Are there tax liabilities on regular job income for sole proprietors?
October 23, 2010 10:13 AM   Subscribe

I want to get a business license so I can buy products from businesses-only wholesale stores like Jetro. I would not have any income from the business. Would starting this business as a sole proprietor (no fictitious name) expose me to additional tax liabilities for the income from my regular job? Company business category would be Computer Consulting. This is in New York state, Brooklyn specifically.
posted by fishfucker to Work & Money (8 answers total) 1 user marked this as a favorite
It really depends on what they mean by "business only".

I, as an individual, have bought from several such stores - Frequently it means nothing more than they have a minimum order, or even nothing at all but an annoying message on their checkout page.

You specifically mentioned wholesale, however. In some cases, that just means "in bulk", but it can also mean "for resale"; in which case, you'd actually need a sales tax ID number. You can get one of those without much trouble, but your state's Revenue Services will frown on your using it just to buy things for personal use.

To answer your direct question, though, it really depends on your state and exactly what type of license you want. In my state, for example, you can turn yourself into an LLC for $175. That carries with it various filing requirements (even if you never make a penny) that I doubt you want to get involved with, however.
posted by pla at 10:33 AM on October 23, 2010

Sorry, I just noticed you did give your state... NY has a $200 filing fee to form an LLC, buy particularly living in the city you'd probably want to talk to your accountant/attorney about the various yearly filing requirements.
posted by pla at 10:37 AM on October 23, 2010

Don't know about your state, but CA has a minimum corporate income tax.
posted by zippy at 11:24 AM on October 23, 2010

Response by poster: I guess my main concern here is that I start a sole proprietorship and the IRS says, "oh, surprise, that means we can tax your work income as though it is self-employed income" which would represent a significant expense for me. I'm not interested in starting an LLC or other corporate entity.

I've bought from cash and carry stores before without having to provide a business license, but Jetro requires one. According to this thread, they don't require a sales tax id:
posted by fishfucker at 11:49 AM on October 23, 2010

Tax authorities are not going to surtax your already-withheld W2 income. (They will get very irate if you try to deduct from your salary income expenses related to a non-real business.)

However, that does not mean that this is worth it. New York City and State impose multiple fees, taxes and filing obligations to business entities and upon any unincorporated businesses they can identify as such ... including sole proprietorships who apply for resale tax-exemption purposes. Hundreds, maybe thousands of dollars, and lots of time every year.

Moreover, you should know that a resale permit to buy wholesale and not pay sales taxes upon goods or services you personally consume, rather than resell, is a big potential problem. You might be able to get around it by immediately paying use tax (basically, sales tax you remit yourself), or it may be that failing to pay at point of sale is impermissible on its own. If the store you are looking to shop makes it possible to pay sales taxes at point of sale, do so.
posted by MattD at 12:50 PM on October 23, 2010

As a sole proprietor, my state/county wanted:
* A business license
* an occupational license (which means they give me permission to do business out of my house, even though it's zoned residential)
* sales tax on everything I sell
* extra-huge taxes on anything I make through the business
* for me to demonstrate that it was a legitimate business, ie income was larger than outgo

They didn't want money brought in from a job with a salary; they're not confused by having several sources of income. But they did certainly want to stick their fingers in everything associated with the sole proprietorship. If you're calling yourself a business and they hear of it, they may ask for any of the above as well as back taxes and late fees and penalty fees, back to when they think you started.
posted by galadriel at 2:33 PM on October 23, 2010 [1 favorite]

To your core question, yes, your W-2 income is safe, it is unconnected to your business and will be dealt with in the normal way and unaffected by a non-income-producing business.

I personally many years ago had a legal business on the books that had zero income (this was not a clever strategy on my part, I just was bad at it) and nobody ever hassled me or seemed to notice or care for the several years before it went defunct. You may have to file some tax forms anyway, I did but I can't remember the specifics and I may have been in error about that obligation.

You should probably look into how "use tax" works in your locale. If you buy goods tax free but use them for personal consumption it is likely a use tax applies.

I don't know how likely a business that is filing zero income is to be audited, I don't know the legality of maintaining a legal business identity solely for the purpose of being able to purchase from certain businesses. If I were considering what you are I would want to have solid answers to these questions. Also seconding the comment that starting and maintaining a business is not trivial or inexpensive and having a non-functional business requires ongoing legal maintenance. The "is it worth it" question in this equation is probably worth pondering.
posted by nanojath at 11:18 PM on October 23, 2010

I used to do this all the time. Just use your SSN as the "EIN" on whatever form they want you to fill out to get an account. It's usually that simple. If they want a resale license, you may or may not be able to get around this depending on the merchant and what state you live in (and what state they're in). You may need to pay the sales/use tax when you file.

Business licenses and incorporation are things you to do to business your locality, not really stuff you need to buy from a private merchant. The city is not going to come beat down your door looking for your business license because you bought something wholesale.
posted by bradbane at 6:10 PM on October 24, 2010

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