00:04:09 ◼ ► So first, I guess, the right place to start. And probably a fair disclaimer, this is going to be fairly US-focused, just in the sense of some of the things that we're going to talk about only apply to people in the United States.
00:04:23 ◼ ► I think the general lesson and the principle applies universally, but since A) we both live in the United States and the majority of our audience seems to live in the United States based on our analytics,
00:04:54 ◼ ► That you, in theory, could just start being self-employed as a sole proprietor, which is the fancy term for you're just a guy with a checking account who does work and gets paid, which is certainly something that you could do.
00:05:16 ◼ ► In general, it's good from a liability perspective. It's like the vague concept that a lawyer and accountant would talk about where you're separating your work you're doing from your own personal finances.
00:05:51 ◼ ► Which, going independent, if you aren't thoughtful and intentional about, those two things will very easily blur together and become problematic, both in terms of your time as well as in your finances.
00:06:01 ◼ ► So it's good to have it there, as well as from a professionalism perspective. It's nice that if you're going to have student consulting and someone's going to write you a check to pay you, that they're writing that to a company rather than just to you to your name.
00:06:22 ◼ ► I remember when I was starting, I worried a lot about what's the perfect type of company that I could start, and it's like, should I be an LLC? Should I be a corporation? There's lots of questions you can have there.
00:06:52 ◼ ► You can choose to be an LLC that's taxed as a corporation. There's lots of flexibility there, but you just need to decide. Get some good advice, make a decision, and then presumably you'll file a bunch of paperwork.
00:07:03 ◼ ► I know how it works in Virginia, where I live. It's basically you fill in a form and send it to the state corporation commission. At least for forming an LLC, you send a form to the IRS to get your employer identification number so that you don't use your Social Security number for everything.
00:07:33 ◼ ► Oh, man. So this is one lesson that I might interject here, is that for a very long time, I was the kind of person that I would do as much as I possibly could of the administrative stuff myself.
00:07:45 ◼ ► I used to do my own taxes, not so much once I started the business stuff, and that got pretty complicated. But for a long time, I did my own taxes. I would do all my own accounting, all my own basic bookkeeping and stuff like that.
00:08:23 ◼ ► And so it's like the idea of why would I give somebody $300 to do something for me if I can just do it myself? That's something that a lot of people don't, that isn't how they want to spend their money.
00:08:45 ◼ ► Businesses that are well run usually recognize, like, okay, in the grand scheme of this business, $300 is not going to be a make or break amount of money, and it's better to spend this on the professional doing all this stuff, not only for you, but probably doing it better than you would have done, or doing it correctly, where you might have missed something.
00:09:05 ◼ ► And so at some point early on in my self employment career, this switch flipped in my head where I'm like, oh, actually I shouldn't be the one filling out these papers if I can have my accountant create an entire new LLC registered properly in the state of New York and everything, and do all that for me for a small amount of money.
00:09:37 ◼ ► And then you don't have to worry if you either missed something or did something incorrectly, or like checked the wrong box on something that might affect some major attribute of your business down the road, or might create problems later if you do need to invoke the liability shield and things like that.
00:09:54 ◼ ► Like, it helps a lot to have professionals do that kind of stuff for you. And I feel like it is a difficult mindset for a lot of people to get into of like being willing to spend money on professional services that you think you can do yourself or that you even could do yourself.
00:10:34 ◼ ► I've never once heard a single case of the other direction where people regretted hiring professionals for modest sums of money to do things for them that the professionals were really good at.
00:10:43 ◼ ► So I would say when it comes to filing for a company or LLC or corporation, whatever it is, there are almost always lawyers and/or accountants who are nearby in every state who can do this for relatively small amounts of money. Just have them do it for you.
00:11:00 ◼ ► Yeah, I mean, I think that is very good advice. And I think it is certainly a transition that I saw in myself that I started off doing everything myself. And then now I'm in a different place now where I have professionals take care of a lot of this type of thing for me.
00:11:23 ◼ ► Because, which is part of honestly why at the beginning, there was the financial part of it a little bit, but also I wanted to make sure that I really understood that when I formed an LLC company in the state of Virginia, what that meant, and understood why I was doing that and the pros and the cons.
00:11:44 ◼ ► Just to make sure that you're able to take advantage of all of the advantages of whatever the, say, in this case, the type of company you have will have certain benefits to it. It will also have some drawbacks. And to understand what those are ahead of time.
00:11:58 ◼ ► And similarly, this is a more general point, but I always try when my accountant is telling me about something or when I'm going through my taxes, manual taxes with my accountant, I want to make sure that I understand what they're doing, not to the degree that they do, obviously.
00:12:15 ◼ ► This is the advantage of it being a professional, is that somebody who, they can tell you which of the dozens of opportunities or things that you could do or not do, you should do. But once they whittle that down to here's one thing that I think you need to take, you should do or you should structure yourself this way,
00:12:35 ◼ ► for me to make sure that I understand that. Because there isn't, as someone else, like ultimately you are going to be responsible for these choices. You're going to be the one who's going to be signing the paperwork and being ultimately held accountable for those choices.
00:12:48 ◼ ► And so, making sure that you understand what you're doing. So it isn't like, "Oh, I hired an accountant, they took care of everything, I don't have to think about it." There's a little bit of that. Like you can hopefully trust that they're giving you good advice,
00:13:00 ◼ ► but you want to make sure that you understand what you're getting into and understand the process enough. Like you don't need to go to the degree that I was doing back then when I was actually physically filling in the paperwork, but when they send you paperwork to sign, read it, make sure you understand it.
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00:14:01 ◼ ► And FreshBooks does so many convenient things. So for instance, one of the things they do is they automate late payment email reminders. So you don't have to spend so much time chasing down payments. You can really focus on your business and what you need to do for it.
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00:14:35 ◼ ► The next place that probably makes sense to start is you open up your spreadsheet. You're going to start off working out like, "Okay, I've decided what company I'm going to be. Now I'm going to start putting together a list of the expenses."
00:14:45 ◼ ► Probably the best expense to start with is to understand what the taxes that you're going to have to pay are. Because almost certainly, that is going to be your single largest expense for any business.
00:15:28 ◼ ► You're going to have to determine what taxes you need to pay and just account for the expense of them. Be aware that the taxes you're going to pay are very different and probably a bit higher than what you're paying currently.
00:17:29 ◼ ► Exactly. This is one area where my philosophy has always been to really conservatively set it, or really aggressively set aside money for taxes, basically, and really just estimate really high on it.
00:17:44 ◼ ► You said a third to half. I will frequently just assume that half of the money that comes in is not mine, even though my tax rate is not 50 percent, but it might be 30 to 40 percent for a lot of people, depending on what state you live in and what your income bracket is and everything.
00:18:00 ◼ ► So be very aggressive about setting aside money for taxes until you really know what that number is, which you probably won't have a great idea for it until you've been doing it for a year.
00:18:51 ◼ ► Some amount of that is going to go to taxes, but you're going to hold on to that for potentially up to like three months, and you need to make sure that you are being thoughtful about that so you don't find yourself at the end of those three months with a big liability that you can't cover.
00:19:06 ◼ ► So just as general advice, don't play fast and loose with those liabilities in terms of understanding that you're going to have this money that sort of feels like it's yours, but it isn't really yours.
00:19:17 ◼ ► And you're now responsible for making sure that when the time comes to pay the tax man, that you have the money to pay the tax man, and that you haven't sort of spent that money or forgotten that you're going to have to pay him down the road.
00:19:31 ◼ ► So one trick you can do for this that I learned early on, especially when you're new to it and you're kind of getting the hang of how this all works, a really good thing you can do, there is nothing saying that you can't pay more in estimated taxes than you need to, or that you can't pay more often than you need to.
00:19:49 ◼ ► So one thing I would do when I was mainly starting out with Instapaper, and this was actually fairly easy because all the income was coming from Apple at the beginning, so every month I would get one giant deposit from Apple, and then I would literally monthly pay estimated state and federal tax.
00:20:07 ◼ ► And not based on a very carefully calculated estimate, I think I looked up whatever the top tax bracket was, I think it was 38.5% or something like that for federal, and New York State was something like 7%, or something like that.
00:20:31 ◼ ► And sure, at the end of the year I would have overpaid, but not by that much, and it was, and then your end of the year payment considered a bonus that you don't have to make some of that payment depending on what your accountant tells you.
00:20:43 ◼ ► And so this, you know, accountants used to tell you, like, oh, you should never pay more than you have to, or even earlier than you have to, because you're giving the IRS an income-free loan, you know, why don't you keep it and get the interest?
00:20:55 ◼ ► And that made sense back when interest rates mattered, but these days the interest rates are so low on, like, checking and savings accounts and things that there's not a lot most people can do with that money in the meantime anyway that isn't a huge risk, that would actually get them more, you know, any kind of meaningful return.
00:21:14 ◼ ► So when you are getting the hang of this, if you're freaked out about taxes, which you probably should be before you know what they are, then actually making, like, every month, whatever you made that month, giving a fixed and fairly aggressive percentage in an estimated payment to federal and state governments is not a bad thing to do.
00:21:34 ◼ ► It's actually, I find it very helpful, because then I knew when the money came in, I gave this to federal, this to state, and the rest was pretty much mine. Like, I knew how much was mine, and it was a pretty good estimate.
00:21:46 ◼ ► Yeah, and even more importantly, the last thing you want in the area of taxes are surprises. Or at least surprises that are expensive. Yeah, surprises in one direction. Yeah. It's great to be surprised at the end of the year. It's like, "Hey, here's, you know, here's four or five thousand dollars that you're getting back as a rebate." Like, great.
00:22:06 ◼ ► Like, that's a good surprise. The surprise the other direction can be very problematic. And so yeah, I didn't do quite as aggressive of a plan as you did, but I definitely, at the very least for your spreadsheet purposes, make sure you're not trying to be like best case or optimistic or whimsical about your tax rates.
00:22:25 ◼ ► Like, be overly conservative there. Work out what the worst case is or what the worst case would look like, and then plan accordingly. And either take that money and put it into a separate account, prepay it ahead of time, however you're going to account for it.
00:22:38 ◼ ► But make sure that you're being conservative about it enough that you're not going to get caught out at the end, because that sounds like a very, very bad situation to find yourself in. Exactly.
00:22:49 ◼ ► All right, so there's going to be a variety of things that we're going to talk to, and I think it'll end up probably being two episodes. But before we get into some of the other expenses you may have, it probably makes sense to just also talk to a little bit about the way income will likely work, so that you can kind of, as you kind of are putting together these expenses and these counterpoints, and even just for the purposes of your taxes, you need to a little bit understand what your income is going to be, to know what bracket might make sense and so on.
00:23:18 ◼ ► So the income you get will depend a lot on the kind of work you do. For the purposes of this, if you're going to be an independent iOS developer of some form, that is almost certainly going to start off involving some amount of consulting, and maybe, I think we would both recommend that trying to diversify that into product income as well would make a lot of sense.
00:23:43 ◼ ► But initially, it's likely going to be largely consulting-based, where you're doing work-for-hire type of development. And that kind of work is probably the first thing to say, is that kind of work has an income profile that is incredibly bursty, that it is so inconsistent.
00:23:59 ◼ ► You will have one month where you, one or two months of the year will account for 80% of your income, and you'll potentially go for stretches of two or three months where you have zero income, which I think is mostly something to keep in mind.
00:24:16 ◼ ► A) If that's going to freak you out and drive you crazy, then this is going to end up being very problematic for you, because you just kind of have to get used to the fact that your income isn't direct deposited into your bank account every two weeks.
00:24:31 ◼ ► Though you can, actually, as a side note, one thing that I will encourage you to do is to think about if you like that, or if you, from a disciplined perspective, it appeals to you, you can still do that. You can just pay yourself on a regular basis.
00:24:46 ◼ ► This is something that I switched over to fairly early on in the process, where my business would pay me on a regular basis. And I just meant that on a personal level, I could kind of continue to budget and manage my finances like I used to when I had a regular job.
00:25:02 ◼ ► And my business would just sort of truck along as normal. And as long as my income in aggregate had exceeded my payroll that I was paying out over time, it was fine. And I found that to be really helpful.
00:25:16 ◼ ► So just keep that in mind. But either way, on the business side, your income is going to be fairly bursty. And honestly, even if you have product-based income, it's still going to be fairly uneven.
00:25:42 ◼ ► Where I would make 10 or 15% of my revenue in the two or three days around Christmas every year. And so whenever that gets paid to me, which is probably in February, which is also important to remember that your income is delayed by at least two or three months, it could be very uneven.
00:26:33 ◼ ► It's something that I will say that once you start invoicing clients for things, even though those clients may be paying you later than the work was done, eventually it starts to even out.
00:26:45 ◼ ► And it kind of works out. But it's certainly something that you're going to have to work out for yourself. Like how much runway do you need in terms of how many months of expenses do you want to be able to cover and what level of income is that going to require?
00:27:33 ◼ ► And there's no rhyme or reason between whether they're big or small, rich or poor. People pay at vastly different rates. They'll give you every excuse in the book why they have to pay so slowly.
00:27:46 ◼ ► But the fact is they can pay as quickly as they want and most companies don't need to pay quickly, so they don't. So you might actually be doing work and getting paid for it two to nine months later.
00:28:12 ◼ ► And it's probably also fair to say this is another area where diversifying your income can help a lot with that. It's very problematic, or at least dangerous, I suppose. If your entire business is based on one consulting client paying you, that is just a very precarious situation.
00:28:45 ◼ ► That business may just go out of business, and not for anything that you did or they did, it's just like the market turned down or whatever, and suddenly you never get paid for that six months of work.
00:28:55 ◼ ► If you have a diversified income source, that would still be awful and not great, but at least if you have different things. And so if you can find other ways to get income that you'll have, you know, you maybe have you have affiliate income from links to your apps in the App Store or to other apps, or you have a podcast that has sponsorships, or you have, like we've said, product and consulting.