- Add up all your monthly expenses, so you know what a month of personal expenses really are for you.
- Still in a day job? Then start setting aside 5 percent of your net pay each paycheck and build savings.
- Sound like too much? Start with a goal of setting aside $100 week=$5,200 a year, which is a nice cushion.
- As an entrepreneur, you want to be sure that whenever you take a cash draw from the company, you set aside money for tax. Don't be surprised later with a nasty tax bill.
- Start now. The most important thing is to create a habit of saving each week.
5 Tips on Building a 6 Month Cash Reserve
Barter Tax and Accounting Issues
Barter transactions can provide your company with important financial, sales and marketing benefits. Like other transactions, however, barter sales are taxable, and your company must report them to the IRS. This is also true of credits you receive or spend through a barter exchange; regardless of how you use barter credits, they are taxable as though they were cash.
Barter Income and the IRS
The U.S. government considers barter exchanges to be legal third-party record keepers, similar to banks, brokerages and other firms that deal with taxpayer records. Barter exchanges are required to complete and submit Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions," for each of their members and the IRS. In order for the exchange to complete this form, you'll need to give the broker your taxpayer identification number.
As far as the IRS is concerned, barter dollars are identical to real dollars. As a result, you won't get any special tax benefits (or penalties, for that matter) from using a barter exchange. If you conduct any direct barter — that is, barter for another company's products or services — you'll have to declare the fair market value of the items you sold as taxable income.
This same-as-cash standard also applies to barter purchases: If a barter purchase is business-related, you can deduct it from your taxes, but if it's for personal use you can't deduct it.
Barter Accounting Tips
There are a few accounting guidelines to remember when you conduct barter transactions. First, keep in mind that all barter income is dealt with on the cash basis, and the IRS treats barter as income received whether you use accrual-basis or cash-basis accounting. Also, you must report and pay taxes on barter income for the year in which it accrues; if your business is profitable you should try not to have unspent barter credits at the end of the fiscal year. (If you're unprofitable, and your barter income does not make you profitable, the IRS won't tax it.)
What should you do if you have unspent barter credits at the end of the fiscal year? If your barter exchange allows it, you may be able to contribute them to charity and deduct them from your taxes.
Using Barter as Compensation
Barter can be a great way to provide bonuses or other types of compensation without raiding your company's bank account. Just keep in mind that barter compensation, like cash, is subject to personal taxes. If you use barter to compensate a contractor, include it on their Form 1099; if the recipient is a regular employee, declare it on their W-2 and withhold all appropriate taxes.
What Does the IRS Think about Barter?
Some business people believe that the IRS takes a dim view of barter transactions. As a result, they may assume that using barter subjects them to possible audits or to other legal scrutiny.
The truth is that a company using barter is no more likely to get audited than any other business. IRS rules concerning barter are now well established, and the government considers the barter industry to be a perfectly legitimate business.
Treat barter just as you would any other business activity. Keep good records, work with a reputable barter exchange and consult a qualified CPA if you have any questions or problems. If you handle barter transactions properly, they can be a useful — and profitable — part of your business.
Visit the AllBusiness.com finance and accounting center for tips on bookkeeping topics such as payroll, cash flow management and financial reporting. AllBusiness.com is a leading provider of practical information and services for growing businesses.
Self Employed Health Insurance
Many self-employed employees who file Schedule C are not aware that Medicare expenses for themselves and their spouses can be deductible. Up until 2010, the IRS did not specify that Medicare premiums were deductible. In 2010, for the first time, the IRS indicated in Publication 535 that Medicare premiums, under certain circumstances were deductible even for non-itemizers.
Specifically, Publication 535 ( which has not been updated since 2010) states that you may be able to deduct premiums paid for medical, dental, and qualified long-term care health insurance for yourself, your spouse and your dependents. You cannot take the deduction for any month you were eligible to participate in any employer (including that of your spouse’s employer) subsidized health plan.
One web site, specifically Kiplinger, states that you can deduct expenses for Medicare Part B, Part D and Medicare supplementary insurance. Other sources refer to Part B only. I talked to an IRS representative who agreed with Kiplinger’s interpretation. Unfortunately the opinion of an IRS agent on the phone can’t be used as gospel. I have talked to several Enrolled Agents and CPA’s. None disagreed with Kiplinger’s interpretation. I suggest that if you do have your return prepared by an enrolled agent or CPA, ask for his opinion.
Publication 535 also states that if you were eligible to take a Medicare deduction in prior years, and did not, you could file an amended return. The fact the IRS specifically states that Medicare expenses are deductible, it seems reasonable to assume that all Medicare premiums would be deductible as well as Medicare supplementary insurance premiums, as long as you are not participating in any subsidized health plan.
Is Your Worker an Employee or an Independent Contractor?
Think that just because you pay a contractor using a W-9 that they are an independent contractor instead of an employee? Think again.
Whether a worker is an employee or an independent contractor relies on much more than a W-9, and the same worker could be classified differently for different purposes. The IRS employs a 20-factor test to determine whether an independent contractor is really an employee. Under copyright law, only certain situations meet the criteria for a worker to be an “employee” such that the employer, rather than the worker, owns the work product. And some courts have held employers liable for the actions of workers who were “independent contractors” under the tax code but “employees” at common law.
So how do you know whether you have employees or independent contractors working for you? Almost all of the tests the IRS employs have to do with the amount of control you exert over the worker. When your intent is to hire an independent contractor, your best bet is to enter into a written agreement that spells out the terms of your business relationship. Your agreement should address all of the above factors as well as other concerns, such as, for example, the ownership of any resulting intellectual property.
Page 10 of 12