Advice for a New Homeowner Juggling Higher Bills and a New Business

Juggling home bills
Juggling home bills

When Cassandra, 32, moved from New York City to the New Jersey suburbs with her spouse and two toddlers this summer, she felt a huge sense of relief. "We were like a case study for the show Hoarders, living in two small bedrooms," jokes Cassandra, who asked we not use her real name.

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.

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"Because it's an S Corporation, 100% of the money is her taxable income," says Elda Di Re, partner with Ernst & Young. "So the actual distribution of money from the corporation to her is not an event from a tax standpoint."

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.

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Cassandra should take a modest salary and do payroll withholding, says Di Re. She should also talk with an accountant about making appropriate quarterly estimated tax payments. Any cash left after that is hers, and she can take it as a direct distribution from the business.

"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."

Struggling with your own personal finance situation? I welcome your questions but it's also about your wisdom, ideas, and experiences that may help other readers. Email me at You can also follow me on Twitter @MoneyHappiness.

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