Financial management is often challenging for small businesses and self employed massage therapists in good times. Balancing cash flow, saving, taxes, and expenses can be a delicate balance. When the economy and public health have many ups and downs there is a predictable pattern of contraction and expansion of consumer spending.
The massage industry can be sensitive to economic downturns and public health crisis. Economic downturns like 9/11 and the great recession of 2008 affected many small business especially massage businesses that are often micro small businesses and solo practitioners.
Rainy Days Come
When the economy retracts, consumers can become fearful of spending and conserve their cash. The conservation of cash can be temporary or prolonged. Consumers may choose to only spend the minimum and cut spending anywhere they deem to be a temporary or long term disposable expense.
Let the Good Times Roll
When the economy is good and consumer confidence is high spending becomes more flexible and generous. Consumer confidence in the state of the economy as reflected in things like the availability of jobs, return on investments and cash on hand make consumers feel safe to spend money. When its good, its good for everyone and money flows.
The Covid-19 public health crisis has brought to light for many they may need to make changes in the way they handle their finances and/or have their business structured.
Ordinarily, self employed workers, gig workers, sub contractors, independent contractors do not pay into unemployment for their state so they are not entitled to unemployment benefits. Due to the magnitude of the crisis created by social distancing and the enormous amount of people that would have suffered the CARES Act created a means for the self employed workers to get unemployment.
Going forward, however, this may not be the case. This was a special circumstance that created this special legislation to cover the self employed under unemployment. The money going to the self employed is not true unemployment which is usually collected by the state and distributed by the state department of labor. The money flowing through the state department of labor as "unemployment" to self employed workers is actually federal money being distributed through the states.
You have a choice moving forward.
1. Work for an employer as a W2 Employee that will contribute to your state's unemployment, as well as, take your taxes and social security contributions out of your income and pay them on your behalf.
2. Work for yourself....
Sole Proprietor: You are your own boss and responsible to pay your taxes quarterly. You do not pay into unemployment.
LLC- You are your own boss and responsible to pay your taxes quarterly. You do not pay into unemployment. You do have the benefit of a layer of legal protection from a lawsuit affecting you personally. You will pay the state business taxes (your accountant can advise you about those).
Corporation- You can pay yourself as an employee and pay into unemployment. You will pay corporate taxes which can be significant. You do get a layer of protection from being personally affected in a lawsuit.
It is best to examine all these options with your CPA and determine for your business what is best and how the option you choose will affect you as related to taxes.
Tuck Some Away
For any of these employment options, it is CRITICAL that you have a rainy day fund. Especially if you are not an employee either through working for someone else or your own company, you have to have a rainy day fund. It is critical to have a year of living expenses to hold you in case you have a medical emergency, a disability, a mandated government closure or an economic down turn. I know, really I do its hard to save. Do what you have to do to save. Do extra massages, take a second job. get a room mate, move back home, down size, get a cheaper car, reduce your expenses, and save money! Get a separate account that is your own personal paid time off account to draw on only if you are unemployed. Think of it as your own personal unemployment fund. The key is to be disciplined and not think about this money as "extra" for unexpected expenses and emergencies.
While these are difficult times, the good times will return and when they do take some off the top and tuck it away!