small or home-based business

One of the things about being a tax attorney is that folks automatically assume that my financial house is always in order, that I always make the right tax elections and decisions and that I file on time, every time.

Wrong, wrong, wrong.

Running my own business? At the same time as raising a family? It is often pure chaos.

That said, I try to make the best decisions that I can for my business and my family. That’s all anyone can ask. And each year, my husband and I (yes, we practice law together, crazy, huh?) evaluate where we are and where we want to be and we make some decisions. Here’s where we landed this year:

1, We’re keeping our current entity structure. This sounds like a no-brainer, but I would advise you to consult with a tax professional from time to time and see if your choice of entity makes sense. Tax laws are changing and the business world is changing. New hybrid entities or combinations of entities are often created that make better sense for your company. In our case, our financial picture changed - when we first started, we didn’t see much of a profit, so registering as “professional corporation” made sense for us. This year, we needed to tweak that a little bit to avoid a huge tax bite.

2, We’re adding a payroll company. I hate to spend money. And I can file a 941 on my own, thank you very much. But payroll taxes take a LOT of time to do and the rules are constantly shifting on the state and local level to require you to pay at different times. At first, I figured I’d eat the penalties for being a few days late - but the dollars started to add up.

3, We’ve hired a CPA. People look at me funny when I say that someone else does my taxes, but it’s true. Yes, I could sit down and do it myself. I know the software in and out, and I can do an 1120 by hand. But I don’t have to. A professional and reputable tax preparer is not expensive and will stick with you, unlike those big boxes that conveniently close for 9 months out of the year.

4, Take advantage of tax savings plans. Our medical insurance will increase another 20% this year (don’t even get me started). After sifting through the “savings folder” (call it what you what, big insurance company, you’re just trying to confuse us into spending more money), we decided to keep our current insurance scheme and create a medical savings account at the office. We can use pre-tax dollars to pay for co-pays, meds and more. This didn’t make too much sense when it was just my hubby and myself - we were rarely sick and take no regular medications. But one nasty stretch in November with three kids and rotavirus convinced us differently.

5, Remember why you started your business. Every year, we have to remind ourselves of this. We didn’t start our business to get bogged down in administrative nightmares. It’s stressful and it takes way too much our time. We are (slowly but surely) learning to offload those burdens onto other people. That’s the best advice that I can give to you. Whether you freelance, own a business or just run your family’s finances, don’t feel like you have to do it all yourself. Consult with people who do this for a living and let them help you out… the taxgirl does!

Technorati Tags:
penalties, tax, tax planning

{ 0 comments }

Taxpayer asks: Quick question from a slightly embarrassed newbie.

Although I’ve been working as an hourly consultant for a few years, this year is the first year during which ALL of my income was received via 1099-MISC (I’m not incorporated in this state (Georgia), invoice an onsite consulting firm for my hours, and have checks sent directly to me without any taxes (to my knowledge) withheld).

I’m aware that I’ll have to pay those taxes come April 15th, but was just alerted to the fact that I was supposed to be paying ESTIMATED taxes every quarter (gulp…)

Soo…My question is: Is it worth it for me to attempt, at this late stage, to send the government %30 or so of what I’ve earned this year, or should I just go ahead and have an accountant give me the bad news in February? (Will I be fined, in some way, for paying it all in April, instead of sending a little each quarter)?

Taxgirl says:All is not lost! You probably won’t get reamed this year since you say it’s your first year in this situation - the IRS isn’t that bad. If you didn’t owe taxes last year, you can request that the penalties be abated for this year - there is a safe harbor (read on).

Generally, you should pay estimated tax if you are not subject to withholding. Realistically, this means that folks who rely on income that will be reported on a form 1099 (this includes self-employment income, interest, dividends and retirement income) are most likely to be responsible for estimated tax.

You will need to make estimated payments if you:

1. You expect to owe at least $1000 in tax for 2007 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2007 tax return or 100% of the tax shown on your 2006 tax return.

To figure your estimated tax, you can use form 1040-ES (download it here as a pdf) - the form also advises you of the due dates for each quarter. If you do not pay enough tax by the due date for each quarter, you may be charged a penalty even if you are due a refund when you file your income tax return (nice, huh?).

So, I say all of that to say that if you’re nervous, go ahead and send in a payment - it can’t hurt and may save you from being subject to at least one penalty. But be aware that you can’t avoid the penalty for missing an earlier payment by overpaying at the end since each quarter is treated independently. However, the penalties and interest accrue based upon how much time has passed since the due date, so making some sort of payment will mitigate your final bill.

But if you don’t make any payments, all is not lost. You may be subject to a penalty which stinks but isn’t the end of the world. You pay the penalty and you move on. Next year, you should plan on making the estimated payments. When you do your return, fill out the form 1040-ES at that time. If you’re using software, you can do it all at once (a package like TurboTax will ask you if you need to complete it - say yes!).

And it’s worth mentioning that the rules for estimated payments are different for farmers and fishermen. If you do either for a living, I’d recommend getting an accountant.

Remember that if you are subject to estimated payments for federal purposes, it’s likely that you may be subject to making estimated payments for state purposes, too. There are some exceptions - you should check your state’s rules to be sure.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the Taxgirl!

Technorati Tags:
tax, estimated tax, ask the taxgirl, penalties, 1040-ES, 1099-MISC

{ 0 comments }

I think so.

But Jim over at Small Business Boomers begs to differ - and he takes issue with the Small Business and Entrepreneurship Council’s criteria. Find out what he thinks matters.

And then I want to know what your own criteria is when deciding where to site your business: taxes? workforce? quality of life? proximity to transit?

{ 0 comments }

On Problogger yesterday, a few folks commented that the list of potential deductions for bloggers (one of many groups of self-employed persons) was too long or too complicated.

Which made me think. It also leads me to today’s Fix the Tax Code Friday question:

Should there be a separate Standard Deduction alternative for self-employed persons? It could function just like the existing deduction, but calculated at a higher rate for those persons filing a Schedule C. Or there could be some other criteria. Thoughts?

{ 0 comments }

Not right now. But there’s a chance that you might in the future: the moratorium on an internet tax expires November 1. The moratorium is sometimes referred to as the Internet Tax Freedom Act, or ITFA.

ITFA has been extended twice since 1998. It bans taxes on certain internet transactions at the federal level, but also prohibits state and local governments from passing similar taxes with the exception of nine states which were allowed to keep existing internet taxes. The internet transactions are: internet access (including dial-up, DSL, cable modem and wi-fi); “double tax” for products or services bought over the internet; and discriminatory taxes that treat internet purchases differently from other types of sales. Those nine states which are current exempt from the ban are Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin; not surprisingly, most of the governors of these states appear to oppose making the ban permanent since the exemptions will not be included in a permanent bill.

Nonetheless, a handful of Senators, including John McCain (R-AZ), Trent Lott (R-MS) and John Sununu (R-NH) have suggested a permanent internet tax ban. Not surprisingly, fearing both loss of revenue and potential for abuse, there is opposition to a permanent ban on both sides of the political spectrum who have offered a number of alternatives. One suggestion is to limit the length of the moratorium rather than make the ban permanent - but so far, that isn’t getting much support.

What do you think? You pay tax on your phone connections, why not the internet? That is the loudest argument, after all, against the permanent repeal - the fact that cell phone service is taxed and is at an all time high. So, the thinking goes, how bad can it be? Well?

digg_url = ‘http://www.digg.com/tech_news/Do_You_Owe_Uncle_Sam_for_Reading_This’;

{ 0 comments }

Keep an eye out for the b5 media Business Channel “Jump Start Your Business” contest. You can win fabulous prizes including software, web hosting, tee shirts, books and the best prize of all, advice from b5 media’s Business Channel experts.

You’ll find details here and at many of the Business Channel blogs and (shortly) on our Business Channel home page.

Or go directly to the blog of your choice:

Behind the Buzz
Brandcurve
Business and Blogging
Buzz Networker
Common Sense PR
Contract Worker
Copy Blogger
Digital Money World
Franchise Pick
Home Biz Notes
Interview Chatter
Just Make Money Online
Leadership Turn
Life Dev
Linked Intelligence
Pimp Your Work
Property Crossroads
Slacker Manager
Small Business Boomers
Start Up Spark
Successful Blog
Taxgirl
Work Boxers
Yielding Wealth

{ 0 comments }

Today’s question was not emailed but asked in person at BlogHer! It was asked after my session, so I thought I’d post it for the benefit of everyone.

Taxpayer asks: Do I have to pay sales tax on sales through my web site?

Taxgirl says: This is such a loaded question. I’ll start off by making a quick correction - not to be picky but to make an important point. The seller of products never “pays” sales tax due on the sale of a product - the seller collects and remits payments. Those are two different things (and in some states, it’s actually a crime not to collect the tax and to pay it yourself). So, keep in mind throughout this discussion, that this tax is not yours to pay but to collect from the buyer and pass along to the authorities.

Whether you’re responsible for collecting this tax is subject to a couple of factors:

1. Where you’re located; and
2. Where you sell.

The first bit is fairly simple to figure out. Most states focus their tax laws (since sales tax is a state and local issue, not a nationally or internationally governed tax) on your actual physical location. If you are sitting in your home in North Carolina selling baubles over the internet, you are considered to be located in North Carolina - even if your internet server is in Missouri and you ship out of Connecticut. This means, with few exceptions, that you are subject to the laws of the taxing authorities in that state.

And here’s my quick *aha* moment. Some states, like Delaware, do not have a sales tax. Do not be fooled into believing that you can escape sales tax merely by incorporating in a state like Delaware! Your state of incorporation does not automatically equal physical presence.

So, what does physical presence mean for sales tax purposes? Here’s the fast and loose rule: if you are physically located in State A and sell to a taxpayer in State A - even over the internet - you are responsible for collecting sales tax due to State A from the buyer. Get it?

However, if you are physically located in State A and sell to a taxpayer in State B over the internet, you are most likely not responsible for collecting sales tax. The exception to this rule has a lot to do with the amount of “physical presence” you might have in State B. If you never actually do business in State B beyond selling to someone over the internet, there is probably no physical presence.

But what if…

What if you travel to State B for a book tour? Or to tout your wares at a fair or convention? Or you open an office in State B? It’s important to realize that you don’t automatically subject yourself to sales tax “nexus” (the legal term for physical presence) just by making an appearance. But if your marketing, promotional and other business activities in State B are extensive, it could be perceived that you have a physical presence in that state and you could be subject to sales tax.

I always refer my clients to the order forms in the middle of catalogs for comparison. You know how it will say, “NY residents must pay sales tax” or you’ll see a list of four or five states whose residents must pay sales tax and no one else has to pay? This “physical presence test” is exactly what’s going on. The state where the company is located must collect sales tax from consumers in that state - there’s no getting around physical presence in that instance. Other states where the company must collect sales tax are likely states where the company has satellite locations, sales forces or other substantial presence. However, just mailing a catalog to another state - or soliciting via the internet - will generally not be enough to suck you in and subject you to sales tax.

And as to international destinations? I don’t profess to know the laws in every country around the world. But you can more or less count on the fact that sales tax is a state and local rule and selling products to residents of countries outside of the US probably does not subject you to sales tax.

Of course, I have to add some disclaimers:

First, this is such a fact specific area. Don’t make life changing corporate decisions based on an article on a web site (no matter how wonderfully written). If you have serious concerns about your tax liability, contact a local tax professional.

Second, this is the state of the law as of this very minute. Every day, it seems, someone is proposing some variation of an internet commerce tax - whether state, local, national or international. There’s a lot of confusion and a lot of gray area because, let’s face it, the internet is an enormous and often nebulous place. But this is more or less the state of the law today.

Third, if you are subject to sales tax, the laws for collecting and remitting the tax vary from state to state. If you think you should be collecting sales tax, contact a local tax professional or your local Department of Revenue for more information.

–

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the Taxgirl!

{ 0 comments }

My BlogHer session is later today. For those of you who couldn’t make it, or for those of you who want a recap, here are some details worth noting:

I’m in Chicago today for the BlogHer Conference, where I will be speaking about blogging and tax. One topic that I plan to focus on is the issue of hobby versus business, which I addressed earlier in an “Ask the Taxgirl” segment and in my Problogger guest post. Briefly, the IRS allows you more favorable tax treatment when you are running a business (for profit) as compared to when you are entertaining your hobby (for fun). So today’s Fix the Tax Code Friday question is:

Should there be a distinction between tax rules for income earned from a business versus a hobby?

{ 0 comments }