Remember to pick up your check
Dear Karen: How do I reasonably compensate myself during start-up?
Answer: Talk to your accountant or attorney about salary strategies and their tax implications. If you skip paydays, you are depriving your business of the basic tax deduction of owner compensation, said Bill Zimmerman, a consultant for Hartford Financial Services Group.
“If you can, set up a token salary for yourself. Review this figure periodically and raise it as you can,” Zimmerman said.
Your goal is to eventually compensate yourself in keeping with standards for your industry, or better. If the business cannot pay you for a period of time, have the business write you an IOU saying you’ve skipped a paycheck as a loan to the company. When business improves, pay yourself back.
An alternative to a regular salary is to pay yourself whenever your business can afford it. These special payments will be taxed as regular income. Make sure that you record all such transactions, as well as any missed or token paychecks and any personal funds you channel into the business, Zimmerman said. If investors raise questions, you’ll have all the documentation you need to provide answers.
Making mix tapes your business
Dear Karen: I have been making music compilations for friends who love them. Can I sell these products through a subscription service or would there be copyright problems?
Answer: Music junkies who make great mix tapes often think they’d like to turn their talent into a business. But the reality is that you’d have to have a lot of friends paying you a lot of money for this to make any financial sense, said Larry Weintraub, a former music industry executive who co-founded Fanscape Inc., which bills itself as a “new-media marketing agency.”
“For each song, you’d need to pay the person who wrote the song, the publisher and the owner of the recording -- usually the record company,” Weintraub said.
“It would cost several hundred thousand dollars just for one song.”
Technology might offer you some alternatives, however.
“If you are great at putting compilations together and people will pay you for your advice on what to buy, you can have them pay you simply for that advice. You could have people pay you a monthly fee and then you can tell them what songs to download, in what order, at a place like iTunes,” Weintraub said.
“If you use services such as Rhapsody or Napster, they have features where you can create playlists and then share them with other people. Both services often offer incentives or commissions when you bring in new subscribers.”
Putting your kids on the payroll
Dear Karen: I’ve heard that I can hire my kids to work in my business. Is this legal?
Answer: You can put your child on the payroll of your business for performing copying, filing, typing, cleaning services or other tasks that he or she is capable of performing and that you’d pay someone else to do if your child were not available, said Salim Omar, a New Jersey tax and financial educator.
“In 2007, a child can earn up to $5,150 and pay no federal income taxes on the earnings because of the standard deduction,” Omar said. “Your business can deduct wages paid to your child, provided the amount is reasonable and for bona fide work.”
If your business is not incorporated, you won’t have to withhold FICA (Social Security and Medicare) payroll taxes on the earnings of a child younger than 18.
Got a question about running or starting a small enterprise? E-mail it to ke.klein@ latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
