Monthly Archives: February 2013

Administrative , , , 1 Comment

Taxes: The Home Office Deduction

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Are you about to do your taxes,  Freelancer friend?  Read this post first and find out if you are able to deduct expenses for your home office.  The IRS sets a high bar for this deduction,  but if you pass the qualifiers,  it’s all yours.  Tele-commuters and outside sales reps might also deduct home office expenses.

1.   The space must be used exclusively and regularly for business purposes only and not for your personal life.  The space must be used regularly for business  and not just a few times a year.   Those who live in small apartments are at a disadvantage because no room can be consigned to business only.   However  if you use the space regularly for business,   it is not necessary to partition it off to demonstrate that you have established a separate workstation.   A desk in a corner of a room qualifies as a workstation,  along with a  “border”  of a few square feet.  Outside sales reps who must store product samples and marketing collateral at home can also include storage space square footage in the home office deduction.

2.   Does your home office exist primarily for your convenience,  or for the convenience of your employer or clients?  If your employer or clients have provided a location at which you may regularly conduct business,  then you are not allowed to deduct home office expenses.  To take the deduction,  you must have no other work space available  (you and your computer at Starbucks is not a disqualification).  Employees and independent contractors may have to give documentation to the IRS.  A letter from the employer stating that there is no office space provided for you and/or receipts for un-reimbursed business expenses and supplies will suffice.

3.  If you have more than one home-based business,  all businesses must meet the first two tests:  you cannot have any office space made available to you by a client or employer and you must devote that space  exclusively and regularly to business.  If any entity for whom you work provides regular office space for you,  then you are not allowed to claim the home office deduction and it’s an all or nothing proposition.   However,  disqualification from the home office deduction does not mean you cannot deduct other business expenses.  You are still eligible to file Schedule C  (Freelancers/Independent contractors)  or Form 2106  (outside sales reps and other employees)  to deduct other un-reimbursed expenses incurred while doing business.

Are you ready to complete Form 8829 Expenses for Business Use of Your Home?  To get started,  measure the number of square feet used at home exclusively for business purposes  (maybe measuring storage closets and the area of your desk,  plus a  “reasonable”  border,  instead of an entire room)  and divide that number by the total square feet in your home.  If your office is 12′ x 12′,  you have 144 square feet of office space.  Let’s say your apartment has 750 square feet of space.  Divide the area of your office by the area of your apartment: 144/750 equals 0.192,  or 19.2%.

That figure represents the percentage of your home that is devoted to business,  the percentage of the year’s home expenses you may charge off to the business and deduct.  There are direct expenses and indirect expenses to calculate.  The fraction applies to indirect expenses,  i.e. the total year’s utilities,  rent/mortgage,  taxes,  home insurance,  etc.  For example,  if you spent $800.00 on last year’s electricity,  you may deduct 19.2 %  x  $800.00 or $153.60 for that category.  Expenses incurred solely for the benefit of your workstation are the direct expenses.  Office supplies,  postage and office furniture are direct expenses.  Add your direct and indirect expenses.

The final test is,  does your home office deduction exceed the revenue generated/income?  Your home office deduction cannot exceed the money generated.  So if your business earned $1000.00 and your home office deduction adds up to $1200.00,  you may only claim $1000.00 for your home office deduction.  But that extra expense does not get wasted.  You may carry it forward to add to a future home office deduction in a year when revenue exceeds expenses.

The bottom line Form 8829 number is recorded on Schedule C  (Freelancers /Independent contractors)  or Form 2106 and Schedule A  (outside sales reps and other employees).  Employees must itemize deductions  (hence Schedule A),  to which the home office deduction is added to other un-reimbursed business expenses and all other Schedule A deductions.  Those deductions must exceed 2% of your adjusted gross income.  For more detailed information specific to your situation,  speak with an accountant or tax attorney.

Thanks for reading,

Kim

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Where the Freelance Money Is

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You’ve written a business plan—now what?  Kim is the midwife who helps you take your business from the drawing board to reality in  “Business Plans:  Next Steps”.  Bring your completed business plan and join Kim and other hopeful entrepreneurs in round robin discussions where you’ll get a critique of your business model;  smart marketing/PR/social media  advice;  insights into sales distribution channels that make sense for you and your customers;  and suggestions on how to finance your business in today’s economy.  Wednesdays March 13,  20  & 27  5:30 PM – 7:30 PM at Boston Center for Adult Education 122 Arlington Street Boston.  Register at  http://bit.ly/Zd9dqR   or call 617.267.4430 class ID 9074.

Some Freelancers are more likely to earn the coveted but elusive six-figure annual revenue than others.   Maybe you’re there or could be,  with some good luck and timing,  opening doors with the right skills.  Here are six potentially lucrative occupations that attract Freelancers:

Writing

Magazines do not often pay $2.00/word anymore and there are only so many 5000 word articles bring commissioned in this era of short attention spans,   but allegedly there a number of Freelancers still able to pull in big money through writing assignments of various kinds.  This category includes not only magazine and newspaper article generation,  but also technical writing.  I am acquainted with two or three Freelancers who’ve made a nice piece of change in the latter category.  It’s very boom and bust,  but the money is sometimes there.   Also,  Freelancers pay Freelancer colleagues to produce content for websites,  blogs,  newsletters and marketing collateral.   Writers need no special equipment,  other that a computer and writing software like Apache OpenOffice or Scrivener.  

Translating

I have a friend who regularly gets assignments translating Arabic and German to English and vice versa  (hello George!),  although he has other revenue streams in addition.   According to the American Translators Association,  their certified translators average $72,000/year and those without that certification average $53,000.   As you’d expect,  much depends upon the language you translate.   No surprise that there is a big demand for Spanish translation,  with Arabic,  Chinese (Cantonese and Mandarin),  French,  German,  Japanese and Korean also showing strong demand.

Photography

Photography has long had the potential to produce a healthy Freelance income.   Wedding photographers have traditionally commanded large sums and they continue to do so,  in spite of robust competition from videographers.   Portrait photographers also command high prices—business owners and corpoate execs need a professional headshot for websites,  annual reports and other promotional uses.   E-commerce fattens the wallets of product photographers,  who make items sold on-line look appealing.  Food photography and fashion photography are lucrative sub-specialties.   Those lucky enough to have an  “in”  with colleges and/or big corporations can make a nice living,   as do those who have relationships with busy special event planners.  The downside is that good cameras and Adobe Photo Shop editing software are expensive.

SEO Search Engine Optimization

Freelancers who hope to drive traffic to their website pay confreres Freelancers for this potentially revenue-generating service.   Those new to the field can expect to bill $50.00/hour and allegedly the best known can command up to $500.00/hour from big corporate clients.  It is furthermore essential to be well-versed in the various metrics that prove your worth to clients,  so that satisfied customers can be recruited to give testimonials that help you obtain more clients.

Mobile App Development

Writing software applications for mobile devices like cell phones and tablets lured one million Freelancers to the field in 2010 and no doubt that number has grown significantly.  App development is like a modern day gold rush.   I recently read an article in the New York Times  (11/17/12)  about those who aren’t making money in the app development business and that is the usual scenario.  As author David Streitfeld details in his comprehensive article,  don”t quit your day job and developing for Apple is akin to sharecropping.   Still,  you may be the one who can retire on the residuals of the next  “Angry Birds”.  Another downside is that you must spend a hefty sum on the technology needed to test your apps in development.

Social Media Strategy

Millions of Freelance consultants and owners of businesses large and small feel that social media cannot be ignored and that in order to maximize its potential and not leave money on the table,  a specialist must be hired.  If you can convince decision-makers that you know how to choose social media that is appropriate for their business,   plan and execute a social media campaign and know how to  demonstrate measurable results,  you can be off to the races.  Newbies to the field can expect to bill $25.00 /hour and top-drawer known experts can allegedly bill $250.00 /hour to big corporate clients.

Thanks for reading,

Kim

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Business Model Tune-up

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You’ve written a business plan—now what?  Kim is the midwife who helps you take your business from the drawing board to reality in  “Business Plans:  The Next Steps”.   Bring your completed business plan and join Kim and a group of hopeful entrepreneurs in round robin discussions where you’ll get a critique of your business model;  smart marketing/PR/social media advice;  insights into sales channels that make sense for you and your customers;  and advice on financing options in today’s economy.  Wednesdays March 13,  20  &  27  5:30 PM – 7:30 PM at Boston Center for Adult Education  122 Arlington Street  Boston.  Register at  http://bit.ly/Zd9dqR  or call 617.267.4430 class ID 9074.

A cloud of worry and paranoia envelopes business leaders and other decision-makers and in their role as B2B clients,  they become more fickle and gun-shy every day.  They brag about postponing projects and declining to spend money.

To survive and thrive,  it is therefore  essential for Freelance consultants and other business owners  to make an annual assessment of the company’s business model and evaluate how the organization can deliver the right services in the right way and demonstrate to clients that the value you bring improves the bottom line and makes clients look smart to the higher-ups.

The business model is the blueprint for the process your organization follows to connect with clients,  deliver services and make and sustain a profit.  The business model reflects what you believe about what clients need and value,  the way in which those needs ought be addressed and solutions delivered and what clients will pay to obtain those solutions.   Additionally,  the business model shows the business leader how to make his/her organization function efficiently for leader and clients. Perfecting it is the cornerstone to success  (along with a healthy dose of good fortune!).

The most direct way to check up on your business model is to take a good client to a restaurant for some combination of libation and/or meal at the conclusion of a project,  when the client’s trust in you is high because you’ve delivered the goods and exceeded expectations.  You will likely be able to persuade your client to open up and tell you what’s going on in the organization as regards challenges and opportunities,  plans for the future,  services that are valued and the preferred method of delivery for those services.

You are certain to learn all sorts of useful information that will tell you how you might refine,  adjust,  package or price your services.  Knowledge of your client’s priorities and concerns is the first step to winning the project that does the work to address them,  says Alexander Osterwalder,  co-author of  “Business Model Generation” (2010)  and founder of The Business Model Foundry  http://www.businessmodelgeneration.com

Knowing how your clients can get the job done without you is also useful (although painful!).  As I mentioned at the beginning,  your real competition may not be another Freelance consultant but the client,  who decides to table the project indefinitely or do it in-house.  That’s not easy to counteract.  Your only defense is a solid business model that helps you position and promote your solution as preferable in some vital way.

Flexibility in your business model is a necessary feature if you expect your business to make a profit.  The need to adapt to shifting client preferences may require you to selectively experiment and reconfigure the services you offer,  or how you package and promote them.

Updating the keywords you use in marketing campaigns and online and print collateral will help clients and prospects to visualize where your services might have a place within their organization,  so stay up-to-date with industry concerns and buzzwords.  Keeping abreast of client needs allows you to successfully adapt your business model and promotional message,  keeping your organization competitive and able to stay profitable.

Thanks for reading,

KIm

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Got Help?

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Freelance consultants usually work solo,  building a client base gradually over time,  developing and refining our personal brand and deriving great satisfaction from operating our boutique enterprise.  We take pride in keeping the show on the road all by our lonesome,  whether we’re making a killing or bumping along.  Especially in a troubled economy,  fear of an inconsistent paycheck causes the majority of us to avoid hiring help.   However,  an unbiased examination of reality may show that this practice could depress one’s earning potential.  To test the premise,  I invite you to ask yourself four questions.  Do any of these conditions exist  in your business?

  • You neglect following up on leads because you’re too busy working,  servicing clients or doing administrative duties such as billing and bookkeeping.
  • You’ve turned down business,  because you don’t have time to take on another client.
  • Revenue is no longer growing because you are not meeting prospects that you can persuade to become new clients.
  • You have only one client (although perhaps a good one).

Hiring help may resolve those problems,  but the process can be scary.  Who can you trust to enter your business,  advance its goals and not make you look bad? Can you be certain that there will be sufficient cash flow to make payroll?  Which duties should you hand over to an outsider?

The decision to hire begins when you let yourself recognize when it’s time to hire.  To ease your fear,  re-frame the scenario and think of an employee not as an interloper and a drain on your expenses,  but as a potential revenue enhancer who will give you time to apply to activities that will grow your business.

You’ll need a job description,  so decide what it is you dislike doing and what functions can be taken from your plate.  For example,  if you dislike billing,  bookkeeping,  answering the telephone and/or making Power Point presentation slides,  you’d hire an administrative assistant.  A call to Katharine Gibbs or other secretarial schools will give you a source of applicants who are vetted through the school and likely to be qualified and trustworthy.

If prospecting and account executive duties are not your favorite,  then you need someone who will help fill your sales pipeline,  follow-up on potential speaking and teaching engagements,  write press releases and assist with certain client needs.   Vetted candidates with marketing and sales skills can be accessed through university MBA programs.

Next,  make a quantitative assessment by doing a 12 month revenue projection,  to demonstrate that you can comfortably expect to meet all fixed and variable expenses,  including your owner’s draw,  and also fund an employee.   Search Craig’s List to determine the going hourly rate in your geography for the skill set you need.  Following that,  check with your accountant or tax attorney and get the latest info on tax breaks for hiring within special categories,  such as the long-term unemployed,  and how that can help subsidize your employee.  Your tax attorney or accountant will also advise you on payroll withholding and may do payroll for you  (or recommend a bookkeeper or payroll service).  All those expenses will be included in your hiring process financial projections.

Interview three or four candidates.  Check references.  Start small and hire someone for a three month trial for maybe 8 – 10 hours/week,  to see how things work.  Once you get your new hire trained and operating at full capacity,  you may be pleasantly surprised by how much more revenue-generating work is taking place!  If for some reason your new hire isn’t working out,   make sure that you are communicating expectations appropriately.  If you can assure yourself that you are doing so,  then hire another candidate.

Establishing a profitable business requires the effective  management of all resources and that includes staffing.  Freelance consultants must be especially aware of resource management,  because we go it alone and the  list of what it takes to run a viable business continues to grow.   We love what we do,  but keeping the bases covered is time-consuming and can be  exhausting.  Before you dismiss the idea of hiring help,  realize that doing so may limit business growth and revenue.

Thanks for reading,

Kim