5 Hidden Costs of Running a Small Business

July 12, 2017


Cash flow is king as a small business owner, but many small business owners fail to plan for certain expenses.

Ultimately, these unexpected expenses can keep you strapped and put your cash flow in peril. To arm you with the knowledge to protect your budget and your business, we list 5 hidden costs keeping you from running a successful small business. Are you prepared to cover them?

Ultimately, these unexpected expenses can keep you strapped and put your cash flow in peril. To arm you with the knowledge to protect your budget and your business, we list 5 hidden costs keeping you from running a successful small business. Are you prepared to cover them?

Hidden Costs #1: Credit Card Fees

According to the 2016 U.S. Consumer Payment Study from TSYS, 40% of consumers prefer to pay with credit cards, followed by 35% with debit cards and only 11% with cash. Accepting credit and debit cards is convenient for your clients and customers, but it comes at a cost. Processing fees average 0.05% for debit card transactions and 1.5% to 1.65% for credit cards.



Keep in mind, one of the perks that customers love about credit cards, besides convenience, is the ability to dispute transactions. If a customer decides to dispute a transaction, the transaction is reversed and the business incurs a chargeback fee, which is set by the payment gateway and is intended to cover the costs and effort involved in returning funds from the merchant to the cardholder.

According to Signifyd, chargeback fees average around $15 to $25 per payment gateway. This isn’t too bad if you only have a couple chargebacks per year. However, if you receive too many chargebacks, your payment gateway could classify you as a “risky merchant.” That results in higher processing costs and potentially losing your ability to process credit card transactions.

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Hidden Costs #2: Income Taxes

When you’re struggling to get your business off the ground, owing income taxes can come as a surprise.

Businesses are responsible for making quarterly estimated tax payments if they anticipate owing $1,000 or more for the tax year. The amount you should pay varies depending on your business formation, tax bracket and other factors. That’s why it’s a good idea to work with a tax professional to come up with an estimated amount.

In addition to income taxes, self-employed people are required to pay self-employment taxes. This is essentially Social Security and Medicare tax for people whose income is not subject to employer withholding. In general, you are required to pay self-employment taxes if your net self-employment earnings are $400 or more for the year.

For 2017, Social Security tax is assessed at a rate of 12.4% on the first $127,200 of earned income. Medicare tax is assessed at a rate of 2.9% with no income cap. Half of your total self-employment taxes are deductible on your tax return, as an adjustment to reduce your Adjusted Gross Income.

Hidden Costs #3: Business Insurance

When you’re just starting out, buying business insurance may be the last thing on your mind. That said, it’s something you should consider early on, even if you work from a home office.

One of the most obvious reasons to purchase small business insurance is to protect your investment. If a fire destroyed your computer, furniture, electronics, inventory, and other business equipment, would you be able to continue working, serving clients, and bringing in revenue?

Your homeowner’s insurance policy may provide a limited amount of coverage for business property, but most policies exclude liability coverage for businesses operating in the home. Liability insurance protects you in case your business is sued because of an accident, injury, or negligence claim. For example, if a customer is injured on your premises or a defective product causes injury or damage.

There are many different types of business insurance out there. Rates vary depending on the kind of business you own and the coverages you choose. You should consult an insurance agent to find out what policies are practical and necessary for you.

Hidden Costs #4: Payroll Taxes and Benefits

Too often, small business owners miscalculate the costs of running their business.

So you’ve decided it’s time to bring on some help and you’re budgeting for an hourly wage. But what about the other costs of hiring an employee?

As an employer, you are responsible for paying:

  • Social Security taxes to the tune of 6.2% of the employee’s wages up to $127,200 (in 2017)
  • Medicare taxes of 1.45% of each employee’s salary (plus an additional 0.9% after the employee’s wages exceed $200,000 in a calendar year)
  • Federal Unemployment Taxes at 6% of the first $7,000 you pay to each employee
  • State Unemployment Taxes that vary by state
  • Workers Compensation Insurance that varies by state, but ranges from $0.75 to $2.74 per $100 in employee wages

In addition, to attract the best employees, you may need to consider providing other benefits, including health, dental, vision, disability and life insurance, retirement plan contributions, bonuses, training and professional development and paid time off. And then, of course, there’s the cost of calculating, withholding and remitting payroll taxes. It’s a complicated and time-consuming process that you just might want to hand off to a third-party payroll provider, which comes at a cost as well.

You may be able to avoid all of these additional costs if you hire an independent contractor rather than an employee, but be careful about classifying workers as independent contractors solely to avoid payroll taxes. The IRS and the Department of Labor could reclassify contract payments as employee wages if they don’t agree with your classification—that may have costly legal consequences. There is no single test for determining whether an individual is an independent contractor or an employee, but in general, the IRS will look at who controls how, when and where the work takes place and whether the contractor supplies his or her own tools.

Hidden Costs #5: Legal Fees

You can never predict the legal binds your business may find itself in. Even when you think you’re doing everything right, your small business could fall victim to frivolous lawsuits. According to the National Federation of Independent Business, small businesses are often the target of frivolous lawsuits. This is because lawyers know that they are more likely to settle a case rather than go to court. They estimate that small businesses pay $35.6 billion out of pocket to resolve such claims.

The NFIB estimates that most small business settlements are less than $5,000, but that doesn’t take into account the hidden costs that come from lawsuits. After being the target of a lawsuit, your liability insurance premiums will likely increase. Plus, devoting time and attention to lawsuits is time you aren’t spent running your business.

Too often, small business owners miscalculate the costs of running their business. So part of being successful depends on how you budget for expected and unexpected expenses. For that reason, it’s a good rule of thumb to start an emergency fund. Start with a safety net of one month of expenses and keep increasing it from there. In no time, you’ll have a healthy nest egg that can protect your business from whatever life throws at you.


about the author

Freelance Contributor Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction and binge-watching Real Housewives.