When you start the book, you might be tempted to think that You Call The Shots will be just one big lovefest about Cameron Johnson, how awesome he is, how enterprising he was, and how just gosh darn great it was that a young guy like him was able to do so much. In fact, the beginning of the book goes pretty heavy on the credentials, which is a fair way to start a book if you think that you’re going to learn all the great business ideas from someone in their early twenties, but I see the value of the book elsewhere.

You Call The Shots breaks down your traditional thinking about working, earning a living, and making money by taking you along a journey started by a kid who didn’t know he wasn’t supposed to be successful starting businesses online. Cameron Johnson isn’t some child prodigy who was given a head start either, he started as a kid not willing to fit what society thinks children should do, and he just did whatever he wanted – and it worked. He became a sales manager at his family Ford dealership through hard work, not nepotism (in fact, he said that being the son of the owner probably made his ascension much harder, which is probably right), and he started multiple businesses just because he had an idea and the moxie to execute.

Sure, the book offers 19 secrets to entrepreneurship (and they are excellent secrets framed with even better anecdotal recounts) and it follows the wild ride that was and is Cameron Johnson’s life, but the value is really in that it shows what happens when you’re willing to ignore what other people think you should be doing and doing that which you love.

I really enjoyed reading this book and it’s one of the few books that I’ve reviewed where I’ve read it from cover to cover, in part because I identify with him and his personality and also because I’m a sucker for these anecdotal books. If you are the enterprising, entrepreneurial type, I strongly recommend picking this book up and reading it (and to date, I don’t think I’ve given as strong a recommendation for any book I’ve reviewed).

The internet really has only been a place of commerce for about a decade now, and still people are searching to find their gold mine on the internet. A lot of people want to strike it rich, yet a lot of digital miners end up finding nothing but fool’s E-Gold. There are a lot scams for businesses on the internet, and you need to avoid them like the plague. But how does one know that a business is a scam? There are some big red flags that you will notice about a company to determine whether or not it is a scam. If a company has any of these red flags, you should be very wary about dealing with them.

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So I did my taxes over the weekend and found that I had a significant tax shortfall (more than I’ve ever had as a rebate, but I see it as a good thing) as a result of not paying quarterly estimated tax payments last year. Now, I wasn’t assessed a penalty because I paid more tax than I did the year before (I wasn’t within 90% of what I owed, which is the other ‘get out of jail free’ card) but this year I will have to be paying these estimated payments in order to avoid penalties. If I hadn’t paid more than last year, I would’ve had about a hundred and fifty bucks in penalties, which isn’t bad on an absolute scale but terrible when you consider it’s a completely avoidable loss. So, here is my rough and tumble guide to calculating and paying your quarterly estimated taxes.

Calculating How Much Tax You Owe

You must make quarterly estimated tax payments on any self-employment income you earn and the process of calculating the amount of that tax isn’t tricky but does require a calculator. The first thing you need to do is to figure out what your average tax rate is, which you can find on your previous year’s tax return by dividing your income tax (line 43 on your Form 1040) by your adjusted gross income (line 37 on your Form 1040), that is your average tax rate. As a self-employed person, you need to tack on an additional 15.3% for Social Security and Medicare. Now, you take that tax rate and multiple it by your quarterly profits and that’s the amount you need to pay.

Another safe way to go about it is to see how much you paid in taxes last year, estimate how much you’ll have withheld and subtract that value from your tax paid, add some buffer to that and divide it by 4. If your business is growing, you’ll still experience a tax shortfall but you’ll avoid penalties. So, if you have a tax liability of $10,000 for 2006, your job withheld $6,000 last year, then your shortfall was $4,000. Add some buffer, say another $400, and you should send in $1,100 each quarter. That means for 2007, you’ll have paid $11,600 in taxes which is more than the $10,000 you owed last year – penalties avoided.

Paying That Quarterly Estimated Tax

As for paying it, you have two options – the 1980 way of writing a check, or the 2000 way of sending payment through the Electronic Federal Tax Payment System. I recommend the EFTPS because you won’t lose a payment in the mail but if you use a check, be sure to make out the check to United States Treasury, your social security number on the check, and include a copy of Form 1040-ES. The due dates for payment are April 15th for the first quarter, June 15th for the second quarter, September 15th for the third quarter, and January 15th (of the following year) for the fourth quarter. Obviously, keep copies of all your checks, forms, etc. for tax time next year.

Now, another question I had was whether the payments have to be equal and they aren’t required to be equal but they should. I don’t know what the ramifications are if they aren’t equal but as long as you do a pretty good job of estimating, a small deviation probably isn’t a big deal.

(As with anything you read on blogs, please consult a tax professional before you take any action)

This was a question posed to me by a recent reader:

Hi Jim,

I see that you’ve written a lot about sep-ira’s and I had a question I hoped you could answer, I was going to make a contribution to my sep-ira, can I deduct that on my taxes?



Thanks,

The answer is yes but where you deduct it will depend on your situation.

Self-Employed Persons

If you are self-employed, you can contribute to an SEP-IRA as either an employer or an employee. When you contribute to the SEP-IRA as an employer, you can deduct that contribution but you deduct it from your business/self-employment income. If you contribute to the SEP-IRA as an employee, you can deduct that contribution from your own income.

Not Self-Employed Persons

If you work for a business that offers a SEP-IRA, you’re going to be contributing as an employee and subject to the rules of a Traditional IRA. So, again you will be able to deduct the contribution but you will be deducting it against your own income.

So to recap, if you are a self employed and contributing as an employer, you deduct it against your business’ income (you are still subject to self employment tax). If you are self-employed and contributing as an employee or you are not self-employed, you deduct it from your own taxes.

Anyone want to add anything? (or fix something I may have gotten wrong?)

PayPal is offering (it’s supposed to start in 2007 but you can’t get one yet) these slick new SecureID tags that will definitely help improve security in PayPal accounts. The idea behind SecureID is that it will display a six digit number that changes every thirty seconds and that number will be required every single time you log into your account. Why is this more secure? Well security comes down to three things – what you know, what you have, and who you are. Your user name and password satisfy the ‘what you know’ part and the key will satisfy the ‘what you have’ part.

This will protect you against phishing because even if thieves find out your user name and password, without the SecureID code they cannot access your account.

The key is only $5.00 but it’s absolutely free for Business accounts!

PayPal Security Key Site (thanks Consumerist!)

I was a little bored one day and thought I’d try to find fifty fun facts about credit cards that I didn’t know before hand and put them all in once place for you all to munch on and enjoy over the weekend. Some of the things I already knew, like the AMEX Centurion card has a $2500 annual fee and a $250,000 annual spend requirement, but others I didn’t, like how American Express started off as a shipping company and later branched out into financial services.

I broke the fun facts into these general categories: Historical Nuggets (with subcategories for each major card company), Useful Things That Make You Go Hmmmm…, Technobabbliciousness, Legal Ways You’ve Been Hosed & Un-Hosed, and Department of Holy Crap They Make A Ton of $$$$$. Historical Nuggets obviously covers the history of cards and the various companies. The Useful Things That Make You Go Hmmmm… covers some useful consumer information that may one day come in handy in your daily life. Technobabbliciousness covers some interesting facts about the technology behind credit cards. Legal Ways You’ve Been Hosed & Un-Hosed covers various court rulings and other legalese that explain why the environment is the way it is (like ridiculous fees and interest rates!). Finally, Department of Holy Crap They Make A Ton of $$$$$ is just a collection of mind-boggling statistics that should make you think twice about starting your own credit card company.

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This is the second of my big six income tax deductions for 2006 and this one is a little bit of a freebie because you don’t really need to do anything in order to claim it because your employer will automatically deduct 401K contributions from your income, which will ultimately be reported in your W-2. So, with a 401K, you simply do nothing and you get this deduction. How about people who contribute to a Traditional IRA? And for those who have businesses, or are independent contractors, and are contributing to a SEP-IRA as an employer (I’ll be doing this for the second year in a row)? That’s when things get a little trickier.

Traditional IRAs

If you have taxable income (and you won’t turn 70.5 this year), you’re eligible for a Traditional IRA. For 2006, you’re allowed to contribute $4,000 towards the Traditional IRA (this maximum limit is also shared with a Roth IRA, so you can only contribute a total of $4k any type of IRA) if you are under 50 and up to $5,000 if you’re over 50, it’s called a catch-up provision. You must open an IRA with an approved institution.

How much of the contribution you can deduct depends on your modified adjusted gross income. If you are a single filer, you get a 100% deduction if your MAGI is under $50,000; a partial if your income is between $50,000 and $60,000; and no deduction if your MAGI is over $60,000. If your MAGI is over $60,000, then it is far better you to contribute towards a Roth IRA since you get no deduction in the first place.

SEP-IRAs

If you have self-employment income, the Simplified Employee Pension Plan (SEP-IRA) is a great way to defer some of your income and any business, sole proprietorships included, that earns any income can start something like this. You can contribute up to 25% of compensation to a maximum of $44,000 (2006 limits) and deduct this from your Schedule C income.

For more on SEP-IRAs, I wrote a whole series of articles when I was investigating it for my side business (this site), hopefully you will find them helpful:

• Primer on Self-Employment Taxes, or Why SEP-IRAs? – A brief introduction to self-employment taxes and my logic in opening a SEP-IRA in the first place.
• Introduction to SEP-IRAs – More on SEP-IRAs and how the employer deduction works.
• Vanguard Deposit Recoding Sample Letter – I accidentally made a contribution as an employee (bad, because the SEP-IRA contribution limits are shared with Roth and Traditional, and I maxed out my Roth contribution already) so I had to send Vanguard a letter to reclassifying the contribution as an employer contribution for 2006.

For anyone who runs their own business and has hired an accountant (or anyone who has gone to an H&R Block, based on what I’ve heard), you’ll run into someone who will aggressively pursue deductions even if you’ll feel a little uneasy about taking them. Now, it’s hard to figure out whether or not the deduction is legitimate for your situation and each one of us has a different level of tolerance for aggressive deduction taking but Jeanne Fleming and Leonard Schwartz recommend that you simply ask the accountant to explain the reasoning behind the deduction.

I agree with their argument that you shouldn’t accept any of these explanations:

• The likelihood of an audit is low.
• Everyone else is doing it. (Seems very grade school-ish of an answer doesn’t it?)
• The penalties are low if you’re caught.

With the wealth of information on the internet, you can simply shelve the deduction for now and do a little research on it. While nothing online, short of the IRS website, can be a definitive answer, many sites can easily tell you if you should be wary of taking a deduction. You can always email me and I can give you my unfounded opinion or, if you’d like, I can post the question on this site and hopefully someone will be able to steer you in the right direction.

Remember, in the end it’s your neck on the line with your tax return, no matter who actually fills it out, so if you wouldn’t feel comfortable taking a deduction after doing your research, don’t take it.

Source: CNN Money