Business.com

---

• Why Working Capital Is Key to Economic Recovery
• 2021: The Year of the Digital SMB
• How Can Small Businesses Cultivate Resilience During the COVID-19 Crisis?
• What Is Email Automation?
• Self-Employed Guide to Tax Benefits and Deductions

Why Working Capital Is Key to Economic Recovery Posted: 02 Feb 2021 12:31 PM PST For many businesses, the biggest struggle during the COVID-19 pandemic has been maintaining cash flow and finding enough capital to stay afloat. Access to working capital will be the key to recovery for these businesses, especially smaller ones that have been subject to temporary closures or operational adjustments. More working capital flowing through small businesses means greater economic strength, both within local communities and for the country as a whole. Here's what small business owners need to know about working capital and the resources available to help them obtain it.   What is working capital? Working capital is how much money a business has on hand to use in its operations. It is the difference between the company's assets, such as cash flow and inventory, and the debts and liabilities it owes, such as accounts payable. Sufficient working capital means the value of the assets you own and your overall business income is more than the cost of operating your business. The amount of working capital a company has is an indicator of its liquidity, operational efficiency, and short- and long-term financial health. Positive working capital gives companies more flexibility to scale and invest in other opportunities, while insufficient working capital means a business will struggle to cover expenses like rent, utilities, payroll, and inventory. Importance of working capital for economic recovery COVID-19 forced businesses to slow or shut down their operations, drying up a much-needed source of working capital. Supply chains are operating more slowly, social distancing guidelines are still limiting the number of in-person customers a business can support, and some goods and services just aren't feasible to offer in the way they were before the pandemic. This problem for businesses has been compounded by the fact that many customers are not spending as much as they did before. Many consumers have been financially hit or lost their jobs because of the pandemic. With less revenue coming in, companies are losing profits and, therefore, have less working capital to get them by. For these businesses to thrive again, they'll need to find ways to rebuild that capital and maintain positive cash flow through the remainder of the pandemic and beyond. This will, in turn, begin to reverse the downward economic trend that accompanied the onset of the pandemic. With more working capital, companies can grow by hiring more people, opening new locations, or otherwise expanding their business. When a company earns more profit, it also pays more taxes to the government, which can be reinvested into the economy. The sooner businesses get up and running at normal capacity, the more quickly the overall economy will bounce back. Working capital can help businesses invest in COVID-19 recovery Working capital isn't just important to keep businesses afloat and bolster economic recovery. With access to sufficient funding, businesses can also invest in necessary technology upgrades and safety measures to prevent the spread of COVID-19, thereby contributing to the overall pandemic recovery efforts. Being viewed as a business that prioritizes the health and safety of its employees and customers has the added impact of encouraging people to shop with you. To that end, your business might need additional working capital to cover expenses like these: E-commerce and mobile ordering capabilities Many businesses have pivoted to online sales and delivery options to encourage customers to shop from the safety of their homes. However, companies may have rushed to make this shift without considering the larger user experience and the technology stack necessary to support e-commerce. Businesses should consider investing in tech upgrades to improve and optimize their web and mobile buying process, encouraging customers to continue ordering from them. Personal protective equipment (PPE) If you operate a service-based business where you interact with customers, or if your business has returned to the office and your employees are interacting with one another, you've likely invested in PPE like face masks, gloves, and face shields for your staff. Until COVID-19 vaccinations are more widely available and social distancing guidelines are relaxed, this will be an ongoing expense for many in-person businesses. Plastic barriers Each state has different requirements for how businesses should operate during the pandemic. While not every region requires plastic barriers in stores and offices, it's a good idea in general to install them (if you haven't already) to keep your customers and employees safe. These barriers are another layer of protection for your employees during their shifts and give people peace of mind about their safety in your location. Cleaning and disinfection It is more important than ever to be cleaning and disinfecting your business, especially with the compounded health concerns of cold and flu season during a pandemic. Working capital can ensure you always have enough funds to restock your disinfectants, hand sanitizer, and other cleaning products, and to pay for janitorial services.   Can a working capital loan help your business? If your business is struggling to make ends meet or simply needs a little more money to invest in COVID-19 safety measures and business upgrades, a working capital loan can help supply those much-needed funds. Often used as a flexible, short-term financial solution, working capital loans can help businesses cover immediate and necessary expenses like rent and payroll until they can boost their sales and repay it. Other options for obtaining working capital Working capital loans aren't the only financial product that can help you meet your short- and long-term business goals. Here are a few other options to put you on the path to financial success. Small business term loan: A small business term loan gives you financing relatively quickly, to be paid back on a fixed schedule. This is a solid option for businesses that were operating successfully before the pandemic but have taken a hit from the shutdowns. A small business term loan can help you get the equipment and materials you need to quickly implement health and safety measures. Business line of credit: A business line of credit lets you draw cash in any amount (up to your established limit) whenever you need it. Once you pay it back, the funds are freed up for you to borrow again as needed. This is ideal for businesses that only need small amounts of money at a time, but on a recurring basis. If you anticipate that you'll need continued, flexible access to funding in the year ahead, a line of credit could be a great solution. Bridge capital loan: If you need a fixed amount of money just to see your business through a short period, a bridge loan can keep you afloat while you wait for guaranteed income. The application process is relatively fast and easy, and you get funding instantly after approval. One drawback is that the interest rates tend to be higher. Equipment financing: Equipment financing is a leasing option that allows you to lease materials and equipment to build or grow your business. You can pay back the loan on a regulated payment schedule. This is ideal for businesses in healthcare, construction, manufacturing, food and beverage, and other sectors that require expensive machinery and appliances. Invoice factoring: You can collect on your unpaid invoices from clients and vendors by "selling" them to a third party (the factor) for a fee. You will get 70% to 90% of the invoice amount as an advance to use immediately and receive the rest (minus the factor's fee) when the customer pays. Companies with customers who cannot pay their invoices because of the pandemic should look into this option, especially if they know the money will come later. SBA 7(a) loans: A 7(a) loan is backed by the U.S. Small Business Administration. It has no down payment, low interest rates, and long, flexible repayment terms. These loans are ideal for startups and small businesses that were hit hard by COVID-19 and need funds for various purposes. How to get a working capital loan Depending on what type of loan you're applying for and the lender you're working with, the documentation required to apply for your loan will vary. This is the most common documentation you'll need: Your business plan Bank and financial statements for the last two to three years Tax returns Your employer identification number (EIN) Once you have all those documents in order, you can submit a loan application to your lender. A great credit score and a personal financial summary will increase your odds of being approved for a small business loan. SBG Funding offers flexible financial products and lending options for small businesses that need fast and affordable access to cash. If you're a small business that needs funding to recover from the pandemic, contact an expert today to learn how you can increase your working capital with SBG Funding.

2021: The Year of the Digital SMB Posted: 02 Feb 2021 10:16 AM PST Global pandemic. Social upheaval. Economic headwinds. Administration turmoil. That was 2020. Against that backdrop, small and midsize businesses (SMBs), particularly brick-and-mortar retailers, had their digital "adapt or die" reckoning. In-person purchasing became a serious health liability; customers and workforces moved overwhelmingly to online-only models. It was the year SMBs turned to technology, irrevocably. The pivot to digital that many SMBs made last year is only the beginning of their digital journey. In 2021, SMBs need to ensure they have fully exploited the power and benefits of virtualizing their operations, customer service, and relationships with their customers. Here's what we can expect to occur in the coming year. SMB digital transformation will continue apace. 2021 is the year SMBs further accelerate their digital transformations. Technologies adopted for COVID-19 propelled a digital-first or hybrid physical-digital business model that's here to stay. Connectivity, e-commerce, and the know-how to succeed online are more important to success than ever. An October survey of SMB owners by GGV Capital and Hello Alice found that 83% believe their business will perform better in 2021. Those that turned to smart digital solutions to survive the business impact of the pandemic found new ways to reach customers and improve productivity. Also, 75% of the survey participants plan to spend more on technology in 2021. SMBs will invest in delivery of an excellent digital customer experience. The upheaval of the last year accelerated a trend affecting all businesses and brands: the erosion of consumer loyalty. The entire purchase cycle is now enabled online. Previous barriers such as location, distance, transportation, and time are condensed or wiped out. The friction of physical consumerism is nearly gone. Where does that leave the typical small business, when its customer base now has the entire world of retailers and their inventory available via their connected devices at a moment's notice? Actually, this is where SMBs may have a distinct advantage. A bedrock principle of SMBs is the personal touch. They know their customers. Likewise, their customers know them and trust them to understand and meet their needs. However, their customers are increasingly seeking their goods online. SMBs need to meet them there, and ensure a robust, user-friendly digital presence that complements their physical presence and extends online. I see the digital customer experience as a key priority for SMBs in 2021. SMBs seeking to improve customer loyalty and grow revenue will turn their attention to delivering excellent customer experiences digitally. Capabilities they will offer in their digital storefronts include intuitive user interfaces, smooth navigation, online chat, a smooth digital path from product selection to checkout, free or value-priced delivery, and easy online return/replace functionality. SMBs that go all in on the digital storefront experience will be pleasantly surprised at how much they can learn from the anonymized data today's e-commerce and social platforms allow them to collect and use. This treasure trove of data can help them determine the time and place to promote certain products over others, dynamically price their goods based on product demand indices, identify new sets of customers based on similarities to existing customers, and remarket products. These capabilities can help SMBs virtually replicate the in-person, personal-touch experience. They can also help SMBs identify and accumulate new customers to their always-on, available-to-anyone digital storefronts. Customer communications will take center stage. Facing a contactless future, SMBs will use email and social media messaging more frequently – and more strategically. According to the fourth edition of the Salesforce Small and Medium Business Trends Report, SMBs expect to be more careful about their communications, expand ways they can reach their customers, offer more flexibility, and prioritize customer relationships over one-off transactions. This emphasis on enhanced customer communications requires dependable, high-speed connectivity. SMBs will increasingly turn to fiber-based solutions for reliable, ultrafast connectivity and high-speed internet to support expanded customer communications, video conferencing, and the sharing of data-rich media. Fiber supports easy and fast access to customers, website expansion, and an improved customer experience. Our fiber solutions are offered to businesses as stand-alones or bundled with cybersecurity solutions to help them protect their technology investments. Corporate social responsibility will be tied to business success. The urgency of our collective racial awakening and the escalation of environmental and social issues came into full relief nationwide last year. The events of 2020 created a groundswell of demand for businesses to demonstrate a purpose beyond making money.  How fast is the concept of the purposeful business taking root? For example, investors using environmental, social, and governance (ESG) investing tools can now choose from dozens of causes to invest in, such as reducing greenhouse gas emissions, supporting LGBTQIA+ rights, and divesting from big tobacco, fossil fuels producers, and weapon-makers.  SMBs get it. According to the Salesforce survey, 45% of SMB leaders in the U.S. say they are taking at least one step to address racial injustice, as just one example.  2020 taught SMBs the importance of agility and resilience. The pandemic-induced shift to remote work and contactless commerce underscored the importance of digital transformation as a driver of business agility and resilience for SMBs. We know from our own customer base that the shift to working from home at scale drove exponential increases in bandwidth requirements for many businesses. In 2021, we expect SMBs will continue to invest in connectivity technologies that support communications and the flexible, hybrid (home/office/storefront) workforce model they've adopted. Fast, robust, highly secure, and reliable connectivity is now table stakes as business activity, like consumer activity, has moved online. This includes meetings, events, presentations, negotiations – all are now enabled and conducted through connected devices. It's not merely the sales process that has been virtualized, but almost all of work, calling into question the necessity of "the workplace." We also expect SMBs will continue their uptake of backup and recovery networking solutions to ensure all is not lost when the forces of climate-led or manmade incidents bring technology systems to their knees. 2021 is the year of the digital SMB. Digitally savvy, purpose-driven brands and businesses will be in the vanguard in 2021. These businesses will find new customers and deepen customer loyalty by winning hearts, minds, and a greater share of customer spend. The winners will deliver niche services that meet customers where they live with more personalized services: e.g., the dry cleaner who picks up your clothes from your house, the virtualized personal trainer, telehealth, and home delivery of food and other goods. The maturation of 5G will allow businesses to reimagine their operations with graphic- and video-rich content to reach new customers. SMBs and their owners are the lifeblood of the local community and the heartbeat of our economy. It is important that they thrive. In 2020, millions of them made the move to digital to stay afloat and grow during one of the toughest years in modern history. Now, they are recalibrating their digital strategies and assessing opportunities as the COVID-19 vaccine rolls out, relief money flows in, and a new administration settles into the White House. For SMBs that make the right digital investments, a better year awaits.

How Can Small Businesses Cultivate Resilience During the COVID-19 Crisis? Posted: 02 Feb 2021 09:00 AM PST The COVID-19 pandemic has impacted organizations of different sizes across industries and countries. Specifically, the resilience of small businesses with limited assets and cash reserves has been tested. Significant changes have happened during a short period of time. Physical restrictions, economic recessions, and lockdowns all contribute to the most difficult situation that small businesses are facing right now. Many small business owners feel that they started 2021 with uncertainty and are fighting to survive. Now, the question is, how can small businesses cultivate resilience and navigate through this global health and economic crisis?  What is resilience?  Resilience is the process of positive adaption in the face of adversity. None of us were prepared for the unexpected COVID-19 pandemic and were trained to lead through a global crisis like this. Nevertheless, personal and business resilience can be cultivated. What are the methods for small businesses to cultivate resilience amid this current crisis? Based on my research and consulting experiences, I would like to provide the following suggestions. Leadership First, develop resilient leadership and a collaborative organizational culture. Effective leadership plays an essential role in crisis communication.  There is a trending discussion in the business.com community. A community member asked about resilient leadership. This question has received a lot of attention and more than 70 people have responded so far. Generally, respondents expect resilient leaders to have the ability to lead through tough times by identifying the changes in the environment and making the right decisions in a timely manner. Being flexible, agile, and acting quickly is the key. If you are the leader for your small business, you need to cultivate resilience for yourself and collaborate well with your employees. As Felena Hansen shared, resilience is her superpower.  A resilient small business owner should have a clear vision, they should be composed, they should possess reasoning and problem-solving skills, they should be persistent, and they should collaborate with others. In terms of collaboration, you need to continuously build and maintain your professional networks and get support from your employees, especially in times of crisis. Your employees are your valuable assets.  Their behaviors represent your organizational culture and affect the image of your company. If you treat your employees well and care about their well-being, they are more likely to collaborate with you, have a good work ethic, and interact positively with your customers.  Tracking Second, keep tracking the changing consumer behaviors to understand your customers' needs. I have identified four consumption trends that have emerged, including online shopping, panic buying, shifting product categories, and consumers becoming much more price sensitive. Nevertheless, consumer behaviors are still evolving in this fast-changing environment. For example, many consumers have developed health concerns amid the pandemic. How can you know what your customers' needs are and provide products and services to satisfy their needs, thus keeping loyal customers? As Rachel Krug noted, you can uncover customers' needs by conducting research and continuously listening to the voice of customers (VOC).  You can listen, gather data, and uncover hidden needs by asking the right questions. Then, you can test the hypotheses and take action. You don't have to conduct large-scale customer insights research with good amounts of market research budgets. There are some easy and free research methods for small businesses to use. For example, you can directly talk to your customers and ask them to provide feedback to you. You may also review your customers' comments about products or services on review sites (e.g., Yelp) or social media sites. By looking closely at customers' social mentions, you can figure out what your customers like most and what can be improved. There are some free or inexpensive social listening tools for you to use. Customers Third, meet with your customers where they are and provide a safe consumption environment for them. If your customers mainly shop online, sell your products online. You can also change the way you deliver your products to your customers. For example, many restaurants take online orders and offer food delivery and takeout services. There are many online ordering platforms such as Uber Eats, Grubhub, ChowNow, and DoorDash. Many gyms and athletic clubs are offering virtual classes. Even doctors offer diagnosis and therapy sessions virtually. With the help of modern technology, you can offer touchless payment and online shopping options to your customers. If some activities need to be done in stores (e.g., a  hair cut at hair salons), you need to provide a safe environment for your customers.  For example, hair salons need to follow government guidelines and take see a small number of customers with appointments at a time. You also need to frequently clean the chairs and tools. The stylists and customers need to wear masks all the time. Digital presence Fourth, maintain a strong digital presence for your small business. Because of the pandemic, people are now living in an online world. People spent two hours and 24 minutes (144 minutes) on social media in 2020. Electronic word-of-mouth (eWOM) is extremely important for small businesses. Many consumers rely on other consumers' opinions, reviews, and ratings before making a purchase decision. For example, many consumers decide which local restaurant they will order foods from and which hair salon they will visit based on the reviews on Yelp.  In addition, your customers may want to interact with you (and other customers) on your company's social media sites, especially during the social distancing era. I highly recommend that you engage with your customers and foster positive customer relations on social media. Positive eWOM can be fostered by offering exceptional products and services, cultivating connections, and creating enjoyable conversations and experiences in your brand/fan communities or organizational blogs. Negative eWOM can be reduced by addressing customers' concerns and complaints effectively and quickly. If you see negative comments on review sites or social media sites, you can contact the dissatisfied customers, such as sending a private message, and provide solutions, such as refunds or product exchanges, immediately. You can also transform e-commerce business with social media by posting effective content with a content calendar, sharing positive reviews and ratings, using videos and visuals, and adding social media feeds to your e-commerce sites. Support Fifth, get support from the available resources. The U.S. government offers grants for different types of small businesses, such as women-owned businesses, minority-owned businesses, and veteran-owned businesses, to apply for. Because of the pandemic, the U.S. Small Business Administration (SBA) offers small business relief grants, such as Payroll Protection Program (PPP) and Express Bridge Loans. You can check the SBA's website or contact your banker for information and guidance. In addition, some universities, educational institutions, and technology companies provide free training sessions or webinars to help small businesses to transform business online. If you are interested, you may attend these training sessions or webinars. You may also check the COVID-19 Resources page at business.com to get expert business advice, tips, and resources for navigating this uncertain time. Adjust Finally, continuously adjust your business practice, as well as the 4Ps of marketing (product, price, place, promotion), to respond to environmental changes. As I mentioned earlier, consumer behaviors and the market economy are still evolving. You need to keep watching the trends. By doing so, you can be agile and meet your customers' needs and expectations. For example, if there is a change in the number of customers you can have in your store, you need to follow the public health policy and notify your customers. Because of the economic impact, consumers tend to shop more for necessities instead of luxury goods. Thus, you may carry and sell different types of products as you did before the pandemic. For example, some boutique clothing stores are selling face masks. If possible, sell your products, and provide services online. You may also carefully evaluate your pricing strategy. Because of the extra cleaning cost, some small businesses, like hair salons, add COVID-19 fees to the prices of their services. If you have decided to do so, make sure that your new price is reasonable and affordable. You may consider offering free or flat rate shipping for orders over a certain amount as a promotional method, because consumers are becoming much more price-sensitive. In conclusion, business resilience can be cultivated. Being flexible, agile, and responding to environmental changes quickly are the keys to success. This can be done by having effective leadership and a collaborative culture, uncovering customers' needs, meeting with your customers where they currently are, getting support from available resources, and continuously adjusting your marketing 4Ps.

What Is Email Automation? Posted: 02 Feb 2021 05:30 AM PST The use of email automation for marketing campaigns and continued communication with customers can be a highly impactful, efficient, and inexpensive tool. Email automation delivers your messaging to your targeted audience at precisely the right moment. This practice increases customer click rates and sales per email, as opposed to other marketing methodologies. Understanding email automation and how it works The value (and genius) of email automation is that you can send timed or scheduled emails to potential customers, followers, and subscribers when desired. This practice is terrific for online businesses that want to share messaging that corresponds with other business-related attributes (or developments) that customers may be interested in. Many companies, large and small alike, work with third-party software that streamlines their efforts. How email automation (and marketing) can develop your brand Seventy-five percent of marketers report using at least one type of marketing automation tool (whether it be via email or another method). Automated email marketing retains a return on investment (ROI) that is largely unmatched with any other marketing or customer communication tool. The ROI of email marketing stands at around 4,400%.  BuzzFeed is an example of a company that has created, and sustained, an incredibly powerful email marketing program that leverages automation at every turn within their platform. BuzzFeed's educational courses are leading the way as they effectively utilize email automation. For example, the "4-Week Get Fit Challenge" is a subscription series that customers sign up for. Participants receive a series of emails with tips and suggestions on how to live a healthier life. The best way to deliver customized messaging and "special deals" to customers is with targeted marketing campaigns. Today, these marketing campaigns are most commonly executed through automated emails. Another attribute that automated email marketing provides is time savings. Since time is a commodity of its own, it's important to note that 69% of marketers reported that automation helped them streamline tasks and find more working time and space in the workweek. How to maximize your use of email automation Even though anyone can utilize email automation for marketing campaigns of any kind, there are best practices that others find yield higher returns for their efforts. Although we will not capture all the best tips here, as there are many, the ones we highlight are proven to be efficient, duplicative and highly impactful. Develop powerful welcome emails. As they say, you only get one chance to make a good first impression. Your welcome email is the first exposure that new customers, or followers, have to you and your brand. It sets the expectation and the overall tone for the entire experience thereafter. Tell compelling stories. Although storytelling is one of the most time-tested principles in direct marketing, automated or otherwise, many companies still get storytelling wrong. A quality story helps sell your products and services to customers. Regardless of all the other tactics, tips, and ideas you attempt, storytelling is essential to sustained success. Execute split-testing experiments. Split testing, also known as A/B testing, is the practice of comparing two versions of the same message, with some slight differences. This is most commonly executed by offering one version of the message to group A and another version of the same basic message, but with different language and tactics used, etc., to group B. Then you can see how each variation performs with varying and/or the same customer base. Test multiple deployment delivery times. Ensuring that your automated messaging aligns with your audience is critical for success. You can assess what your "customer open rates" are based on the timing of your grouped emails. Alternating or trying different time slots helps you determine which one has the highest ROI. Segment your audience. As opposed to engaging 1,000 or so followers at once and sending them the same email, why not segment these followers into several groups so it is easier to customize your communication approach? One way you can do this is that after your prospects become paid customers, you can then use the customer's purchase as informative data on how to communicate with them in the future. Find the sweet spot for email send frequency. Sending too many emails can be detrimental to your brand – in multiple ways. The most common damaging effect of sending too many emails is that your target audience will quickly and quietly unsubscribe. Sending too many emails also diminishes your brand visibility – consumers begin ignoring or becoming blind to your marketing efforts. Utilize a well-constructed customer response email template. Services such as Mailchimp offer templates that can be easily customized. The cost of these automated responses is minimal, and these services allow you to expand your customer service efforts to satisfy your customers and turn them into advocates of your brand. Deploy a clear call to action. Your content needs a clear call to action to spur the customer in your sales funnel. For example, once a customer opens and reads your email about spring fashion, they should be able to click a button to "Shop Now" to see which styles you have in stock. Always give your customers a clear and easy path to take the next step, whatever that might be. Regularly measure the success of your email campaigns. Constantly assessing the effectiveness of your efforts is important to maximize your ROI, ensure that you are not paying for unneeded services, and guarantee that you are targeting the write customers in the right way. Routinely clean house and confirm your emails lists. Over time, countless email addresses (mistaken, fake, inactive, etc.) get added to your lists, and it can have a negative impact on your email performance – you could acquire the reputation as a spammer. With the strategic use of automated email campaigns, your company can reach far more customers cost-effectively. There are ways to target specific customer groups, and you can test – and improve –your methods along the way, so your efforts result in the highest ROI possible. Third-party automated email software Partnering with a third-party service to assist your company's efforts synergizes your ability to reach the right customer, at the right time, with the perfect messaging. These four automated marketing email software companies are among the leaders in the space. They are a good starting point when choosing an email marketing solution: Mailchimp Sendinblue Constant Contact Benchmark Besides helping you create – and automate – marketing campaigns, email marketing automation software helps you gather information about your target audience. You learn the most effective tools and practices that can resonate with your specific demographic and/or targeted customer base. It even contributes to a shortened sales cycle (from "pitch to purchase"). When you have created a solid automated email campaign, you begin seeing its benefits almost immediately. Companies save time, increase customer interaction, and increase their ability to assess data so they know how to improve in the future, etc. Automated email campaigns benefit both your sales and marketing teams, as they can seamlessly – and in a targeted fashion – pivot to further hone messaging to interested customers.

Self-Employed Guide to Tax Benefits and Deductions Posted: 02 Feb 2021 04:30 AM PST The U.S. tax code is notorious for being difficult to navigate. For self-employed individuals, things are especially complicated. We've compiled some important information on the best deductions, benefits, and tips that could help ensure you submit an accurate and ultimately beneficial tax return. What is self-employment tax? When you began working for yourself, you took on a lot of the responsibilities that a traditional employer would handle for you. One area where this is particularly evident is the taxes that support government-issued benefits like Social Security and Medicare. Since every working adult in the U.S. chips in for both of those services, any money you earn as a self-employed entrepreneur is subject to taxation. Self-employed tax rates If you were working for an employer, approximately 8% of your gross income would cover both Social Security and Medicare taxes, with your employer providing a matching contribution. Once you become self-employed, whether you own your own business or are working as an independent contractor, you will be responsible for the full tax, including the half your employer would have covered. According to the IRS, the current self-employment (SE) tax accounts for 15.3% of a person's gross income and consists of 12.4% for Social Security tax and 2.9% for Medicare tax. Remember that your SE tax is separate from your federal income tax, which you will also need to calculate and pay to the IRS. How do you calculate your self-employment tax? When coming up with your self-employment tax, note that the IRS limits how much can be taxed for either Social Security or Medicare and applies that to your net earnings. According to the IRS, only the first $137,700 in 2020 earnings will be taxed for Social Security. If you're a single filer and your earnings go over $200,000 (or $250,000 if you're a joint filer), then 0.9% of additional Medicare tax will be applied to those earnings. So, in order to calculate your self-employment tax, you will have to take your net earnings for the year and calculate how much of that income is subject to the tax. You would owe 15.3% of that amount toward your SE tax. For example, a self-employed person earning $100,000 in a year would owe $15,300 toward Social Security and Medicare. How and when to file taxes When you will file your taxes depends on whether you will be filing on an annual or quarterly basis, since you should consider taxes throughout the year. This decision depends on a number of factors, including how much you'll be withholding, if you receive untaxed income, and if you're self-employed or an independent contractor. Depending on your answers to those questions, you may need to pay quarterly instead of every year. As for how you file your taxes, you could hire a CPA to manage the process for you or do it yourself. If you go it alone, we recommend using one of our best picks for online tax software, since these options are quick and accurate. By making sure you handle your taxes in a professional manner, you can avoid falling behind on taxes and needing a tax debt relief service to get you out of trouble with the IRS. 12 tax deductions, benefits and tips for the self-employed As you prepare your self-employment taxes, you should know about the deductions and benefits that can improve the process for you while lowering your tax bill. By knowing what's available to you as a self-employed taxpayer, you can put together the most accurate and beneficial filing possible for the 2020 tax year. 1. Self-employment tax deduction When you calculate your SE taxes, you'll be figuring out how much you have to contribute to both Social Security and Medicare. Again, this is because you are assuming the contribution responsibilities that an employer would have handled for you in addition to your own tax requirements. However, you can deduct the employer portion of your self-employment taxes from your adjusted gross income. According to the IRS, this deduction only applies to your federal income tax and "does not affect either your net earnings from self-employment or your self-employment tax." Furthermore, the IRS says that if you are going to file Form 1040 or 1040-SR Schedule C, you could be eligible to claim the earned income tax credit (EITC). 2. Retirement plan contributions Just because you're not working for a traditional employer doesn't mean you have to deny yourself a retirement plan. Contributing to a SEP IRA, SIMPLE IRA, Roth IRA, or traditional 401(k) could lower your overall tax bill while helping you plan for the future. Under the IRS' current tax plan, a self-employed individual can defer up to $19,500 to all of their retirement plans, "including pre-tax and Roth contributions." You can make additional contributions depending on your self-employment earnings, the maximum amount being $57,000. Limits vary by plan type and change each year, though, so double-check the maximum before you commit to those contributions. 3. Mileage deduction If your vehicle is an important aspect of your business, you can deduct the miles you put on it in a tax year. Though the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated some of the deductions associated with mileage, the IRS maintains a table of standard mileage rates that shows how much you can deduct for certain vehicle usages. For strictly business purposes, you can deduct each mile at 57.5 cents, while charity mileage and miles driven for medical or moving needs can be deducted at 14 cents and 17 cents per mile, respectively. Those figures show a continuing downward trend, with the 2021 tax season only allowing business miles to be deducted at a rate of 56 cents per mile and moving and medical expenses eligible for a deduction of 16 cents per mile. 4. Meals and travel deductions If your business requires you to travel to meet clients or go out for meals with them, you should definitely keep track of those expenses, because you can deduct them from your taxes. As long as these meetings are strictly for business, up to 50% of the meal's cost can be deducted with proper documentation. You can find the standard meal allowance for your business on the U.S. General Services Administration website. Like most parts of the tax code, the TCJA further changed how meal and entertainment costs are deducted. According to the IRS, "if food or beverages are provided during or at an entertainment event, and the food and beverages were purchased separately from the entertainment or the cost of the food and beverages was stated separately from the cost of the entertainment on one or more bills, invoices, or receipts, you may be able to deduct the separately stated costs as a meal expense." Under the TCJA, if the meal and entertainment are not listed separately on your receipt, neither can be used as a deduction. 5. Qualified business income deduction Up to 20% of your qualified business income can be deducted from your taxes, provided you meet several criteria set by the IRS. According to the federal government, your income for 2020 must be less than $163,300 if you're a single filer or $326,600 if you're filing jointly. If you go over those limits, the IRS then determines if you're still eligible for a full or partial deduction. Under the current IRS guidelines, the qualified business income is "the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business," excluding things like capital gains and losses, dividends, interest income, foreign income, and some payments to partners and shareholders. 6. Business loan interest deduction If you had to take out a business loan to cover expenses, the associated interest could be deducted from your taxes. While that's great news for you, if you used the loan for any personal expenses in addition to your business ones, you'll only calculate the business ones for deductions. The same goes for credit card deductions. To get this deduction, you'll have to keep meticulous records of how you used the money. 7. Net operating loss (NOL) carryback Even if you don't operate under a traditional business structure, you can still use your net operating losses to lower your tax obligation. A net operating loss, or NOL, happens when a business's deductions are more than its taxable income. These NOLs can be carried over to future tax years to lower tax liabilities. Before the passage of the TCJA, these carryovers were limited to 20 years. That restriction has been removed, but NOLs are now capped at 80% of the taxable income of any given period. Further changes for NOLs took place after the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. Those changes make all the difference, said Jackie Meyer, CPA, president and founder of Meyer Tax Consulting. "The CARES Act made changes to NOLs that provided a five-year carryback for losses earned in 2018, 2019, or 2020, which allows firms to modify tax returns up to five years prior to offset taxable income from those tax years," she said. Under the CARES Act, the NOL carryback rules also pertain to individuals, estates and trusts, and tax-exempt organizations, so if you've had a particularly rough go of it, you can potentially use the NOL to offset your taxes. 8. Home office deductions Many more people have had to familiarize themselves with this cost in 2020 thanks to the COVID-19 shutdowns. Any costs you incurred to keep your home workspace running during the tax year can be deducted as a home office expense. Along with office space costs, you can deduct a percentage of your home's mortgage interest, your home's depreciation, homeowners insurance, utilities, and repairs. How much of those costs can be deducted depends on how much of the home your workspace occupies. The larger the office space in your home, the greater your tax deductions. 9. Rent costs Similar to the home office cost deductions, you can deduct the rent you pay for an office space, as well as the rental fees for any additional equipment you needed during the tax year. You can also deduct business lease cancellation fees, though you can't deduct rent expenses if you won the property. 10. Self-employed health insurance Everybody gets sick, so you likely have your own health insurance. If you aren't on your spouse's plan and you pay for your own premiums, you can deduct your entire health, dental, and some qualified long-term care premiums. If you have dependents listed on your health insurance plan, such as a spouse and children younger than 27, you can deduct those costs as well. The IRS provides a worksheet to calculate the amount of your deduction.

You are subscribed to email updates from Business.com. To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google, 1600 Amphitheatre Parkway, Mountain View, CA 94043, United States