Money advice for the self-employed

Dog walkerIf you’re self-employed, you’ve probably noticed that standard money advice often falls short.

A lot of what you read assumes you receive regular, predictable paychecks with taxes already withheld and benefits covered. Just try finding advice to deal with the following:

  • A major customer abruptly changes payment policies, so that five-figure check you’re counting on to pay the bills lands weeks later than you expected.
  • Your health insurer announces your premiums will increase 39%, and your insurance broker tells you that no other company will cover you for less…or at all.
  • Congress dithers on renewing a key tax break, so your CPA advises (at Christmastime) that you’ll need to cough up thousands more dollars to make yourself “penalty proof.”

These aren’t hypotheticals. Each has happened to me as a small business owner. Predicting income and expenses when you run your own show is often as much art as science. When you’re providing your own benefits, handling your own taxes and doing your own billing, your financial life becomes complex in a way that would confound most of the W-2 world.

This is what has helped me:

A business line of credit. Excellent credit scores helped me land a low-rate line of credit when I opened my business checking and savings accounts. I relied on it heavily when I was getting started to cover those inevitable gaps in cash flow (translation: slow-paying customers). I still use it occasionally to deal with unexpected expenses; I don’t carry a balance for a day longer than necessary, but I’d rather pay a few bucks in tax-deductible interest for a few days than keep a huge wad sitting idle in a business savings account.

A tax pro. I don’t write about taxes often, and almost never about business taxes. So why would I waste time trying to keep abreast of business tax law and struggling to do my own taxes when I can hire someone? Especially since that someone lives and breathes taxes, and can be counted on to represent me in an audit. We small business owners often have trouble delegating, but we’re far better off spending our time making money than wrestling with tax forms.

A simple rule of thumb. Early on, a CPA said he could bill me to make some elaborate projections, but he suggested a simpler way: save half. If I put aside half of every check that came in, I’d be able to cover my taxes and expenses. Ten years later I have a much better handle on cash flow, but it still pretty much boils down to saving half of what comes in.

If you’re an entrepreneur, I highly recommend “The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People with Not-So-Regular Jobs Paperback” by Joseph D’Agnese and Denise Kiernan, two freelancers who through trial-and-error figured out a money system that really works.

Protect those who look after your kids

NannyA woman who works as a nanny and housekeeper wrote into the Wall Street Journal recently. Her employers had paid her under the table for years. As a result, at she’s facing retirement with only a miniscule Social Security benefit.

This drives me nuts. If you can afford to hire a nanny or a housekeeper, you can afford to pay her taxes.

Yes, you can.

The employer half of payroll taxes for Social Security and Medicare is 7.65%. The cost of hiring someone to do the paperwork is around $500 a year. (I use the Nanny Tax Company, which charges a $100 one-time set up fee and a $475 annual preparation fee. Each additional employee after the first one is $125.) Those aren’t exorbitant sums. If you can afford to hire help, you can afford to pay the taxes that are legally required as a household employer.

(I’m assuming that your household help can legally work in the U.S. If that’s not the case, well—that’s a matter for a whole different column.)

There’s a line between frugal and cheap. You cross that line when you force other people to pay the price while you save money. The people you entrust with your children and your home deserve better.