Explain my small business tax responsibilities to me like I'm a 5-year-old.
May 31, 2011 2:31 PM   Subscribe

Explain my small business tax responsibilities to me like I'm a 5-year-old, please?

I have started a one-person design business on the side. I work out of my own home (or coffee shop as the case may be). I have filed my dba with my county.

As far as I can tell, I do not create anything that would require sales tax in that I do mostly web and logo work.

I believe that I need to report self-employment taxes quarterly? How do I do that in the simplest way?

I know this is pretty simple, but when things are pretty simple, I get concerned that I'm not doing something right. Tell me what's right. I want to run a clean ship. Just remember to phrase it in toddler-like language.
posted by anonymous to Work & Money (11 answers total) 15 users marked this as a favorite
Tell me what's right. I want to run a clean ship. Just remember to phrase it in toddler-like language.

Hire a CPA.
posted by Blazecock Pileon at 2:34 PM on May 31, 2011

You want the 1040-ES.

Honestly, the best thing you can do in your position is to develop a relationship with a local accountant. They won't (shouldn't) charge you for just a consult, and will not only clear this up, but help you figure out other tax-related things you should be doing (mainly regarding expenses and reducing your tax liability).
posted by mkultra at 2:35 PM on May 31, 2011

It would really be worth your while to spend the money (or find a friend of a friend that will advise you for free) to hire an accountant for an hour to explain what your responsibilities are on a state and federal level. It would be money well spent (and you can probably write if off your taxes).
posted by tomswift at 2:36 PM on May 31, 2011

We just had a sit-down with an accountant to go over all this with us and it was worth far more than we paid for an hour of time and was cheaper than the pile of books I originally purchased on the subject.

But: today, starting right now, set aside 30% of everything you make for your estimated taxes and you should end up with more or less the right amount when it comes time to pay. We actually use a separate savings account so that the money just goes there and sits quietly until we need it. It's the one thing we did right from the start before we talked to anybody. (And the accountant, when you meet, will explain how to fill out the forms for the taxes.) Once you've paid a couple of quarters, you might bump that percentage up a squidge so that you're over-saving, and you can put the remainder in a retirement account at the end of every year.

It's worth a lot to do this right, and accountants aren't actually that expensive. I believe we found ours on Yelp.
posted by Lyn Never at 2:52 PM on May 31, 2011 [1 favorite]

It really matters what state you live in. Some states have business taxes and fees that you will need to pay attention to.
posted by bq at 2:53 PM on May 31, 2011

Part 1:

Please speak to an accountant. Pretty please. With sugar on top.

Full Disclosure: I was a subject matter expert in QuickBooks in my previous employment. Often I was the bearer of bad news for people who didn't heed the above advice. The above advice is what I gave to every person with your question because it is the right answer. The price you pay for an accountant will likely be in the few hundreds of dollars, it depends on how much your accountant needs to do. It is a small price to pay to avoid headaches over the books, or worse, dealing with the IRS and/or state revenue service.

Part 2: The dba is a very good start. Have you considered a LLC? You really might want to. You may or may not need to get a business license in your area. A local chamber of commerce could answer that for you in a heartbeat. Your services in web and logo work may be subject to sales tax. Your state sales tax authority can likely answer that for you as well as the accountant you are getting.

You do need to report and (usually) pay self-employment taxes quarterly. The easiest way to do this is to keep your books up to date on a regular basis. Plan on doing books at least weekly. Keep all receipts. You'd be well advised on getting some type of accounting software to keep track. Your accountant you are getting may even prefer or give discounts for using their preferred software.
posted by Mister Fabulous at 2:56 PM on May 31, 2011 [1 favorite]

Much of this depends on where you are.

Here in California, my service-oriented small business pays a local city tax. I then pay State and Federal estimated withholdings. I do so through an Employer Identification Number (EIN) which in a sole proprietorship such is mine is superfluous, but one client wanted it in order to help further establish certain legal boundaries for my doing the withholding.

In California, I'm further required to file sales tax paperwork for anything I buy on which I don't pay sales tax, and I'm required to have a sales tax ID number rather than simply adding that on the appropriate line to my personal income taxes because my company grosses over... I forget the exact number, but it's somewhere circa $100k/year.

So: Federal means you file quarterly 1040ES forms, attempting to match as closely as possible how much I'll pay in Federal income taxes at the end of the year. Note that this additionally includes self-employment (Social Security and Medicare) and runs about 15% above your regular income taxes. (the IRS page says 13.3% for 2011, 15.3% in 2010). I try to make it even, but I've had years when I paid all my withholdings in the last quarter: Don't panic, there's a form you can file with your regular taxes that lets them tell you when you made the money, if it doesn't divide up evenly.

In California, I also file quarterly income tax estimates using the 540ES.

I pay an annual pittance to my city government, the city clerk can help you there. It's less than a hundred bucks.

And then, as previously mentioned, I have to file the sales tax paperwork. And generally as long as you're acting in good faith, the various agencies are pretty good about not screwing you over; I didn't know about the sales tax thing, the state sent me a letter, I sent the paperwork back, life was good.

I don't think you necessarily need a CPA, but you should find at least a bookkeeper and schedule a sit down. Especially since you will be depreciating all of your computing equipment, and deducting some of your dinners out, and as cool as TurboTax is it's nice to have someone go through the "are you sure you didn't buy anything like ...?"
posted by straw at 2:58 PM on May 31, 2011

You have enough to think about when you have a small business, don't add to it. Just go to an accountant and have them tell you what you need to do. I love my CPA, and he is available al year if I have questions. (he's in L.A. and can give you his info)

I have to say, it is a huge relief to have someone you know who really 'knows' the ins and outs. You will have such a learning curve with a small business, that farming some stuff out really helps. Mine is pricey, but I just don't care. That I can sleep at night without one more stressor is worth it.

It helps that he has tea, girl scout cookies and puppies (seriously) every time I go in.
posted by Vaike at 3:30 PM on May 31, 2011

people are right that you should get an accountant. i never have because i can't afford them in this expensive fucking city.

i have gotten by fine with turbotax home&business. the one thing it DOESN'T work for though is city taxes, so i have to do that with pen and paper.

so, you need to check if your city/village/whatever has a buisiness license and fee and a business tax. philadelphia does, even for 1 person sole proprietorships. they're taxed exactly the same as comcast or any other huge business.

other cities have taxes but they're on a sliding scale of sorts for small businesses.

so, double check that your city doesn't require you to have a license and pay taxes as a business instead of a wage earner.

you CAN do it yourself, it's just a lot of research and work. but if you can't afford a cpa, you can't afford a cpa.
posted by misanthropicsarah at 12:07 AM on June 1, 2011

Get an accountant. I only need to rely on my guy once a year at tax time, but he's well worth the money.

Also, ask that person about your specific state's sales tax procedures. States vary considerably in their regulations regarding what you need to collect and pay sales tax on.

I have a couple of friends here in Maryland that found this out the hard way; thinking that their services were not subject to sales and use tax.
posted by imjustsaying at 2:52 PM on June 1, 2011

When I started my design business I went to a CPA at the end of the year. I hate to spend money but in this case it's worth it. I got recommendations off Yelp and from friends. Some will try to over-sell you on services you don't need. If you're in Chicago I can recommend my non-nonsense accountant. I visited or talked to 3-4 accountants before I chose mine. Non one charged me to talk to them about their services and their experience with my kind of business.

The first year I didn't pay quarterly and settled up at the end of the year. My accountant gave me a formula for determining my quarterly taxes, and handed me piees of paper with the due date and all lines to fill out along with addressed envelopes. When I was confused I called for clarification. Generally, put away 30% off all fees you collect and you'll be okay.

Sales tax for design services (and how they're classified for tax purposes) varies by stateā€”I know the only issue that my accountant gets concerned with is charging for printing or stock photos I buy.

I'm not sure how much of your home/materials/utilities/etc. you can pass off if you're just doing a little on the side but an accountant will be able to get you as much deductions as you can legally take.
posted by Bunglegirl at 7:12 PM on June 1, 2011

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