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Ask Stephen G. Your Own Question

Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 4037
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I am starting a new business that will provide editing and

Resolved Question:

I am starting a new business that will provide editing and design services to independently publishing authors.

I have set up the business as a single-member LLC. Clients will be taken on a by-project basis. I will be performing the vast majority of the work and any projects that I cannot complete myself will be offered to a few select independent contractors.

I am currently drafting my business plan and am working to develop my financial projections and am struggling to figure out how to account for payments made to ICs and myself.

Let me use a specific example to demonstrate.

I offer beta reading services at a rate of $62.50 per 50 pages. If I utilize an IC to perform the work, I pay them a rate $50 per 50 pages.

Currently, in my sales forecast, I am accounting for the cost of paying that $50 to an IC in my direct costs. Is that correct?

Now, what if I do the work myself? Should I also include that same $50 as part of my direct costs? Or would it be better to calculate a percentage of the work I think I will do myself and account for that in a monthly salary and only account for the fees paid out to IC in my direct costs?
Submitted: 1 year ago.
Category: Finance
Expert:  Stephen G. replied 1 year ago.

Stephen G. :

Well, first of all, just a general comment that if you are only receiving 62.50 as revenue, it seems rather high to be paying out 50.00 to an independent contractor, leaving only 12.50 to cover your overhead & profit.

Stephen G. :

As far as your question with respect to direct costs are concerned, are you talking about how to reflect both the IC payments and your efforts for your business plan or for income tax purposes?

Stephen G. :

You realize that as a single member LLC you can simply file a Schedule c with your personal income tax return to reflect the activity of the LLC?

Stephen G. :

LLC's are "disregarded entities" for federal income tax purposes, which means that there is no separate income tax form for the LLC to file. There are various options available, but in your case, the best and easiest options is to file a Schedule C with your personal returns.

Stephen G. :

What are you planning to do with your business plan?

Stephen G. :

Are you there?

Customer:

I know that margin is low, but my overhead is also extremely low. It really just takes an internet connection to provide this kind of service, and the plan is to do the vast majority of the work myself.

But for those times when I have to pay a IC, I am unsure of where to account for those costs. Because that cost to pay an IC is by project, can I include it in direct costs? Is that where it belongs?

And yes, I know the activity of the LLC is accounted for on a schedule C. I guess my question is more about how to present it within the business plan. I will be using the plan for a business grant offered by a training program I attended at Syracuse University.

Stephen G. :

OK

Stephen G. :

Well, yes the IC costs would be a direct cost, but in your business plan, based upon the fact that you are going to do the work yourself, your compensation would simply flow to the net profit of the activity. There is really no reason to have a separate category for "direct costs"; you aren't making a product, which is when that category is most useful.

Customer:

Okay....that makes sense. Thank you! So if I estimate I will do 85% or 90% of the work, do you think it would make sense to show projections for the remaining 10-15%...and demonstrate the direct costs for that percentage of the work? Or better to just make note within the plan itself about how I intend to use ICs?

Stephen G. :

You can't pay yourself a salary as an employee or a payment as an independent contractor; any withdrawals to yourself are not "expensed", they are simply reflected on a Balance Sheet as "Owner's Draw"; those payments do not affect "profit"; that's how a sole proprietor accounts for any withdrawals of profits during the year.

Customer:

that also makes sense...I am paying tax on all profit, whether I leave in the business account or cut myself a check. Thank you for helping to make that clear.

Stephen G. :

Showing direct costs at all would tend to be misleading; you would just show what you expect to pay IC's as "Subcontracted Project Cost" or something similar. Just a regular expense. You can explain how you intend to use them, just as you did in your question and your responses to me.

Customer:

Great! That will make the whole process so much easier. And make my revenue and margin look a lot better, too!

Customer:

Thank you!

Stephen G. :

What is the purpose of the grant & what do you plan to use it for?

Customer:

It is a general business grant, awarded for completing a viable business plan.

The plan is to use the money to build out some specific features into my website. I can handle most of the programming, but there are a few things out of my range.

Stephen G. :

In your cost projections & business plan, how do you plan on obtaining business? Do you have an advertising budget or how are you going to market your services?

Customer:

I have some advertising costs built in, but word of mouth, especially in my particular field goes a long way. I have been active in the independent writer community for years, and I am not even really in business yet and have clients lining up. Independent publishing is growing...so hopefully this is something that will be able to sustain. :)

Stephen G. :

OK, sounds like a plan........................

Customer:

Thank you again for helping to clear things up! I appreciate it!

Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 4037
Experience: Extensive Experience with Tax, Financial & Estate Issues
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