Running your own business (including 1099 work) introduces different elements that aren’t always easy to factor into your personal financial plan. With some guidance, however, you will be able to better navigate these different elements and find more ways to tie them in with your personal financial goals.
There are some key issues a business owner should consider when making financial planning decisions, such as:
- The effect running a business may have on one’s personal financial goals.
- The general tax implications of running a business.
- How certain tax planning factors may be coordinated to better suit one’s financial situation.
- Examples include retirement plan contributions, certain deductions, hiring a spouse, specific business entities, etc.
- Other areas that may be affected by operating a business such as risk tolerance, insurance needs, financing issues, etc.
If you have questions or want to learn more, keep reading as we go deeper into these issues. For a full interactive checklist on the topic, download “What Issues Should I Consider as a Business Owner or 1099 Worker?”
Are there areas where your business may be affecting your personal financial goals? If so, consider the unique aspects of running a business that may be negatively impacting your personal finances. This could include fluctuating income, unexpected costs, or other expenses that might be hurting your cashflow. Be sure to review your budget regularly and consider increasing your emergency fund in light of any additional business expenses.
Do you need to review your investment goals or risk tolerance? If you need to review, consider the extent to which investments in your business introduce risks, like lack of diversification, to your overall investment and financial planning goals.
Do you need to reassess your life and disability insurance coverage? If you do, consider making changes to your coverage to address any business-related risks such as disruption to business activity, loss of potentially higher future income, key person or succession issues, buy-sell issues, or estate illiquidity that your life and disability insurance may fail to adequately cover.
Do you need to begin planning for the sale, disposition, or succession of your business? If you haven’t started planning, consider starting this process early on to get ahead of any challenges that may disrupt the continuation of your business like identifying a successor, valuation/marketability issues, gifting issues, etc.
Are you properly allocating and taking general business expense deductions? It’s important to consider the allocation between business and personal expenses (including business-use vs. personal-use). Be mindful of what is considered “ordinary and necessary” for your line of business when taking deductions.
Are your quarterly estimated tax payments appropriate? Consider how your business income and expenses may impact your overall tax liability and be sure to factor these in when making your quarterly estimated tax payments. Income and expenses to consider are:
- Retirement plan contributions
- General expenses
Can you accelerate depreciation or use traditional depreciation on any large business expenses you are incurring? If so, consider the extent to which each method affects your personal tax rate (larger deduction up front vs. spread out), and determine which option might better maximize your deductions at optimal tax margins. If using an accelerated version of depreciation, be mindful of any risks or limitations that may apply such as potential for recapture, flexibility limits, dollar limits, NOL carryforward limits, and planned sunsets/phase-outs.
Has your business or 1099 work claimed a loss on your tax return within the last 5 years? If so, consider whether your business may be subject to hobby loss rules (i.e., not profitable for 3 of the last 5 years), and have a plan to address this in case the IRS audits your return.
Are there additional ways to increase deductible contributions to your retirement plan? If so, consider the following:
- If appropriate, consider hiring your spouse for increasing both employee contributions and employer contributions to your retirement plan, but be mindful that your spouse must work as a bona fide employee of your company.
- Determine whether it makes sense to expand your retirement plan, such as adding profit sharing or a cash balance plan to make additional employer contributions. However, be mindful of any mandatory contributions, including for employees, especially if your business income greatly fluctuates.
- Be mindful of the interplay between Qualified Business Income (QBI), taxable income, and deductible contributions to retirement plans.
Do you need to review ways to minimize the taxation of your income?
- C-Corporations: Consider whether you can appropriately leverage the flat corporate tax rate of 21% (in comparison to your personal tax rate) for reinvestments into your business but be mindful of additional tax issues such as double taxation and accumulated earnings tax.
- S-Corporations: Consider whether it’s appropriate to shift more income from W-2 wages to K-1 distributions (which have no FICA or self-employment taxes and may be eligible for the QBI deduction, etc.), but be mindful of the “reasonable compensation rules.”
If operating as a Partnership, do you need to review whether you are appropriately taking your “distributive share”? Consider whether you are correctly tracking your basis (e.g., capital contributions, distributions received, etc.), and be mindful when using “special allocations” to alter the taxation of your “distributive share,” as the IRS may scrutinize this if it is not considered to have “substantial economic effect.”
Other Things to Consider
Are you thinking about hiring an additional employee? If you are, consider whether hiring an employee will help your business goals (increased productivity/profitability) and personal goals (work-life balance). Furthermore, consider other specific factors that may better complement your financial planning goals such as hiring a family member or W-2 vs. 1099.
Are you able to coordinate access to certain employer benefits through your spouse’s employment like medical insurance? If so, consider whether it makes sense to use your spouse’s benefits rather than purchasing benefits through your business. Be sure to factor in a cost comparison, as well as any tax deductions/credits you may be eligible for, when deciding.
Do you need to review any planning opportunities that are specific to your business industry? Consider whether there are any specific tax credits/deductions that may uniquely pertain to your business, as well as any insurance that helps mitigate industry-specific risk that may pertain to your situation.
When owning a business, there are a lot of moving parts you must juggle to keep afloat. It may seem overwhelming and impossible sometimes to make sure all the finances are tracked correctly, you’re utilizing the proper investment and tax strategies, and you’re not missing anything important. It can be comforting to know you have professionals by your side ensuring all runs efficiently, whether that is CPA’s, attorneys, or financial advisors.
If you’d like the full checklist of issues to consider as a business owner or 1099 worker, download it here.