Under the Radar

115: The Going Indie Spreadsheet, Part 1


00:00:00   Welcome to Under the Radar, a show about independent iOS app development. I'm Mark Orment.

00:00:05   And I'm David Smith. Under the Radar is never longer than 30 minutes, so let's get started.

00:00:10   So today, we wanted to kind of expand on a topic that I think has come up many, many times over the course of Under the Radar.

00:00:18   I think we're up to episode 115 now, and certainly one of the things and the topics that we have touched on many times is

00:00:26   the process and practicalities and logistics around being self-employed, about being an independent developer.

00:00:33   Obviously, given the nature of the show, we're typically talking about being an independent iOS developer in whatever form that might take for you.

00:00:41   But in general, that is something that we talk about a lot. And something that I realized, though, was that I don't think we'd ever really sort of tried to put together a concise,

00:00:52   clear description about what that transition or what that process might look like.

00:00:58   And if you're a listener of either Analog or ATP, other podcasts involving either our network or Marco,

00:01:08   you will find that you have heard that a good friend of ours, Casey Liss, is sort of in the early process of deciding if this is something that he wants to pursue.

00:01:18   And it's come up there, and I'll have links in the show notes to those discussions.

00:01:22   Because that got me thinking about, if I wanted to try and condense a concise kind of version of, you're thinking about maybe going independent, what would that look like?

00:01:33   What would be the starting point for that? And I kept coming back to the importance of starting with a spreadsheet.

00:01:41   And maybe this is, in my life, just personally, I know something has gotten serious when I make a spreadsheet for it.

00:01:50   Like if I'm planning a vacation, it's a fun idea until I make a spreadsheet. And once I've made that spreadsheet, then it's serious.

00:01:57   So that's just how I think. But I think for something like this, practically, the process of going through and turning the big,

00:02:05   scary, kind of woolly ideas that you might have in your mind around going independent, about suddenly being responsible for so many other things about your employment,

00:02:14   about your income, there's these big kind of amorphous things that are so easy to kind of blow out of proportion in your brain.

00:02:22   They become these big impossible tasks that might get in the way of you deciding that you can or that it's possible or reasonable or safe or whatever to start.

00:02:33   And it's also just an important thing to understand and to go into a process like this where you are suddenly responsible for a lot more things with big open eyes

00:02:43   and understand the details and the process. And so I thought it would be a good idea to kind of just expand upon that and to talk through all the different parts

00:02:54   of what the transition to being self-employed might look like, the things that you would want to have in a spreadsheet.

00:03:00   And when I say a spreadsheet, what I really mean is you need to understand the base financials of going independent.

00:03:09   What are your expenses going to be? What are your incomes going to be? Really, it's focusing on your expenses so that you can understand what your income would have to be

00:03:17   in order to have it be viable. And this is certainly not a unique concept. I'm reminded of, and I'll have a link in the show notes to this too,

00:03:25   there is a discussion on the Supertop podcast where Padre Gunnar Sheen, the makers of Castro, talk about how in their business they call it the doomsday countdown,

00:03:35   which is basically they have a big spreadsheet where they have their expenses and they have their income and they put the two together and at some point they'll run out of money or not.

00:03:44   And it's a really constructive way to think about it. But that's what we're going to do. We're going to unpack all the various parts

00:03:52   and try and put some handles on what this process might look like so that it's hopefully not scary. Or at the very least, if you're scared, you're scared for the right reasons

00:04:04   and you're not scared for made-up reasons.

00:04:06   That's always good, to be scared for the right reasons.

00:04:09   So first, I guess, the right place to start. And probably a fair disclaimer, this is going to be fairly US-focused, just in the sense of some of the things that we're going to talk about only apply to people in the United States.

00:04:23   I think the general lesson and the principle applies universally, but since A) we both live in the United States and the majority of our audience seems to live in the United States based on our analytics,

00:04:35   it's probably not inappropriate, but just wanted to put that out there as a vague caveat.

00:04:39   But the first thing you have to decide is a little bit around the formation of the company that you're going to do.

00:04:48   And it's probably important to say that I think it is very important that you be a company.

00:04:54   That you, in theory, could just start being self-employed as a sole proprietor, which is the fancy term for you're just a guy with a checking account who does work and gets paid, which is certainly something that you could do.

00:05:09   But forming a company, I think, is an important step in this process because A) there's some vague sort of...

00:05:16   In general, it's good from a liability perspective. It's like the vague concept that a lawyer and accountant would talk about where you're separating your work you're doing from your own personal finances.

00:05:27   Exactly how the degree to which that liability shield would actually be useful or not is up for debate, but the reality is at the very least it has created some separation.

00:05:38   But I think more importantly, it makes a lot of things simpler down the road. It makes things like your accounting much simpler. It helps keep your work and your personal life separate.

00:05:51   Which, going independent, if you aren't thoughtful and intentional about, those two things will very easily blur together and become problematic, both in terms of your time as well as in your finances.

00:06:01   So it's good to have it there, as well as from a professionalism perspective. It's nice that if you're going to have student consulting and someone's going to write you a check to pay you, that they're writing that to a company rather than just to you to your name.

00:06:15   It doesn't quite have that same professionalism, and it also means you're serious about it. So that's probably a good thing.

00:06:22   I remember when I was starting, I worried a lot about what's the perfect type of company that I could start, and it's like, should I be an LLC? Should I be a corporation? There's lots of questions you can have there.

00:06:32   You can talk to an accountant, a lawyer, or someone who's done this before.

00:06:36   I will clarify, you should talk to an accountant and a lawyer when making that decision.

00:06:41   Yeah. But I would say, don't wrap yourself around the axle about that, though. You can change this down the road. There's a lot of flexibility even within a choice.

00:06:52   You can choose to be an LLC that's taxed as a corporation. There's lots of flexibility there, but you just need to decide. Get some good advice, make a decision, and then presumably you'll file a bunch of paperwork.

00:07:03   I know how it works in Virginia, where I live. It's basically you fill in a form and send it to the state corporation commission. At least for forming an LLC, you send a form to the IRS to get your employer identification number so that you don't use your Social Security number for everything.

00:07:21   I had to fill in a form that I sent to my local county to get a business license. But you just go through this process.

00:07:30   But you do all that yourself?

00:07:32   You did, yeah.

00:07:33   Oh, man. So this is one lesson that I might interject here, is that for a very long time, I was the kind of person that I would do as much as I possibly could of the administrative stuff myself.

00:07:45   I used to do my own taxes, not so much once I started the business stuff, and that got pretty complicated. But for a long time, I did my own taxes. I would do all my own accounting, all my own basic bookkeeping and stuff like that.

00:08:01   And when it would come time to register something with the state or something like that, I would try to do a lot of that myself.

00:08:11   And I was doing this from the perspective, the big picture perspective, of treating my budget the same way I would if I was just an individual, not like a business.

00:08:23   And so it's like the idea of why would I give somebody $300 to do something for me if I can just do it myself? That's something that a lot of people don't, that isn't how they want to spend their money.

00:08:35   Or they can't spend their money that way.

00:08:38   And businesses don't, at least businesses that are well run, don't usually think so much that way.

00:08:45   Businesses that are well run usually recognize, like, okay, in the grand scheme of this business, $300 is not going to be a make or break amount of money, and it's better to spend this on the professional doing all this stuff, not only for you, but probably doing it better than you would have done, or doing it correctly, where you might have missed something.

00:09:05   And so at some point early on in my self employment career, this switch flipped in my head where I'm like, oh, actually I shouldn't be the one filling out these papers if I can have my accountant create an entire new LLC registered properly in the state of New York and everything, and do all that for me for a small amount of money.

00:09:25   Like, just have the accountant do it.

00:09:27   They know what's best, they know how to do it. They have systems in place where it's way less work for them to do it than it is for me to do it.

00:09:33   And so, let the professional do things like this for you.

00:09:37   And then you don't have to worry if you either missed something or did something incorrectly, or like checked the wrong box on something that might affect some major attribute of your business down the road, or might create problems later if you do need to invoke the liability shield and things like that.

00:09:54   Like, it helps a lot to have professionals do that kind of stuff for you. And I feel like it is a difficult mindset for a lot of people to get into of like being willing to spend money on professional services that you think you can do yourself or that you even could do yourself.

00:10:12   But I do think if you're getting into self employment, that is a transition that you almost certainly need to go through.

00:10:18   And the earlier you go through it, I've never spoken to anybody who has gone through this transition of doing things themselves to paying others to do them for them.

00:10:26   I've never talked to anybody who has said, "You know, I wish I did that later."

00:10:31   It's always like, "I wish I did that sooner."

00:10:34   I've never once heard a single case of the other direction where people regretted hiring professionals for modest sums of money to do things for them that the professionals were really good at.

00:10:43   So I would say when it comes to filing for a company or LLC or corporation, whatever it is, there are almost always lawyers and/or accountants who are nearby in every state who can do this for relatively small amounts of money. Just have them do it for you.

00:11:00   Yeah, I mean, I think that is very good advice. And I think it is certainly a transition that I saw in myself that I started off doing everything myself. And then now I'm in a different place now where I have professionals take care of a lot of this type of thing for me.

00:11:13   The only slight caveat I will say is, I think it is important to understand what it is your accountant or your lawyer is doing and why they're doing it.

00:11:23   Because, which is part of honestly why at the beginning, there was the financial part of it a little bit, but also I wanted to make sure that I really understood that when I formed an LLC company in the state of Virginia, what that meant, and understood why I was doing that and the pros and the cons.

00:11:44   Just to make sure that you're able to take advantage of all of the advantages of whatever the, say, in this case, the type of company you have will have certain benefits to it. It will also have some drawbacks. And to understand what those are ahead of time.

00:11:58   And similarly, this is a more general point, but I always try when my accountant is telling me about something or when I'm going through my taxes, manual taxes with my accountant, I want to make sure that I understand what they're doing, not to the degree that they do, obviously.

00:12:15   This is the advantage of it being a professional, is that somebody who, they can tell you which of the dozens of opportunities or things that you could do or not do, you should do. But once they whittle that down to here's one thing that I think you need to take, you should do or you should structure yourself this way,

00:12:35   for me to make sure that I understand that. Because there isn't, as someone else, like ultimately you are going to be responsible for these choices. You're going to be the one who's going to be signing the paperwork and being ultimately held accountable for those choices.

00:12:48   And so, making sure that you understand what you're doing. So it isn't like, "Oh, I hired an accountant, they took care of everything, I don't have to think about it." There's a little bit of that. Like you can hopefully trust that they're giving you good advice,

00:13:00   but you want to make sure that you understand what you're getting into and understand the process enough. Like you don't need to go to the degree that I was doing back then when I was actually physically filling in the paperwork, but when they send you paperwork to sign, read it, make sure you understand it.

00:13:16   And if you have questions, ask questions. They're a professional, it's their job to make sure that you're understanding what it is that they're encouraging and advising you to do.

00:13:26   We're sponsored this week by FreshBooks. This is very relevant actually to all the freelancers out there. You know how important it is to make smart decisions for your business. FreshBooks can save you up to 192 hours with their cloud accounting software for freelancers.

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00:14:01   And FreshBooks does so many convenient things. So for instance, one of the things they do is they automate late payment email reminders. So you don't have to spend so much time chasing down payments. You can really focus on your business and what you need to do for it.

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00:14:25   All you have to do is go to freshbooks.com/radar and enter under the radar in the "How did you hear about us?" section. We thank FreshBooks for their support of this show.

00:14:35   The next place that probably makes sense to start is you open up your spreadsheet. You're going to start off working out like, "Okay, I've decided what company I'm going to be. Now I'm going to start putting together a list of the expenses."

00:14:45   Probably the best expense to start with is to understand what the taxes that you're going to have to pay are. Because almost certainly, that is going to be your single largest expense for any business.

00:14:58   One thing that's kind of funny about being self-employed is now suddenly you are responsible for all of your taxes in terms of the payment of them.

00:15:09   Previously, maybe they were taken out with payroll withholding or something like that. Now you have to decide how you're going to pay them. Are you going to do quarterly estimated taxes?

00:15:18   Are you going to run payroll for your company and do withholding that way? But whatever you do, suddenly you are responsible for your taxes in a very different way.

00:15:28   You're going to have to determine what taxes you need to pay and just account for the expense of them. Be aware that the taxes you're going to pay are very different and probably a bit higher than what you're paying currently.

00:15:42   Or at least what you think you're paying currently because you're going to see the whole picture. A lot of this will depend again on the type of company you form.

00:15:51   If you're a pass-through entity is the big fancy term for if your business income is being taxed as an individual, like it passes through the company and then you pay taxes there.

00:16:02   Or you can pay your taxes inside of the company and then your company pays you a salary and dividend or profit income. There's all kinds of things there.

00:16:13   But ultimately, you need to work out in your spreadsheet what percentage of your income is going to go to taxes and what taxes those are going to be.

00:16:23   You'll have basic taxes, like general income tax. You'll probably have self-employment tax or payroll taxes, which are your Social Security and those types of taxes.

00:16:34   Currently, if you work at a regular 9-to-5 job and you get a paycheck, you'll notice that you're probably paying something like 7.5% into FICA.

00:16:46   It's what it usually comes up listed as. It's like the Social Security and Medicare and all that type of taxes. When you're self-employed, you have to pay essentially twice that amount.

00:16:57   Currently, your employer is paying the other half, but if you're the employer, then suddenly that's you, so you're paying both sides of that.

00:17:04   You'll have to pay your state taxes, maybe some county taxes, and you just need to work out what all these are.

00:17:10   An accountant is, again, the best person to talk to about working out what these are, but you're going to need to work out how much this is because it's going to be different.

00:17:19   It's going to be a very substantial, probably a third to a half of your income is going to go to a tax of some kind.

00:17:26   So you better make sure you understand what these are going to be.

00:17:29   Exactly. This is one area where my philosophy has always been to really conservatively set it, or really aggressively set aside money for taxes, basically, and really just estimate really high on it.

00:17:44   You said a third to half. I will frequently just assume that half of the money that comes in is not mine, even though my tax rate is not 50 percent, but it might be 30 to 40 percent for a lot of people, depending on what state you live in and what your income bracket is and everything.

00:18:00   So be very aggressive about setting aside money for taxes until you really know what that number is, which you probably won't have a great idea for it until you've been doing it for a year.

00:18:14   And even then, it might change if you make a lot more or a lot less money the next year.

00:18:19   So really be very conservative with how much money you assume is yours out of your income.

00:18:29   And similarly, it's being very careful about understanding that you're going to hold on to a lot of your taxes for longer than your -- like previously, you never saw that money.

00:18:41   It had just disappeared into your paycheck, or before you got your paycheck.

00:18:46   But now you're going to have -- say you get a check from a consulting client.

00:18:51   Some amount of that is going to go to taxes, but you're going to hold on to that for potentially up to like three months, and you need to make sure that you are being thoughtful about that so you don't find yourself at the end of those three months with a big liability that you can't cover.

00:19:06   So just as general advice, don't play fast and loose with those liabilities in terms of understanding that you're going to have this money that sort of feels like it's yours, but it isn't really yours.

00:19:17   And you're now responsible for making sure that when the time comes to pay the tax man, that you have the money to pay the tax man, and that you haven't sort of spent that money or forgotten that you're going to have to pay him down the road.

00:19:31   So one trick you can do for this that I learned early on, especially when you're new to it and you're kind of getting the hang of how this all works, a really good thing you can do, there is nothing saying that you can't pay more in estimated taxes than you need to, or that you can't pay more often than you need to.

00:19:49   So one thing I would do when I was mainly starting out with Instapaper, and this was actually fairly easy because all the income was coming from Apple at the beginning, so every month I would get one giant deposit from Apple, and then I would literally monthly pay estimated state and federal tax.

00:20:07   And not based on a very carefully calculated estimate, I think I looked up whatever the top tax bracket was, I think it was 38.5% or something like that for federal, and New York State was something like 7%, or something like that.

00:20:20   And so I would literally just, every time I got paid by Apple, I would submit monthly estimated tax payments for 38.5% to federal government, and 7% to New York State.

00:20:31   And sure, at the end of the year I would have overpaid, but not by that much, and it was, and then your end of the year payment considered a bonus that you don't have to make some of that payment depending on what your accountant tells you.

00:20:43   And so this, you know, accountants used to tell you, like, oh, you should never pay more than you have to, or even earlier than you have to, because you're giving the IRS an income-free loan, you know, why don't you keep it and get the interest?

00:20:55   And that made sense back when interest rates mattered, but these days the interest rates are so low on, like, checking and savings accounts and things that there's not a lot most people can do with that money in the meantime anyway that isn't a huge risk, that would actually get them more, you know, any kind of meaningful return.

00:21:09   You're saving maybe, you know, individual dollars at the end of the year, like, you're not saving a lot of money.

00:21:14   So when you are getting the hang of this, if you're freaked out about taxes, which you probably should be before you know what they are, then actually making, like, every month, whatever you made that month, giving a fixed and fairly aggressive percentage in an estimated payment to federal and state governments is not a bad thing to do.

00:21:34   It's actually, I find it very helpful, because then I knew when the money came in, I gave this to federal, this to state, and the rest was pretty much mine. Like, I knew how much was mine, and it was a pretty good estimate.

00:21:46   Yeah, and even more importantly, the last thing you want in the area of taxes are surprises. Or at least surprises that are expensive. Yeah, surprises in one direction. Yeah. It's great to be surprised at the end of the year. It's like, "Hey, here's, you know, here's four or five thousand dollars that you're getting back as a rebate." Like, great.

00:22:06   Like, that's a good surprise. The surprise the other direction can be very problematic. And so yeah, I didn't do quite as aggressive of a plan as you did, but I definitely, at the very least for your spreadsheet purposes, make sure you're not trying to be like best case or optimistic or whimsical about your tax rates.

00:22:25   Like, be overly conservative there. Work out what the worst case is or what the worst case would look like, and then plan accordingly. And either take that money and put it into a separate account, prepay it ahead of time, however you're going to account for it.

00:22:38   But make sure that you're being conservative about it enough that you're not going to get caught out at the end, because that sounds like a very, very bad situation to find yourself in. Exactly.

00:22:49   All right, so there's going to be a variety of things that we're going to talk to, and I think it'll end up probably being two episodes. But before we get into some of the other expenses you may have, it probably makes sense to just also talk to a little bit about the way income will likely work, so that you can kind of, as you kind of are putting together these expenses and these counterpoints, and even just for the purposes of your taxes, you need to a little bit understand what your income is going to be, to know what bracket might make sense and so on.

00:23:18   So the income you get will depend a lot on the kind of work you do. For the purposes of this, if you're going to be an independent iOS developer of some form, that is almost certainly going to start off involving some amount of consulting, and maybe, I think we would both recommend that trying to diversify that into product income as well would make a lot of sense.

00:23:43   But initially, it's likely going to be largely consulting-based, where you're doing work-for-hire type of development. And that kind of work is probably the first thing to say, is that kind of work has an income profile that is incredibly bursty, that it is so inconsistent.

00:23:59   You will have one month where you, one or two months of the year will account for 80% of your income, and you'll potentially go for stretches of two or three months where you have zero income, which I think is mostly something to keep in mind.

00:24:16   A) If that's going to freak you out and drive you crazy, then this is going to end up being very problematic for you, because you just kind of have to get used to the fact that your income isn't direct deposited into your bank account every two weeks.

00:24:31   Though you can, actually, as a side note, one thing that I will encourage you to do is to think about if you like that, or if you, from a disciplined perspective, it appeals to you, you can still do that. You can just pay yourself on a regular basis.

00:24:46   This is something that I switched over to fairly early on in the process, where my business would pay me on a regular basis. And I just meant that on a personal level, I could kind of continue to budget and manage my finances like I used to when I had a regular job.

00:25:02   And my business would just sort of truck along as normal. And as long as my income in aggregate had exceeded my payroll that I was paying out over time, it was fine. And I found that to be really helpful.

00:25:16   So just keep that in mind. But either way, on the business side, your income is going to be fairly bursty. And honestly, even if you have product-based income, it's still going to be fairly uneven.

00:25:27   If not more so. You have paid upgrade cycles and things. It's incredibly up and down constantly.

00:25:34   Oh sure. It's gotten a little bit less to this now, but there was certainly periods early in the App Store where it was very seasonal, too.

00:25:42   Where I would make 10 or 15% of my revenue in the two or three days around Christmas every year. And so whenever that gets paid to me, which is probably in February, which is also important to remember that your income is delayed by at least two or three months, it could be very uneven.

00:26:01   So you're just going to have to keep that in mind and understand probably, too, that you're initially going to need probably some amount of savings to sort of invest into your business.

00:26:14   Not necessarily directly, but in terms of your initial income is not going to be like you start working and then two weeks later you get your first income.

00:26:24   It's probably going to be this process where you may have to go for a couple of months before you have income. Once you are going for a couple of months, it tends to even out.

00:26:33   It's something that I will say that once you start invoicing clients for things, even though those clients may be paying you later than the work was done, eventually it starts to even out.

00:26:45   And it kind of works out. But it's certainly something that you're going to have to work out for yourself. Like how much runway do you need in terms of how many months of expenses do you want to be able to cover and what level of income is that going to require?

00:27:00   Because if that income is a pretty big number, you're going to need to have some pretty big clients to make that happen or be incredibly successful with your products right off the bat.

00:27:11   Yeah, exactly. I mean, just basically plan. Again, this is an area where it also helps to kind of plan for the worst and definitely plan for making nothing for the first few months.

00:27:23   If you do, that's a bonus. That's great. But you probably won't. Because even with consulting, you mentioned there's an invoicing delay and that varies hugely between different clients.

00:27:33   And there's no rhyme or reason between whether they're big or small, rich or poor. People pay at vastly different rates. They'll give you every excuse in the book why they have to pay so slowly.

00:27:46   But the fact is they can pay as quickly as they want and most companies don't need to pay quickly, so they don't. So you might actually be doing work and getting paid for it two to nine months later.

00:27:58   It could be really bad. Again, if you use our sponsor FreshBooks, they can make it easier on you. But you're still at the whim of when a company will actually pay you.

00:28:05   And so trying to get people to pay invoices is a pretty big part of the job, which is why we have companies like FreshBooks trying to make it easy on people.

00:28:12   And it's probably also fair to say this is another area where diversifying your income can help a lot with that. It's very problematic, or at least dangerous, I suppose. If your entire business is based on one consulting client paying you, that is just a very precarious situation.

00:28:34   You hope that everything goes great, but even if everybody is entirely above board and doing the right thing, things outside of your control may come into play.

00:28:45   That business may just go out of business, and not for anything that you did or they did, it's just like the market turned down or whatever, and suddenly you never get paid for that six months of work.

00:28:55   If you have a diversified income source, that would still be awful and not great, but at least if you have different things. And so if you can find other ways to get income that you'll have, you know, you maybe have you have affiliate income from links to your apps in the App Store or to other apps, or you have a podcast that has sponsorships, or you have, like we've said, product and consulting.

00:29:16   But the more you can diversify your income, the more even it will be, the more consistent it will be, and the less risky it will be as a result.

00:29:25   All right, tune in next week for the second half of this discussion, where we talk about a lot of the expenses and especially the big one, health insurance.

00:29:33   Thanks for listening everybody. Yeah, right. Thanks for listening everybody, and we'll talk to you then.

00:29:37   Bye.