RUNNING A SMALL BUSINESS
Translators and interpreters got a crash course in small business management and an in-depth tutorial on financial and tax planning for the independent contractor from Kermit Clum.
BY MARY DENIKE
On February 23 in downtown San Francisco, Kermit Clum led NCTA members through a three-hour seminar entitled, The Dos and Don’ts of Running a Small Business. Kermit is a CPA and owner of Key Financial Solutions in Redwood City, California. Over the course of the seminar, he addressed bookkeeping and accounting challenges facing the freelance translator and independent contractor.
Kermit advised attendees to maintain two separate accounts—one for business and one for personal expenses. Divided accounts make life simpler and more manageable for both the translator and the accountant responsible for financial planning. The easiest and most effective way to keep track of business transactions is with a credit card, not cash. Kermit also advised getting a business license and using the services offered with the license.
On the record
He stressed the importance of maintaining records to simplify year-end tax reporting. Keeping good financial records with business software is critical to tracking income and expenses. Kermit recommended Microsoft Money, Quicken, and QuickBooks, because Intuit offers online training classes.
A small business owner needs to pay self-employment tax. Clients will issue independent contractors a 1099 Form for any job over $600. The independent contractor must complete an IRS Schedule C to report how much money was made or lost. Examples of deductible expenses are health insurance, mortgage payments, real estate taxes, utilities, internet, and cell phone. Travel expenses are 100% deductible during a seminar or conference, including air and ground transportation, meals, and lodging. Other deductible expenses include education and travel to see clients.
All independent contractors are required by the IRS to pay estimated taxes on their annual income four times per year. Money needs to be budgeted carefully, or the independent contractor could face a surprising and huge bill plus a penalty the following year on April 15. The quarterly income payment is based on 110% of last year’s income, or 90% of the current year’s. Foreign sources of income need to be reported as income, and foreign bank accounts reporting (FBAR) must be filed on a TD 92-22.1 Form.
Money in your pocket
Kermit explained how retirement and tax deferral options were the best way to “put money back in your pocket.” For those with employees, he highly recommended an SEP-IRA (Simplified Employee Pension-Individual Retirement Account), which is a simple and low-cost way to defer 18.6% of net income. The employer contribution maximum is 25% of wages for all eligible employees and contributions can be made on or before an extended tax-filing deadline. Kermit also suggested that small businesses consider a 401K plan with a pre-tax contribution limit of $17,500 (for 2013) where the employer can also contribute.
Individual retirement accounts (IRAs) must be established before the end of the year. Traditional IRAs are tax deductible as an adjustment to income (subject to income limitations), and are only taxed when withdrawn as ordinary income. Roth IRAs are recommended for younger people. They are not tax deductible, but the income grows tax-free. Health savings accounts (HSAs) allow a portion of income to be deferred, are individually owned, and monies roll forward year to year. Also to be considered are the Health Reimbursement Arrangement (HRA), which is ideal for a company with employees, or a Flexible Spending Account (FSA), which is typically used for medical or dependent care.
The bottom line for the independent contractor, according to Kermit, is that if you’re not making money, then you’re doing something wrong. In addition to the importance of keeping separate personal and business accounts, he reminded the audience to be smart about the time and energy put into accounting; a wise individual knows when to outsource. MD