Business startup costs that shock new owners |
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7. Self-employment taxes can be staggering.
Have a good year? Uncle Sam will be delighted. That's because self-employment taxes accrue at a rate that will leave you gasping for
mercy. Employers generally match your employment taxes of 6.2 percent for Social Security and 1.45 percent for Medicare. The self-employed
get to foot the whole bill: 12.4 percent for Social Security and 2.9 percent for Medicare.
Expert advice: Tax expert Anthony says,"You get to deduct one-half of the self-employment tax
as an adjustment to income (which) reduces total income." Anthony adds that this deduction does not come off your Schedule C (on which you
report your business profit and loss) because it is not considered a business expense.
The only way to legitimately reduce the amount of employment taxes you owe is to earn less money or incur higher expenses.
8. Not all insurance policies cover all disasters
When Anthony Colleluori's law office burned down, he had to find a new place to do business on a moment's notice. It wasn't easy locating
adequate space for his practice and staff of four, but he had to have an office to see clients and try and rebuild his record-keeping system.
Back in 2005, Kevin Katechis, a partner in Green Cream, a skin care product manufacturer, had a close brush with Mother Nature that almost put him out
of business. In the process of moving operations of Green Cream to New Orleans, Katechis and his partner
warehoused $750,000 worth of inventory there. Because Katechis was busy relocating his family, he set up a meeting with his insurance agent
for Aug. 29th, leaving the inventory uninsured for four short days. When a hurricane was sighted in the Atlantic, Katechis wasn't unduly
worried, but when predictions it might hit New Orleans started coming in, he rented a truck and moved the inventory back to Alabama. Katrina
totally destroyed Green Cream's warehouse. "Had we lost the inventory, I would be bankrupt," Katechis says.
Expert advice: When it comes to situations like the fire that hit Colleluori's law office, the
National Association of Insurance Commissioners says entrepreneurs should make sure their policies have business interruption and extra expense
coverage to help them keep their businesses running while they rebuild.
For natural disasters like the one that nearly wiped out Katechis' inventory, the NAIC says to check with your state's insurance
department or a trustworthy agent who specializes in insuring businesses for advice on how to secure coverage for hurricanes if your policy
excludes wind damage from a named storm (and other disasters). You also likely have a state-based insurance option to consider. If your policy
doesn't cover floods, you might take a look at coverage from the National Flood
Insurance Program.
These are only a few surprises to consider when planning the leap from employee to self-employed. There are tons of others,
including the expense of marketing materials, legal advice fees for patent protection and the cost of doing business in one state versus
another. To really be prepared for the unexpected, talk to other small-business owners in your industry and ask them: "What expenses surprised
you the most as a small-business owner?" The answers could help you avoid costly mistakes in those critical first years.
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