The couple stretched a bit to purchase a four-bedroom ranch with the classic white picket fence, then confronted secondary sticker shock: sky-high utilities, costs for a second car, commuting expenses and a new roof for the house. "The bills had me floored," Cassandra says. Moreover, they'd taken a financial hit on the condo they sold, which they'd purchased at the height of the market.
Soon their monthly bills were surpassing her husband's Wall Street paycheck by about 20%. Since he typically receives a large year-end bonus and they had an ample reserve fund, he told her not to worry. But Cassandra fretted about the future: "Who knows what's going to happen this year on Wall Street? There are more layoffs happening. It's a really stressful time."
She was so concerned that in the summer, she started to take on freelance work in her field, public relations, instead of staying home full-time with the kids as they'd planned. Unexpectedly, her business blossomed, offering a promising solution to their cash-flow problem.
"Out of the blue, people started calling me and asking if I wanted to work for them," she says. "I thought, 'I can't turn this down; I would feel more comfortable having this income.' So I started my own business." She filed the paperwork to create an S Corporation.
But now, Cassandra says she isn't sure how to tap the cash from her business: "I can't take money out of the business to contribute to [household] expenses. So now we're in the same boat, dipping into our savings, and waiting to replenish until bonus season comes around."
How to Tap the Business Correctly
Cassandra is mistaken, due to an error that's probably not uncommon among rookie business owners. While she definitely can't write a check to the cable company from her business account -- personal and business accounts have to be strictly separate -- she can take a paycheck from the business, as well as cash distributions.
Some business owners choose the S-Corp structure because the income is not subject to Social Security or Medicare taxes. But that's a red flag for the Internal Revenue Service. "The IRS is always looking for S Corporations where the owner is providing services and taking all of the income as distributions [without] paying Social Security or Medicare," says Di Re.
"She will be taxed on the profit anyway whether she takes it or not," says Di Re, but adds that Bauer may want to keep a cash cushion available in the business accounts in case she needs to hire an assistant or buy equipment.
Cassandra should then budget her monthly outlay based on the two paychecks. "You can't pay the electric bill with a bonus -- it means you're living beyond your means," says Di Re. "People get caught up in the bonus and start borrowing. That's how they run up debt, and then the bottom falls out when the bonus doesn't come or they get laid off. Live on the salaries and use the bonus for socking away retirement money, or for discretionary items like a vacation. The money from the monthly checks should cover monthly expenses."
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