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Small Business Week: Getting Started

BOSTON (CBS) - This is national Small Business Week, sponsored by the Small Business Administration. Small businesses contribute much to our economy. According to the SBA small firms:

• Employ about half of all private sector employees.
• Pay 43% of total U.S. private payroll.
• Have generated 65% of net new jobs over the past 17 years.
• Hire 43% of high tech workers (scientists, engi­neers, computer programmers, and others).
• Are 52% home-based and 2 percent franchises.
• Make up 98% of all identified exporters
• Produce (16.5 times) more patents per employee than large patenting firms.

A small business by definition has less than 500 employees. However, there were over 21 million firms without any employees. Those are the individuals we will deal with this week.

I figure that number is low for there may be many folks out there not reporting their income from self-employment.

We have a huge underground economy in this country. It's a cash only economy. Individuals think that they will have more money in their pocket if they don't share it with Uncle Sam.

That may be true, but if you don't pay taxes whether they are income taxes, social security or Medicare taxes you will not be eligible for future benefits.

I am not recommending anyone pay more taxes than they should, but you do need to report all of your income and then look for the deductions you are eligible for as a self-employed individual.

The IRS has a section for small businesses on their website and they do offer some good advice.

They even have links to a tutorial on writing a business plan. Request publication 583, Starting a Business and Keeping records and publication 334, Tax Guide for Small Business to get you off on a good start. Both can be downloaded from the IRS' website.

Another helpful government resource for the small business owner is the Small Business Administration; they have key information on running your business and where to get financing.

Also, check out the many books available for starting your own business whether it is a day care or a landscaping firm. Both the Complete Idiot Guides and the Dummy series have some good offerings.

A mistake the self-employed often make, especially those that are new to being self-employed, is that they are overly optimistic in estimating their annual income. If you have a good first quarter, it's easy to fall into the trap thinking that the next three quarters will also be good! Don't count on it! Plan for the worse and if it never happens aren't you lucky?

Another problem for the self-employed individual is the lack of a steady income. Consultants, real estate agents, writers, musicians, landscapers, Dairy Queen owners and carpenters all suffer from fluctuating income.

It's often feast or famine. And it's not unusual to find yourself stuck in the famine mode where you need to hone your money survival skills. A long winter dampens the spirits of many self-employed individuals as well as depleting their savings.

One more thing:    Starting a new business from the IRS' website:

First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.

Good records will help you ensure successful operation of your new business. You may choose any record keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method.

Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

Resources:

Starting A Business
Operating A Business
Closing A Business
Publication 4591, Small Business Federal Tax Responsibilities (PDF 470.1K)
Publication 334, Tax Guide for Small Business (PDF 286.2K)

As a self-employed individual, you should try to figure out how much money you need to maintain their life style. Do a cash flow. Where does your money go each month? What would be the bare bones approach if you had to? Are you using your credit card to supplement those no-income periods? Okay to do that but pay it off entirely when your income increases.

And then work on putting together your emergency fund. During the good times, start saving aggressively so that you have at least 6 months' worth of living expenses set aside for the lean times. For those lean times are going to come.

You want to keep this money separate from your checking account and definitely make it hard to get to it so you are not tempted to use it for a vacation or Christmas. Use a money market account, a 3-month CD or even EE bonds.

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