There have been a lot of reports floating around the internet that indicate Millennials are the most entrepreneurial generation yet. However, more recently, experts have been calling that claim into question. A recent Kauffman Foundation study found that when Generation X was aged 20 to 34, they made up roughly a third of all entrepreneurs. Millennials, who currently reside in that same age range, only make up about a quarter of the entrepreneur pool. The Office of Advocacy of the U.S. Small Business Administration published a survey that found similar results; while 6.7% of Baby Boomers and 5.4% of Gen X’ers are entrepreneurs, less than 2% of Millennials report being self-employed or business owners–and that this number will stay low for decades.
So what’s with this disparity between expectation and reality? Zachary Slayback suspects that it’s because Millennials are taxed to death and drowning in debt, among other things. I have to agree, in a sense, but also recognize that these things represent a double-edged sword to the average entrepreneur. For those Millennials who are going into business for themselves, loans and debt are almost always essential, and taxes are universally challenging for everybody, but manageable with the right knowledge. Here’s how to make the most out of debt, taxes, and credit.
Making the Most Out of Your Taxes
Simply put, taxes are confusing. There are a lot of different forms to fill out, and nobody likes doing them (except for accountants, of course). Nevertheless, Ben Franklin said it best: “The only things guaranteed in life are death and taxes.” Entrepreneurs starting up their own small businesses will never get away from doing them, but the good news is that they can absolutely mitigate the costs associated with paying them.
For starters, look at who you’re hiring. Those companies that hire unemployed veterans are eligible for the Work Opportunity Tax Credit which can save a business between $1,200 to $9,600. Alternatively, you can also look at using independent contractors as a source of labor to save money on payroll taxes.
Deductions are probably the biggest opportunity for entrepreneurs to save on taxes, though advice this comes with a word of caution: make sure that you aren’t running afoul of the tax code by making deductions on things you aren’t allowed to make deductions on. Business use of your car, home office space if you have it, your business cell phone use, and lunch meetings are all deductible expenses you can put toward your tax credit at the end of the year. Another word of warning: keep these expenses (all business expenses really) separate from your personal expenses.
Of course, there is a lot more to the tax code than what’s presented above, but every little deduction and credit you can get helps. Elizabeth Wasserman offers more great tips in her article over at Inc.com.
Utilizing Debt Correctly
Recent graduates are no strangers to debt, but as much of a sore subject as it may be for some, investments and loans are the lifeblood of startups. Understanding how to successfully manage these loans, especially if you’re still paying off student debt, is crucial.
First you have to be somewhat of a daredevil to take on more debt when you’re already financially in the hole–but remember to think logically about what you’re doing and act accordingly. While it might be tempting to take out as much as possible, getting stuck with business loans that you can’t pay off is going to affect the personal loans and expenses you have to pay off as well. This could lead to missed payments, a lower personal credit score, and the inability to get more funding for different projects in the future. On the flip side, managing and building your personal credit score can help you obtain better rates and higher amounts on loans–credit expert John Ulzheimer recommends keeping your credit balance below 30 percent of your limit to stay favorable in the eyes of lenders.
In the search for the best loans with the lowest rates, one might consider getting creative with where those loans are coming from. Traditional lenders are great, but consider hitting up friends and family, who will most likely have less stringent policies and will be more open to negotiating deals. Also, open your mind to the possibility of refinancing the students loans you already have to obtain a better rate on those.
Lastly, the most important rule on loans: if you have the ability to pay them off more quickly, do so. Debt compounds faster than most realize, and staying ahead of those loan payments can mean the difference between massive market success and failure.
The thing to remember about being an entrepreneur is that your business, statistically speaking, will probably fail–but that doesn’t mean it will always be a failure. The most successful people in the world generally never got there on their first try. Craig Newmark worked out of his living room for five years before creating the hit website Craigslit, while Janus Fiis and Niklas Zennstrom struggled with Napster-esque Kazaa before reworking it into the world renowned Skype platform.
Your business successes will be informed by and built on the top of your business failures. With the right knowledge and techniques on handling debt and taxes, you’ll be on the right path to achieving your dreams. The next step? Easy. Never give up.
Did I miss any tax or debt tips that have helped you out in the past? Let me know about them in the comments below.