Tax Strategies for IRA Withdrawals

Posted on December 31, 2021 by HopeToRetire

When you invest in an IRA, or other tax deferred plans like a 401(k), you delay taxes on that income (subject to limits) and growth until you start to make withdrawals.

As of the August 2019, you can start to make penalty free withdrawals at age 59-1/2 (some distribution reasons can be additional tax penalty free prior to age 59-1/2) and you are currently required to take distributions (Required Minimum Distributions – RMD) the year you turn 70-1/2. There is talk to increasing the RMD age to 72-1/2 currently.

The calculations can be complicated, and the penalties for not taking the RMD are steep: If you don’t take the required minimum distribution by the deadline each year, you’ll pay a penalty of 50% of the amount you should have withdrawn.

Considering the withdrawals will be taxed as ordinary income, the prospect of the tax bill can be scary. You need to know the strategies you can use to minimize taxes and avoid mistakes.

This post contains affiliate links

Calculate the Amount of Your RMD Withdrawals

Your RMDs are based on the balance in your accounts as of December 31 of the previous year, divided by a life expectancy factor based on your age. You can use the Uniform Lifetime table (Table III) in Appendix B of IRS Publication 590-B on the IRS website. If your spouse is more than 10 years younger than you and is your sole beneficiary, use Table II, the Joint Life and Last Survivor table, for the life expectancy factor.

IRAs are owned individually, even if you’re married and file a joint tax return, so you and your spouse have to take your RMDs from your own accounts.

Most IRA or 401(k) administrators will send you the required minimum distributions each year also.

Choose the Accounts of Your RMD Withdrawals

You have to calculate the RMD from each of your traditional IRAs, including rollover IRAs, SEP or SIMPLE IRAs. But you can add the total required withdrawals from all of those IRAs and take the money from any one or more of the IRAs. You cannot take RMDs for a 401(k) from your IRA.

I would choose accounts with high fees or exceed SIPC insurance balances first. Limited investing options (high concentrations) are another possible reason to withdrawal first too. Most insurance companies and banks offer IRAs, but allow you to invest in the company or interest savings only.

Choose Which Investments to Withdrawal

Some IRA or 401(k) administrators automatically withdraw RMDs proportionately from each of your investments, unless you specify otherwise, and they could end up selling stocks or funds at a loss to make your payment. If you’d like to prevent that from happening, you can usually elect to take a fixed percentage from each of your investments or have 100% taken from cash. If you choose the cash option, the IRA administrator may send you an alert beforehand in case you need to sell shares to raise the cash.

I am the conservator of an estate that has an IRA through Edward Jones, I use the cash option and convert certain investments annually to cash to meet the RMDs.

Time Your Withdrawals

You usually have to take your annual RMD by December 31 of the year your turn 70-1/2, but you have until April 1 of the year after you turn 70 to take your first required withdrawal. However if you delay the first withdrawal you will have to take two RMDs in one year (one by April 1 and the other by December 31), which could create a large tax bill. The additional ordinary income could cause more of your Social Security benefits to be taxable, put you in a higher tax bracket that includes surcharges, etc.


You Can Choose to Automate Your Withdrawals

If you’re worried about missing deadlines, most IRA administrators will let you automate your RMDs. You can usually sign up to have the money withdrawn every month on a certain date each year.

Have Your RMD Go to a Charitable Organization

You can get a tax break donating your RMD to a charity. After you turn 70-1/2, you can transfer up to $100,000 directly from your IRA to charity each year (called a qualified charitable distribution), which counts toward your RMD but isn’t included in your adjusted gross income. This strategy can be particularly helpful now that fewer people are able to itemize their deductions due to the Tax Cut and Jobs Act and otherwise wouldn’t get a tax break for their charitable gifts.

You can make the transfer to one or more tax-qualified charities. The transfer must be made directly from your IRA to the charity to count as a QCD. If you receive the money first, the distribution will be taxed as income and you will have to itemize to get credit for the donation. The benefit is greatly reduced in that situation.

Consult with your IRA administrator about their procedure. Most send the money directly from your account. Let the charity know the money is coming so they can send you a confirmation, which you’ll need to keep with your records and give to your tax return preparer, along with the 1099-R you will receive around February of the month following the distribution year end.

Roll your Traditional IRA RMD into a Roth IRA

You do not have to take RMDs from Roth IRAs, so any money you have rolled over from a traditional IRA to a Roth avoids future RMDs. You will still have to pay taxes on the amount you rolled over (withdrew.) Take that into account, you may need to withhold some of the rollover to pay your estimated taxes. If you choose to rollover before 70-1/2, consider what amount you can afford the tax on to rollover each year.

Invest in a QLAC

Balances invested in a Qualified Longevity Annuity Contract (QLAC) is not included in the RMD calculation. You can invest the lessor of 25% of the balance or $130,000. I would look at this option closer to retirement age, but before 70-1/2. You’ll pick the age you want to start receiving an annual benefit for the rest of your life. The benefit is based on actuarial tables, but you will need to factor in your own health and family health history and access to quality medical care. You must start receiving the benefits at age 85 if you do not choose earlier.

You don’t want to start receiving lifetime benefits at age 72, only to drop dead at 73.

I hope this post helps you in considering your options in withdrawing from your IRA. If you need help preparing your tax return, please email me at ValdostaCPA at Yahoo.com. Personal 1040 tax returns with 1 State start at $100. Many of my retired clients do not exceed that fee. I can prepare remotely, you just need either a scanner or smart phone to get paperwork to me (although some clients elect to mail everything.)

I would love if you shared this post if you got something out of it that helps you.

Posted in Retire | Comments Off on Tax Strategies for IRA Withdrawals

Avoiding IRA Rollover Errors

Posted on December 31, 2021 by HopeToRetire

Ineligible Rollovers Cause Expensive Tax Penalties

Not all IRA rollovers are eligible to be a tax free transaction. Ineligible rollovers can cause you to be taxed on the rollover, including a 10% penalty. You could also get slapped with an excess contribution penalty, which is currently 6% per year the excess contribution is in the IRA.

If you distribute a large amount (i.e. the entire plan balance), you will have a huge tax liability if the rollover is an ineligible rollover.

3 Most Common Rollover Errors

  1. Violations of the once-per-year IRA rollover rule.
  2. Missing the 60-day rollover deadline.
  3. Distributions to non-spouse beneficiaries.

This post contains affiliate links


Once-per-year IRA Rollover Rule

You can make only one rollover from an IRA to another (or the same) IRA in any  twelve month period, regardless of the number of IRAs you own.

The one-per year limit does not apply to:

  • rollovers from traditional IRAs to Roth IRAs (conversions)
  • trustee-to-trustee transfers to another IRA
  • IRA-to-plan rollovers
  • plan-to-IRA rollovers
  • plan-to-plan rollovers

Once this rule takes effect, the tax consequences are:

  • you must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover (other than a rollover from a traditional IRA to a Roth IRA) in the preceding 12 months, and
  • you may be subject to the 10% early withdrawal tax on the amount you include in gross income.

More information is available on the IRS website.


60-day Rollover Deadline

Most pre-retirement payments you receive from a retirement plan or IRA can be “rolled over” by depositing the payment in another retirement plan or IRA within 60 days. If the distribution is paid to you, taxes will be withheld from the distribution. You will need to make up the portion withheld from other funds so the full distribution is rolled over.

There are certain situations that allow a waiver of the 60 day requirement, see this IRS article.

Most plans will rollover the funds directly to another account, which negates the need to make up the taxed funds and stress of the 60 day window.

Distributions to Non-spouse beneficiaries

Rollovers are not permitted for non-spouse beneficiaries. For example, if a single parent dies and leaves the IRA to a child, the distributions cannot be rolled over. They can be distributed. Typically the beneficiaries cash out the IRA and the distribution is taxed as ordinary income, or they convert to an inherited IRA, which they can take Required Minimum Distributions (RMD) annually based on their life expectancy.

The RMDs are required by December 31st of the year following death. It is critical you plan accordingly with the plan administrator to convert to an inherited IRA, collecting all in one year could result in a large tax bill.

There is currently talk in Congress that forces non-spouse beneficiaries to distribute the full balance within a 10 year timeframe.

Those are the common ones, but there a several more rollover errors. 

Required Minimum Distributions (RMD)

See my previous retirement article that discusses required minimum distributions.

RMDs can never be rolled over, but it happens often , especially in conjunction with Roth conversions. If an RMD is rolled over, it becomes an excess IRA contribution subject to the 6% penalty unless it is removed by Oct. 15 of the year following that of the excess contribution.

A Roth conversion is a rollover and so the RMD can never be converted to a Roth IRA. If that is done, the RMD is still satisfied, as the funds have been withdrawn, but the funds rolled over to the Roth are excess contributions. Once the RMD is satisfied, then any balance remaining in the IRA is available to be converted.

After-Tax IRA Funds

Only pre-tax IRA funds can be rolled over in an IRA, after tax funds cannot. This segregates the pre-tax contributions and allows you keep up with the basis.

IRA basis includes the after-tax funds from nondeductible IRA contributions and any rollovers of after-tax plan funds into the IRA. Clients are required to keep track of their IRA basis on Form 8606 (Nondeductible IRAs) when they file their taxes. Roth IRA funds also cannot be rolled over to a company plan, even to a company Roth 401(k).

Hardship Distributions

Some plans allow hardship distributions. These withdrawals cannot be rolled over.

The hardship distribution is taxable (to the extent of pre-tax plan funds being withdrawn) and subject to the 10% early withdrawal penalty if no exception applies. There is no financial emergency or hardship exception to the 10% penalty, except in the case of special rules for natural disasters.

These hardship distributions do not apply to IRA withdrawals, as all IRA funds are eligible to be withdrawn at any time, regardless of the reason. The distribution might be subject to tax and the 10% early distribution penalty. If IRA funds are withdrawn for a hardship and not needed, they can be rolled over to the same or another IRA, as long as they are eligible for rollover under the 60-day and once-per-year rollover rules.


Divorce

When IRA funds split in a divorce are withdrawn, those funds are taxable and cannot be rolled over to the ex-spouse’s IRA.

IRA funds should be moved from one spouse’s IRA to the other’s by a tax-free direct transfer.

Plan Loans

A defaulted plan loan is usually considered a “deemed” distribution.” The plan will report the outstanding loan balance on Form 1099-R with code L in box 7.

A deemed distribution is not offset from the employee’s plan balance. Instead, this unpaid amount will remain recorded as an outstanding loan by the plan until a distribution can occur under the plan’s terms. A deemed distribution is taxable and may be subject to the 10% early distribution penalty. It is not eligible to be rolled over to an IRA, even if the employee has the funds to complete the rollover.

A plan loan offset can be rolled over. In this case, the loan is not in default. The employee may have left the company but still had an unpaid loan balance in the plan. When the employee withdraws their 401(k) balance, it will be offset by the amount of the unpaid plan loan. The full distribution will be taxable, even though the employee only received a net amount.

The employee can avoid taxes and penalties by rolling over the loan offset amount to an IRA.

If the offset distribution is the result of plan termination or employment separation, the distribution must be rolled over by the tax-filing deadline, including extensions, for the year the distribution is received.

The employee will need to repay the balance, either from personal capital or a loan.  This is the only opportunity to avoid taxes on the offset amount. If they don’t repay the outstanding balance, it is treated as a distribution. Since a loan offset is not in default, any offset amount is eligible to be rolled over.

Different Property from Withdrawal

If you withdraw cash from an IRA, only cash can be rolled back over. Same with stock. It must be the same property, otherwise it cannot be rolled over.

There is an exception for property distributed from an employee benefit plan.

§72(t) Distributions

§72(t) distributions are a series of early withdrawals that are set up to avoid the 10% penalty. To qualify for the penalty exception, the withdrawals must be a series of substantially equal periodic payments.

You can withdraw from your IRA or employee benefit plan before age 59-1/2 without a 10% penalty if you commit to a plan of withdrawals according to the rules set out in Section 72(t)(2)(A)(iv) of the Internal Revenue code.

You can begin a §72(t) payment schedule from an IRA at any age, even if you are still working. These payments must continue for at least five years or until age 59-1/2, whichever longer, and the distributions cannot be rolled over.

You must take consistent distributions and cannot change the agreed upon schedule or account and pay the appropriate tax. If you violate this contract (i.e. by rolling the distribution over), then the 10% penalty will apply to all distributions taken prior to age 59-1/2. See the recapture penalty rules.

Another issue is when eligible rollover dollars go into an IRA that is subject to an active §72(t) payment schedule. That rollover of new funds into this IRA will modify the IRA balance and trigger the retroactive 10% penalty.

I hope this article helps you avoid costly rollover mistakes.

If you need help preparing your taxes, email me at ValdostaCPA at Yahoo.com. Simple tax returns start at $100.

Posted in Retire | Comments Off on Avoiding IRA Rollover Errors

Advantages and Disadvantages of a Limited Liability Company

Posted on December 31, 2021 by HopeToRetire

What entity structure do you choose? A lot of the time a Limited Liability Company is a good fit, but make sure you know and trust your partners. Below are some advantages and disadvantages.

Advantages and Disadvantages 

Advantages

  • A limited liability company can have more than one member (owner.)
  • Members do not have to contribute money, they can contribute any tangible or intangible property in exchange for a membership interest.
  • Member interest is transferable.
  • All of the members have the benefit of limited liability from the obligations and liabilities of the entity, including if they participate in the management of.
  • Can be taxed as a partnership, on a Schedule C if a single-member LLC or husband-wife LLC, or elect to be taxed as a corporation.
  • If taxed as a partnership or on your personal return, the income of the business is only taxed once and losses can be used to offset other income.
  • A limited liability company taxed as a partnership can divide the gains and losses between the members for tax reporting without regard to how much capital they contributed.
  • A LLC taxed as a partnership can be converted to another business structure in a tax-free transaction.
  • A LLC can be managed by either its members or by a manager. This allows the LLC to choose the best structure for decision-making purposes.
  • If a manager-managed LLC, those that do not participate in the management do not have to pay self-employment taxes on their share of income.
  • If a manager-managed LLC, the business survives death or incompetence of a manager that is not a member.
  • No requirement to have formal meetings.
  • Depending on the State organized in, you may be able to withdraw and receive fair value of your interests from the limited liability company.

This post contains affiliate links




Disadvantages

  • Unless a manager-managed LLC, members will have to pay self-employment taxes.
  • Since all members and managers have the right to participate in management, disagreements between members can occur.
  • Other members or managers have the authority to bind the entity in the ordinary course of business.
  • All members must provide consent if transferring your interest to another party.
  • A limited liability company could be dissolved if a member withdrawals, dies, goes bankrupt or is otherwise incapacitated, unless there is an operating agreement in place that provides instructions as to what happens in the event of that happening to a member.
  • Requires a State filing in the State of organization and the States doing business in.


What is a Limited Liability Company (LLC)

A limited liability company (LLC) is a business structure that gives the members (owners) liability protection and the ability to pass profit and losses to their personal tax returns.

This basically blends a corporation and a partnership. Instead of the owners being responsible for the liabilities of the business, creditors would need to go after the business’s assets. This is different from a partnership or sole proprietorship, where creditors can go directly after the personal assets of the owners and partners.

But like sole proprietors and partnerships, the income and losses can flow to the member’s personal tax return. LLCs have many different options in filing taxes:

  • Single-member LLCs can file on a Schedule C of the member’s personal 1040
  • Husband and Wife LLCs can do the same as a single-member LLC
  • LLCs with two or more partners usually file Form 1065, the partnership tax return. The members will receive K-1s they will report on Schedule E of their personal tax return
  • A LLC can file Form 8832 and elect to be taxed as a C corporation
  • A LLC can elect to be taxed as a S corporation by filing Form 8832 and subsequently file Form 2553.

Who Should Consider Starting a LLC

I recommend using a LLC structure for most businesses that may face creditor claims or potential lawsuits.

You do not want to work for years building your business and saving money annually, only to lose everything due to legal fees or a judgment

Note that even though the LLC offers liability protection, the members can still be liable in certain situations. Some of the ways the corporate veil can be pierced:

  • Members not separating assets (i.e. not having a separate bank account for the business)
  • Illegal activities within the business
  • Knowingly not correcting an unsafe situation on the premises

To be safe, I would create an LLC or S or C-Corporation for many businesses that has property, uses labor (in-house, contract or temporary), and many that provide a product or service.

If you do all of the labor in a small service or provide a commodity product that doesn’t have liability, you may be ok to use a sole proprietorship or partnership. Otherwise, in most States, it only costs $100-200 more per year to maintain a LLC. It’s considerable higher in some States like California, which charge a franchise tax.

There are some businesses that are prohibited from creating LLCs: banking and insurance. Some States (like California) do not allow licensed professionals to start LLCs: law practices, CPA firms, doctor offices, etc.

My CPA firm is organized as a Professional Corporation (PC.) I see a lot of law offices organize as Limited Partnerships or Limited Liability Partnerships.

How Do You Form a LLC

Most States just require you to submit an Articles of Organization and pay the filing fee. Many States, including my home State, Georgia, allow you to file the Articles of Organization online with the Secretary of State.

In Georgia, it only takes about 20 minutes to go through the entire process. Right before or immediately after, you must submit your Intent to Form a LLC with your local newspaper. The rate will vary by publication.

I hope this helps you in your decision as to whether to form a LLC.

If you have a LLC and need help preparing your taxes, reach out to me at ValdostaCPA at Yahoo.com. I have clients in most States and many countries. If you have a Smartphone, Scanner or feel like mailing me your forms, I can prepare your taxes.

Posted in Entrepreneurship, Legal | Tagged , | Comments Off on Advantages and Disadvantages of a Limited Liability Company

Review and Summary for “Publish. Promote. Profit.” by Rob Kosberg

Posted on December 31, 2021 by HopeToRetire

Publish. Promote. Profit.

This post contains affiliate links.

“The key to every story is the proactive focus of the authors to create the results that you see” 

– Rob Kosberg

Publish. Promote. Profit. by Rob Kosberg is a must read if you have a service or consulting business. The author gives a step-by-step process of publishing your book on the Kindle Direct Publishing (KDP) platform in just 176 pages. The book is free if you have a Kindle Unlimited subscription.

The author’s process is best for those in consulting, service organizations or have a product that could solve a specific user’s problem. The “Profit” part is mostly in up-selling and speaking engagements, not book royalties. While I no longer have a full-time service business (CPA firm), this book would have proved very valuable to get leads if I followed the steps.

Kosberg asserts that most books are not successful, you need a firm foundation. The average book only sales 250 copies. Consider these questions for your foundation:

  1. What is your specific goal or desired outcome for your book? Most nonfiction today is to grow authority, not sell books.
  2. What is your audience’s main problem or concern that you can solve?
  3. What is the conversation going on in the reader’s head, so you can enter and hook them?

Publish

Start with the title, cover and content.

The title is extremely important. Books are judged and sold based on their covers and titles. Take the necessary time to get this part right.

The three primary characteristics of a good book title are curiosity provoking, interesting and memorable. Its also recommended to use uncommon words to describe common subjects (ie. Outliers.) Do not shy away from controversy. If you have a nonfiction book, you need a subtitle, a descriptive, benefit-rich wording that explains the premise of the book. The author’s subtitle is “The New Rules of Writing, Marketing and Making Money with a Book.”

The subtitle needs to offer 1 or 3 benefits (the human brain works best in 1s or 3s – the author used 3.) The 4-hour Work Week also used three “Escape 9-5, Live Anywhere, and Join the New Rich.” Tim Ferris is everywhere now simply due to writing and promoting a book.

As far as content flow of your book, the author explains the three most common ways:

  • Logical order of progression (ie. biographies.)
  • Segmentation by content (ie. Seven Habits of Highly Effective People.)
  • Non-sequential questioning (ie. Daily Devotions or 49 tips to…)

Rob Kosberg is a big proponent of the “hybrid” ghostwriting process. This is dividing each chapter into a 15-20 minute presentation (like a Ted Talk.) Record and give the presentation to the ghostwriter. This helps ensure the story is in the “voice” of the author.

Each chapter should start with a compelling story, then give the main points using elements from the story to illustrate. Finally the chapter needs to end in the culmination of the story. Remember:

  • Compelling story at the beginning of every chapter
  • Leave the story at a high-point and share how the content affects
  • Close (end your story)

Promote

The five steps in the KDP setup phase:

  1. KDP upload
  2. Amazon book description. Take your time and make keyword rich
  3. Choose your categories
  4. Get verified reviews
  5. Launch your pricing strategy

I will focus on the author’s recommendation for the last two phases. In getting verified review, once you upload your book, have a two week period with the book priced at $0.99 to get as many verified reviews as possible. Someone has to pay at least $0.99, or the review will not be listed as “verified purchase.”

Then you want to announce to your email list or social media that your book is selling at a reduced price for a limited time. Ask them to read a couple of chapters and leave an honest review based on those chapters.

After two weeks, change the price to $9.99. After 24 hours, do a five day free promo period. This alerts numerous outlets of the change, which readers subscribe to. After the 5 day promo period, change to full retail price for the Kindle edition, 2.99 to 9.99, preferably.

The launch consists of:

  • Book cover and design (make sure the formatting looks good in first 2 weeks)
  • Reviews (2 week and free promo period)
  • Press releases (several sites provided in the book)
  • Free and paid advertising (websites in the book)
  • Social Media Strategy (paid and organic)

You do all of this, hopefully you are a bestselling author in your category.

Profit

I won’t devote much here. I have a great, fulfilling job, so if I wrote a book, it would be for the royalty potential, not how the author and his clients make their money.

The author maintains books are used for lead sources, such as consulting and speaking engagements. He even goes into detail about using speaking engagements to further sell coaching and consulting services from stage.

The profit system would work great for financial advisers, CPAs, attorneys, weight loss consultants. Even other niches, you could use this system to become an industry leader and build your authority.

While I may not follow all of the advice, I do believe it would work. I would try this step-by-step if I ever went back into public accounting. This book was definitely worth the read, with great actionable advice. 

Other books by Rob Kosberg:

Life After Debt

 

Posted in Book Reviews | Tagged , , | Comments Off on Review and Summary for “Publish. Promote. Profit.” by Rob Kosberg

Easiest Side Hustles – Commercial Cleaning

Posted on December 31, 2021 by HopeToRetire

Key Points:

  • My story
  • How I would get clients (and have done successfully in the past)
  • How I calculate my fee
  • Quick start guide to your own janitorial company
  • Products I use

This post contains affiliate links

In 2003 I was 25, had a good job, but $9,000 in credit card debt and about $15,000 owed on a car loan. I also had a baby and my wife did not work. I wasn’t incurring more debt, but I could only make the minimum payments.

I was in purchasing and knew what the cleaning crew was making, so I decided to go in the business myself. I sent out 100 personalized letters, taking me about 6 weeks over the weekends. That led to 2 quotes and 1 account.

Not knowing what I was doing, I went after the biggest companies. I landed one of those, which would later become a DuPont facility. I bid $4,500 per month for the account and they accepted on the spot, little did I know they had been paying $12,000 per month!

In the beginning, I would work one job 8-5:30, then go straight to my account until about 1 am. That was tiring, so I hired a part-time employee Monday – Thursday and brought my best friend down from Ohio as a 50% partner. With extra services, waxing and carpet cleaning, that account was over $70,000 per year in income. We then picked up another cleaning account and several floor care accounts.

Over time, I learned and streamlined the business and got the hours down to 18-20 hours per week for the standard services, and billed $70 per hour for the extra, which included costs of materials.

It only took me a few months to pay off my credit card, and within a year I had paid off the car. The following year, I had the down payment for our first house. Within 2 years I purchased a waterfront lot as an investment on the coast, using just the income from cleaning.

A year after purchasing the company, DuPont transitioned to internal employees. I had one other account and was just doing this part-time, so it was actually a relief to me.

In 2008, I left my job and went back to school to complete an Accounting degree. I had savings, but I didn’t to use up. I picked up the phone seven times, starting in the A section of the phone book, which happened to be accounting. I picked up two new accounts from that, and soon after a third from a referral.

This allowed me an income of approximately $30,000 part-time, while returning to school. I worked less than twenty hours per week and went to school full-time, without incurring student loans. Little did I know, five months after leaving my position, the stock market would tank. I lost a large portion of my savings, which I had invested disproportionately in Sigma Designs (SIGM.) I lost over $35,000 on that one stock and learned a valuable lesson.

Today I have a great job, and have only kept one account that I got in 2004. If I ever lose, I may not replace the income. I clean twice per week, Tuesdays and one day over the weekend, which equates to five to six hours per week. I gross $885 per month, approximately 20 percent goes to expenses since I perform the work myself.

If I was starting a business today, I would use the phone as the main way to pickup new clients. It’s not easy, but is the cheapest and most effective. Once I got the chance to quote, I would figure out how long it would take me per week and multiply by $35 per hours time 52 weeks per year. Divide that by twelve, and you get your monthly quote. Some high cost markets can probably get more than $35 per hour.

Your expenses are going to be a business license and I would recommend some insurance. If you get a small account, just use household cleaning supplies and vacuum. I wouldn’t recommend a large commercial client first like I did. I was lucky that Servpro had lost the mall account and I got a storage unit of chemicals and equipment for $3,200, otherwise it would have cost me over $10,000 to enter. Plus a large account cost me $1,750 per year for a bond and general liability insurance.

I also wouldn’t recommend doing personal homes because they are usually done during work hours, people pay a lesser rate and are pickier with their personal homes.

Not the most glamorous business, but it pays pretty good, anyone can do and is cheap to get in. I worked full time from September 2003 through November 2005 and made over $95,000 NET in 2004, the only full year I worked in it full-time.

Starting Your Own Commercial Cleaning Company

If you want to start your own, I would recommend doing on the side first and grow organically. I do not recommend franchises, since they offer little in return for the costs.

  • Pick a niche (mine was professional offices for the most part, restaurants are a good one too, but need more chemical training.)
  • Decide on your name (I was not cute with mine, 2 words and simple – Economy Cleaning. It told others what I do and in the beginning I did compete on price.)
  • Get a business license with your city or county and I would recommend filing with your State for extra legal protection as a LLC or other entity type than sole-proprietor or partnership. I also recommend getting a business bank account.
  • Now you need to market, before spending other money on equipment and insurance. Some of the ways to market are:
    1. Cold calling by dropping in and introducing yourself (time and mileage is high) or calling on the phone (very low cost.) Phone cold calling is very hard to do due to the high rejection, but effective in cost and results. Truthfully, it is less of an interruption than dropping in on a potential client.
    2. Email, but you need to build a list first. This is time consuming, but cheap.
    3. Post card mailing. Cost is about $0.45 per card to print and mail. It’s not very effective, so you need really good copy for someone to not throw away.
    4. Mail personal letters. I got my largest client this way. Write a personal letter and mail with a handwritten address to an actual person and regular, not metered stamp. This is intriguing to the prospect, but very time consuming and costly, about an hour to compose and research per letter and $0.60 to mail each letter after stamp, printing and envelope.
  • Get a supplier. Once you have your account, you can go to a local distributor, Sam’s Club, Home Depot or order supplies or equipment online. Only purchase what you need in the beginning.
  • Get insured. A lot of companies will require you to be bonded or have a commercial liability policy. You may also have to shop worker’s compensation insurance. Insurance for a small firm of 1-2 employees that has revenue of under $100,000 annually should cost about $1,500 to $2,000 per year, not including a vehicle if you do not use your personal vehicle.

Vacuum Cleaner I Use Now for a small account

Vacuum I used when I had a large account that needed vacuuming daily

Sanitaire SC899F Commercial Shake Out Bag Wide Upright Vacuum Cleaner with 7 Amp Motor, 16″ Cleaning Path

Hope this helps you get started quickly. As you grow, there are a lot of other steps. I am in the process of writing a startup guide, so check back in a couple of months.

Another Easiest Side Hustle article about designing shirts on Amazon Merch.

Posted in Make Money | Tagged , | 1 Comment