Making Taxes Less Taxing
Gina Noy offers her clients stress-free tax preparation.It's not often you find "stress-free" and "tax" in the same sentence, especially during busy season, but for Noy, it's a philosophy that carries through her Manhattan-based CPA firm.
Noy, who offers tax planning, budget advice, and bookkeeping services, works with a variety of different clients – fr om individuals and small businesses to start-ups and medium-sized companies. However, she said her sweet spot tends to be start-ups and companies in their second or third year of business – those moving toward a big growth stage.
According to Noy, many new businesses will experience a net loss in their first year – especially in the start-up phase – and she said that's not necessarily a bad thing.
"If you have other income (such as W2), losses from your business can offset it, reducing your overall tax burden," she said. "In other words, losses don't have to be a total loss. However, they can impact your cash flow, your ability to grow your business, and attract investors and financing."
She said many of her clients – especially those just starting a business – have to deal with correctly identifying whether they've hired an employee or a contractor. In the case of an employee, the business owner will be responsible for self-employment tax and keeping and filing additional documentation. Incorrectly identifying an employee's status may expose the business owner to potential audits and penalties.
"My role in my clients' business is to educate them," Noy said. "Spending extra time, especially with new clients . . . educating them, helps them to succeed. I give my clients baby steps in tax, finance, and budgeting."
It may only be a part, but for Noy, if her clients don't understand the importance of tax in their business, they're most likely not going to understand the importance of other financial matters.
"Especially with people who make a transition from working with a company and being self-employed, you feel like you're floundering in the ocean. The income you earn isn't always yours to keep, and you have to be responsible enough and realize that with the freedom of being a freelancer, you get a lot of responsibility."
Noy recommends individuals just starting out to wait on incorporating and operate as a sole proprietor. She suggests saving the money on those start-up fees by purchasing insurance instead, and perhaps incorporating later on.
Many small business owners underestimate the responsibilities of running their business, and simply providing good service isn't enough, Noy said.
"It's very important to bill your clients, it's very important to collect money from those clients and pay your bills on time. One thing leads to another. I find a lot of business owners will work extremely hard but will take a back seat to the financial part."
And often, entrepreneurs and those just starting out will listen to advice from their friends and family rather than a professional, and they start making decisions, such as forming an LLC, without really having the information they need.
In January, Noy was a presenter at the Reboot Workshop in New York City, a networking event and "unconference" for freelancers and entrepreneurs. She said 90 percent of attendees' questions were about incorporation and how entrepreneurs should move forward – "Should I incorporate, what type of incorporation should I be, when should I incorporate," she recalled. "A lot of people incorporated but didn't know what to do with it."
Most new business owners are misinformed about write-offs as well. Noy said there are several that aren't taken advantage of, including setting up a business retirement plan.
"Many clients don't realize that they can put away as much as $49,000 for 2011 or $50,000 in 2012. Instead of looking for small deductions, business owners should start thinking big. By putting away money for retirement, they can save on taxes and provide for their future."
Noy also added that many freelancers and entrepreneurs think health insurance is unapproachable and too expensive; therefore, they just put it to the side.
"There's a way to offset a high deductible – put away pretax money into a Health Savings Account (HSA)," she said. "Tax savings are there. A little planning can go a long way."
Cash flow management is vital to the successful operation of a small business. Noy says that once she walks her clients through their financial records, figures out how the money is flowing in and out, helps them value their business, and discusses how to price their services, the stress for the client goes away.
For many small business owners, especially freelancers, coming up with rates for services is often a trying and daunting process. Noy said she doesn't figure out the rates for them, but she does walk them through their expenses and overhead to do some budgeting.
"A lot of people ask me what they should be charging. Of course, it really depends on what the industry expectations are, but it also depends on what their costs are," she said.
If business owners' costs are high due to their industry or overhead, then they may need to target corporate clients or more high net worth individuals. On the flip side, if business owners or entrepreneurs have low overhead and work out of a coffee shop on a laptop for the first two years, they can keep their pricing low and target a higher volume of clients – as many as they can service – and grow their business. They can raise their rates later.
The other piece, Noy points out, is knowing your market and pricing competitively. A business or entrepreneur charging too little, say $75 an hour for a service wh ere everybody else is charging $125, could actually deter potential clients.
"I'm going to think something is wrong with your service because it's too cheap," she said. "I advise clients that you might want to offer $125, but offer a discount and say 'I love your business, I really want to do work with you and I can give you a 20 percent discount.'"
Noy stresses that the most important thing for a small business owner or freelancer to remember is to learn how to budget and realize that money management is the key to their success.
"Without managing what's coming into their business and what expenses have to be paid to come out of their business, it will be harder for them to grow."