5 Things Small Business Owners Need To Know – Money Learning Checklist 6



If you’re a small business owner, congratulations.  You’re your own boss and no one tells you what to do, create, or produce.  That’s the upside.  The downside is that you’re in charge of everything, and that means everything.  Sometimes you get what you ask for.

In addition to your main talent, you need to be talented at these other activities as well.

Take some time out to focus your attention on these very important elements.  Get help if you can’t handle it.


Keep good records

Get organized.  This is the key to any financial activity.  Maintaining good records for accounting and tax purposes is essential not only for tax purposes but also for banking purposes.  Being organized lends credibility to your activity.  Make sure you can identify the sources of your income, reasons for expenses, and documents related to purchases of business property.  Even if you’re not an accountant, you can keep separate folders for each type of expense.  Drop receipts right into the folder and organize them later.  That’s something that anyone can handle.

Prepare financial statements on a regular basis.  When you need to apply for a loan, the bank will ask for them.


I’ve worked with many consultants and small business owners that neglect their record-keeping and then don’t want to pay income taxes.  You can’t deduct expenses from income unless you have proof of a purchase.  That means you need receipts for everything.


Cover self-employment tax and income tax

A sole proprietor is responsible for their own employment taxes.  Self-employment taxes fund Social Security contributions and Medicare and are the equivalent of payroll taxes deducted from an employed person’s paycheck.

Self-employment taxes are calculated separately from the income tax computation, meaning that the income is taxed on two levels.  Both taxes need to be paid to the IRS on a quarterly basis.  Therefore, you should know what portion of your gross income needs to be put aside and paid to the IRS.  When estimates are not paid timely, interest and underpayment penalties accrue from the quarterly due date through the due date of the tax return.

Too many consultants spend all of their income, then express shock and anger when their tax return is due and they owe money.  Also, if you never pay in any Social Security taxes and stay self-employed your whole life, you will not be entitled to any Social Security funds in retirement.

A common fallacy is that everything is deductible and that business owners don’t pay taxes.  Being a cash taxpayer does not mean that every dollar that leaves your wallet is deductible.  Example: business loan payments.  Only business interest is deductible, not the loan principal.  The reason is that the loan principal is not included in income when the loan proceeds are distributed to the borrower.  Therefore, there is no deduction for the payback.


Finally, don’t forget about your state income taxes.


Retirement options

Many self-employed individuals neglect to save for retirement and waste many earning years.  These are the options for small business owners along with some highlights.  Consult IRS Publication 590-A.

Individual Retirement Account (IRA) – traditional or Roth

You have until April 17, 2018 to make maximum contributions of $5,500.  Add another $1,000 if over 50 years of age.  A traditional IRA may result in a tax deduction.  Roth IRA contributions are never deductible.

Simplified Employee Pension (SEP) IRA

A SEP IRA is very easy to set up and may be done by the due date of the filer’s tax return.  Making employee contributions is not required every year but must be made for every eligible employee.  Contributions are limited to 25% of earnings or $54,000.

Savings Incentive Match Plan for Employees (SIMPLE) IRA or 401(k)

Another easy plan to set up, it’s best for small businesses with up to 100 employees.  Employees may contribute up to $12,500 and there is some percentage flexibility with employer contributions.

Qualified (Keogh) plans

Other alternatives are qualified defined contribution or defined benefit plans.  The contribution amounts for these plans offer the highest of all the options.  There’s a considerable amount of administration related to this option, so it really only makes sense for high earning self-bosses.


You may qualify for a tax credit related to startup expenses of the plan choices.  The maximum credit is $500 in each of the first three years, subject to the credit requirements.  See IRS Publication 560.



Liability insurance

Sole proprietors bear the liability risk of the entire business.   More importantly, the personal assets of a sole business owner are fully exposed to liability risk.  Having business insurance and liability coverage will prevent a catastrophic lawsuit from personally bankrupting you.


Disability insurance

This is otherwise known as income replacement insurance and is often overlooked.  The sad truth is, a working adult has a better chance of becoming injured and disabled than of dying.  In addition to concern over excessive medical bills, the sole household breadwinner needs to ensure that their income will be replaced in the event of a debilitating illness or injury.


Related Posts:

Money Learning Checklist 1         Earning/Saving

Money Learning Checklist 2         Spending

Money Learning Checklist 3         Credit

Money Learning Checklist 4         IRAs

Money Learning Checklist 5         Retirement


Tasks Keep good records
Remit self-employment/income tax
Explore retirement options
Obtain adequate liability insurance
Obtain disability insurance
Books/Magazines  Small Business For Dummies
Websites to follow Entrepreneur.com
Online tools www.sba.gov


Related Article: Small business insurances – https://www.forbes.com/sites/thesba/2012/01/19/13-types-of-insurance-a-small-business-owner-should-have/#4da1a68020d3

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