Just a couple of years back, during the worst economic times since the Great Depression, what kept this country afloat was small businesses. Hallmark companies– the names of which were as familiar as our immediate family–went belly up. Government bail outs were rushed to the auto industry as well as lending institutions to avoid irreversible collapse. Withstanding the strong winds of adversity were the mom and pop shops and independents. These determined individuals got out of bed everyday, opened their doors and gave unwavering service to those who came by. Cash was low. Anxiety was high. With grit and determination and a lot of praying, they believed the day would come that things would get better. Some survived against all odds.
I’ve always had a side hustle, but April of 2013, I left employment and became 100% independent. Quite a milestone! From that point on, GAME ON! I’ve learned a couple of things, especially during tax season, that I want to pass along
If you’re deducting a home office, make sure it’s a bona fide, only-used-for office space
I’ve had a home office for quite a few years now. One thing that my tax preparer advised this year, however, was that I take a picture of it. I did. I also researched North Carolina requirements and obtained a home-based business permit and business license. You might not think this is necessary. I can say that I feel more secure knowing that I’ve added that extra validity to the work that I perform. Should I be audited, I can flip out my pictures, my approved home-based business permit and my nicely framed business license.
If you offer services, make sure you get a formal contract
Back in the day, a handshake was enough. It was called a verbal contract. And in some courts of law, it is just as binding as a formal contract. We’re talking about the IRS though. I’m not so sure they place the same value on that. That’s not a chance I’d want to take. Having a contract is a legal document that speaks to what services you are performing, how they will be performed and the compensation. You need a contract. Merely saying you are an independent contractor is not enough. One major determinant for the IRS is “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Says IRS.gov, “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”
Make sure the check is made out to the business, not to you
If you have a variety of customers or perform at different gigs, it adds credibility to your business if your payments are made out to your business. Without that, there is nothing that legitimizes what the money was for. This, the IRS does not like. They don’t like that there is no contract or nothing is defined on an invoice or statement of work. Secondly, they don’t like it if the checks are made out to you personally. In such cases, establishing a separate bank account for your business is essential. In my search for a bank that offered free checking to small business owners, I found three local ones. One was discontinuing its free offerings to businesses but one wasn’t — First Citizens Bank.
Let me interject that I am not employed by First Citizen’s Bank and don’t get a discount for referrals. Still, I think they have earned a shout out. There is no cost if you have less than 175 items per month and you elect to get your bank statements electronically. And get this! You don’t have to maintain a certain balance to remain eligible. That’s pretty sweet. They also offer great customer service. My banking account was less than 30 days old and typically your deposit is held for a time before your funds become available. An issue came up, in the interim, that required I use the money. I called the bank. Though the bank officer was busy, one of the tellers helped me. She made a phone call to the issuing bank and verified that the check had cleared. They immediately released the funds. This averted a potential crisis as small businesses need access to funds as early as possible.
I’ve written about three things I’ve learned. But this is in no wise exhaustive. Feel free to add comments and other tax tips or information that can benefit us, the few, the proud, the Independent!