Kermit Clum provided valuable money saving financial tips to seminar attendees.

Kermit Clum provided valuable money saving financial tips to seminar attendees.

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.

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 MoneyQuicken, 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