Not in my book, if you are self employed.

The self employed don’t have their estimated income taxes withheld from their paychecks.  There aren’t any paychecks if you are among that resolute band of entrepreneurs, small business folk, and independent professionals.

You are expected to make quarterly tax deposits throughout the year toward the current year’s taxes.

But as I asked bankruptcy clients over the past couple of months about the status of their 2011 tax return, I saw a pattern in those who expected to ask for an extension of time to file the return.

Almost always, they were putting off making tax deposits for this year until their tax professional calculated the right amount.  They were not only extending the time to file last year’s return, they were postponing advance payment for this year’s taxes.

Trouble ahead

The light at the end of the tunnel is the approaching express train.

Put off beginning to provide for this year’s taxes, waiting for a precise calculation, and you set yourself up for being short come next spring’s tax season.

In a perfect world, you don’t want to pay more taxes into Uncle Sam’s holding than necessary.  But in my experience, the longer you delay beginning to pay, the more likely you can’t pay when you reach year’s end.

I’ve even advocated ditching quarterly tax deposits in favor of monthly tax deposits.

No harm, no foul

Here’s my proposition for those on extension:  deposit at least one quarter of the taxes from the last filed return in April, and each quarter thereafter until your accountant calculates more precisely what is required for this year.

If that turns out to be more than a quarter of your estimated 2012 liability, you can even it out in the later quarters by reducing your deposits.

If you find you’ll owe more taxes this year than you did two year’s ago, you’ve at least gotten a start toward paying.  You’ll have to make larger deposits in later quarters to avoid penalties for being under withheld.

But that beats confronting a larger-than-expected tax debt without having made any provisions for payment.

Being self employed is a heady proposition, as long as the heady feeling isn’t oxygen deprivation when you learn you owe a fistful of taxes, for which you’ve made no provision.

Image courtesy of complexify.

Business is my bankruptcy “B’ word.?? Business debt of the individual filing bankruptcy is dischargeable just as other personal debt.

In Silicon Valley, the very innovation and risk taking that makes the Valley vibrant brings with it the risks of not making it in the marketplace.? Bankruptcy can be the “do over” vehicle freeing manpower and resources to move on with life.? Often they move on to try again, which is what makes this place exciting.

At the conclusion of his book The Lexus and the Olive Tree, Thomas Friedman, writer for the New York Times, (@NYTimesFriedman)? imagined the characteristics a society needed to thrive in the global economy .? Generous bankruptcy laws, he proposed,? were essential for that society to prosper.

design… a country with a system of bankruptcy laws and courts that actually encourages people who fail in a business venture so declare bankruptcy and then try again, perhaps fail again, declare bankruptcy again, and then try again, before succeeding and starting the next Amazon.com?without having to carry the stigma of their initial bankruptcies for the rest of their lives.

In Silicon Valley, says renowned venture capitalist John Doerr, ?it is O.K. to fail and in fact it might even be important that you failed before on someone else?s money:? In Silicon Valley, bankruptcy is viewed as a necessary and inevitable cost of innovation, and this attitude encourages people to take chances. If you can?t fail, you won?t start. Harry Saal, who founded one of the most successful software diagnostic systems in Silicon Valley. after being involved in several start-up ventures that went belly-up, once told me over coffee in Palo Alto: ?The view here is that you are always better and wiser for having failed. Which is why when people here fail after having tried something, they often have an easier time raising money the next time around. People say, ?Oh. he went bankrupt on that first venture? I bet he learned something from that, so I?ll bankroll him again.?

In Europe, bankruptcy carries a lifelong stigma. Whatever you do, do not declare bankruptcy in Germany: you, your children and your children?s children will all carry a lasting mark of Cain in the eyes of German society. If you must declare bankruptcy in Germany, you are better off leaving the country. (And you?ll be welcomed with open arms in Palo Alto.)

Some struggle with the concept? that when the business is a sole proprietorship, rather than a corporation or an LLC,? there is no dividing line between business debts and personal debts.? When a person files bankruptcy, all of their debts of whatever origin, must be listed.? One cannot just “file bankruptcy on the business debts.”

While our bankruptcy laws became less generous for those with largely personal, consumer debt with the changes of 2005, bankruptcy remains open and forgiving for those with business debts.

This post was brought to you, as they say on Sesame Street, by the letter “B”.

Image courtesy of TooFarNorth.

“Being sent to collections”

I was counseling a small business with lots of vendor debt.? We were looking for a strategy that could keep them in business.? When I suggested that management sort their payables into vendors they needed and wanted to keep, and those they could live without and wouldn’t pay going forward, I heard the familiar refrain:? “but they’ll send us to collection!”

So?? Where is “collection”?? What is so bad about a corporation being there?? It isn’t painful…

Let’s think: ?? “collections” is little more than an accounting category including debt that isn’t paying or isn’t likely to pay without something more.

Collectors, whether business or consumer, rely on the same weapons.? Their job is to “motivate” the debtor to pay up, because the alternative approaches for the creditor are expensive, timeconsuming, and uncertain.

My pitch to this business was premised on the idea that 1) there wasn’t enough money to pay everyone; 2) they had multiple sources for the product they needed; and 3) the survival of the business was at stake.

It is certainly unpleasant to face the fact that you can’t pay everyone you owe.? But that risk and that result comes with being in business, for both the debtor and the creditor.

Individuals face the same dilemmas when there isn’t enough money to go around.? I try to inculcate in consumers the same view as I pitch to businesses:? this is only money we are talking about and both sides to a credit transaction know that payment isn’t assured.? That’s why credit comes with a cost, to cover that risk.

Business sometimes requires that we make decisions and take actions that we wish we could avoid.?? It comes with the territory.

This group of clients left with a plan to focus on the big picture, reduce the overhead, and trim the cash outflow dealing with the past.? My hope is that there is a future for them as a result.

In the past year, I’ve seen half a dozen folks whose small business isn’t really making it, and in better times, I would have urged them to acknowledge that and move on.? But in our present economy, what is there to move on to?

Over at Money Health Central, my buds and I have been writing about self employment:

• choosing the form of the business
• do’s and don’ts for the self employed
• planning for self employment taxes
• staying out of? tax troubles
• filling all the roster positions as an entrepreneur

But we haven’t cracked the problem of self employment as a last resort.

The handwriting on the wall suggests that the economy of the future will involve more freelancers, project based employment, and multiple career changes.? Networking will be essential to find work and budgeting essential to carry us between jobs.? We can teach those skills to the young;? it’s a lot harder to change the mind set and skill set of the middle aged.

I’ve gotten good at talking people into surrendering the overly expensive, underwater house. I’m clueless about how to help the involuntarily self employed.

But last week, such inattention promised to pave the way for the stockholder to walk away from a failed corporation, taking the phone number, which was undoubtedly the most valuable assets in the business.

For, you see, they never transferred the phone account of the proprietorship to the corporation. My individual client still owned the phone number and should be able to use that number in a new business started from the ashes of the present corporation!

If the phone number had been transferred, then we would have been faced with tricky questions of how to sell it to the individual before the corporate bankruptcy and how to value the number such that the transfer wasn’t a fraudulent transfer.

Spared that headache by the ineptitude of the incorporating professional. Yipee!