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How Do I Pay Myself and My Taxes as a Sole Proprietor?

Where to Begin?

Businesses are created because business owners have a passion that needs to be pursued.  They may be changing the world and even their own lives. Payroll, however, is most likely not their passion. Yet, every business owner faces the unique challenge of figuring out how to pay themselves.

Paying yourself as a sole proprietor can feel daunting. How much do you pay yourself? How do taxes factor in? Unless you have a side hustle as a financial advisor, it can be difficult to know where to start.

Self-Payment, Simplified

Breathe a sigh of relief. Paying yourself as a sole proprietor is not as complicated as it seems. Tax filing is simplified too! In this blog post, we will walk you through paying yourself as a sole proprietor!

 

How Do I Pay Myself?

You can pay yourself as a sole proprietor by taking an Owner’s Draw. An Owner’s Draw differs from a regular salary in that you can take money from your earnings as needed. Depending on how well your business is doing, you can take more or less, allowing for flexibility in your payments.

If your business is profitable, start by subtracting liabilities (any debt your company owes) from assets (items of value the company owns that will provide benefit in the future). The remaining amount is referred to as ownership equity, which is what you will take your draw from. Once you decide on an amount to take (more on that in a moment), it can be transferred from your business bank account to your personal account.

Because the Owner’s Draw is taken from ownership equity, it reduces the funds that can be used for the business. Sole proprietors must balance how much they need to support themselves and what their business needs to thrive.

How Much Do I Pay Myself?

To set an appropriate payment for yourself, you have to determine your projected profits. To estimate how much you can draw and when you must:

  • Set up a separate business bank account. As a sole proprietor, you do not need to incorporate or register your business. The business name will default to your legal name unless you file a DBA (doing business as), which allows you to operate under a different name. Once your DBA is set up, you can open a business bank account. This ensures that your personal and business expenses stay separate, and creates an accurate picture of your business’s finances.

 

  • Keep your books up to date. Keeping detailed records of your income and expenses will help you identify when cash flows into and out of your business, and how cash flow may change over time. An online bookkeeping service will be able to take this task off your plate, saving you time and stress. You will also receive monthly reports that give you actionable insights to help you make the best decisions for your business.

This will help you determine your projected profits and when you should take your draw. You can start out by paying yourself only what you need to meet your basic needs until your business breaks even. From there, you can increase your pay to your “market value”. You can increase your pay again once your business is producing consistent profits. How often you choose to draw is up to you. Some may follow a bi-weekly schedule, others may draw as needed. It ultimately depends on your personal preference.

How to Pay Your Taxes

Sole proprietorships are considered pass-through entities, meaning the IRS views your business, personal assets, and liabilities as one and the same. Because of this, you are only required to file a personal tax return. Income and expenses related to your business are accounted for on your individual Form 1040, Schedule C.

While the Owner’s Draw is not subject to federal or state income tax, it is also not expense-able. It will appear under the total net income of the business, which is taxable. Be aware that sole proprietors are required to withhold self-employment taxes, which contribute to Social Security and Medicare. As of right now, the self-employment tax rate is 15.3%.

So, how can you maximize your tax savings? Business tax preparation and filings are included with almost all of our packages! Your online Tax CPA takes care of filing your Schedule C that goes along with your personal tax return to itemize business deductions.

Xendoo is Here for You

The good news is that you do not have to figure it all out on your own. Xendoo Online Bookkeeping is here to help! We move at the speed of business, so you can make informed decisions faster – like deciding how much you should pay yourself as a sole proprietor! Get started with a free trial.

Ready to take the next step? Schedule a free consultation with a Xendoo accountant today!

 

Want to learn more? Learn the difference between the business entity types here. 

 

 

Cashflow Vs. Profitability with Lil Roberts, CEO Xendoo

Lil Roberts, CEO and founder of Xendoo, appeared on The Savvy Entrepreneur with host Doris Nagel to discuss concepts of cash flow vs. profitability and share tips to keep both healthy.

The Savvy Entrepreneur is a talk radio show dedicated to helping entrepreneurs on their path to success by sharing tools, tips, resources, and experience.

Time for a Makeover: Ideas for How to Increase Profits for Hair Salons

Editor’s Note: This post was originally published in October 2018 and has been updated for accuracy and comprehensiveness.

Just like your clients, your business operation needs a good makeover every now and then to help increase profits for your salon and keep your bottom line healthy. Unfortunately, we sometimes let ourselves get into a rut, keeping the same systems and processes in place mainly because they’ve always been good enough. But is “good enough” really good enough in an ever-changing marketplace? Do you really ever have enough revenue?

Here are ideas on how to increase profits for your hair salon.

Implement a Revenue Management Plan

Is your salon backed up with more business than you can handle on Saturday but full of tumbleweeds on Wednesday? If so, maybe you need to take a look at scalable pricing instead of just charging the same flat price to everyone. Unless you’re ready to expand your business, you have a fixed amount of capacity each day because you only have so many chairs and so many stylists. That means the one tool you have at your disposal to manage supply and demand is your pricing. Don’t be squeamish about raising prices where you need to. If you’re turning away business because you don’t have enough capacity, that means you aren’t charging enough. If you don’t have enough business to fill the day, that means you might be charging too much. In a perfectly balanced supply and demand scenario, you should be running at close to 100% capacity and not turning anyone away because you don’t have open slots. Charge a premium price on high-demand days like Saturday and run discount offers on slower days to incentivize demand and pick up that incremental revenue.

A salon owner checks her profit marginson a tablet

Outsource What You’re Not Good At

Your accountant doesn’t do hair, so you shouldn’t be doing tax returns. There’s a saying in effective management training: only do what only you can do. Stick to what you’re good at and outsource other things that aren’t in your wheelhouse. Those things are time-consuming and draw your attention away from what you should be doing – growing your business. At the top of most lists of tasks to outsource is bookkeeping for hair salons because it’s both complex and time-consuming. An accountant is an expert and can probably do in an hour what might take you an entire day, so it doesn’t make sense to waste your productivity on that. This is where a partner like Xendoo can help you because we specialize in small businesses like yours for a flat price that’s often less than what you would pay an hourly accountant. 

Do a Sales and Inventory Analysis

Do you know the sell-through rate of everything you keep in your inventory? If not, you should. Are you keeping enough of the right items in stock or too much of the wrong things? If you’re not sure, you might have too much money sitting on the shelf month after month doing nothing for you, so you need to do some homework. Print out some sales reports from your point-of-sale (POS) system and see which items are your best sellers. Most good salon software systems also have some inventory control features, so take a look at those to see how to increase profits. One key calculation you need is the sell-through rate, which is the ratio of inventory sold during the month to the inventory added in the same period. If your POS doesn’t have inventory control features, it might be worthwhile to look at upgrading to one that does. 

A stylist talks to her customer about additional services

Up-Sell and Cross-Sell Aggressively

When people hear about up-selling and cross-selling, they often have thoughts of trying to sell clients products they don’t need, but that’s not the case at all. Clients come to you for your expertise. As a salon owner, part of your job is to educate your clients about products and services they need but don’t realize they need. For instance, if a client comes in wanting a particular color treatment that you know from experience will be harsh and make the hair dry, you might recommend a conditioning treatment to help mitigate that effect. Once the client understands and sees the value proposition, it becomes a win-win: the client gets better service, and you get more money.

Spend the time to make sure that everyone on your team is intimately familiar with every product that you carry and can discuss them with clients appropriately. Also, encourage your staff to use the products you sell and promote them in conversation with friends and social media. People trust their stylists and often feel like they’re getting a little inside scoop by using the stylist’s same products. 

Get Creative with Marketing

At the risk of stating the obvious, marketing is key to how to increase profits for your hair salon, and your strategy needs a refresh occasionally. If you’re in a mall or other high-visibility setting, create a nice-looking display in the window where passers-by can see it easily. Stock it with high-margin products you want to promote and put the most important items at eye level. Research has shown that “eye level is buy level.” That’s fairly traditional marketing, but don’t be afraid to get creative with it. Have you noticed that almost every store you visit these days wants to sign you up for a rewards program? Well, there’s a reason for that—they work. Customers love rewards and free things. Consider creating a loyalty program for your return customers and give them a $25 coupon after ten visits. Word of mouth is one of your most powerful marketing tools, and you can leverage that. Implement a referral program where an existing client who refers new business gets a discount on the next visit.

These are just ways on how to increase profits for your hair salon, but Xendoo can help you increase your profit in other ways, too. Contact Xendoo today to start your free trial and get your business on the road to maximum profits.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How to Change from an LLC to an S Corporation

Remember back when you had to decide on a name to register your new business, forming a limited liability company—LLC? Now your small business has grown up thanks to your hard work and dedication. You may have outgrown your current legal status and it’s time to change from an LLC to S Corp to gain additional tax benefits that you’ve earned! Since determining the status of your business is important to its success and potential, we’ll break it down for you.

What is an S Corporation?

Under “S” corporation status, the small business owner’s income, losses, deductions, and credits “flow through” to you and are reported on your personal tax returns and assessed at your individual income tax rate. S Corp status is great for small businesses because you have the LLC protection from losses beyond your capital investments, while still providing you with the flow-through taxation.

How is an LLC Different from an S Corporation?

As an LLC owner, you could lose everything you have invested in the business, but your personal home, bank account, and other assets are protected. The main differences between an LLC and an S Corp are:

  • An S Corporation isn’t a business entity like an LLC—it’s an elected tax status.
  • LLC owners must pay self-employment taxes for all income. S corp owners may pay less on this tax, provided they pay themselves a “reasonable salary.”
  • LLCs can have an unlimited number of members, while S Corps are limited to 100 shareholders.

A small business team discusses changing from an LLC to an S Corp

Why you should consider changing from an LLC to an S Corp

Here are three great reasons to change from an LLC to an S Corp:

Self-employment taxes

S Corp distributions aren’t subject to FICA/self-employment taxes. This is one strategic way to minimize self-employment taxes, making it a great business structure for consultants, sole-proprietors, and more. If you have an S-Corporation and are active in the business, you must pay yourself a market-rate salary for your work The IRS won’t let you pay yourself entirely in distributions to avoid self-employment tax.

Tax-preferred retirement savings 

You can contribute more to retirement accounts with an S Corp than an LLC because with an S Corp you can set up a Solo 401(k) in addition to a Roth IRA.

Easier to scale

S Corps allows for a smoother transition from a C Corp. Stockholders are required to report their percentage of the profit/loss whether or not they actually receive that money as a distribution. If you own 100 percent of an S Corp and it makes X dollars in profit, you can keep that money in the business to make purchases next year. You are still required to report the profit on your individual tax return. If you anticipate keeping a significant amount of money in the business, you may be better off as a C Corporation.

How do I change from an LLC to an S Corporation?

If you decide to change from an LLC to an S Corp for federal tax purposes, you can simply make an election for the LLC to be taxed as an S Corporation. All you need to do is fill out a form and send it to the IRS. Once the LLC is classified for federal tax purposes as a Corporation, it can file Form 2553 to be taxed as an S Corporation.

With this approach, you don’t change the actual entity type, only the federal tax classification. Even though the IRS classifies the LLC as S Corp, it is still an LLC and may be taxed as such by the state where it is formed.

To change the actual entity structure you must formally change the LLC to an S Corporation with the formation state. If the simple conversion process is not allowed by the formation state, then you can do the following: 

  • send the IRS a letter informing them of the structural change
  • choose to be an S Corporation by filling out IRS Form 2553
  • cancel the LLC while filing with the state for a new corporation

Is Switching from LLC to an S corp right for my business?

When you’re ready to change from an LLC to S Corp, we recommend that you consult an accountant or tax preparation services to make sure there are no mistakes that could cause you to lose your money-saving tax status. Your Xendoo team of small business accounting experts can help you find the right solutions for your small business, and take the hassles of tax prep and filing off your shoulders. Whether it’s the 1120S,  1120, or 1065,  Xendoo’s CPAs will file the right return for you, right on time.

With bookkeeping, tax consulting, and tax filing all under one roof, your U.S.-based Xendoo financial team is here to answer all your questions and to file your business and personal taxes. We’ll do what we do best — and let you get back to doing what you do best to make your business a success. Sign up today.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

eCommerce Trend Report: 2020 Recap & 2021 Forecasts

Editor’s Note: This post was originally published in March 2020 and has been updated for accuracy and comprehensiveness.

For all the challenges the economy faced in 2020, it may come as something of a surprise that overall domestic retail sales saw their highest rate of growth in over two decades during 2020. What probably isn’t much of a surprise to anyone who has been paying attention is that that strong growth was driven entirely by eCommerce trends in 2020, with online sales accounting for 101% of that growth. 

The COVID-19 pandemic drove more and more shoppers to online retailers in lieu of brick-and-mortar stores, and the good news is that that movement shows no sign of slowing down in the eCommerce trends for 2021. The bad news is that sales tax compliance continues to be a thorny issue for online retailers as they struggle to keep up with state regulations. Figures represent US domestic sales unless specifically noted as global figures.

Consumer Migration to E-commerce

Overall retail sales in 2020 topped $4.04 trillion, representing a 6.9% increase over 2019 sales of $3.78 trillion. That was driven by a massive 44% increase in online shopping, nearly three times the previous record eCommerce year-over-year growth in 2019 of 15.1%. A significant portion of that increase was due to first-time online shoppers, as well. E-commerce market penetration leaped from 15.8% in 2019 to 21.3%, representing a sharp increase from its previous trend of 1-2% growth per year. In 2020, eCommerce transformed from being a convenient alternative to brick-and-mortar stores for some consumers to an essential part of daily life in an age of pandemic.

A person checks his phone for sales during Black Friday

Holiday Shopping

Following along with the overall trend toward online shopping, domestic holiday shopping showed similar rates of year-over-year growth. Out of $861 billion spent online in 2020, over $200 billion of sales occurred during the holiday shopping months of November and December. 

  • Thanksgiving Day online sales rose 21.5% to $5.1 billion 
  • Black Friday online sales rose 21.5% to $9 billion
  • Cyber Monday online sales rose 15% to $10.8 billion
  • Total Cyber-week domestic online sales reached $60 billion 

Hottest E-commerce Segments in 2021

Fashion and online apparel remained the largest segment of online shopping globally in 2020, followed by toys and electronics. 

  • Online apparel sales rose 15% to $760 billion globally, projected to reach $1 trillion by 2025
  • Toys rose 12% to $590 billion in global online sales, projected to reach $766 billion by 2025
  • Consumer electronics saw $542 billion in global online sales, a 28% increase over 2019.
  • Food and personal care items came in fourth at $468 billion
  • Furniture and household appliances totaled $362 billion globally.

Largest Retailers

Unsurprisingly, Amazon retained its throne as the undisputed king of online retailers, with a whopping 38% of all domestic sales, down slightly from its 2019 share of 43.8% share in 2019. Other online retailers like Walmart and Target managed to chip away at Amazon’s lead, but are still behind by a wide margin. 

  • Amazon – 38%
  • Walmart – 5.3%
  • eBay – 4.7% 
  • Apple – 3.7%
  • Home Depot – 1.7%

Smartphone Sales

Smartphones continued to increase in popularity as a platform for online shopping, representing 54% of online sales in 2020 and projected to reach 73% in 2021. 79% of smartphone owners have made at least one online purchase with the device, and 80% of smartphone owners have used a smartphone to look up product information or reviews while shopping in a traditional brick-and-mortar store. It’s clear that the prevalence of smartphones will continue to be a driving force in eCommerce for the foreseeable future. 

A man pays for an item using his digital wallet on his phone

Trends to Watch

Whether you have something like a Shopify store or sell through your own website, it’s imperative to stay on top of technology and predict online consumer product trends so that you can stay one step ahead of the competition. To that end, we’ve identified some eCommerce future trends that are definitely worth keeping an eye on in 2021.

BOPIS (Buy Online, Pick-Up In-Store) and Curbside Pickup

This was the trend that dominated much of 2020 because it combined the convenience of online shopping with the immediacy of in-store shopping. While some shoppers will revert to in-store shopping, this trend is here to stay.

Augmented Reality (AR)

Augmented reality emerged as a player in eCommerce in 2020, with, for example, some furniture retailers allowing consumers to upload a photo of their living room and see how a particular piece would look in it.

Digital Wallets & One-Touch Purchase

Many consumers have been hesitant to make the move to online shopping due to concerns about fraud, while others were put off by the inconvenience of having to enter a credit card number. Digital wallets like ApplePay and GooglePay have alleviated many of those concerns by making secure one-touch purchases from smartphones. However, most security concerns are pushed to the wayside for convenience, and this eCommerce trend is probably here to stay. 

Cryptocurrencies

Although controversial and not widely adopted currently, cryptocurrencies are poised to become a force in eCommerce in the not-too-distant future. Because Bitcoin is both a currency and a payment processor, it can facilitate secure transactions across borders at transaction fees of 1%, as opposed to the typical 2-3% merchant fees charged by credit card processors. Some large online retailers like Overstock.com already accept Bitcoin.

More Sales Tax Headaches

In response to declining state sales tax revenues from the move to online shopping, the US Supreme Court ruled in South Dakota v. Wayfair (2018) that each state had the power to individually tax online retailers to create a replacement revenue stream. Online retailers must now monitor and comply with 50 different sets of sales tax laws, creating an enormous amount of accounting overhead. 

This is yet one more reason to outsource your bookkeeping service and accounting to a professional firm like Xendoo as a cost-effective solution to this regulatory nightmare. Sales tax processing is just one of the many affordable services available in Xendoo’s suite of small business offerings. Xendoo can also make sure that you are getting all the eCommerce tax deductions that you are entitled to as an online retailer.

It’s clear that eCommerce will only continue to grow by leaps and bounds in the years to come. Consumers were already growing accustomed to the convenience of online shopping, and the COVID-19 pandemic was the impetus that pushed many holdouts to take the plunge. Many retailers struggle to understand emerging technologies and keep pace. The retailers that don’t will be left behind in the wake of those who do. Staying on top of technology and eCommerce trends is critical to success in retail in 2021. 

Experience the Xendoo difference with a one-month free trial.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

What Type of Entrepreneur Are You?

Not every entrepreneur is made from the same mold. The reasons you started the business, how you run it, and how you define success could be very different from someone else’s.

Why is knowing what category you fall into important? Because you’ll have a better understanding of what drives you, why your business came to be, and ultimately help answer that age-old question… Who am I?

Here’s an overview of the four types of Entrepreneurs. In future articles, we’ll explore each of them in-depth.

The Freedom Seeker.

The Freedom Seeker prefers to work for themselves. They like to make their own decisions, set their own schedule, and above all, control their own destiny.  They also foster teams that can share in the same freedoms by breaking conventional models of how a business should run.

The Legacy Maker.

The Legacy maker wants to build a business that can be passed down to his or her children — and their children. For this entrepreneur, their business is their way of leaving their mark on history.  It’s one of the ways they’ll be remembered after they’re gone.

The Opportunist.

This Entrepreneur spots a money-making opportunity gets buy-in and gets out at the right time. The Opportunists love and excel at marketing and interacting with people. They are confident, optimistic, outgoing, and sometimes impulsive.  They run with those impulses and many times will reap the financial rewards of such perfect timing.

The Innovator

This Innovator starts a business based on his or her knowledge or innovation. The Expert would rather spend all day doing what they love, not actually operating the business. The expert or innovator prefers not taking risks and doesn’t like to have to prove themselves. Their confidence in their product speaks for itself.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Be More Productive with Less Work: 5 Easy Tips

Business owners put a lot of thought into maximizing the productivity of their operations. But they don’t always do the same for their own work habits. Here are 5 things you can do to make the best use of your time and energy.

1. Get a second monitor.

Studies show that having a second monitor for your desktop computer increases productivity by 20 to 30 percent. By allowing you to see two screens at once, it saves time on a variety of tasks such as:

  • Data entry
  • Viewing a large spreadsheet in its entirety without scrolling
  • Side-by-side comparisons of products, artwork or spreadsheets
  • Pulling information from one place to use in another, or drag and dropping images
  • Having a chat window on one screen and your work on the other

Although the time difference may seem miniscule for each individual task, it can add up to 2.5 hours a day, according to a University of Utah study.

2. Use task management software.

How often do you lose track of your appointments, to-do lists and work schedules because they’re scattered through a variety of calendars and notebooks? The quick fix is to keep everything centrally located in one app. Many of them also let you share project information and discussions with your team. Some of the top rated apps right now are:

  • Wrike
  • Monday
  • Trello
  • Asana

3. Reduce meeting times.

Probably the biggest productivity killer in the workplace today is the meeting.  You know, the one that was supposed to take an hour and instead consumed the entire morning.  Or the one where everyone talked in circles but decided nothing. Cut the time suck by:

  • Eliminating non-essential meetings. Do you really need status updates more than once a week, or is the same information being repeated from one meeting to the next?
  • Sending the team a pre-meeting brief and agenda. This eliminates time needed during the meeting itself to bring everyone up to speed.
  • Setting a concrete goal. Vague statements like “We need to update our marketing plan” will lead to long, inconclusive discussions. For better results, be specific: “How to allocate our marketing budget for the next quarter.”

4. Stay on task.

It’s not true that multi-tasking is more efficient. It’s actually the opposite: nothing ever gets finished. Even worse, every time you’re distracted from your train of thought, you have to spend more time getting back into it — basically, doing the same work over and over without making progress.

Minimize distractions. Instead of answering phone calls and emails as they come in, set aside  specific times of day when you’ll knock them out all at once.

5. Break down big projects into small ones.

It’s natural to feel overwhelmed and paralyzed when faced with a massive task. However, if you divide it up into smaller sub-projects, it will seem more doable. Some ways to do this include:

  • Plan steps in a time sequence. For example, if you’re building a house, you must first lay the foundation, then put up the framework, and so on.
  • Put tasks in order of importance. When you’re building that house and you see rain coming, your top priority might be to get the roof on.
  • Delegate sub-projects to team members. For the house you’re building, you might use carpenters, electricians, plumbers, interior decorators and so on.

These 5 habits of highly productive small business owners will not only make your own workday both easier and more effective, they will also improve the productivity of your entire team. That’s what we call a win-win!

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.