Annual Federal Income Tax Return” if your annual employment taxes are less than or equal to $1,000.
To ensure the timely credit of your taxes, plan on submitting them at least one day before they’re actually due. Alternatively, your tax advisor, payroll service, bank, or other financial institution can make the deposit on your behalf.
For more information, visit www.eftps.gov or call 800-555-4477.
Also, remember that self-employed individuals need to pay self-employment taxes, which are Social Security and Medicare taxes. See Chapter 10 for all the details.
Sales taxes
As you probably already know from your years as a consumer, many towns, cities, counties, and states levy sales taxes on the purchase of particular goods and services. A related tax, known as a use tax, may be levied on the buyer of certain products from out of state.
As the seller of goods or services within a state with a sales tax, your business is obligated to collect and submit said tax to the relevant agency for sales tax collection in your state.
The Streamlined Sales Tax Governing Board was created by the National Governor’s Association (NGA) and the National Conference of State Legislatures (NCSL) in 1999 to simplify sales tax collection. By visiting their website at www.streamlinedsalestax.org/ you can find a list of Certified Service Providers that can help you collect and remit sales tax to the state(s) in which you do business. There is no cost to your business for this service, and using it eliminates any risk of your business being audited for sales tax collections.
Chapter 2
Making Important Business Decisions
IN THIS CHAPTER
As a small business owner, you face many important decisions. This chapter deals with two big ones that come up in the early days, months, and years of your venture.
First is the type of business entity you’ll operate under — sole proprietor, C or S corporation, limited liability company (LLC), and so on. This decision impacts the liability exposure you have, tax-reporting requirements, and income taxes you and your business will owe.
The second is the benefits your business may consider for yourself and any employees.
Choosing Your Business Entity
Many small-business owners don’t fully consider (or aren’t even aware of) the options they have for the entity under which they conduct their business. Most entrepreneurs default into sole proprietor status for a variety of reasons. But you should be aware of all your choices — such as C corporations, S corporations, partnerships, and LLCs. That’s what I discuss in this section.
Sole proprietorships
If you’re interested in running your own business, odds are you’ll do so as a so-called sole proprietor. About 70 percent of self-employed folks operate their businesses as sole proprietors because setting up a business this way is easier and generally less costly than other options. In this section I discuss the advantages and disadvantages of operating your business as a sole proprietorship.
Understanding the “solo” advantages
The pros of operating as a sole proprietor (going solo) may or may not outweigh the cons for a given small business owner. Each business (and owner) is unique and should weigh the pros and cons. Consider the following advantages:
Simplest tax rules and record keeping compared with other business entity options: You report your business income and expenses on Schedule C of IRS Form 1040 (discussed in detail in Chapter 8), and the net income or loss carries over to your personal income tax return. Though no walk in the park itself, compared with corporate tax forms, Schedule C is easier to complete.
Low cost to establish or discontinue: Without incorporating, it’s a relative snap to get going or shut down such an entity from the perspective of state and local regulations and requirements.
High flexibility to switch to other entity forms: You can easily switch to any of the other entities (corporation, LLC, and so on) I discuss later in this chapter.
Good retirement plan options: You can stash away a large chunk of your business earnings in a tax-advantaged retirement account (discussed in Chapter 3).
So does this mean that running your small business as a sole proprietorship is the way to go for you and your company? Not necessarily — next up are the drawbacks, which you should weigh in your case.
SIDELINE BUSINESSES, TAX WRITE-OFFS, AND THE HOBBY LOSS RULES
Many supposed tax gurus state that you can slash your taxes simply by finding a product or service that you can sell on the side of your regular employment. The problem, they argue, is that as a regular wage earner who receives a paycheck from an employer, you can’t write off many of your other (personal) expenses. Open a sideline business, they say, and you can deduct your personal expenses as business expenses.
The pitch is enticing, but the reality is quite different. You have to spend money to get tax deductions, and the spending must be for legitimate purposes of your business in its efforts to generate income. If you think that taking tax deductions as a hobby is worth the risk because you won’t get caught unless you’re audited, the odds are stacked against you. The IRS audits an extraordinarily large portion of small businesses that show regular losses.
You need to operate a real business for the purpose of generating income and profits, not tax deductions. The IRS generally considers an activity a hobby (and not a business) if it shows a loss for three or more of the preceding five tax years. (Exception: The IRS considers horse racing and breeding a hobby if it shows a loss for at least six of the preceding seven tax years.)
Some years, a certain number of businesses lose money, but a real business can’t afford to do so year after year and remain in operation. The IRS commonly views
