So last week, I began the conversation around those foundational items of necessity for a “real” business that many business owners in Bergen & Rockland County don’t quite take into consideration when they first get started.
These are the sort of things that can be the difference between a long-term, sustainable business versus one that gets sunk.
And yes, these issues are aside from the problems of marketing/sales, cost controls, capitalization, management, and other critical components to building a business.
Part of our job for you is to make sure you’re on top of these necessities so that you can go out there and do what you do best. Because nobody “got into a business” to major on these issues, so they’re the perfect things to have somebody else handle on your behalf.
And while we can’t directly handle all of these things for you, we can certainly give you pointers.
So, without further ado, here’s more of what I started last week…
Six Underlying Needs For Effective Small Business Planning In Bergen & Rockland County
“A little thought and a little kindness are often worth more than a great deal of money.” – John Ruskin
Last week, we identified six areas in which many business owners remain under-planned.
- Disability and Workers’ Comp
- Property and Liability Coverage
- Unemployment Coverage
- Healthcare Plans
- Retirement Plans (401(k)s, etc)
- Retirement Income Plan (Social Security and beyond)
Last week, we covered Disability and Property/Liability. Let’s today dive into the rest.
Unemployment — Where’s Your Safety Net?
When it comes to retirement and healthcare, there are lots of ways that a Bergen & Rockland County small business owner or freelancer can “mimic” the coverage often provided by large companies to employees. But there is one significant problem with the “business owner” life (which can also be a great source of motivation): no safety net.
For the employee who gets laid off, you can apply for unemployment. Your employer has paid an unemployment tax (presumably!) on your work the entire time you have been employed with them, which is a simple payroll cost for them. All those taxes go into a pool of government funds from which those who are laid off can get a small amount of money each week to tide them over while they find work.
The business owner or freelancer, on the other hand, must pay their own “unemployment tax” — by which I mean have a short-term savings plan. This is in case disaster somehow strikes and you go out of business. As an employer, you aren’t able to dip into that same kind of pool. Having this in place is an essential way to shore against disaster, and you need to build a “retained earnings” plan into your business just as soon as you are able. Nobody else will do that for you.
Healthcare For The Employer Or Freelancer
Employees on their company plans get to (mostly) pay for their healthcare insurance in “pre-tax” dollars — which makes it “cheaper” (though not for the employer). If you don’t have that option as a business owner or freelancer, you can still technically deduct the premiums, but under the existing tax code, it has to be more than 10% of your income to qualify for the medical expense deduction.
And of course with the larger standard deduction coming into play this year, itemizing these deductions might not be the best tax play for you.
However, there are lots of great options for employers, at least from a tax standpoint. It doesn’t change the fact that healthcare is EXPENSIVE, but if you do the thing correctly, you can actually set up a system by which you can pay for ALL of your healthcare costs (not just premiums) with “pre-tax” dollars using a Small Business HRA. And there are other options as well if you don’t want to go through that process.
Week-long seminars could be devoted to this topic of employer healthcare (and they are!), so I won’t go on and on. But know that you have options, and we are here to help you set up the most tax-advantageous ones.
Retirement Planning For The Small Business Owner
Again, this is a topic around which entire books can be written, so I will keep my comments on this short and sweet.
The main thing here is to have a plan.
But here is a decent rule of thumb. There might be certain cases in which you might want to do something differently, but this is a good place to start, when you consider how to save for retirement:
If you want to save less than $5,000 per year, your best bet is to use an IRA or a ROTH IRA.
If you want to save more than that (up to around $40,000 per year) and you do NOT have an S-Corp, the best choice is most often the SEP IRA.
If you want to save more than $5,000 per year and you do happen to have an S-Corp, then a 401(k) is the best choice. We can help you get that set up.
And then if you want to get really aggressive (over $40K per year), then we’re talking about pension plans — and these are definitely not something you want to set up on your own. If that’s you, let’s definitely talk (if we haven’t already).
As for your Retirement Income Plan…
This will depend upon your choices above, of course.
But on top of your savings, you need to make sure you’re paying into Social Security through payroll taxes — which, of course, means putting yourself really and truly “on the payroll”.
And yes, if you take the pessimistic view (for which there is plenty of evidence), the system might be completely broken by the time you are able to take from it.
But assuming that’s not going to happen, remember that those payroll taxes you are paying can still be seen as an investment into your future. Sometimes that takes a little sting out of having to pay both sides of it.
All of these things (including Disability and Liability) are items that any business owner in Bergen & Rockland County should have a plan for.
If they intimidate you, let us help you. That’s what we’re here for.
Feel very free to forward this article to a Bergen & Rockland County business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.
Arthur Sisco, CPA PC