Chapter 2 – Setting Up Your Handyman Business

Are Labor and Materials Sales Subject to Sales Tax?

Since every state has different guidelines, the best suggestion I can make is to use the local state sales tax office as a resource and follow their instructions to the letter.  I am lucky enough to have a state office located in our city so I opened my account in person and asked a lot of questions.

Collecting the correct sales tax can be tricky and the rules are full of pitfalls.  Is labor taxable?  What about materials sales?  If you tell someone that the cost of the job will be $500 is the entire amount subject to sales tax or just the portion that covered the materials?

If your materials and labor are both taxable, your sales tax liability will be MUCH higher.  In my business, labor accounts for about 85% of my total revenue so the stakes are high.

In California, because labor is generally not taxable and materials sales are, you have to be very careful how you quote prices and fill out your invoices.  You must clearly break materials out from labor when quoting the work and while totaling the invoice. If you don’t you might be liable for sales tax on the entire sale.  I always quote labor and materials as separate items.

How Should I Manage My Money for Taxes?

Many business people have found that in their first year in business, the biggest challenge is keeping the doors open and paying the bills.  The second year another problem arises…how to pay all of the income tax!  Because there is a lot more money flowing in the second year they find themselves spending too much and having too much fun.  Unfortunately they don’t foresee how large the impact of taxes can be and don’t set enough aside for taxes.

The good news is that your overhead as a handyman is low and you should be earning a profit early on.  The bad news is that you will need to plan for taxes right from the beginning.  The best way to handle this is with a savings account specifically for taxes. Every time you deposit your earnings, deposit 20% of the total into your tax savings account.  Yes…20%.  Want a different number?  An alternative is to transfer funds at month end after you’ve closed your books and calculated your profits.  Transfer at least 35% of your net profit after expenses.

I know from experience that this is not easy.  So whatever you do, make deposits regularly into your tax savings account.  Use these funds to make quarterly estimated tax payments to the IRS and to your state.

Quarterly tax payments?!?  Yes, otherwise known as Estimated Tax Payments, these are a sad reality of working for yourself.  These are the equivalent of withholding from your paychecks.  The federal government and most states want to be paid throughout the year, not just at the end.  They’ll penalize you if you don’t make payments at least four times a year.  (IRS due dates are Apr 15, June 15, Sept 15, Jan 15)

The percentages I’ve given are obviously an estimate.  Unfortunately, you may not know exactly how much you need until it is too late so save all that you can and as often as possible.

If you’ve been generous with your tax savings account you will find that the estimated tax payments won’t be so painful after all.  At year end, after your income and sales taxes are paid, you may even have money left for that hard earned vacation.  It’ll be just like getting an income tax refund!

Can I Open a SEP-IRA Retirement Account?

According to the IRS; businesses, corporations and self-employed individuals can open retirement accounts including the SEP-IRA.  As a self-employed handyman the amount you can contribute is dependent on your profit for the year.

It is not easy to calculate your allowable contribution.  Always looking for a bargain, I opened a SEP-IRA at one of the large discount mutual fund families.  Their retirement planning department was great about answering my questions, they calculated my allowable contribution and all of their advice was free! Check with a tax professional or a financial planner to see if you qualify.

About Invoicing and Billing for Handyman Work

To promote a professional image and set yourself apart from your competition, you must use a professional looking invoice.  Customers appreciate having a paid invoice and you will find that all commercial work will require it.  The invoice that I use carries my logo, name and address, and has a place for the customer to sign that they have accepted the job as completed.  I leave a copy with the customer and keep the signed top copy for my files.

You can find handyman invoice templates here.  Print out the template; paste your logo at the top left and your name and address into the top right box and take it to your local full service copy store.  Have them create 2 part NCR (no carbon required) forms.  You should end up with 200 invoices for around $50. This is a real bargain when you consider the level of professionalism you just added.  If you will be doing commercial work, you should consider having the invoices printed with sequential numbering.  The numbering can be done at the time the NCR forms are printed.  Aluminum invoice boxes can be purchased at office supply stores to hold your invoices.

Will I Get More Business If I Accept Credit Cards?

I haven’t had a single customer ask if I accept credit cards. I don’t think they expect me to.  But I do offer the option and I think it brings me more business.

There are some compelling reasons to invest the money it takes to have a merchant account.  People will often have you do more work if they know you will accept their credit cards.  It is also great to be able to offer the credit card option to the rare customer who, after the work is done, says that they don’t have enough money.  If you have a merchant account you can let them charge it.

Secondly, by letting your customers know that you accept credit or debit cards you will set yourself apart from your competition.  Every advantage helps!

Here is the least expensive way to accept credit cards.  Open a Paypal business account.  Your customers can pay with their charge cards even if they don’t have a Paypal account.  The fees charged to you are minimal and are strictly on a per transaction basis.  There are no monthly service fees.  Your customers could also pay with their Paypal account.  Visit the Resources and Helpful Links section on this website for more details.

What About Billing Customers for Completed Work?

If it brings you more business, just say “Yes.”  This has come up in three different situations.  When I’ve done commercial work, work for a property management company or while doing pest repairs for real estate agents.

The problem with billing customers on account is the time delay in receiving payment.  Commercial accounts often take up to 90 days to pay and require extra paperwork when requesting payment.  Completed pest work is often paid through escrow when the house is sold and can take 30-45 days for receipt.  In all cases, the submitted bill has proven to be as good as money in the bank but you must allow for the extra time.

Should I Accept Personal Checks?

Yes!  Most customers pay by check.  However, when in doubt do what the corner merchant does to cover himself.  Write the customer’s driver’s license number on the check to prove you checked their ID.  In order for the police to help you collect on a bad check, you will need to be able to prove who it was that signed the check.

Should I Ask To Be Paid in Cash?

No.  And don’t offer a cash discount.  Never tell a customer that you prefer to be paid in cash.  Asking for cash is bad business and a dead give away that you are cheating on your taxes. If they pay you in cash, accept it!

What About Preliminary Notices and Mechanics Liens?

Here is a definition for you:  A Preliminary Notice contains language which describes the details of the contract and who the interested parties are to the transaction.  It also makes a statement to the property owner that a mechanics lien could be placed on the subject property, what the consequences of such a lien placement are, and what their remedies would be.  The placement of a Mechanics Lien helps to ensure that you receive payment for your services.  The owner of the property will not have clear title until the lien is released.

I’ve never filed a Preliminary Notice or a Mechanics Lien for work that I’ve done as a handyman.  Would I be sorry that I hadn’t?  Yes, if I’d done work for a homeowner or a contractor and never got paid!

As a handyman, we continually work under the assumption that we will be paid for the work that we do.  If payment is never received, the homeowner has great leverage against us.  It is usually impossible to repossess the work that we did.

A Mechanics Lien is our way of insuring that we receive payment.  The Preliminary Notice is the first step in the process and it lets the homeowner know that a Mechanics Lien could be filed.  This in itself is often sufficient to prompt the homeowner to pay for the work making the actual filing of the mechanics lien unnecessary.

Check your local authorities for details.  Each state has its own filing requirements, time restrictions and laws.

Should I Incorporate My Handyman Business?

What legal business structure should I choose?  The three most commonly chosen legal business structures are Sole Proprietorship, Limited Liability Company (LLC), and S Corporation.  Because I am not a lawyer or a tax attorney I am not qualified to recommend one structure over another.  I can only tell you what I have done and strongly recommend that you consult with an attorney and an accountant before making your final decision.

I chose the simplest and most basic structure you could set up, with all of its benefits and pitfalls – the Sole Proprietorship.  As a Sole Proprietor income is reported on the individual income tax return (1040, Schedule C) so there is very little additional paperwork.  If you choose this option you represent the company legally and fully and you are personally liable for all debts and actions of the company.  If something went drastically wrong with a job you completed your assets could be at risk.  This makes it very important to carry sufficient liability insurance.

I suggest you seriously consider forming an LLC, particularly if you have a lot of personal assets and/or will be hiring employees.  Since the handyman trade could be considered a high risk industry, many handymen choose this option.  This structure affords the members (owners) the liability protection of a corporation.  Unfortunately, this liability protection may not be complete as you could still be held personally liable for your actions if you have signed a personal guarantee.  Personal guarantees are often required by banking institutions if you get a business loan.

A third option, often chosen by contractors is the S Corporation (Small Business Corporation).  This structure allows the profits to be taxed in a way similar to a Sole Proprietorship avoiding the double taxation problem inherent to the corporate system.  As with the LLC, the presence of a personal guarantee would leave the owners personally responsible for debts.

For inexpensive legal advice I became a member of Pre-Paid Legal Services.  This is an extremely low cost legal service that I have found to be a great asset.  For less than $20 per month you have legal advice that is just a phone call away.  It’s a lot like having a lawyer on your payroll!  Pre-Paid Legal associates are easy to find and they will be glad to sign you up.

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