Taxes are complicated – unfortunately. Fortunately, Americans are blessed with the opportunity to plan their affairs to take advantage of tax deductions, credits and incentives in their businesses and personal lives. The nightmare is figuring out how to take advantage of the system. The first thing entrepreneurs need to figure out is what taxes do you owe?
There are a few common taxes that entrepreneurs should be aware of that are most commonly going to apply to most of your businesses.
Anyone that has every worked and looked at their paycheck knows what an income tax is since it hits our wallets. Income tax is fairly straight-forward because it is based on your income. If you earned a taxable profit, then you’ll create a tax liability. If you lose money, then you won’t owe tax and you’ll possibly be able to use those net operating losses for a tax refund in the future.
There are seven states that do not have an income tax (1) Alaska, (2) Florida, (3) Nevada, (4), South Dakota, (5) Texas, (6) Washington and (7) Wyoming. Historically, these states derived their taxes from property taxes, so they did not create an income tax. Politically, its suicide to create an “income tax.” While many of these states “say” they don’t have an income tax, they do have alternative ways of getting into your wallet. For example, Texan entrepreneurs don’t have to worry about personal income tax, but your business is responsible for a gross receipts tax. It is a tax based on your “receipts.” Thus, if you lose money but you made sales, then you’d possible still owe taxes.
This is vital for any entrepreneur. When you work for someone else as an employee, your company is retired by law to help you pay or remit your taxes. Those of us who are self-employed or entrepreneurs need to pay taxes regularly to the government on our own. Estimate taxes are required generally every quarter and if you miss these regular payments then there are penalties involved. It’s likely one of the most common things that entrepreneurs forget.
Franchise taxes are legally “taxes for the right and privilege to operate for a profit in a state.” Many states have an annual franchise tax for creating a corporation or LLC. These are similar to annual fees to maintain your legal entity. Delaware and California have their annual franchise taxes that are based on your assets. Forgetting these taxes are frustrating so its important to make sure that we get these taken care of annually.
Sales taxes are becoming more complicated every year. Sales used to be only made through stores until mail orders became popular. Today, online stores are probably more popular that brick and mortar stores. Thus, states are aggressively hunting for their share of sales taxes made through internet sales.
The rules for sales taxes are very easy. If you have a store, then you’re going to need to collect and pay sales tax. You’ll need to apply for a sales tax certificate and make quarterly payments to the state for any sales taxes you’ve collected. Unless, you’re in one of the “NOMAD” states or states that do not have a statewide sales tax. These states are New Hampshire, Oregon, Montana, Alaska and Delaware.
The rules for online sales are complicated, but there are a few general rules of thumb. (1) If you live or operate in the state that you’re selling to then you’ll need to collect sales tax. (2) If you are ONLY mailing a product through USPS, Fedex, UPS or other common carriers then you’re not required to collect sales taxes on behalf of the state. Legally, the buyer is required to declare their purchases and pay sales taxes on their own (Obviously, this will never happen). Most states have a FAQ section that will literally list everything you could possible sell or provide as a service and whether it is taxable.
Sales taxes bear extremely heavy penalties and interest. This is because you’re holding money on behalf of the state as a “fiduciary.” Sales taxes collected is never your money it is the buyers money that you’re helping them send to the state. Underreporting or not reporting sales taxes is effectively larceny or theft. Thus, every state is extremely serious about their collection of sales taxes. Credit card companies report your sales annually to the state, so trying to underreport is not a good idea because you will be caught. Unless the transactions are cash, they will always be traceable. Even if your business is all cash, the state could still levy a heavy sales taxes through a field audit.
Employment Tax (Medicare and Social Security Tax)
Employment taxes are like sales taxes because your act as a “fiduciary” or someone the government trusts to hold the employee’s money until you pay the government. Employment taxes are even stricter than sales taxes. The government will press for felony charges if they see that fraud is prevalent in employment tax cases. Please do your utmost to avoid employment tax mistakes because they hold the heaviest penalties and interest of any tax. I strongly urge any entrepreneur to obtain professional assistance whether it is through a full-service payroll company or software that allows you to handle your own payroll. Assistance is always necessary due to the amounts of compliance, paperwork and complicated issues. If you have multi-state employment tax issues then you’ll want to have someone else handle it most of the time to avoid painful issues down the road.
Keeping taxes in mind is going to help you avoid painful expenses at the end of the year. Taxes are unfortunately never going away, so you’ll need to always keep them in mind so that you don’t miss deadlines and other issues that will cause you tax problems. Remember that hiring a CPA or another tax professional is not enough. People will make mistakes and at the end of the day it is your business. You can never fully rely on someone else to watch your company. You trust the professional to know more, but you’ll always need to ask questions, learn and keep on top of your taxes. For example, asking for confirmation of whether your taxes are filed and etc.