Math for the Self-Employed

Ever talk to another self-employed person about finances? Specifically about income? It never ceases to amuse and befuddle me.

For one thing, I do my own bookkeeping and my own taxes. This might go a long way in my understanding of my own income ...and others’. But it amazes me what other people actually don’t know about their own income — not to mention what they just plain lie about thinking that I don’t know either.

The self-employed lie about their incomes for all sorts of reasons, I guess. Or maybe not so much lie, as carefully choose which amounts to discuss.

I find that a lot of people like to brag about how much money they make by focusing on their business’s gross receipts. Like the salon owner who says she makes $130K a year. Oooooh, that sounds impressive. What you don’t get to see is that that’s the amount she puts on the first line of her Schedule C. BEFORE she lists all her deductions. That amount includes every penny her business took in for the year, but by the time she’s done deducting every possible penny she can convince the IRS was business-related, her personal adjusted gross income was more like $30,000. And that’s pre-tax.

I know business owners and self-employed persons all over the country who can’t decide if they make $100K a year or $10K because it all depends on whether they’re trying to convince someone that they’re doing well or that they aren’t.

I particularly love hearing from one fellow entrepreneur who likes to brag that she makes well in excess of a quarter million a year — but also shares that she only pays $10,000 in taxes... Ummm? That math doesn’t quite add up. But I know the difference between bragging about gross receipts versus paying taxes after deductions.

But truth of the matter is, on paper, many of us make less than enough than we’d like to insure. And I’m not even talking about those people who just flat out cheat on their taxes to begin with. I’m talking about people who legitimately spend a significant amount of their income on business-related expenses.

I don’t want to purchase disability coverage that would pay me 60% of my personal adjusted gross income, I want to insure my gross receipts! Because my gross receipts represent what I personally earned by the sweat of my brow with my own hands. My gross receipts are not padded with money made by the labor of others and only minutely by retail product that I could profit from even if one of my arms falls off. No. My gross receipts represent the money I earned. The fact that I then re-invest a significant amount of that money into continuing to earn money is immaterial in my mind. Maybe not so much to an accountant — but to me. I made that much money and if one of my arms falls off, I want my insurance to reflect that amount.

Sigh. I need to move on to a new subject. This disability insurance thing is frustrating and depressing.