Small Business Taxes Basics
December's PHLBloggers event was a discussion about small business taxes and finances hosted by Creative Business Accounting & Tax Service. Believe it or not, the business side of things was the one thing standing between me and opening my online greeting card shop. I just didn't understand it. I had tried to look up how to start your own business and couldn't find anything that made sense to me. I had tried to do my own taxes in the past (fail) and I just couldn't figure out where I kept going wrong. As an engineer, I really do understand numbers, but for some reason finances are an entirely different beast. Once I figured accepted that it was okay for me to not understand how to do my taxes, things started to get better.
Before we get into the odds and ends of taxes, I want to tell you the story of how I knew it was time to make my business and blog legit.
The keynote speakers of Texas Style Council 2013 were Emma & Elsie from A Beautiful Mess. It was awesome to get to hear them both talk about what they'd learned from blogging at that point. At the end of the entire conference they brought the speakers from each day up on stage (all at the same time). For some reason I got gutsy during the Q&A section and decided to ask a question. My question? At what point do you legitimize your blog and make it a company? No one on stage with access to the microphone was able to give me a straight answer to this question, and before I knew it my turn was over. The rest of the Q&A session finished, I gathered my things to head out, and turned towards the door. The next thing I knew Emma was right in front of me. I think I remembered to say hello?
Anyway. She said to legitimize your business as soon as possible. It's easy, it doesn't cost much, and it's much better to start off your business on the right foot rather than have to fill in the cracks later. Thirteen months later I pitched my first guest blog post on a site that offered payment, which was the first monetary compensation I had recieved for blogging and that solidified it, I needed to talk to somebody about making this official.
I started doing some googling and came across Creative Business Accounting & Tax Service. I worked with Tamara to understand exactly what I needed to do to start my own business and she made it seem so. easy. It was right then that I knew she was going to have to come talk to the members of PHLBloggers about small business taxes, and here begins a summary of our Q&A session with Tamara & Karen. Hopefully this will help you when it comes to filing your 2014 taxes.
When should I make my blog a business? Do you need to be an LLC?
If you're making money you should become a business. You can open a business using just your social security number. If you have a high liability, you should consider becoming an LLC. This essentially means that you can't lose your house if you get sued. You can get sued if your service damaged somebody in some way. For me as a greeting card shop owner, the worst that can probably happen is a paper cut, but the situations can get a little bit dicey. The situation that I came up with during the workshop was that if a graphic designer redesigned Madonna's website and ruined her brand, that graphic designer could technically be sued for ruining that brand because there is a value associated with it. Crazy, right? Also, sometimes just being an LLC makes you look more legitimate, which could attract more business.
One girl boldly asked how many years you can operate as a loss. The answer? The standard is that out of 5 years, 2 years can be a loss
How do I make my blog a business?
To register as a business, first you register federally, then with the state, and then with the city. It is free to register federally. In Pennsylvania it costs a one-time fee of $125 to register, and in the city of Philadelphia it is also free. Note: At Creative Business Accounting & Tax Service they'll charge you a reasonable rate. You will need an Employer Identification Number (EIN) in order to register to become an LLC. As an LLC with one member, you choose to be a sole-proprietorship or corporation and as an LLC with two or more members, you will choose to be a partnership or corporation.
Do I need a separate bank account?
No, but it does make it easier to separate your money from the business' money. Make sure to keep good records and keep track of all income and expenses. You will need an EIN in order to register as an LLC. Also, make sure to check account minimums to make sure that you're not going to be dealing with unnecessary fees.
What counts as revenue?
Money you make for selling items and money you make for services contracts count as revenue. If you get free stuff while blogging, it depends on the context. If there is an exchange made where someone is going to give you something in exchange for advertising in some capacity, then you must claim the fair market value of whatever product you received as revenue. Sales tax paid to you by the customer counts as revenue, but will count as an expense as well. Shipping costs paid to you by the customer count as revenue, but will also count as an expense. This means that if you overcharge for shipping you actually make more revenue.
What counts as expenses?
You can claim half of your entertainment and meals costs. This means half of any food you buy at a networking event can be claimed. You should claim your purchase price of all sold inventory as an expense, you cannot claim the inventory that you have purchased that hasn't sold as an expense because it counts as being in-stock. You can claim hosting fees, courses you take, and books you buy. You can also claim the rent and utility costs for the percentage of square feet of your home used for business purposes. However, you can only claim expenses up to a $0 balance, if you are already operating at a loss, you cannot claim additional expenses. Remember that you can also include sales tax and shipping costs. In addition, don’t forget to record your startup costs from earlier in the year, even if they happened before your official business start date.
What about sales tax?
Sales tax is paid to the state on any item that you sell. If you have a brick and mortar store, sales tax must be paid by everybody who buys locally from your shop. If you have an online store, the sales tax must be paid by everybody who buys from your shop that lives in the state you live in. Therefore, if somebody buys from out-of-state you do not need to pay taxes on that purchase, the customer should be claiming that expense on their own taxes in various other states. This is because you only need to pay sales tax in states in which you have a storefront and the online shop acts as your brick and mortar store the town you run the shop out of. Sales tax need to be paid to the state quarterly. In Pennsylvania you can pay this online using the e-Tides system.
How much money in taxes should I expect to pay in taxes?
In Philadelphia, you can estimate 25% and that should cover federal, state, and city taxes. This is because each year you need to pay the current year's taxes and a mandated estimate for the following year. Here's what that means. If year one you make $100, you pay taxes on $100 plus Philadelphia assumes you will make $100 next year so you pay for that as well. In the second year, if you make less than the $100 anticipated, you may get some of your money back that you pre-paid the year before. If you make more than the $100 anticipated, you may have to pay additional money on the pre-paid year. Also, in that second year, you will need to pay the mandatory estimated taxes for the third year, and the cycle continues from there.
If you are outside of Philadelphia, you’re going to have to check with an accountant because if you live outside the city, but still do business in the city it starts to get more complicated. However, 25% is still a good estimate of what the taxes will be.
It is suggested that you pay estimated taxes quarterly, but there is no penalty for not doing this.
Where do I put these numbers on my taxes?
The federal taxes that you file with the US government use a 1040 form (link from 2013). Whether you are a business or not, you can still claim revenue on line 21 of the 1040 form called "Other Income" up to $650. In this instance, you can't claim any expenses. If you are a business, you file a secondary form, the 1040 schedule C (link from 2013) called "Profit or Loss from Business" to break down both revenue and expenses more fully.
What is the best piece of advice?
Prepare. Go see an accountant before the end of the year, or even half-way through the year to better understand how much you're going to owe at the end of the year. If you had a crappy year last year and are having a great year this year because of the mandatory estimated taxes payment in Philadelphia, you might end up owing a heck of a lot more than you think.
So what have we learned? Tamara and Karen are awesome. If I can walk out of there understanding all of this information, anybody can. The best part was that they never made me feel stupid for asking any questions, even when I really really didn't understand. If you're in Philadelphia, I highly recommend giving Creative Business Accounting a call to talk through anything and everything you have questions about (or like their Facebook page). They're so wonderful.
Also. Don't be shady. If you're shady, it's going to catch up with you eventually and it's just not worth the hassle.
Also also. When Emma from A Beautiful Mess comes up to you and tells you to legitimize your business, legitimize your business.