Financial and Legal Considerations of Starting a Home-Based Answering Service

You’re almost ready to start your new phone answering service business. There are some financial and legal considerations that will impact your business.

First, be sure to check with your local zoning office to be sure you can run a home- based business if you intend to start in your own home. Your answering service business is not a high customer-traffic business, so it shouldn’t be a problem, but check anyway as you may need a specific permit to operate your business. It should only involve an application, but could require a hearing, too.

You may have to have your home inspected to determine if it meets business-type regulations for health, building and fire codes. If it doesn’t, you will have to make the necessary modifications to operate the business out of your home. These alterations should not be major.

Check with an accountant concerning the tax-deductibility of a home-based business. The Internal Revenue Service is more careful in checking these deductions today. In general, the amount of space in your home devoted to the business is eligible for a deduction. That area must be used exclusively for business, however.

Once you determine the space involved, divide that into the total space in the house to obtain the percentage of your home used exclusively for business. That percentage will be applied to some of your usual house bills like your electric bill.

Keep a journal of expenditures for your business along with the corresponding re-ceipt. Record and file them by month for easy reference. Many of these expenses are deductible to your business, up to certain specified limits. New tax laws can affect their deductibility, so it’s best to keep up to date through an accountant.

As a self-employed business owner, you would be filing a Schedule C (Profit or Loss for Business or Profession) along with your regular 1040 form. Your accountant can brief you on other forms you need to complete during the year, too. There is usually an estimated tax payment to be made each quarter along with FICA and Unemployment taxes.

Insurance will also be a necessary part of your business life. Some of the insurance is actually required.

Health insurance is a familiar vehicle to cover hospital and medical bills. A number of states have enacted recent health care reform legislation to aid small businesses in obtaining quality, affordable health insurance. Contact your state insurance department for more information about the programs in your area.

Workers’ compensation is often required by law. This coverage provides medical, hospital and disability income benefits for on-the-job injuries or illnesses. This program is administered by each state individually and you should check with your state insurance department to see if you are required to carry this coverage. If you are the only worker, some states merely recommend rather than require the coverage be carried.

Liability coverage may also be a good investment for your business. This protects the business against liability for adverse actions which affect your client(s). If you incorrectly record a message and that error results in the loss of business to your client, there is always the possibility of a lawsuit today. Liability insurance can be purchased to cover the threat of a suit.

If you have a company car, insurance will be necessary and the car must be de-signated for business use. This may or may not be necessary in a phone answering service business, but if you call on clients or potential clients, then you are using the car for business and may be eligible for a business tax deduction for a portion of in-surance payments on the vehicle. Your accountant can verify the deductibility of any item associated with a company-owned car.

If you are working out of your home, check your homeowners policy to be sure your property listing includes any business equipment you have such as phones or a switch-board. It you are operating the business out of an office you purchased, you will need to have hazard insurance to cover that facility separately.

Life insurance can be used to cover your life in the event of death. This money can be used to continue the business if surviving family members wish. Disability insurance should also be considered. This policy provides income to you and your family in the event you suffer an injury or illness (at any time, not just “on-the-job”) and cannot work. Many insurance companies do not offer this type of coverage to business owners that work out of their own home, but check with your insurance agent to see what he or she can find.

If you have a partner, you might also consider some type of buy-sell coverage so that if one of you dies or becomes severely disabled, the healthy owner can buy the interest in the business back from the one affected. Both life and disability insurance is available to fund this need.

Finally, you should also keep an eye towards the day when you will retire from work-ing. Business owners are able to put money into various pension-type vehicles on a tax-favorable basis.

There are three common types of retirement plans for self- employed business plans: the Individual Retirement Account (IRA), the Simplified Employee Pension (SEP) and the Cough plan (often called HR-10).

The IRA is a familiar vehicle that lets you put up to $2,000 before taxes into a retire-ment plan. For many business owners, this amount is insufficient and thus other vehicles where larger amounts can be put away for retirement are more attractive.

A Simplified Employee Pension plan is similar to an IRA except you can contribute much more to it, up to 15% of your income but not more than $30,000. That’s significantly more than the $2,000 maximum pre-tax contribution under the IRA. The Keough plan is similar to the SEP except that the contribution percentage can be as high as 25% up to $30,000. This type of plan is usually selected by sole pro-prietors. These retirement vehicles should be discussed with your accountant for advice on the best avenue to pursue. However, not only do these programs serve as a source for retirement funds, but they assist the business owner with reducing current tax liability, too. Any business owner should review one’s options carefully.

You should now have all the information you need to determine if a phone answering service is the right business start-up idea for you.

Good luck!