CHAPTER 19

Meeting Uncle Sam and Other
Necessities

Let me begin this section by saying that I am not a legal expert, a financial planner, or a tax professional of any kind. However, I have made my way through a number of business startups without having hired any of these experts to date—all while remaining on good terms with the federal government. I learned the old-fashioned way: by reading, researching, working with successful business owners, and asking tons of questions. I tell you this because if your business is starting out small, you may want to consider doing the legwork yourself and saving a few thousand dollars.

One of the best tips I can give you is to visit your local library and search for books dedicated to the legalities of starting a small business. Alternatively, you can search online for reputable treasure troves of information such as the U.S. Small Business Administration (www.sba.gov) or the Internal Revenue Service (www.irs.gov). There are endless printed directives, video instruction, materials you can have shipped to your door—the works! Let me hit some of the highlights to get you started, but please keep in mind that this list is not exhaustive.

Establishing Your Business

This is an important section of the book, walking you through each of the mandatory steps for establishing your business as an official entity. From choosing a location for your office to setting up your records, the following steps will get you up and running:

1. Choose a location. Choose an official location for your business: a home office, a leased space, or some other place (see the previous chapter for more information on this topic). If you choose to run the business from your home, check local zoning requirements to be sure that your intended business activity is permitted in a residential area.
2. Determine your business mailing address. Once you know the location of your business, it’s time to think about whether you want your actual location to be your business mailing address. Even if you anticipate working from a home office or leasing office space on a trial basis, it is still a good idea to open a P.O. Box to use as your official mailing address in the name of anonymity and continuity. However, keep in mind that this will require you to drive to and from the post office on a regular basis, so choose the location nearest you. Once you have an official business mailing address in place, you are ready to choose a legal structure.

   Think Twice Before Using Your Home Address as a Business Address

   If you run a business out of your home and use the house address as your official mailing address, you may find that customers and solicitors will knock on your door unexpectedly and fill your residential mailbox with supply catalogs and other junk mail for many years to come.

3. Choose a legal structure. This sounds complicated, but if you are willing to do a little reading on the IRS Web site, you can readily determine which structure is the best choice for your business. Legal structures range from sole proprietorships to S corporations to limited liability companies (LLCs) and more, and each structure has its own legal and tax considerations. Once you decide on the structure that is right for your business, you can apply for your Employee Identification Number (EIN).

   Spend the Money for a Larger P.O. Box

   If you’re setting up a P.O. Box, choose a medium-sized P.O. Box instead of the smallest box available. Although the small box seems best in the beginning, a year from now your box may be overflowing, causing mail to be returned to the sender. This can be embarrassing, be confusing for the client, and cause checks to become lost in the mail. And changing boxes down the road means changing all of your printed business materials and requiring all of your clients to update their records as well. Buying a larger box now will save you and your clients time and hassle.

4. Apply for an EIN. This number, also known as a Federal Tax Identification Number, acts as an identification number for your business, and you will use it for paperwork filing and to receive payment in much the same way that you use your Social Security number. The EIN is a necessary form of identification for banking, tax, and payroll purposes. Most importantly, the EIN makes it possible for clients to pay you! As soon as you are serious about getting your business started, you need to visit the IRS Web site and apply for your EIN. Having this number makes it possible to open business bank accounts and more.

   Learn More About EINs

   For more information, read IRS Publication 1635, Understanding Your EIN.

5. Open a business checking account. Once you have your EIN, you will be able to open a business checking account from which you can write checks to pay for business expenses and receive checks from clients for deposit. Opt for a free business checking account that is separate from your personal accounts to get started. Maintaining a separate account for your business prevents personal items from inadvertently becoming mixed up with business items and makes it easier to view your business cash flow.

   Search for Checking Plans with Unlimited Deposit Plans

   Look for a business checking plan that allows for unlimited deposits with no additional fees. Because you will be working for multiple employers, you will be receiving and depositing a great many checks each month. You earned it; hang on to it!

6. Set up your recordkeeping. Last but not least, you’ll need to determine if you will pay taxes based on a calendar year (12 consecutive months beginning January 1 and ending December 31) or a fiscal year (12 consecutive months ending on the last day of any month except December). Then mark your calendar with your important must-pay-by federal and state tax deadlines. Missing these deadlines means paying penalties and doing additional paperwork. Also, you’ll need to set up your recordkeeping system either on paper or with a program such as Quicken and determine whether you will use a cash or accrual accounting method. (To learn more about these methods, consult the IRS Web site.) Meticulous recordkeeping is critical in order to have an accurate picture of your income and expenses, to make adequate tax payments, and to answer to Uncle Sam in the event of an audit. Finally, look ahead to April 15 and think about how you can best organize your records to make tax filing as seamless as possible. Quicken and TurboTax pair nicely together; do the research and determine if they are the right solution for your new business.

   Learn More About the Business of Accounting

   For more information, read IRS Publication 538, Accounting Periods and Methods.

Congratulations! You are officially in business. Now it’s time to protect yourself and your business by taking a look at the various forms of insurance.

Taking Steps to Safeguard Yourself

Insurance is a necessary expense for any small business owner. The purpose is simply to transfer risks that you can afford (the premiums) to cover risks that you cannot afford (such as a client breaking his leg when slipping on the ice on your front steps). The necessity for any of these forms of insurance will be driven in part by the type of work in which you engage. As a Patchworker, you may want to consider a few different types of insurance:

• Liability insurance: Does your business need liability coverage in case you make a grievous error while on the job? For most people the answer will be no, but due diligence is in order.
• Renter’s insurance: If you lease office space and store your computer and other office equipment there, you will want to get a quote on renter’s insurance.
• Upgrade on homeowner’s insurance: If you run your business from your home, you may want to upgrade your current insurance policy to reflect the additional equipment stored in the home and other business-related considerations.
• Health insurance: Let’s face it. Health insurance is the big sticking point for a lot of people when they consider leaving the security of the 9-to-5 world. The next section details health insurance concerns in more detail.
• Life insurance and disability insurance: These forms of insurance may have previously been arranged through your 9-to-5 employer and are yours to shop around for going forward.

Insurance is essential to your long-term success. You should contact a certified insurance agent for more information about these products and what is best for your business needs. Among the many forms of insurance that you must consider purchasing, health insurance is the most critical.

Health Insurance—More Affordable Than You Think

Millions of Americans get up and go to their 9-to-5 jobs each day for the sole purpose of maintaining their health insurance eligibility. I used to be that person, so I understand where you are coming from. The turning point for me, in all honesty, was when I one day discovered that the inflated health insurance premium that I was paying at my 9-to-5 job for basic coverage was only $20 per month less than it would have cost if I opted to leap out on my own and purchase coverage independently. It was a revelation.

Alternatively, you can investigate your eligibility for COBRA group health continuation coverage through your most recent 9-to-5 employer. Under certain circumstances, you may be eligible to purchase coverage through the group plan for up to thirty-six months. Prepare yourself for the fact that COBRA coverage may be pricey, but it can prove to be a viable and guaranteed form of coverage for individuals with certain preexisting health conditions.

When was the last time that you shopped around for health insurance? Have you ever done that before? Do you know what the actual costs are to purchase coverage outright for yourself and your family? Shop around! You might be pleasantly surprised.

To begin your quest for insurance, you can request insurance quotes online through a portal, such as www.healthinsurance.org, or enlist the help of a local certified, professional insurance agent who can evaluate your needs, educate you, and shop around on your behalf.

Health Savings Accounts

Opening a Health Savings Account (HSA) is a smart option for managing health-related expenses when you choose a high-deductible insurance plan. The HSA is a tax-advantaged repository established by the U.S. Department of Treasury to encourage saving for health-related expenses. You can withdraw money from the account to pay for health-related expenses such as medical bills, medication, or your deductible. According to the official Treasury directives:

• Amounts contributed to an HSA belong to the account holder and are completely portable.
• Funds in the account can grow tax-free through investment earnings, just like an Individual Retirement Account (IRA).
• Funds distributed from the HSA are not taxed if they are used to pay qualified medical expenses.
• Unlike amounts in Flexible Spending Arrangements (FSAs) that are forfeited if not used by the end of the year, unused funds remain available for use in later years.

Purchasing a health insurance policy with a high deductible and then building up an amount in the HSA equivalent to that deductible can give you peace of mind, knowing that in case of a catastrophic accident or serious illness your deductible can readily be met and a large portion of the costs will be covered. Contact a health insurance expert or the U.S. Department of Treasury (www.ustreas.gov) for more information.

Cash Discounts

It is unorthodox in our society to haggle with someone about the costs of a retail good or service being provided in a store, much less a medical setting. However, most medical professionals do have a separate pricing category for someone who has a high deductible and is essentially paying cash, minus the in-network discount. For routine procedures this can provide a moderate discount that can add up to a great deal of savings over the course of a year. For major procedures, such as newborn delivery, the discount can be as much as 50 percent off of the inflated retail sticker price. That can really add up to a lot of savings. Ask the question of the billing specialist at the medical office—you may like the answer!

Retirement Savings

Saving for retirement is critical, period. Just because you’re no longer contributing to a company-sponsored 401(k) doesn’t mean you can forget about saving for retirement. After all, retirement is a metaphor for the biggest journey of your life. The journey will be to places you have always dreamed of living or visiting and in the manner you have always envisioned. It is a trip that will last for many years, and the path you travel as well as the level of luxury you enjoy will be determined by your careful and disciplined preparation. Effectively saving for retirement will empower you. Failing to save for retirement sufficiently will result in a long, difficult journey.

To plan for and ensure a safe, pleasant journey into your golden years, you should first check out an online retirement calculator to determine the approximate amount you need to save in order to enjoy the lifestyle you have in mind. Most brokerage companies, such as Vanguard, offer excellent, free, and easy-to-use online tools for the general public. Use this information as a starting point for a conversation with a certified financial planner in your area.

Attending to these necessities is critical in order to ensure your health and the health of your business. Take your time and build a strong foundation that will safeguard your future success.