Reader Case Study: New Business Owner, Confused and In Debt

[Sita]

Hi everyone,

I'm brand new to both the MMM blog and forum and also to the world of responsible personal finances. I want to drastically change my life if I can, so I'm looking for advice/resources and accountability for myself. I have a TON of questions about my business, my debt, my car, and my living situation below. I don't really expect anyone to answer all my questions; I am just completely overwhelmed and put it all out there.

I don't think I'm too much of a complainy pants, but that being said, I better assimilate the information from gentler facepunches, like with a kitten instead of an actual fist... :-)

My Basic Story:
27 years old
Massage therapist, both self-employed and an independent contractor (first year practicing)
Renting a 1br apt in Boulder, CO with my boyfriend and my dog
I HAVE A BIKE! but not a trailer yet :-(

Income:
My income is variable, but I make $2,600 - $3,000/mo
99% of my income comes from working as an Independent Contractor at two different companies
1% of my income comes from my own rented office, but I use it solely for business expenses (I'd like to change this ratio, more info on that further down)
Note: I haven't paid taxes on any of this income yet because it is my first year practicing, and I'm not sure what self-employed taxes entail. I accept that my ignorance here probably deserves a facepunch.

Current monthly expenses:
Rent - $120 (boyfriend pays remainder, total rent is $995)
Gas/Water - $20 (I pay whole bill)
Electricity - $30 (I pay whole bill)
Health Insurance - $105 (high-deductible catastrophic coverage, just me)
*Groceries - $300 (has been at $500, so I'm working on getting this down already)
Pet food - $50
*Household stuff - $50
Phone - $85 (WAIT WAIT, BEFORE THE facepunching commences, I'm going to switch to one of Republic Wireless's new plans in November)
Internet - $30 (for now, on a promotion)
Gas for car - $120 (I can get this down to less than half; I've been excessively lazy)
*Bodywork for myself - $50 (I consider this a necessity to physically be able to do my work)
Office rent - $475
*Other business expenses - $30
Total Monthly Expenses - $1,535

Monthly Savings for Intermittent Expenses:
Taxes - $800
Loan Interest - $275 (some of the loan in grace is unsubsidized, so this is for paying off the interest before it gets added to the principal)
Car Insurance - $60
Car Registration - $10
Professional Association Renewals - $20
Total Monthly Savings - $1,165

Total Monthly Budget - $2,700
*if my income doesn't exceed my budget, I skimp in these areas first, then the other flexible areas

Assets:
$2,000 at this moment in the bank (both savings and checking)
$2,400 in a Fidelity IRA (JUST rolled over from my old employer and I don't think it's doing anything)
2000 Toyota Camry XLE V6 (according to Edmund's and Kelley Blue Book, it's worth around $2,000, but it's really not in great shape, so I'm skeptical of those numbers)
$2,300 in my business - $900 in the bank and about $1400 in office furnishings.

Liabilities:
$2,000 in Collections debt from unpaid medical bills after an ER visit (no need, I'm facepunching myself here.)
$23,000 in student loans (in grace period until April 2014)
$3,500 in student loans at 6.8% interest (also facepunching self here.)

Other notes:
I have no idea what my credit score is, the only things on it are the liabilities listed above. The medical bills in collections are obviously hurting it, I've always my lesser/older student loan on time, and the big student loan is brand new and I'm not scheduled to make payments yet, so I'm not sure how each of those affects my score.

My boyfriend earns $1,700 to $2,000/mo and has a monthly budget of about $1,200 - essentially rent and student loans. Right now, the remaining $800 goes toward mostly his beer cellar but basically all play... he's not much of a future-thinker. I'm encouraging him to throw all of the excess minus some emergency money at his loans. Other suggestions?

Specific Question(s):
I feel like my budget is relatively trim but I know I can do better with my phone, gas for the car, groceries, pet food, and getting massage for myself. That being said, do I have blind spots? What other changes can I make and how?

What should I do about my car? I feel like it's nearing end of life because I have not maintained it well and it's been in a few accidents. Reading MMM has re-inspired me to get on my bike more, so I can already save on gas, but I do legitimately need a car a couple times a week. I've been thoroughly scared into not financing one, but I can't afford another out of pocket, so should I drop $1,000+ in repairs to keep it going for... I have no idea how long? Should I risk it dying suddenly as I work to save up enough to buy something else? Should I sell it and invest in a scooter instead? Should I just reorganize my life so that, for example, I don't need one (which would probably impact my income)? Or should I do something else I haven't thought of?

Speaking of working, what should I do about my business? I foolishly jumped in not really knowing what resources I needed and now I'm flailing. In order to pay my bills (because I don't have enough clientele at my own office), I am now working pretty full schedules at other offices that provide clients. I earn less than half as much as I could make at my own office, but if I open my schedule to allow time at my office and don't get clients, I don't earn money. I don't have cash on hand to invest in a big marketing push to ensure more clients, but I can't seem to earn enough to start working less hours elsewhere and simply wait for my business to grow. Should I get a business loan and start focusing on my business immediately? Should I bide my time at my jobs until I have more savings to slowly ease my schedule into more office hours? Should I close my office and save that $575/mo and covert the assets to cash for debt payoff? Should I sublet the office to earn income on it?

And lastly (for now), what should I do with the $2,400 sitting in a Rollover IRA? I know nothing of retirement funds or investing of any sort other than it was a few numbers on my paycheck when I was employed and automatically enrolled in the company's 401(k).

Thanks for reading! I look forward to other perspectives, being able to make some clear cut goals, and seeing them come to fruition.

[Kipp]

Note: I haven't paid taxes on any of this income yet because it is my first year practicing, and I'm not sure what self-employed taxes entail. I accept that my ignorance here probably deserves a facepunch.

To avoid this from being a severe punch in the face come tax time... make sure you have all of your mileage and other business expenses properly recorded.  I am assuming that this is all a sole proprietorship so you will need to fill out a schedule C come tax time.  Be prepared to pay out BOTH sides of social security on all income as well as your marginal tax rate.  With a 31,200 to 36,000 income and it appears expenses of about 8100, you could be looking at about ~$6000 to $7000 in taxes to shell out for federal (not sure on your state).  So you may want to increase that budget slightly, and look into doing estimated payments to avoid penalties and interest in future years (should be safe harbor for this year, but I do not know your circumstances).  Your health insurance is included in expenses because you can deduct that on your tax return since you are self employed.

[lackofstache]

Speaking of working, what should I do about my business? I foolishly jumped in not really knowing what resources I needed and now I'm flailing. In order to pay my bills (because I don't have enough clientele at my own office), I am now working pretty full schedules at other offices that provide clients. I earn less than half as much as I could make at my own office, but if I open my schedule to allow time at my office and don't get clients, I don't earn money. I don't have cash on hand to invest in a big marketing push to ensure more clients, but I can't seem to earn enough to start working less hours elsewhere and simply wait for my business to grow. Should I get a business loan and start focusing on my business immediately? Should I bide my time at my jobs until I have more savings to slowly ease my schedule into more office hours? Should I close my office and save that $575/mo and covert the assets to cash for debt payoff? Should I sublet the office to earn income on it?

I've tried unsuccessfully several times on small ventures while working part time. My advice would be to cut your business costs substantially. When your lease is up, cancel it. Focus on making a bit more money contracting, build up a bit of savings and get rid of some of your debt. When you have enough money saved or are out of debt revisit doing your own thing. You may find working as an independent contractor you can find some clients that would follow you when it's time to open your own place. If you can't devote making your business full time financially you probably should just make money and worry about the business later.

[dude]

Do you really need an office location?  Have you thought about buying a portable table and going mobile?  Saving on the overhead might make your rate more competitive and taking your business to clients' homes might help you establish a client base that you can eventually take to an office should you find a consistent gig at a spa or the like.  Leave your card at the local Starbucks' and other coffee shops, doctors' offices, local gyms, martial arts studios, etc.  Not sure if the added gas costs would exceed the office cost, but worth crunching the numbers.

[Guizmo]

Hey I'm in Denver!

Anyways, you need money to be able to do marketing and not be totally worried when you don't have clients. I would drop the office ASAP, work hard as a independent contractor until you could pay off debt substantially, save money at the same time and may start the office up again once you have 10k saved up (or around 6 months worth of expenses, to account for slow months).

Lastly, since you will be a business owner I would not go to Republic Wireless. You get what you paid for. I used to be at Verizon, switched and went to Virgin Mobile. Great price, terrible service. As a business owner you need something reliable. I moved to a Verizon prepaid plan. At $55 it is not the cheapest, but when you need unlimited talk, text and 2gb of data, and RELIABILITY, the price is hard to beat.

[Sita]

To avoid this from being a severe punch in the face come tax time... make sure you have all of your mileage and other business expenses properly recorded.  I am assuming that this is all a sole proprietorship so you will need to fill out a schedule C come tax time.  Be prepared to pay out BOTH sides of social security on all income as well as your marginal tax rate.  With a 31,200 to 36,000 income and it appears expenses of about 8100, you could be looking at about ~$6000 to $7000 in taxes to shell out for federal (not sure on your state).  So you may want to increase that budget slightly, and look into doing estimated payments to avoid penalties and interest in future years (should be safe harbor for this year, but I do not know your circumstances).  Your health insurance is included in expenses because you can deduct that on your tax return since you are self employed.

Wow, that was really helpful info, thank you! I started working solo in May and had some additional withholding from my last job, so I figured I'd have about $3,000 in taxes, which I will be able to save by the end of December, but I'll give myself a little extra just in case. I'm pretty overwhelmed as far as all the different tax forms and what I can deduct, etc. Do you think it's wise to get help from a tax professional, at least for this year, since I am completely new at all this?

I've tried unsuccessfully several times on small ventures while working part time. My advice would be to cut your business costs substantially. When your lease is up, cancel it. Focus on making a bit more money contracting, build up a bit of savings and get rid of some of your debt. When you have enough money saved or are out of debt revisit doing your own thing. You may find working as an independent contractor you can find some clients that would follow you when it's time to open your own place. If you can't devote making your business full time financially you probably should just make money and worry about the business later.

Thanks for the advice. I'm doing well as an IC and already have several clients that expressed wanting to see me in my private practice when I leave my employers. I rent my office out part-time to one person, but I will add someone else so I can at least recoup more of the rent until the lease ends next year. I will also look into where I can trim expenses since I am available for my own office so little anyway.

Do you really need an office location?  Have you thought about buying a portable table and going mobile?  Saving on the overhead might make your rate more competitive and taking your business to clients' homes might help you establish a client base that you can eventually take to an office should you find a consistent gig at a spa or the like.  Leave your card at the local Starbucks' and other coffee shops, doctors' offices, local gyms, martial arts studios, etc.  Not sure if the added gas costs would exceed the office cost, but worth crunching the numbers.

Thanks for the suggestion! I decided not to do mobile because my car isn't running that well anymore and has pretty awful mileage anyway, and I feel like I have less time to be driving around a pretty crowded town than I do money to just pay for an office, especially with an officemate sharing the cost. However, you're right, crunching the numbers is the smartest way to go about it.

Hey I'm in Denver!

Anyways, you need money to be able to do marketing and not be totally worried when you don't have clients. I would drop the office ASAP, work hard as a independent contractor until you could pay off debt substantially, save money at the same time and may start the office up again once you have 10k saved up (or around 6 months worth of expenses, to account for slow months).

Lastly, since you will be a business owner I would not go to Republic Wireless. You get what you paid for. I used to be at Verizon, switched and went to Virgin Mobile. Great price, terrible service. As a business owner you need something reliable. I moved to a Verizon prepaid plan. At $55 it is not the cheapest, but when you need unlimited talk, text and 2gb of data, and RELIABILITY, the price is hard to beat.

Thanks for your input! And isn't CO the best?? I'll definitely reconsider switching to Republic; I'm with Verizon now so it may be better and easier to switch to prepaid.

[willn]

For self employment tax purposes, don't overthink it.  Just remember you are taxed on your profits.  Profits = revenue minus expenses.

Not trying to be condescending here but just for clarity, revenue is whatever you bring in as payment from others for services.  Expenses are the costs of anything you pay for that is used to get revenue.  Mileage, business cards, marketing, phone, office rent etc.

Keep track of all your expenses and store your receipts, and the first year or two, it is a good idea to have an accountant do your taxes based on those records.  They can help you set up Quickbooks and you can probably manage yourself once you see how its done.

You should get a separate "DBA" (doing business as) checking account.  Use it only to deposit business revenue, and pay for business expenses.  You can pay yourself out of that account.   Your business is probably simple enough that the checkbook basically becomes an income statement.  Each month the (reconciled) balance is essentially your profit for that month.  A bookeeper can help you set up Quickbooks or Quickbooks online and help classify expenses and identify more complex expenses that may be valid, like equipment depreciation, vehicle costs, home office expense, that may or may not apply.

In general, if you set aside about 25% of profit, you'll have close to the amount you owe in tax.

In your second year, you'll have to file 1040ES forms for quarterly estimated tax payments. It's easy and most tax programs and accountants will give you a coupon to use to attach and send the check. The amount will be based on your previous year income, so if your business picks up, be sure to save more for tax day. 

[cosmie]

Thanks for the suggestion! I decided not to do mobile because my car isn't running that well anymore and has pretty awful mileage anyway, and I feel like I have less time to be driving around a pretty crowded town than I do money to just pay for an office, especially with an officemate sharing the cost. However, you're right, crunching the numbers is the smartest way to go about it.

I'd second the mobile option that dude mentioned, but with a slight twist.

Rather than try to find private clients and drive all over the place, look for mid-sized businesses that may want to partner with you as an "employee perk". At one place I worked, a massage therapist visited two days a week and provided on-site massages. The business provided the space, the therapist provided the equipment/furniture, and payments were directly between the employee and the therapist. It was pretty popular, and the company loved it (only cost them an unused office). At another job I had, the company gym had a massage therapist come once a week. I don't know the payment structure, as they were free (covered by the gym membership),  but it was again very popular. The company gym actually had several people sign up specifically for the mid-day massage. :-D

Since you're only visiting one (or possibly two) places a day, the transportation costs are significantly less than if you were running around all day between individual clients. Certainly no more expensive than your office rent, and the transportation costs would be a deductible business expense anyway. And massages are scheduled in advanced rather than in a walk-up fashion, so if you end up with a day with no appointments at a business you can forego the cost of going (especially when first starting out). Plus, you end up with a captured audience; it may be taboo to dip out in the middle of the day to go get a message elsewhere, but less so if you're going to spend a half hour with the company-sponsored message therapist down the hall. You also end up with a more stable client base this way, making income a lot more predictable.

[Fuyu]

Have you tried VITA (http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers) for free help in preparing your tax return? There's one at University of Denver. http://www.denverbap.com/vita.html

A volunteer will the prepare your tax return, and then the tax return will be reviewed by a professor/CPA before its efiled.

[Kipp]

For self employment tax purposes, don't overthink it.  Just remember you are taxed on your profits.  Profits = revenue minus expenses.

Not trying to be condescending here but just for clarity, revenue is whatever you bring in as payment from others for services.  Expenses are the costs of anything you pay for that is used to get revenue.  Mileage, business cards, marketing, phone, office rent etc.

Keep track of all your expenses and store your receipts, and the first year or two, it is a good idea to have an accountant do your taxes based on those records.  They can help you set up Quickbooks and you can probably manage yourself once you see how its done.

You should get a separate "DBA" (doing business as) checking account.  Use it only to deposit business revenue, and pay for business expenses.  You can pay yourself out of that account.   Your business is probably simple enough that the checkbook basically becomes an income statement.  Each month the (reconciled) balance is essentially your profit for that month.  A bookeeper can help you set up Quickbooks or Quickbooks online and help classify expenses and identify more complex expenses that may be valid, like equipment depreciation, vehicle costs, home office expense, that may or may not apply.

In general, if you set aside about 25% of profit, you'll have close to the amount you owe in tax.

In your second year, you'll have to file 1040ES forms for quarterly estimated tax payments. It's easy and most tax programs and accountants will give you a coupon to use to attach and send the check. The amount will be based on your previous year income, so if your business picks up, be sure to save more for tax day.

Willn is correct, calculating your business should be fairly straight forward as long as you keep your records.  About 25%-27% of profit just for federal taxes and then your state taxes is what you should set aside.

[StarryC]

I have been a massage customer (pre-mustachian days) and here is what annoyed me:
1) Having to call to make appointments during business hours.  So, if I want a massage on Friday, I have to call ahead and make an appointment on Wednesday, while I am at work. 
2) Appointments available from 10-6, Monday through Sunday.  I work 8:30-6 during the week, and would love a late/early appointment but they aren't there. 

So, Perhaps this as an option, while you have office space.  If you are working as a contractor during normal hours, try to build a practice at your own space during odd hours.  Say appointments at 7, 8, and 9pm and 6, 7, and 8 am.  Put that on the cheap business cards you get from Vista Print and leave them at Starbucks, gyms, etc.  Go to a nice hair place in your town/ near your office and offer to do free 15 minute massages for all of the stylists on a Saturday morning, give them your cards, and ask them to refer their clients to you.  Maybe a nail place, too.  People who spend money on hair and nails are more likely to spend money on massages.   

See if you can find a free or cheap online scheduling website, so people can just go online, see when you are available and schedule.  No need to call and guess times, etc.   

Your budget isn't so bad: Try to reduce groceries.  Can you trade massages with a massage-school friend rather than paying money?