Form 1099 Changes for Tax Year 2020

Freelance Consultants will soon receive from clients who were billed $600 or more in tax year 2020 the IRS Form 1099 and as many of you may have heard, changes were made. The general rules concerning who must file the form remain the same, but there are now two versions —-the 1099–NEC and a recalibrated 1099–MISC. Freelancers must receive their appropriate Form 1099 no later than February 1, 2021. The 1099–NEC cannot be downloaded online, but must be ordered from the IRS website.

1099–NEC (non-employee compensation) will be filed by Freelancers and that includes attorneys. Clients must send out this version of the 1099 when:

1. Payments of at least $600 were made during tax year 2020 to an individual (or company) who provided services to the client company but who is not formally employed by the client company.

2. Payment was made for services rendered and not for products or merchandise.

3. Payment was made to an individual, partnership, or other unincorporated entity. With the exception of attorneys or law firms, payments to either C or S corporations are not recorded on Form 1099–NEC or 1099–MISC.

Freelancers who file 1099–NEC will report their income on IRS Schedule C (Profit or Loss from Business), a supporting document of Form 1040. Your client should ask you to complete IRS Form W-9 if you bill, or expect to bill, $600 or more in the year.

Clients would traditionally mail to the Freelancer a hard copy of 1099-NEC (copy B), but the client may ask, or Freelancers can request, that an electronic copy be sent instead. Email correspondence between client and Freelancer, in which the Freelancer consents to receiving an electronic 1099–NEC from the client, is all that’s required to authorize the electronic format.

1099–MISC will be filed by recipients, including Limited Liability Companies (LLC), of $600 or more in rent payments (landlords), plus prize and award winners who receive $600 or more and recipients of royalties in excess of $10.

Other types of 1099–MISC income includes payments to an attorney or law firm for fees other than legal services, payment received from a legal settlement, fishing boat proceeds and non-qualified deferred compensation.

Freelancers and merchants who accept credit and debit card payments (maybe on Square, Stripe, or PayPal) will receive Form 1099–K from payment processors if those payments amounted to $20,000 or more and 200 or more transactions took place during calendar year 2020.

The card transaction income reported on 1099–K confirms for both the business and the IRS that income reported on 1099–K and Schedule C aligns. However, the business may also receive checks or even cash, so Schedule C income may be greater than 1099–K income.

The 1099 is part of federal taxes, but 39 states also require it to be filed with annual taxes. States that do not require the 1099 to be filed at that time are: Alaska, Florida, Illinois, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

Did I mention that 4Q2020 taxes are due on Friday January 15? Just saying.

Thanks for reading,

Kim

Create a New Client Onboarding Process

Freelancers and other business owners and leaders understand the importance of periodically reviewing and assessing the experience they present to those who agree to pay for their products and services. Business owners and leaders must continuously strive to offer the best experience possible to those willing to do business.

For B2B service providers, creating a pleasant and efficient process that welcomes, i.e. onboards, new clients is Step One in affirming that the decision to do business with your company was sound. Good onboarding is good business.

Sets the stage for a good working relationship

Demonstrates your organization’s competence and efficiency

Brand-enhancing

Kicks-off the customer retention strategy (begin with the end in mind!)

Develop an onboarding process that skillfully guides your clients and demonstrates that your organization anticipates needs and questions and take extra steps to eliminate miscommunication that may lead to misunderstanding, confusion, or disappointment. The goal is to assure your new client at every step that you’ve got this.

A videoconference call or an email from the project leader, perhaps joined by one or two other company leaders, is a good basic onboarding gesture. Do this to personally welcome the new client and express how excited you are to work with him/her. If you have a case study or two and you haven’t already shared them, send them now, to reinforce your experience and expertise in providing the solutions your client requires.

In a videoconference call or basic phone call, ask the client to review what a successfully completed project will look like. The answer will confirm exactly what your organization must deliver to fulfill or exceed expectations and make yourself eligible for repeat business. Take notes to ensure you understand the metrics the client will use to define success—results such as sales conversion rate or quarterly revenue or a deliverable such as a website upgrade or new logo.

On the call, confirm the project timeline, project milestones and payments linked to the contract signing and milestones. Confirm all resources that the client will provide to support the work, such as support staff and what that individual will provide.

You want to know early in the process if you have the labor needed to do the work and how it would impact the preferred timeline. Bear in mind that because this process includes client input, your organization receives instant client feedback and agreement and demonstrates your ability to communicate and collaborate.

Confirm all agreements in an email to the new client to complete the onboarding process. Top it off with a few branded swag items if you have any—pens, note pads, tote bags, water bottles and the like, if you have them, shipped to your client’s office.

After reviewing and confirming the project scope and milestones on the call, confirm in an email to further cement everyone’s understanding. Your client will appreciate your attention to his/her needs. Make it obvious that your goal is to do excellent work and make the client look good to the higher-ups at his/ her company.

Merry Christmas and thanks for reading,

Kim

Photograph: Cunard Line’s Queen Mary made her maiden voyage in May 1936.

5 Health Insurance Plans for Freelancers

The open enrollment period for obtaining health insurance, or changing to another insurance provider or modifying your plan options, began on November 1 and will end on Tuesday December 15, 2020. Your new or renewed health insurance plan will activate on January 1, 2021.

If there have been changes in your household status or income, report those changes to your current provider, since the change may impact the insurance you’ll need and/ or its cost. If you were married earlier in the year, or if you and your spouse became parents, that represents a change in household. If your income has significantly declined, perhaps because of a COVID related loss of business, that information should also be shared with your current insurance carrier, particularly if you’re enrolled in a Marketplace plan (update your application).

Freelancers should remember to deduct the cost of medical and dental insurance premiums on your annual tax return. Be advised that you cannot deduct more than the amount of your net profit for the year. If the business didn’t make a profit, you don’t get the health insurance tax deduction.

With Freelance consultants in mind, Investopedia Magazine examined 15 health insurance companies and determined that the plans listed below offer the most comprehensive coverage for individual purchasers (i.e., Freelancers) at the best price. The cost of insurance will vary by state, applicant age, family size, the type of plan and factors such as smoking.

Medical, dental, vision, Medicare, Medicaid, supplemental insurance and prescription drug coverage are available in most plans listed here. Sign up through the insurer’s company website, your state health insurance exchange, or at http://healthcare.gov. The plans are presented in ranked order.

BlueCross BlueShield

In business since 1929 and probably the most familiar health insurance provider in America, BlueCross BlueShield is actually an association of 36 independent companies that operate nationwide. It could be said that the company’s primary advantage is its extensive healthcare provider network and the familiarity of its brand.

The BCBS network serves 107 million member customers in 50 states plus Washington, D.C. and is affiliated with 96% of hospitals and 95% of physicians in the country. Americans living overseas are able to obtain coverage and receive healthcare services through the BCBS global network of providers.

Dental, hearing, vision, supplemental, Medicaid and Medicare are available in most states.

UnitedHealthcare

Along with offering health insurance in all 50 states, UnitedHealthcare is known for its technology, which is said to enable its providers to deliver care and related administrative services more efficiently and as a result, do so at s lower cost than comparable competitors.

UnitedHealthcare Group is the largest health insurance company in the nation, operating in all 50 states plus 130 countries. In 2019, the company counted 1.3 million physicians and other healthcare professionals plus 6,500 hospitals in its network. Medical, dental, vision, prescription drug, Medicaid, Medicare and supplemental coverage is available.

Kaiser Permanente

Kaiser Permanente has a focus on preventive care, based on the company philosophy that prevention of illness keeps customer members healthier and saves them money in the long run. The company is known for a high level of customer satisfaction and retention.

The downsides are that Kaiser operates in just eight states —-California, Colorado, Georgia, Hawaii, Maryland, Oregon, Virginia, Washington plus Washington, D.C. Moreover, it’s physician and hospital network is lacking. Kaiser serves a whopping 12.4 million members, but there are just 23,261 physicians, 63,306 nurses and 39 hospitals in its network.

Cigna

The company was founded in 1792, making it one of the oldest corporate entities in the country. That said,the company is ahead of the curve in responding to the new normal and was out in front of the competition in offering virtual medical, including behavioral/ mental health appointments and prescription drug delivery in partnership with Express Scripts, the largest pharmacy benefits manager in the U.S.

Cigna is international and provides health insurance to 180 million member customers in 30 countries. In its global network there are 1.5 million healthcare providers and facilities—-physicians, nurses, hospitals and others.

In the U.S., Cigna offers individual plans in just 10 states—-Arizona, Colorado, Florida, Illinois, Missouri, North Carolina, Tennessee, Utah and Virginia and there are 500 hospitals in the U.S. network. Depending on where you live, dental, vision, Medicare and Medicare Supplemental will be available.

Oscar

New kid on the block Oscar was launched in 2012. The company’s calling card is customer service, a consideration that may be especially attractive to Freelancers and other business owners who are left to navigate the complexities of health insurance on our own.

Oscar currently operates in 19 states—-Alaska, Arizona, California, Colorado, Florida, Georgia, Iowa, Kansas, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas and Virginia. In 2021, the company expansion plan is to enter major markets in the states where it does not yet operate. Currently, Oscar provides primarily HMO health insurance and Medicare plans to 420,000 member customers and does not cover out-of- network provider claims.

Oscar offers its Doctor on Call feature that gives free, 24/7 access to a healthcare provider. Another featured offering is The Concierge, where a dedicated team of guides and nurses will answer your questions and help you save money. Oscar members can access the services of Doctor on Call and The Concierge through a mobile app that also gives access to your medical records, laboratory results, deductibles and other related information.

For more information on obtaining medical and also dental insurance, Freelancers can explore what is offered through the Freelancers Union. https://www.freelancersunion.org/insurance/health/

Happy Thanksgiving,

Kim

Photograph: Kim Clark

The Captain and the Team

According to a U.S. Census Bureau report that documented business activity through the first 37 weeks of 2020 (i.e., 3Q2020), COVID-19 related business closures, some temporary and some permanent, have resulted in an unexpected outcome. Counterintuitively, there have been relatively few personal bankruptcies but rather a surge of legal entity applications filed by Freelancers and entrepreneurs who will likely to hire employees. It is clear that lay-offs and furloughs have convinced many former American workers to trust their own skills and ambition more than the uncertainty of being rehired.

Applications to obtain limited liability company or corporation status by Freelancers increased 16% over the same period last year, according to Census Bureau data. Might the urge to become one’s own boss be fueled not only by doubts about re-employment, but also the infusion of stimulus money? The price of entry into self-employment is low for B2B service providers and stimulus money is a natural for bankrolling start-up costs.

Still, self-employment as either a Freelancer or business owner and employer is no cakewalk. The biggest challenge to self-employment success will be acquiring clients; savvy and consistent marketing and your relationships will go a long way to help the business, but selling a product or service that has an adequate customer base is the deciding factor.

2019 Bureau of Labor Statistics data show that 20% of small businesses fail in the first year of operation and only 50% or so will survive into year five (there is no data collected for Freelancers, sole proprietors or those with a legal entity). There is a lot to plan for when launching a business, plus Key Performance Index metrics to monitor, interpret and act upon (or not).

First, know there is a sufficiently deep market for the products or services. Second, know how to access the customers. Third, devise a sustainable and appealing business model. Fourth, secure adequate funds to provide working capital that allows the operation to cover expenses and otherwise function.

Another important resource for Freelancers and business owners is a team of experts from whom you can seek advice and guidance. Freelance consultants and even small business owners are responsible for all decisions. The stress can be overwhelming. It’s impossible to be highly knowledgeable in several fields simultaneously and qualified to make wise decisions all or most of the time. It is very helpful to put together a stable of specialists on whom you can rely when important decisions must be made. Below are professionals whose guidance and advice nearly every Freelance consultant or business owner will need from time to time.

Accountant

An accountant will make sure that the business quarterly estimated taxes are acceptable and filed on time, so that the annual April 15 filing will not result in a surprisingly expensive tax bill due. A good business accountant will also review the financial statements and can make useful fiscal management suggestions. An accountant will also advise you on whether to incorporate the business or form a limited liability company. Finally, if obtaining a loan or taking on investors or partners is a possibility, your accountant will provide invaluable advice. Yes, a business attorney can advise you well on the choice of legal entity for the business and also the matter of taking on partners or investors, but will not prepare tax forms.

Graphic Design

Maybe you’d like to update your business cards or some other marketing collaterals, such as a stand-out Capability Statement that makes the company appear highly reliable and trustworthy, a real asset when approaching a prospective client. Or maybe updating the look of the company newsletter or blog is the goal. Knowing a good graphic design specialist is always useful.

Human Resource

Have you read your medical or dental insurance policy lately? Hire an H.R. benefits specialist to look it over and verify that you’re covered in the way you intended. You might also speak to an H.R. guide about your retirement plan or employee retirement plan options you offer. If outsourcing a function or hiring an employee are decisions you are pondering, an H.R. job analyst and design specialist will figure out the type of employee you and the organization need. An H.R. compensation specialist will help you set the pay scale.

Insurance

If you had met with an insurance agent 12 months ago, perhaps you would have known to purchase business interruption insurance for your organization and the COVID-19 shutdown would have been less financially damaging. The type of business you operate will determine the type of insurance it would be wise to buy. Be advised that the business legal entity does not protect a company from every type of liability.

Mentor

Whether things are going swimmingly or the world feels as if it’s crashing in, having a trusted peer to talk things over with is so reassuring. Strictly speaking, a mentor is someone who is more experienced than you and is positioned to make beneficial recommendations and introductions. In practice, you may find a mentor (or two) who is likewise in business, is successful and is your peer and good buddy. If your mentor can make a good client referral every once in a while, it’s a special blessing. If you can return the favor, so much the better.

Technology

If the business has employees, it is almost guaranteed that several computers will be used and that requires a professional to install and program the computers and also ongoing network support. Disaster recovery services to save company data in the event of a system crash, data breach, or other type of hacking incident is another necessity. Maintaining website functionality is yet another requirement. If the company plans a virtual webinar or meeting of some type, bringing in a specialist to do the technical set-up and keep it operating is more important than you may know.

Thanks for reading,

Kim

Photograph: Kim Clark

Return to the Office, Safely

Happy September everyone! We are on our way to Labor Day Weekend, the symbolic end of summer. This year, Labor Day Weekend is also our cue to move beyond the pandemic pause that in mid-March disrupted the operations of nearly half of the nation’s businesses. Enough is enough. Business owners and leaders must prepare to tackle the COVID workplace logistics at their organizations and settle into the new normal.

The sorting out process of who will work from home and for how many days per week is underway. Office hours and days of operation are under review. Whether or not the organization needs the same amount of office space, which inevitably leads to a discussion of a possible move, is being considered. Everything is potentially up for grabs, including the products and services that are sold.

After following hastily devised processes that were enacted in the early days of the shutdown, the vital matter of how forward-facing team members will engage with prospective customers in a way that makes all parties feel comfortable must be resolved. Is it smart or risky at this point to invite customers to the office for socially distanced face2face meetings? Will prospects respond to a video sales pitch? So much is unknown.

Then there is the matter of what the safely reopened office will look like and what it will feel like to work there. How will your organization incorporate social distancing guidelines, infection control protocols, personal protective equipment and new normal staff and customer interactions?

What other changes can workers expect when they get back to the office? Will the kitchen be open and can coffee or tea be made? Can lunches still be stored in the fridge? Can we microwave?

The Centers for Disease Control and state public health commissions have established guidelines for places of business. Your insurance company can help your company to interpret the regulations that now apply. Click here for the CDC office building guidelines. https://www.cdc.gov/coronavirus/2019-ncov/community/organizations/businesses-employers.html

To move forward with your office reopening, promote staff buy-in of the anticipated changes by inviting the team, or representatives from each department, to assist in planning and executing the new office lay-out and infection control procedures.

Create a sign-up sheet that lists categories such as office entry/ lobby, conference room. photocopy room, restroom, workstations and kitchen and ask team members to volunteer to suggest the lay-out of the office sectors with the new regulations in mind. Members of each team can be responsible for the ongoing maintenance of the space they volunteered to manage.

But the best solution will be to apply whatever available funds to hiring a space planning firm that specializes in helping companies institute COVID practices as mandated. Let the experts design a space and suggest office furniture that will enhance traffic flow, protect privacy, be attractive and make the best use of available space.

Health screening

Large office buildings have tasked their building entry concierge team to first conduct a quick health screening of all who enter, in addition to the usual ID check, appointment confirmation and badge ritual. Those running a fever are denied entry.

Smaller office buildings may leave health screenings to each tenant and perform only the ID protocol. Regardless of your building’s protocol, be sure to post a sign at the office entrance to announce that masks will be required. A basket of free surgical masks to offer will be a nice touch.

Disinfecting

Lysol, Clorox and 70% alcohol solutions are known to kill the coronavirus, according to the Environmental Protection Agency. Daily wipe downs are a must for items such as shared desks, conference tables, chairs, computer keyboards and nearly all surfaces in the en suite kitchen and restroom. Providing a bottle of hand sanitizer in high traffic areas will be helpful.

Door knobs, counter tops, microwave oven doors and handles. water faucets, remote control devices, light switches, heat or air conditioning knobs, product displays, telephones and cash registers/ point of sale devices are likewise virus (and bacteria) breeding grounds and in need of one or more disinfecting wipe downs every day.

Speaking of hand sanitizer, the pandemic has shown us that Mom was right about keeping our hands clean, whether with hand sanitizer or soap and water. We must also learn how to wash our hands. First. remember to wash the area between the thumb and the other fingers. Second, when performing a soap and water scrub, lather up for 20 seconds —-the time it takes to sing the Happy Birthday song—before rinsing.

Social distancing

We all know the drill by now—-6 feet of separation, as per CDC recommendations. We want to do whatever is possible and practical to retard the spread of the air-borne coronavirus. Most offices already have at least 6 feet between desks, but some work stations will need an adjustment.

Computers and keypads placed at common work stations will need a re-thinking. Conference tables will likely need several chairs removed. There may be limits on the number of people who may occupy the office kitchen or restroom or photocopy room at any one time.

Working from home

Many white collar workers can simply turn on their personal laptop, desktop, or tablet and commence office hours. A daily videoconference meeting or two is usually sufficient to keep team members on their paths, supplemented by brief phone calls when useful. Videoconferences can also be used to promote staff camaraderie.

A survey of 25,000 workers that was conducted by IBM in April 2020 showed that 75% of respondents hope to continue working from home at least partially after the pandemic. Millions of white collar workers apparently expect the work from home trend to continue and as a result, home sales in the suburbs and exurbs that border big cities have increased dramatically, as people search for living quarters that allow more space for a home office (or two). Space for at-home schooling is another consideration.

PPE

While in the office workers will be masked at all times, except when on the telephone, eating, or drinking. Masks, surgical gloves and hand sanitizer should be made available to as a courtesy to all who enter the premises. Some workers may prefer to wear a face shield. It is constricting but for the time being, it’s what we do.

Thanks for reading,

Kim

Photograph: Kim Clark. The health screening checkpoint at the Prudential Tower in Boston. The concierge conducts a body temperature reading using the laptop computer shown. If the computer reads an individual as afebrile, s/he is next invited to approach the ID checkpoint.

5 Business KPI Metrics to Follow

Success in business is a numbers game and every business owner and leader would be wise to pay attention to certain metrics, which are Key Performance Indicators. Depending on the business, owners and leaders may follow the daily sales receipts, weekly gross sales, monthly inventory purchases, monthly in-house projects and of course the big three monthly, quarterly and annual financial documents—-Income Statement (Profit & Loss), Cash Flow and Balance Sheet.

KPIs are like vital signs and lab tests; they indicate the health of the organization. Owners and leaders examine, analyze and confirm the venture’s health (read: profitability) or discover and diagnose a problem, for which a strategy is devised to provide the treatment.

Today, we’ll dive into sales and marketing KPI metrics that business owners and leaders would do well to monitor—-Lead Conversion Rate, Sales Cycle Length, Client Acquisition Cost, Churn Rate and Client Lifetime Value. When steps are taken to bring these KPIs into what represents an acceptable range for your industry, a tangible positive impact on the organization will result.

Lead Conversion Rate

Grab a spoon, Love, and get ready to taste test our flavors of the day—-TOFU, MOFU and BOFU. I promise that you’ll enjoy them all, most especially BOFU. Let us begin.

Marketing = Lead Generation, the fuel that feeds the sales engine that keeps the business moving forward. This KPI reveals the strength of the company’s marketing strategies and tactics. First, verify that the marketing mix is actually producing leads that convert to sales. Second, leads that converted to sales should be examined to discover which tactics enabled conversions. Bonus points will be awarded for discovering which marketing tactics bring in a particular type of client—-low or high dollar volume, repeat business or one-off, or a certain product or type of project.

Marketing announces the presence of a business to its target audience and it’s designed to both arouse curiosity and inspire confidence in the product, service, or company that is featured. The intent of marketing is to entice target audience members to linger and browse the marketing outreach. These early-stage browsers are leads at the top, the front door, of the marketing/ sales funnel. They are called TOFUs, Top of the Funnel. Most TOFUs are window shoppers.

Now let’s suppose a TOFU decides to follow the company blog, or interact with the business on Instagram or Facebook. Or maybe the TOFU finds an e-book and after reading the promo, requests a copy. TOFU will then advance through the marketing/ sales funnel and enter the Middle of the Funnel. TOFU will become a MOFU.

MOFU is where lead conversion really begins. MOFU is a fish on the line. To become a client, MOFU must be skillfully led into the VIP Room at the Bottom of the Funnel, BOFU, where intentions are revealed, needs are discussed and commitments are confirmed.

How to do it? If MOFU is in deal-making mode, those who subscribe to the blog or newsletter, or especially those who request an e-book, white paper, or case study, will contact the company to ask for additional information. MOFU will ask to schedule a 15- minute free consultation. If you meet MOFU at the virtual workshop you presented, there will be a request for follow-up. “Can we Skype?”

A well thought-out marketing/ sales funnel draws in TOFUs that sometimes become MOFUs who have reason to turn themselves into BOFUs. That is effective lead generation.

Business owners and leaders must continually review the operation of the marketing/ sales funnel to ensure that a good number of prospective clients are entering at TOFU. They will monitor the percentage of MOFUs who advance to BOFU and the percentage of BOFUs who become clients.

Sales Cycle Length

Determining how long on average it takes for TOFUs to become MOFUs, then BOFUs and finally paying customers, is useful for cash-flow planning. There may be no way to shorten the marketing/ sales funnel journey and speed up the sale, but getting an idea of when money will arrive, or will not, is essential.

If there are recognizable points in the funnel when it may be possible to speed up the sale, that will be money in the bank. When a prospect reaches MOFU, demonstrations of the company’s expertise, VIP clients, superb customer service, or sterling reputation can be presented to convince the prospect to continue the sales journey. BOFU is the time to make tempting deals—-a desirable upgrade that costs little to deliver, for example. Get the deal done as quickly as possible.

Client Acquisition Cost

It is worthwhile for every business owner, business leader and Freelance consult to ascertain the ballpark cost of the time and money associated with bringing in new clients.

After calculating the time spent writing a newsletter and/ or blog; the time devoted to perfecting social media posts and uploading, to say nothing of creating, videos and photos that support the company’s brand story; the time needed to create a presentation that will be delivered at the chamber of commerce or other venue, along with the Power Point slides and hard copy hand-outs that are typed up—-what dollar value should be attached to the labor devoted to promoting the company, its products and services, and yourself as its public face? Get your arms around that one, will you!

I estimate that I spend 10 -15 hours/ week on marketing activities (mostly this blog) and I’ve allowed myself to claim $35/hour as the wholesale value of my labor (because creating content, taking blog photos and typing are not all billed at the same rate). I’ve decided it’s fair market value to claim that I spend 50 hours/ month, $1,750/ month, on marketing. Wow!! Am I getting the right ROI on client acquisition? Maybe I can learn to type faster? It would help.

I am not signing a new client every month. However, I do get repeat business, plus the occasional referral, and that lowers my customer acquisition cost significantly. This is yet another reason to exceed client expectations and provide superb customer service, so that repeat business and referrals are more likely to be received and marketing dollars will produce a greater ROI. Furthermore, if it’s possible to determine which marketing activities attract high dollar volume projects, prioritize those tactics.

Client Churn Rate

Business experts often warn that it costs at least five times more to acquire a new client than it does to retain a current client. Surprisingly, many, if not most, companies lack a client retention strategy and action plan. The rate at which clients stop doing business with an organization is called the churn rate.

Churn rate is calculated by counting the number of clients that no longer use company products or services, expressed as a percentage of the total client list. % churn rate = # Defections / # Retained If there are 50 clients on the company roster and 5 haven’t made purchases in 12 months, then the churn rate is 5/50 = 0.1 x 100, a 10 % churn rate.

If the company churn ratio creeps up through the year, the culprit could be inadequate customer service. Include a short survey with your invoice to encourage clients to tell you how to improve their customer experience.

Client Lifetime Value

Unless the company has history with a client, lifetime value is a projection, an educated guess. Nevertheless, it is important to think strategically about every prospect, since some are worth pursuing and others, not so much.

When evaluating marketing activities, Freelance consultants, business owners and leaders will examine the revenue potential of the target audience and decide the level of resources that should be devoted to the client acquisition process. This KPI, actual or projected, reveals the amount of revenue that can be generated, in a year, or perhaps a quarter, by way of a particular (or the average) client.

When considering prospects who could become clients, prioritize and invest marketing resources only in those with high revenue and/or repeat business potential. Don’t waste resources on low dollar volume clients. Follow the money.

Thanks for reading,

Kim

Photograph: Kim Clark. Trading prices are the KPIs of the New York Stock Exchange.

Trending: Remote Work

A recent survey of 500 + venture capital backed tech company founders conducted by the Kung Group, a San Francisco Bay Area organizational development consulting firm, revealed that the most prominent response employers have had to the coronavirus pandemic has been the launch of the work from home culture.

70% of Kung Group survey responders said they planned to allow some or all of their employees to continue to work from home when their office reopens.

76% of responders reported that their employees had either maintained or increased business productivity while working from home.

66% of responders plan to reassess their company’s future use of and need for office space, as a result of their company’s success with the work from home strategy.

The predictive value of the survey results has been confirmed by prominent technology companies, including Google, Facebook, Square and Twitter, indicating that a significant portion of employees will continue to work from home when the shutdown ends. Facebook projects that in 5 – 10 years, 50% of its employees will work from home.

Remote work is poised to become a defining feature of the early 21st century work place—-work from home, work from anywhere. The new normal for millions of Americans will not include returning to the office. Some employees are already considering a change in their living arrangements, as they contemplate trading cramped and expensive city apartments for houses in the suburbs, or even rural locales, where a home office (single or his & hers) can easily coexist with their personal lives.

Amid the enthusiasm for the shrinking of the corporate office, business owners and leaders would be wise to give serious thought to the practical functionality of the company. In particular, how to build cohesive and productive teams that theoretically might stretch from Ghana to Georgia to Goa?

Needless to say, exceptional communication and collaboration proficiency will be needed. For certain projects, companies may learn that face2face interaction produces the best results.

In support of that approach Apple has decided to continue the company culture of in-house collaboration and is in the process of moving 12,000 employees back into the Apple Park headquarters in Cupertino, CA. Even Facebook is hedging its bets on remote work; it’s been reported that the company plans to create hub offices in the (moderately priced) cites of Atlanta, Dallas and Denver.

But the question for readers of this column is, what will happen to Freelancers in the office space shake-up? It remains to be seen, of course, but there may be reasons for cautious optimism.

If so many team members are working remotely, we Freelancers may have a better chance of inspiring the trust and confidence of decision-makers because to a certain extent, a significant percentage of the workforce will operate in a similar fashion to Freelancers, with the exception of submitting a monthly invoice. Freelancers can much more easily position ourselves as another remote team member.

Furthermore, the shutdown encouraged businesses to re-evaluate many jobs and discover that an unexpectedly wide range of tasks can be performed remotely. The consensus is that most tasks relegated to employees working remotely have yielded satisfactory results. The expectations of their customers have been met.

So the outcomes of remote work have been demonstrated and it bodes well for Freelancers. As businesses recover from the shutdown and need more hands on deck to get things done, decision-makers will feel more comfortable about bringing us on board. Ka-ching.

Harshvendra Soin, Chief People Officer at Tech Mahindra, a multinational technology company headquartered in Pune, India, recently said, “We hire gig workers for niche or scarce legacy skills which are not immediately available internally.” Tech Mahindra has an AI based talent marketplace called Talex that identifies gig workers internally. Soin elaborated, “ We have built an external marketplace called Flex.ai, that allows employers to seamlessly tap into the Freelance workplace.”

Top Freelance skills in demand include business planning, brand strategy, cloud computing, data analytics, digital marketing and SAP implementation. Now you’re smiling.

Thanks for reading,

Kim

Photograph: A traveler passing through South Station in Boston, MA gets some work done remotely.

Paying You: How to Pay Yourself When You’re the Business Owner

Freelance consultants and business owners dedicate a considerable chunk of mental bandwidth to thinking about how to generate business, because the top line matters. We think a lot about making money, but we may not devote much time to thinking through the mechanics of paying ourselves once the money arrives.

Sole Proprietors and single person LLC owners may consider the self-payment process a no-brainer—as invoices are paid, one simply deposits the money into the business bank account. But like so may actions that seem easy at first glance there is usually a right way, a smart way, to pay oneself as a self-employed person.

So—are you on your business’ payroll or do you take payments from your business in the form of owner draws? Do you and your business partners take guaranteed payments (salary)?  Are you paying yourself too much or not enough? How can you tell? Also, where in your business financials are the payments recorded?

Business type Payment Tax return Payroll Tax

Sole Proprietor Owner’s draw         1040/ Sched. C     Yes                                

Single LLC Member draw 1040/ Sched. C Yes

Multi LLC Member share 1040/ Sched. K-1 Yes

S Corporation Dividend/ wage 1040/ Sched. K-1 Yes

C Corporation Dividends 1040 dividends not on dividends

Sole Proprietor

Business owners and Freelancers who adopt this, the default business structure, pay themselves through an owner’s draw, i.e., the amount of money taken from business earnings, after expenses and taxes, by the owner for his/her personal use. The payment is called a draw because money is drawn out of the business.

Sole Proprietors usually take draws by writing a check to themselves from their business bank accounts. Smart Sole Proprietors will then deposit that check into a personal bank account and avoid co-mingling business and personal funds, a practice that inevitably leads to accounting and tax complications. The owner’s draw doesn’t affect business taxes because the net income has already been taxed. The draw is also not a business expense. From an accounting and tax perspective, the owner’s draw is income distribution. Owner draws are recorded on the Balance Sheet.

Limited Liability Company (LLC)

LLC owners, who are known as members, are not (always) considered employees of the entity and therefore they do not (always) take a salary as would an employee. LLC members, especially single member entities, usually pay themselves with a member’s draw, which is taken from the member’s capital account (business bank account). Multiple owner LLCs are considered to be partners in the business and pay themselves with a member’s share distribution, also taken from the member’s capital account. 

While members may periodically draw from their capital account, a draw is in reality an early withdrawal of anticipated year-end profits, a goal that is perhaps at top-of-mind at multi-member LLCs. Whenever a member receives a draw during the year, his/her capital account decreases, but if the business shows a profit at the end of the year, the member’s capital account will increase in accordance with the percentage of ownership. If a member owns 25 % of the LLC, then s/he can expect to receive 25 % of year-end profits. Single member LLCs own 100 % of the entity and are entitled to 100 % of the profits. Member draws are recorded on the Balance Sheet.

A working member in a multi-member LLC has the option of either receiving a guaranteed salary amount as an LLC employee, or paying oneself with a member’s share distribution, as will a single member LLC owner. Members who are strictly silent partner investors and do not work in the business are not entitled to period draws, but will receive their member’s distribution of profits in accordance with their ownership percentage at the end of the tax year. 

The member salary, known as a guaranteed payment, is not based on the percentage split agreed upon in the LLC operating agreement but based on the work the member performs in the business. Unlike member distributions, guaranteed payments are recorded on the Profit & Loss (Income) Statement and are taken from business profits.

The LLC must be diligent about filing the correct tax forms on behalf of members and maintain accurate accounting histories for everyone throughout the year, to reflect member payment choices. Members paid as LLC employees must file IRS Form W-4 to calculate the amount of payroll tax withholding taken from from each paycheck. The member is then treated as a W-2 employee of the LLC. If the member is paid as an Independent Contractor, then s/he must file IRS Form W-9 with the LLC and the LLC must file IRS Form 1099-MISC by the end of the year. All member draws or distributions are deducted from the amount of profits assigned to the capital accounts, based on ownership percentages.

Corporations

An S Corporation is in reality either an LLC or C Corporation that has elected for special tax treatment with the IRS. S Corp income, losses, deductions and credits pass through to its shareholders’ personal IRS Form 1040. Shareholders then report the business’s income and losses on form 1040 and are taxed at their individual income tax rates. C Corps are subject to double taxation—a separate corporation tax and when dividends are paid to shareholders, that amount is recorded on IRS 1040 (but there is no payroll tax).

S and C Corporation owners who work in the business pay themselves a regular “salary” and also distribution payments. S Corp owners are usually employees of the business. Owners who work as employees must be paid a “reasonable salary” before profits (dividend distributions) are paid and the salary is subject to payroll taxes. The IRS has guidelines that define a reasonable salary, based on job responsibilities. Salaries are generally taken from business profits.

Owners of C Corps can elect to pay its shareholders a cash dividend, which is a distribution of company profits. However, the C Corp board may choose to retain either the entirety or some portion of business net profits and decline to pay a dividend in a given quarter or year. If a dividend is paid, that amount is added to income reported on the shareholder’s personal IRS Form 1040. The company records dividend payments on the Balance Sheet.

S corporation owners have been known to request that their corporations pay them little or no salary, since salaries are taxed, and instead take payments as dividend distributions, which are not taxed. The IRS has stepped up enforcement on this issue and in 2000 audited thousands of S Corps whose owner the IRS concluded had received a suspiciously low salary and very generous dividend distribution, in an apparent attempt to evade payroll taxes by disguising their salary as corporate distributions.

Thanks for reading,

Kim

Photograph: Pay day on a U.S. Navy cruiser (1942)

2019 Tax Prep + Deductions

The Holidays are upon us and there is so much to do! Shopping (remember to buy gifts for special clients), holiday cards (everyone you’ve worked with over the past 5 years will receive one), parties and catching up with dear friends and colleagues. You may also find it advantageous to change your health insurance plan before open enrollment ends in your state, or make a retirement account contribution before January 1. It also makes sense to review the years’ invoices to calculate gross revenues and decide how to handle December billings.

Especially for invoices that are due on or after the 15th, should you keep those earnings in this year and invoice at the usual time, or invoice on January 2 and push earnings into next year? If you earned more than expected this year, consider pushing earnings forward, to limit taxable income. You could also make a retirement plan contribution, if you haven’t reached the year’s maximum amount (whether you bill clients in this year or the next). Here are a few more tax season preparation tactics to consider:

Find all invoices and confirm that they’ve been paid. Send a reminder to those clients who have not paid up. As noted above, calculate your revenues (i.e., income before deductions) and determine whether to invoice on time or later. Of course you can do other good things with your windfall, if you have one, such as registering for a class that will be held in the new year and paying for it now (and taking the deduction in this tax year).

Calculate your self-employment tax. In addition to our regular income tax, Freelancers are responsible for paying the 15.3 % self-employment tax levied on the first $132,900 of net income and 2.9% of net income beyond that amount. This tax represents the Social Security and Medicare taxes that traditional employees have taken out of their paychecks automatically. The amount includes as well the employer portion of those taxes, since Freelancers are considered both employer and employee.

Freelancers are able to write off business expenses for these categories:

Business-related travel, meals and lodging

Membership in business and professional associations

Office required equipment or materials

Home office. Most Freelancers work from home and are therefore eligible to take this deduction. The Internal Revenue Service allows independent workers to write off a corresponding percentage of rent/mortgage and utilities when our home is also our office. Get out your measuring tape and determine the dimensions of your workspace as a percentage of the square footage of your home to calculate the amount of your deduction. Be advised that office space must be used exclusively for self-employment work. One cannot, for example, “borrow” a child’s bedroom from 9:00 to 5:00 and consider that your home office.

Office equipment and supplies. One of the downsides of being a Freelancer is that we are unable to use an employer’s computer, scanner, printer, staples, or paper clips. We pay for that stuff out of our own budgets. But since we need certain resources to do client work, the IRS allows us to deduct their cost from gross sales revenues. To avoid IRS problems, keep your business and personal expenses separate. For example, check in with a smart accountant before you decide to deduct your cell phone or Internet service while using them only partly for work.

A real benefit for those who will buy office equipment is the Section 179 Deduction, which allows the business owner (or Freelancer) to write off the entire purchase price of qualifying equipment for the current tax year, up to $1,000,000. Qualifying items include office furniture, computers and software programs such as QuickBooks and InDesign.

Travel, meals, lodging. This category of deductions is the most confusing for Freelancers and business owners. We are allowed to deduct the costs of traveling to our work assignments, client meetings and conferences, including gasoline, tolls, parking, trains, planes, buses, or Uber/ Lyft. One cannot deduct costs associated with commuting to your separately leased or owned office space. Hotel/ airbnb/ B&B rooms are 100% deductible, except for personal expenses such as movie rentals or the mini-bar.

The cost of taking clients and prospects out for a meal are deductible at a 50% rate, while costs associated with company-wide parties, picnics and restaurant meals when at least half of your employees attend are 100% deductible. Keep all receipts —take a picture with your phone as back-up.

As with all Freelancing expenses, deductions must directly relate to one’s business. We cannot write off the tuition for a workshop on baking or flower arranging if one is a website developer, nor can we write off education that trains us for a new occupation. But if we take classes to earn certifications in our field or to enhance business knowledge, then we can typically write off all associated costs. The same is true for any licensing, registration, or certification costs that we incur.

Thanks for reading,

Kim

Illustration: Henry Holiday The Tax Collector at Work, created for the Lewis Carroll poem The Hunting of the Snark (1876)

2020 Health Insurance Open Enrollment: The Facts

Hello Freelancer Friend, the enrollment period for health insurance is here, now through mid-December (in most states). Because health insurance is a vital topic, I decided to defer to an expert and pass along info compiled by Les Masterson for Insure.com. For more detailed information, please visit the site. https://www.insure.com/health-insurance/open-enrollment-for-individual-health-insurance.html

We have 6 weeks to make a decision on individual/ family health insurance or the Affordable Care Act (ACA) exchanges plan (in most states). We can sign up for health insurance on our state’s health insurance exchange or individual marketplace only during the annual open enrollment period, unless one has a “qualifying life event.” Those events include getting married or having a baby.

If buying health insurance on your own, there are several options for purchasing a policy:

  • Your state’s health insurance marketplace — see healthcare.gov https://www.healthcare.gov
  • Directly from a health insurance company
  • Sites like Insure.com that offers insurance quotes from multiple carriers
  • A health insurance agent
Open enrollment for 2020 individual and family health insurance plans
Begins Ends
November 1, 2019 December 15, 2019

The open enrollment period differs in these states: 

  • CA – Oct. 15, 2019 to Jan. 15, 2020
  • CO – Nov. 1, 2019 to Jan. 15, 2020
  • DC – Nov. 1 , 2019 to Jan. 31, 2020
  • MA – Nov. 1, 2019 to Jan. 23, 2020
  • MN – Nov. 1, 2019 to Dec. 23, 2019
  • NY – Nov. 1, 2019 to Jan. 31, 2020
  • RI – Nov. 1, 2019 to Dec. 23, 2019

If you buy after December 15 in the states that are extending the enrollment period, confirm when the coverage will start. Most states require you to obtain your plan by December 15 for a January 1 start date. If you buy late, your plan might not start until February 1 or March 1.

Those who qualify for Medicaid or the Children’s Health Insurance Program (CHIP) can enroll at any time, because they are state/ federal programs created for people with limited incomes or disabilities.

Marketplace Open Enrollment is for health insurance only

The Open Enrollment period does not apply to life insurance, long-term care insurance, or Medicare. The fall open enrollment period for Medicare is October 15 to December 7, 2019. If you qualify for employer-sponsored health insurance, you will want to buy health insurance through your employer. Individual insurance usually costs more than employer-sponsored plans.

That said, if you qualify for subsidies based on your income, you may find an inexpensive plan on the Affordable Care Act (ACA) Exchange. Many states offer financial help for people with income below 400% of the federal poverty limit. You can find out more about these subsidies at insure.com. 

Remember to enroll!

It is not possible to sign up for coverage if you miss open enrollment, unless one qualifies for one of the special enrollment periods. The following events may grant entrance into a special enrollment period:

  • Divorce
  • Marriage
  • Birth or adoption of a child
  • Death of a spouse or partner that leaves you without coverage
  • Your spouse or partner, who has you covered, loses his/her job and health insurance
  • You lose your job and with it your health insurance
  • Your hours are cut making you ineligible for your employer’s health insurance plan
  • You are in an HMO and move outside its coverage area

Update your plan during Open Enrollment only

What you can do during open enrollment:

  • Renew your current individual or family health insurance plan
  • Choose a new health insurance plan through the marketplace in your state or through private insurance

If currently enrolled in a marketplace health insurance plan, it will automatically renew. However, the plan may make changes to its provider network, co-pays, co-insurance and drug coverage. Your plan must send you a notice of any changes it will make for 2020.

Read the health insurance update notice to learn what it means for youConfirm that your doctors and preferred hospital are still in your network. Be aware that you may be able to use out-of-network doctors and hospitals if you’re willing to pay more. That’s an option in Preferred Provider Organization (PPO) plans. In some cases, such as Health Maintenance Organization (HMO) plans, you’re covered if you go out of network. That means you’ll have to pick up the costs. 

Prescription drug coverage also could change. The plan may no longer cover the drugs you take to manage your chronic conditions. Confirm your plan’s drug benefits for 2020 before you allow it to renew. You may need to find a different plan for your needs and now’s the time to do it. Health plans must provide an online link to the list of drugs they will cover, known as formularies.

ACA Premiums set to decrease for some plans

The premium you pay depends on several factors, including income, your state and the plan type. The Centers for Medicare and Medicaid Services said the average ACA federal exchange plans premium costs dropped for the first time this year. However, because not all plans will be cheaper, it’s still important to shop around to find the right plan for you. 

Choose a level of health plan coverage

Plans in the health insurance marketplace are divided into 4 categories:

  • Bronze – highest out-of-pocket expenses for services (lower premiums)
  • Silver
  • Gold
  • Platinum – least out-of-pocket expenses for services (higher premiums)

Each level indicates how much cost-sharing each requires. Cost-sharing includes deductibles, co-pays and co-insurance that we must pay until the annual out-of-pocket maximum limit is reached.

Bronze plans have the highest deductibles and other cost-sharing expenses. That means more out-of-pocket costs when one uses healthcare services. Silver plans have lower cost-sharing than Bronze and Gold plans even lower than Silver. Platinum plans have the lowest deductibles and co-pays. Once one signs up for a level of coverage, changes are not allowed during that year. If you choose a Bronze plan and discover you need surgery, you cannot change to a plan with a lower deductible.

Generally, the more you pay in premiums the lower your cost-sharing.

In a 2019 report, eHealth estimated that 2-person families paid more than $1,000 in premiums monthly for the first time in the individual market in 2019. Premiums for individual coverage for a single person was $448 in 2019. 

The average premiums for individual coverage according to eHealth:

  • Bronze — $440
  • Silver — $481
  • Gold — $596
  • Platinum — $706

The average premiums for family coverage according to ehealth:

  • Bronze — $1,080
  • Silver — $1,179
  • Gold — $1.426
  • Platinum — $1,460

The health plans, no matter the level, must provide some coverage for at least 10 essential benefits. They are:

  • Outpatient care including chronic disease management
  • Emergency care
  • Hospitalization
  • Pregnancy and newborn care
  • Mental health and substance abuse services
  • Prescription drugs
  • Rehabilitation services and devices
  • Lab tests
  • Preventive and wellness services
  • Dental and vision care for children

The level of coverage for these services can vary. All the plans in the marketplace must provide consumers with a brief, understandable description of what they cover and how their plan works. The Summary of Benefits and Coverage (SBC) must be posted on the plan’s website. Check out the SBCs for the different plans you are considering. This is a good way to compare plans and benefits.

Not all states require health insurance

The ACA once required nearly all Americans to have health insurance. However, Congress decided in 2017 to eliminate the individual mandate penalty. Although the individual mandate is technically still on the books, the tax penalty is not. Still, a growing number of states have implemented their own individual mandate. Here are states that have an individual mandate in 2020:

  • California
  • District of Columbia
  • Massachusetts
  • New Jersey 
  • Rhode Island
  • Vermont

I hope you found this information helpful.

Thanks for reading,

Kim

Image: Thomas Eakins (Philadelphia 1844-1916) The Agnew Clinic, 1899 courtesy of The Philadelphia Museum of Art. The painting was commissioned to honor the anatomist and surgeon David Hayes Agnew, on his retirement from teaching at the University of Pennsylvania.