The VA Biz 101 - Topic #7

Money Matters

Topic Objective: In this topic, we’ll discuss taking care of the financial side of your business.

Disclaimer - yea, you know that part of the commercial where the announcer reads five minutes worth of information in 10 seconds?

Here it is:

This is a general overview of tax and related financial issues. It is not intended to be a substitute for professional legal, accounting, or tax advice.

Now that we have that out of the way…

And before we get into some how to stuff, I want to address a very important point - probably the most important point of this entire course. The goal of a business is to make a profit - not to make money. This may seem obvious when you read it but I believe it is the single largest misunderstanding that people have when transitioning from employee to business owner.

Income into your business is not the same as cash in your pocket. You must allow for your business expenses and tax reserve before you draw your “salary.” If you don’t, you won’t have enough money to run your business and you’ll be back hunting for a j-o-b!

Start by creating a spreadsheet of all of the expenses you will have that are just for your business. For example:
• Phone line
• Internet connection
• Supplies
• Online subscription services (i.e. backup services)
• Equipment
• Training
• Marketing/Advertising
• Startup costs such as business cards and website set up.

This will be a work in progress for the life of your business. Don’t worry that you might miss something, you can add it later.

Billable vs. non-billable time
Another point that may seem obvious but is often overlooked is that you will not be earning direct income for everything you do. For example, you won’t be billing a client for time to do your bookkeeping tasks or marketing. This is usually referred to as non-billable time. Keep this in mind when working on your budget and projections. Don’t project earnings based on 40 hours per week unless you plan to work 40 billable hours.

Taxes and the Self-employed

The IRS says you are self-employed if you have a trade or business as a sole proprietor, partnership, or LLC that files a Form1065. It can be a part time or side business - but it can’t be just a hobby, you have to be able to show intent to make money.

You are an Independent Contractor (as opposed to an employee) “If the client has the right to control only the result of the work and not what will be done and how it will be done or the method of accomplishing the result.” Just because you work at home doesn’t mean you are an Independent Contractor and many employers/clients don’t understand that. It is crucial that you understand it. You may need to do some client education here and you need to be prepared to make a choice to either say goodbye to the client or become an employee, OK, a telecommuting employee, but an employee nevertheless.

As an independent contractor or sole owner of an LLC, you are considered a sole proprietor for tax purposes. Your income is not reported on a W-2. Your clients may send you a 1099 but if they don’t you still need to report that income.

An EIN (Employer Identification Number) is used to identify a business entity. As a Virtual Assistant, you should have one. Keep in mind, however, that the IRS uses other criteria along with the EIN to determine employee/Independent Contractor status. You can apply online fast, free and easy (and it’s an IRS site!) on the IRS website.
In addition to income tax, your earnings will be subject to 15.3% self-employment tax. This replaces the taxes employees pay for Social Security and Medicare. You are both employer and employee so you pay both halves but to ease the pain 50% is tax deductible.
You may be required to pay estimated taxes every year based upon your previous year’s taxes. It’s not as complicated as it sounds and probably won’t come into play until you have been in business at least a year. Add this to your list of questions for your accountant.
Home is where the deductions are!

You’ve probably heard the pros and cons of claiming Home Office deductions for expenses related to the business use of your home. Some tax pundits say it is a red flag for an audit and some say it’s not. You can save a lot of money taking the deductions and if you play by the rules then don’t worry about an audit.
This is the IRS we’re talking about so there are some “rules and regulations” involved. Your office space must be used exclusively for the normal course of business. You can’t deduct your entire family room if you or other family members use it for non-business activities. You can however, deduct the corner of the family room where your desk and office equipment are if they are used just for your business. If your office is 10% of the total square footage of your home, you can deduct 10% of your rent or mortgage and household utilities. You can deduct any expenses relating directly to the use of your home office.
Typical Home Office deductions include:

o Real Estate Taxes
o Mortgage/Rent
o Utilities (the portion that applies to your office space)
o Maintenance and repairs
o Office supplies
o Office furniture and equipment
o Software and subscriptions
o Mileage or Auto expenses
o Travel related expenses
o Meals and entertainment
o Telephone charges
o Retirement
o 1/2 of your Social Security contribution
o Repairs to your office
o Painting

Organizational costs such as setting up your legal structure and consulting with an accountant are deductible. Be sure to check with your City and County regarding licensing and filing a Fictitious Name Statement (DBA).

Health Insurance premiums may be deductible if you have no insurance or access to in insurance.

Other deductions that may apply:

Home Owners Insurance
Repairs and maintenance
Mortgage interest
Depreciation of home

The IRS must agree with you that a business expenditure is “ordinary and necessary” to deduct in the year you purchase. Purchasing MS Office Suite is obvious but if you want to deduct more specialized software such as Photoshop, be prepared to show how you used it in your business.

Start up and organizational costs are generally deducted over 15 years (180 months). There is an exception that allows you to deduct up to $5000 for start up costs and $5000 for organizational costs in the first year. This should be more than enough to cover a VA business, even if you are starting from scratch. I think there are some changes coming down the pike with the economic stimulus stuff so again, check with your accountant!

Consider the real cost of what you buy (how the deduction will affect your taxes) and the true income that will result from the revenues generated. For example, the cost to develop your website or blog is tax deductible and generates revenue.

You must have made a profit; you cannot use your business to create a loss. There might also be tax consequences if you sell your home and you’ve been depreciating the home office space.

So if you’re thinking, “Hey this is way too complicated” think again. It may seem overwhelming but it might be worth digging a little deeper. Check out the IRS Publication, Business Use of your Home for more details. Ok, yes, a lot more details! The best idea is to consult with a tax professional but be sure you find one who really knows their stuff when it comes to Home Based Businesses. In other words, you might want to consider a Home Based Accountant. It’s highly probable that not only do they know every little deduction and how to claim it but they are also pretty savvy on how not to be audited! Paying for such expertise is money well spent.

Worth it? YES!!!!!!!!!!

Contracts
It is very important to have a clear and documented understanding of your agreements with your client. You don’t have to get into pages and pages of legalese in a contract but you do need to have the who, what, where, when and how clearly outlined. Many of your clients are going to be sharing some very confidential information about their business. Be sure to have a Non-Disclosure Clause in your contract. You might consider a separate NDA agreement as well. Often a client will need to share confidential information before you ever get to the contract stage.

Terms and Conditions - think about what you will offer:
Money Back Guarantee
24 hour turnaround
Or?

You can find some good samples at DocStoc to get you started but once you have drafted your own template, have an attorney review it.
Don’t let this scare you. At the end of the day, can you put your name (therefore your reputation) to your work? If the answer is yes, then don’t worry about it.
Recordkeeping
Detailed records are essential not only to manage your finances but every aspect of your business. This is another reason to keep that notebook handy and to save your client communications. Google Docs and Google Calendar are excellent free tools to use to manage projects. You can also check out project management tools like Basecamp.

Use a program like QuickBooks or keep a ledger spreadsheet with a record of all business transactions. Keep supporting documentation well organized. You need to keep anything and everything related to your business such as invoices, deposit slips, and receipts. If you buy anything online either print a receipt or keep the email confirmation in a separate email folder.

You must have a business checking account separate from your personal account. This not only makes it easier to evaluate your success but also makes it easier to do your taxes. Most importantly, it helps to validate your business. The IRS isn’t going to take you very seriously if you keep sloppy records and co-mingle business funds with personal funds.

The financial risk you incur by not keeping good records far outweighs the time and cost. Having good detailed financial records makes preparing for taxes practically painless.

Accepting Payments

I strongly encourage you to accept payment via PayPal. They have a very easy invoicing tool and you can export your information to QuickBooks. There is no monthly fee or start up cost although you will pay a small percentage of the payments to PayPal but these fees are tax deductible. In my experience this is better for the low volume of a VA business (you aren’t doing 100’s of transactions/day) and gives your clients the option of paying with a credit card. It’s quick and easy. If your client insists on paying by check, you can invoice with QuickBooks.

Tip: if they aren’t going to pay with PayPal - get a deposit or retainer up front. I have never had a PayPal client disappear but I have had had it happen with a monthly billing client. Be clear on your payment terms and don’t let them fall too far behind. Set clear expectations (included in the contract) letting your client know that if payment is late, work will stop. You don’t want to have to ask your accountant how to write off bad debt.

Keep an Activity Log - you can just use the notebook system we discussed before or use something more sophisticated like Basecamp’s time tool. Whatever you use, be diligent about your time records. It may be difficult to get in the habit at first but keep at it. This will not only ensure that you charge your clients correctly but that you are paid fairly.
Realistic Rate expectations

Determining your rates can be a challenge and there is no real guideline to follow. As you gain experience within the industry you will see that rates among VAs are literally all over the place. I discussed rates in a previous topic but here’s a good guide to project income potential.
• $500.00/mo - Beginning VA part time just building clientele and “learning the ropes”
• $3000.00 plus for an experienced full time VA
• Rates range from $10.00 per hour to $50.00

Tip: Use Elance as a guide. Yes, the rates may sometimes seem low but it’s a good “rule of thumb.”

VA’s typically charge by the hour but for project work - retainers usually work best. Be sure to have clearly defined milestones and an estimate of hours.

Pros

• You can make more money as you gain experience because you will get faster.
• You will be paid by the milestone, i.e. after X number of hours or X task has been completed.
• You may also be able to outsource some of the work. For example, let’s say you are working on an article-marketing project for a client. You could outsource the research and writing. You edit it and create the marketing/submission plan. Then outsource the task of posting to article sites.

Remember: You are ultimately responsible for the project. Be sure to supervise and review work before submitting to your client. I don’t advise subcontracting work until you have some experience as a VA and working with project management.

This is also a good opportunity for new VAs to gain experience. Find an experienced VA and offer to assist them with their overflow work.

Your clients want results not # of hours. As a client once told me, “I don’t care how my watch works, as long as it works.”

Story Time

I had a client; I’ll call him Mike. Mike hired me as an Executive Assistant and sent me a lot of confidential info such as bank account and credit card numbers.
We were cruising along beautifully for about three months. He had given me excellent feedback and had increased my hours. Then…he disappeared - with about 10 hours left of his retainer. No contact, no response, no nuthin’.
I needed to replace him but because he had paid a retainer and had a balance in the account - I had a cushion of time to replace him.
Hourly clients disappear too and you have nothing, even though you were fulfilling your part of the agreement in good faith.

Cons
Hmmm…can’t think of any - except that your client may not like it. You need to decide if you will waive the retainer or move on to the next prospect. My advice? Move on!
Check with your accountant on how to write off bad debt on your taxes. In my experience, it is a rare occurrence but it is part of being in business and a cost of doing business. And yes, I’ve had it happen to me too. I had a client who wanted me to edit their website. I did the work, spent about 10 hours on it. No payment. We had a contract and I could have sued but it really wasn’t worth the time or hassle. I figured my payment was the lesson I learned to get a retainer up front.

The moral of the story: Play by the rules. They aren’t has hard as they look. You have a good thing going - don’t jeopardize it by cutting corners

Additional resources:
• SBA (Small Business Administration)
• SCORE - Service Corps of Retired Executives

Next Up: Tell Everyone!

Popularity: 57% [?]

If you have any questions or suggestions, just click on Contact Me above and send me a message. I'd love to hear from you. Thanks for visiting!