Every year in late winter I start to think about the legal, accounting, and tax processes I use for our business. I made a number of changes this year, so I thought it may be helpful for others if I shared how Abby and I handle the “business” side of our blog.
Please remember that I am not an accountant or attorney. This post is simply relaying our personal experiences with blog accounting and should not be considered legal, accounting, or financial advice. Everyone’s situation is different, and you should consult your accountant and/or attorney before making any business decisions.
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1. Business Structure (LLC taxed as an S-Corp)
Years ago Abby and I registered our business as an LLC in Pennsylvania. It was an easy process that just required a Federal EIN (Employer Identification Number) as well as filing some papers in Pennsylvania and a modest setup fee.
With the LLC, all net income flows through to our personal tax return. The net income is subject to our normal federal tax rate (10%, 15%, 25%, 28%, or more) as well as the self-employment tax of 15.3%. The 15.3% covers what an employer and employee would typically split (12.4% for social security and 2.9% for medicare).
With federal tax rate and self-employment tax together, we found ourselves in a 40% tax bracket for a portion of our income. Yikes!
For 2016 we decided to make a change and file an IRS Form 2553 to be treated as an S-Corp for tax purposes. For legal purposes we remain an LLC. Previously our LLC was taxed as a partnership and now it will be taxed as an S-Corp.
Filing to be treated as an S-Corp will potentially save us a tremendous amount of self-employment taxes. Here’s how…
With an S-Corp, Abby and I must pay ourselves a reasonable salary and then classify the remainder of our business income as a distribution. For the salary portion, Abby and I pay both sides of the social security and Medicaid tax because we are both the employer and employees. The business distribution portion of our income will be treated as ordinary income for tax purposes and therefore we avoid the self-employment tax for that portion. Here’s more information on the subject from a CPA.
Just as a word of caution… everything mentioned above is just scratching the surface of the added complexity of an S-Corp. Don’t take that decision lightly and definitely consult with a CPA or even a tax attorney before making any major decisions. Added payroll and tax filing requirements will certainly complicate your business.
2. Payroll (Gusto)
Gusto (formerly Zen Payroll) is the provider Abby and I use to pay ourselves a salary. So far they’ve been great. They make the setup process as easy as it could possibly be. It’s nice to know that if Abby and I ever decide to hire a full time employee, it won’t take very much work to set up payroll and benefits.
If you’re making a change to an S-Corp, here’s more information on what is considered a “reasonable” salary.
3. Bookkeeping (WaveApps)
There are a number of great bookkeeping options for the online entrepreneur or professional blogger, but I use the free WaveApps. Unlike some of the other options, WaveApps has a nice web interface and it seems easier to use than some of the other more complicated options.
WaveApps syncs with our business checking account, business credit card, and business PayPal account. That allows me to log in once per week and assign categories to income and expenses and verify the transactions. WaveApps also makes it easy to run reports and get an overview of profit/loss or income/expenses for the month.
If you decide to pay an accountant to manage your books, there’s a good chance they’ll use QuickBooks. Quickbooks is an extremely powerful bookkeeping solution, but it’s also significantly more complicated than WaveApps.
Other bookkeeping options I’ve tried include Xero, Freshbooks, and Less Accounting. Xero’s interface was the worst looking of all that I used. Freshbooks seemed more like an invoicing solution than a true bookkeeping app, but it would be perfect for freelancers and those that bill clients on a regular basis. Less Accounting would be my second choice after WaveApps. It has a nice interface, was easy to use, and had great customer support. In the end I just couldn’t justify switching from our free solution (WaveApps) to a paid solution (Less Accounting).
4. Tax Filing (Turbo Tax)
2015 tax returns are the last ones I’ll prepare and file myself. For 2016 and moving forward I’ll be working directly with a tax accountant. That decision was prompted by the change in my tax filing status from partnership to S-Corp.
If you don’t have the added complexity of S-Corp tax status, you may want to try the do-it-yourself approach to taxes. That’s exactly what I did for years. It’s easy to prepare and file your taxes online with Turbo Tax. The software walks you through the entire process using language and terms that everyone can understand. It’s surprisingly easy and thorough.
Another tax filing option is 1040.com. I actually prefer the interface and ease of use of 1040.com compared to Turbo Tax, but I didn’t feel like they had quite as many options for small business filings. If you have a couple of W-2s and very little business income, you should try 1040.com.
5. Investments (Betterment)
I’m a nerd when it comes to reading about investment philosophies and strategies. I’m a believer in the Fama-French Three Factor Model, Efficient Market Hypothesis, Capital Asset Pricing Model, and the Black-Litterman Model of portfolio construction.
Fortunately for me (and maybe you), I found an investment company that shares similar convictions: Betterment.
Betterment is classified as a “Robo Advisor.” What that means is that they are guided by a certain set of investment principles that dictate the construction of their various portfolios. They take a passive approach and don’t play the losing game of market timing and stock picking. Read more about the Betterment investment philosophy.
More than just an investment philosophy I resonate with, the Betterment interface, support, and customer experience is just amazing.
Abby and I have a joint taxable account with Betterment, Roth IRA’s, and our new SEP IRA (great for self-employed people!)
If you don’t know where to stash your long-term money, consider Betterment.
Before deciding on Betterment, I also considered Wealthfront. As appealing as Wealthfront was, I just have a better feeling about Betterment. Wealthfront seems less guided by investment principles than Betterment and instead are guided by investment trends and fads.
6. Health Insurance (Healthcare.gov)
I don’t want to get into the politics of Obamacare, but as a small business owner I will say that I’m thankful to have reliable access to health insurance for my family that we don’t have to medically qualify for. For an entrepreneur there’s a certain level of comfort in knowing there are safeguards in place to ensure our family can purchase health insurance even if our medical condition changes in the years ahead.
When we first signed up with Healthcare.gov, I made a spreadsheet to compare the cost of various plans. I looked at best-case-scenario costs for the year, worst-case-scenario costs, as well as expected costs. In just about every case the high-deductible plans with a Health Savings Account (HSA) made the most financial sense.
Health insurance is a massive expense for self-employed people. It’s not fun paying for it, but I can sleep at night knowing we have it.
I just want to reiterate that none of this should be considered advice but rather just a summary of my own personal experiences.
I know for some people the money, tax, and legal side of running a small business can be intimidating. Don’t let it be! You don’t have to have all this figured out the moment you start a blog. You can get some of these systems in place as your blog traffic and income grows.