pm to baldona
Thanks again.
Posted on 10/19/16 at 9:33 pm to baldona
quote:
FYI, when you pay quarterly taxes you don't get a tax refund. Any overpayment (refund) amount is applied to your 1st quarter payment for the following year.
Just to be clear... there is no rule indicating it HAS to be like this. (at least not for federal and a number of states, although I've heard some states might be looking at this).
However, it doesn't make a lot of sense to get a refund and then turn right around and make an estimated payment. It's better to just reduce your estimated payment.
Also for purposes of the penalty for underpayment of estimated tax, overpayments from prior year are applied in date order... so first quarter, then second if needed, etc.
Posted on 10/20/16 at 6:34 am to GFunk
Depends on the business. Want some advice that most will say is bad? If it's retail or investment based, don't save shite and spend every penny you can and have it working for you. Saving money aside for taxes is dead money with the low MM account rates. Every penny I own is working for me in some capacity in every business I've ever started. Once you've grown and stabilized, save some back for unseen liabilities such as legal, cash crunches, expansion, etc. Until then, don't liquidate until March/April once you've figured out how much you have due and then pay the tax man. Making money is all about using it to make more of it while taking some risks. Especially regarding startups. If it's not retail/investment based then save a small portion of what you think will be due and blow it out on marketing to expand your business.
Some of my ventures I set aside as much as 70% for marketing. Ex: a membership based revenue model I'm running and started a few years ago. Overhead was low outside of initial dev work around 250k, and I spent every penny I made after that and put into marketing. I tapered off toward the end of the year so I had some cash for taxes, but had most of it in play in some capacity.
Some of my ventures I set aside as much as 70% for marketing. Ex: a membership based revenue model I'm running and started a few years ago. Overhead was low outside of initial dev work around 250k, and I spent every penny I made after that and put into marketing. I tapered off toward the end of the year so I had some cash for taxes, but had most of it in play in some capacity.
Posted on 10/20/16 at 1:38 pm to WhiskeyDick
quote:
WhiskeyDick
quote:
Depends on the business. Want some advice that most will say is bad? If it's retail or investment based, don't save shite and spend every penny you can and have it working for you. Saving money aside for taxes is dead money with the low MM account rates. Every penny I own is working for me in some capacity in every business I've ever started. Once you've grown and stabilized, save some back for unseen liabilities such as legal, cash crunches, expansion, etc. Until then, don't liquidate until March/April once you've figured out how much you have due and then pay the tax man. Making money is all about using it to make more of it while taking some risks. Especially regarding startups. If it's not retail/investment based then save a small portion of what you think will be due and blow it out on marketing to expand your business.
Some of my ventures I set aside as much as 70% for marketing. Ex: a membership based revenue model I'm running and started a few years ago. Overhead was low outside of initial dev work around 250k, and I spent every penny I made after that and put into marketing. I tapered off toward the end of the year so I had some cash for taxes, but had most of it in play in some capacity.
It's an interesting perspective to be sure. But we are talking about cash being withheld for taxes on a radically different scale. I'll probably hold back a grand or two for the 6 months I'll have been in business in 2016.
I'm not sure how I could put my money to work in that size or amount in order to generate more business, especially since the constraint right now is my time and availability. I turn down business as I'm working fulltime at a W-2'd gig that I don't have plans to leave anytime soon.
Not that I'm closed to ideas or suggestions, but the way you can put your money to work is much different simply because there's more of it to put to work by comparison. I'd love to explore the potential to do so, and perhaps I'm being dense but I don't see how I can spin a few hundred or even a thousand into something akin to or along the lines of a passive income generator.
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