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Tax Daddy's 9 commandments for a new business owner


BulldogTom

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My niece is starting a business.   I am going to try to get her started on the right foot, so I started writing a document to go over the things I think are most important.   Having just come back from church, I thought I would put it in the form of the 10 commandments.   Let me know what you think:

1.       Commandment #1 - I am your business and Tax Advisor.  You shall listen to no hairdressers, contractors or co-workers regarding tax and business matters.   You shall not believe everything you read on the internet, hear on the radio, or see in a TV commercial without checking with me.   You shall not call an 800 number for advice on borrowing, lending or tax issues.  You shall keep me informed of all major decisions related to the business, its ownership, its structure, and its profitability.

2.       Commandment #2 – Thou Shalt Keep your business and personal money separate

a.       Business checking account

b.       Anything you take from business for personal is recorded in both accounts

c.       Reconcile your bank accounts monthly

d.       Get a separate credit card for the business (only charge business expenses on business credit card)

3.       Commandment #3 – Thou Shalt Record all your business transactions

a.       Every single one, every single time, every single day, no exceptions, no whining about it

b.       You will keep a mileage log of all the trips you make in your vehicle for business.  It will not be created at my desk during your tax appointment, but will be kept on a daily basis.   You may use any fancy dancy millennial app that you can put on your phone to keep the log, but at the end of the year you will produce a mileage log that I can print out on old fashioned paper and put in my files that tells me where you went, why you went there, what the date was, and how many miles were driven to get there and back.

c.       You have to do this to follow Commandment #4…

4.       Commandment #4 – Thou Shalt Know your costs of doing business

a.       How much do materials cost

b.       How much is your office and other overhead costs (electric, business licenses, taxes, etc)

5.       Commandment #5 – Thou Shalt Price your products and services correctly

a.       At a minimum, you need to mark up your material costs by 40%

b.       You need to have a billing rate for your time

                                                               i.      40% more than you want to get “paid” from your business

                                                             ii.      If you want to earn $20 per hour for your time, your billing rate is $28 per hour

c.       You need to add at least 10% to the above numbers for overhead

d.       You need to add at least 25% to your billing rate and overhead rate to cover taxes

6.       Commandment #6 – Thou Shalt Put into savings a minimum of 25% + any sales tax collected from every payment you receive to cover your tax bill

a.       Sales tax collected is not yours – don’t treat it like it is. Put it in savings until it needs to be paid.

b.       Federal SE tax rate is 15.3%.  This is your SS and Medicare contributions

c.       Lowest Federal Tax Rate is 10%

d.       State Taxes – Find out what your tax rate is and add that to the 25% above

7.       Commandment #7 – Thou Shalt NOT hire any employees until you do all of the following

a.       Get an EIN from the IRS

                                                               i.      You don’t want to give your SS# out to every business customer who asks for it

                                                             ii.      You must have one if you ever hire employees

b.       Get a State EIN - to get a state EIN you need a Federal EIN

c.       Get General Liability Insurance

d.       Get Workers Comp Insurance

e.       Know the Minimum Wage requirements for your State/City

f.        Know the Benefits Rules for your State/City

                                                               i.      Paid Time Off?

                                                             ii.      Sick Time

                                                           iii.      Health Insurance

                                                           iv.      Anything else any Government Entity requires you to provide to your employee

g.       Have the ability to process payroll yourself or hire out the process

h.       Pay your Payroll Taxes on time every time (The IRS takes a dim view of employers who withhold from their employees and does not remit to them – They call it THEFT)

8.       Commandment #8 – Thou shalt have the proper local business licenses and follow your local business laws

a.       States, Counties and Cities can be more brutal than the IRS

b.       If you have an office in the home, make sure it is allowed by the local government

c.       If you are a professional, you must have the required licenses to perform the services offered by your business.

9.       Commandment #9 – Thou shalt keep your appointments with me

a.       My goal is to help you succeed in business.   You will be busy running the operations, trying to sell and trying to develop new products and services.   I know your time is important and limited, you need to recognize that my time is as well.   I will do all I can to accommodate your schedule.  However, government entities impose deadlines that cannot be missed.   Don’t ignore me all year and then show up on April 14th with a shoebox and a flimsy apology and expect me to get your documents ready on time. 

 

There is no 10th commandment, since I am not God, but on earth I am your Tax Daddy!

Tom
Sparks, NV

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The % in 5 b depends on what kind of business you are in.

5 b thru 5 d is confusing. I would take $ 20 / .60 = $ 33.33, however it again depends on the kind of work you are doing.

As a practical matter most self employed aren't able to bill out 100 % of their time worked.

My past experience with self employed clients is that it's difficult to make significant profits unless you are billing at least $ 80 per hour.

 

 

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7 hours ago, BulldogTom said:

5.       Commandment #5

Looks like your are engaged in Client Advisory Services (CAS) at level II or level III.

CAS is recognized as a specialized area of practice by the AICAP.  It would be a violation of ethics for me to perform that level of CAS without proper training or experience.

At a minimum, would need work with client for a year or two at level one before advancing to the next level and give out that kind of advice.

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Seeing how this client is related to me and I have been her tax preparer for nearly 20 years, I think I can give her those general guidelines.    These were talking points for our in-depth conversation on the phone.   

I have seen other clients over the years be very good at their trade or profession and start a business.   They underprice their services and get lots of business that is not profitable, because they don't understand the costs of doing business.   We see it in the tax business all the time, a new tax pro comes to town and starts underpricing.   They get lots of business and revenue, but not profits.   I wanted to make sure my niece did not do that, especially in the business she is going into.

Thanks 

Tom
Sparks, NV

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12 hours ago, DANRVAN said:

Looks like your are engaged in Client Advisory Services (CAS) at level II or level III.

CAS is recognized as a specialized area of practice by the AICAP.  It would be a violation of ethics for me to perform that level of CAS without proper training or experience.

At a minimum, would need work with client for a year or two at level one before advancing to the next level and give out that kind of advice.

If you are a practicing CPA, you are correct. However, if you are an EA like myself or an LTC then this doesn't apply,

even though there are lots of quasi professionals out there giving very bad advice.

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Tom, this is wonderful and timely.  I would replace the Tax Mommy as my son sort of kind of discussed maybe he might be considering starting his own business.  While encouraging him, I did rattle off many of the things on your list but really stressed that he needs to have a conversation with his tax/business advisor.  Good luck to and with your niece!

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1 hour ago, cbslee said:

Tom, after reading your post again, it's pretty "tongue in cheek" so I can't see giving it to a client🤐

My niece and I were meeting after church on Sunday.   As I started writing the notes that I wanted to touch on with her, I thought it would be funny to put it into a 10 commandments format.   She got it, cracked up about it.   Not sure I would send this out to a client either (unless they were members of my church).

If God does not have a sense of humor, I am gonna fry for this....

Tom
Sparks NV

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7h, and similar, for anyone new to the process, I always suggest making tax deposits with every payroll.  There is nothing substantial to gain on using the trust funds, and it is much easier and cleaner to only be "off" by the fraction of cents when filing.  If using a payroll service (legit, not one where you use someone to "prepare" your payroll but they do not handle funds or sign forms) they will likely pull the trust fund amounts anyway...

Also for payroll, note the owner cannot pay to shift liability to a third party, so it makes sense for the owner to at least gain or have a working knowledge of payroll (and business accounting too) so they can either DIY, or be able to keep a watchful eye on their provider - so they do not end up in the situation of a couple years ago where a provider went out of business and left their customers paying trust funds twice.

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