During the Fearless Stenographers Conference, we caught up with Carrie Sheffeld, MBA who is a stellar accountant. We were able to get some fearless financial tips from this savvy professional.
JA: As a recession looms, how should we plan?
CS: Many experts say we’re already in a recession while others say it’s coming. Inflation increased to 9.1% in June, the highest in decades, so it’s safe to conclude our economy is not very strong. The best way to plan for an unstable economy and possible recession is to be smart with your money. As a business owner, you should cut costs, find efficiencies to ensure optimal productivity, consider offering new low-cost products to boost revenue and increase your net income and by all means save your money. The good news is a recession also provides extraordinary investment opportunities. The value of many well-known stocks has significantly decreased, so invest now, hold until the value increases, then sell the stocks for a profit when the stock market rebounds. Just don’t forget to set aside at least 20% of your gains for taxes. Of course, Uncle Sam wants his cut of your stock gains.
JA: Emergency Savings Fund. What is the suggested amount to save? Three months, six months? What would you advise?
CS: Some say save 6 months of your salary, but I’ve always said 6 months of your monthly expenses is good. According to the US Bureau of Labor Statistics, the average unemployment period ranged between 20 and 30 weeks over the past year, so 6 months of savings should give you peace of mind.
JA: We are halfway through the year, any tax tips you would like to recommend for freelancers?
CS: Yes, if you haven’t already, meet with an Accountant or Tax Professional to project your tax bill for 2022. Having a discussion now will allow you to implement a tax plan that could significantly reduce your tax bill. Many ask, “What is a tax plan”? A tax plan is a strategy to legally reroute your money from Uncle Same to yourself or your business. My accounting firm works tax plans for clients often and our strategies typically include, but are not limited to investments in retirement accounts, purchases of large equipment or vehicles that will be beneficial to the business, investments in employees to increase retention and trainings or continuing education that will also benefit yourself and the business. All are legal strategies that allow you to reduce your tax bill while also benefiting yourself, your family and your business.
JA: For our students and new professionals, can you explain the difference between an LLC and S-Corp?
CS: An LLC is a business entity that is recognized by each state and in many cases separates your business and personal assets should legal issues arise. A S Corporation is a tax classification for LLCs that is only recognized by the IRS. There are many differences between the two, but we’ll focus on the money! The main difference between the two entity types is the way they are taxed. A business operating as an LLC will pay 15.3% self-employment tax; whereas an S Corporation does not pay 15.3% self-employment tax. Of course, many see the 15.3% tax savings and automatically want to become an S Corporation, but prematurely requesting an S Corporation classification can haunt you. To be specific, an owner of an S Corporation is required to pay themselves a reasonable salary based upon the geographic location, position held and tasks that will be completed within the company. There are also additional administrative costs of transitioning to an S Corporation – payroll processing fees, more complex tax filings and reporting requirements. Therefore, I suggest waiting to request the S Corp election if your business is not profitable enough to pay the owner a reasonable salary and absorb additional administrative costs. Otherwise, the IRS could administer stiff penalties for non-compliance.