taxes Archives - The Freelancer Head Start

FHS 31 Selling Across State Lines and Taxes

Freelancer Head Start — Fri, 17 Aug 2018 11:14:23 +0000

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Listen to Our Last Episode Here

Jacki and I chatted last time about Taxes and how to avoid getting in trouble with the IRS.

FHS 3: LLC vs S-Corp and the Tax Man!

Income Tax classification

Your tax classification changes the rules about how you will need to file taxes. The different business entities each have their own classifications. For example, an LLC and an S-Corp are handled different but both have flow-through entity rules. You don’t pay income tax on the business (entity) level, you pay on the personal level. Basically, what you earn at the end of the year.

If you have more than one member (owner) of the entity, you’re automatically labeled as a partnership for tax purposes. There are no maximum level of members for an LLC while an S-Corp is capped at 100.

https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

High Court Tosses Online Sales Tax Rule, South Dakota New Standard?

Virtually every state that administers a sales tax may follow South Dakota’s model after the U.S. Supreme Court established the state’s tax law as the new standard for online sales taxation.

The high court ruled June 21 in favor of South Dakota and threw out its 1992 rule in Quill Corp. v. North Dakota. Quill, which states like South Dakota for years have tried to “kill” through lawsuits and regulation, prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

Quick Notes from the Episode

Register to do business with the state
Sales and use tax versus income tax
Rule of thumb: every state is different
Nexus – level of activity to create presence; threshold for filing
Allocation versus apportionment
- Ex. sold property in a state, gain allocated to that state
- Net income allocated based on activity in state using factors
Apportionment factors
- Payroll – I think just employees so not 1099 contractors
- Property – net book value or cost, rent x 8
- Sales
Apportionment formulas
- Evenly weighted 3 factor, 60/20/20
- Sales only
Revenue sourcing
- Physical – tangible personal property
- Services – Cost of performance vs market based
- Digital, SaaS
Prewritten “canned” software, custom made
Leave and load, license
- Use sourced revenue for apportionment formula
LLC versus S corp (partners/members, shareholders)
- Flow through entities, pay tax at individual level instead of entity level
- Some franchise taxes based on equity: GA net worth (over $100k), TN franchise (25% net worth, min $100) and excise (6.5% net taxable inc), AL report fee ($10) and privilege tax ($100), SC min license fee $25
- Separate s corp election in some states: NY and NJ; don’t follow fed, may just file as c-corp
- Withholding or composite taxes and returns; instead of filing individual returns for each partner, sometimes incl on s corp return
Sign affidavit
State of residence taxed on 100% of income
- Credit for taxes paid to other states, at resident state rate
- States that do not recognize s election, corp pays tax (not pay on behalf), then subtraction for income subject to tax
- (credit versus deduction/subtraction)
- Timing of payments; estimated quarterly taxes, extensions, pmts due with return
- Federal deduction for state taxes paid in year (new tax law limit $10k)
- State credit for taxes paid related to that tax year
International – as US citizen and resident you are taxed on 100% of worldwide income, foreign tax credit (or deduction) for taxes paid to other countries

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FHS 5: Money Talk

Freelancer Head Start — Fri, 17 Nov 2017 23:24:00 +0000

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Tax ID for Your Business

The first thing you’re gonna want to do after you have finally registered with your state is to then hop over to the IRS and grab yourself a unique Tax ID, your Employer Identification Number (EIN). Why do you need an EIN? Well, because you’re going to reach a point where your business is making some decent money and you don’t want the government to come in and seize it all. Al Capone didn’t go down for drug charges…..I’ll just say that.

A Tax ID is an identifier that is used by registered business entities to separate personal and business spending and taxes. You as an individual have a Social Security Number while a business has a Tax ID.

Getting a Tax ID is pretty straightforward and usually takes a few minutes. Its 100% free and can be done in a single sitting. That Tax ID can also be used when purchasing bulk or wholesale items. You’ll be doing taxes at the end of the year (or quarterly) with that specific Tax ID and will be tied to your profit/losses for your business.

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

Bank Account

You’re also going to be using your EIN to open up a business bank account. This is your new financial operating point of your business. It’s going to be where you spend and receive money. There are a lot of different offers for from almost every bank in the US, we’re gonna talk about the basic Business Bank Account. We don’t need any additional services other than a place to store your money (that includes credit card processing).

Head down to your favorite bank and ask them about the details of their Business Accounts. Some banks have yearly fees, or minimum amounts, or other special requirements. Go ahead and create an account with an institution you feel comfortable with. Bring your EIN number and your State Entity registration information when signing up. Your bank may need that information.

The other reason that you will want a Business Bank account is because you will eventually get to a stage where you may need to take out business loans or other credit-required actions. Even if you think you will never take out a loan or borrow money, you want to set yourself up now for future in-case situations. Building a relationship and credit with your bank will help in the long run.

Make sure you only spend or receive money that is specific to your business with this account! DO NOT MIX YOUR PERSONAL MONEY WITH THIS BANK ACCOUNT. You will screw yourself over royally because you’ve just created a DIRECT path to all of your personal assets. Which will-be and can-be seized if you’re ever faced with a lawsuit or bankruptcy. You’ve pieced that “corporate veil”.

Make sure you keep track of EVERY receipt for every purchase you make from this account. You’ll be using it as deductibles AND budget tracking.

Business Savings

Yes, that dreadful word; “savings”…..yes..even your business will need it! A business savings can be used used to help keep you going when times get a little rough in the cashflow side of things. Its there to give you the confidence to make decisions that may be risky. Its there to help push your product or service through rough patches and keep things going.

You want to have a business savings account. A WAR CHEST!

To keep things simple, you generally want to have about 3-6 months of $$ stashed away. This is 3-6 months of basic needs (food, light bill, rent, mortgage, etc) to keep you alive and sheltered. This is also going to be your runway of trying things out before you need to alter course.

Trust me, it make your life easier as an entrepreneur when you know you’ve got financial backup in case the poo hits the fan. You will have the freedom to take more risk to reap those rewards.

Record Keeping

Mint – http://mint.com (free)

I use Mint all the time! It does an awesome job of letting me know about my spending habits. I can easily use it to automatically categorize and organize my income and expenses. You can also set goals for yourself and use Mint to tell you REALISTICALLY how to create them. Pretty slick. You connect your bank account(s) to Mint and it helps you keep track of spending and income in a meaningful way.

Alternative: Quickbooks http://quickbooks.com ($5/month)

I tried Quickbooks a few times in the past as well as the online version. The online version is the preferred route if you’re looking for an all-in-one solution. QB has a LOT of features that might make that $5/month fee very attractive, for sure.

Invoicing

Get Harvest – http://try.hrv.st/1-294321 (Free for 2 project OR $130/year for unlimited)

Harvest is my go-to for invoicing. It definitely pays for itself with your first client. You can send out an invoice and give the option of 2 payment routes: PayPal or Stripe. Invoices get sent electronically either with a PDF, link, or an email where the clients can pay online directly. You get reporting on who is late and who paid on time. The invoices also have automatic reminders that are sent out at specific intervals.

You can also use Harvest to keep track of time to bill hourly, keep track of projects, and keep track of expenses. Reporting is not bad. It won’t tell you categories in your spending like Mint does, but it will let you know if you’ll be pretty close to blowing your budget out the water in overspending. If you have a team of more than one person, you can also keep track of spending and income per-person or per project.

Alternative: Hello Bonsai – https://www.hellobonsai.com/ (3 projects per year OR $192/year for unlimited)

Hello Bonsai originally started as an online contract manager tool. I use it primarily to send agreements to clients for them to sign from their emails or online. It helps keep things simple.

They’ve added additional features such as sending invoices out based on the agreement of your contract. You also have the options of sending out reminders as well as new invoices to your clients. Similar to Harvest, your clients have the options of paying online with PayPal and Stripe.

Getting Paid

Square Cash – https://cash.me/ (free for Personal, 2.75% for Business)

Square Cash is one of the simplest routes you can use to send or receive payments. With the business version, you are not limited to the amount you can send or receive. With a person account, you will have trouble over $2,500.00.

Create a “cashtag” to create a unique URL that you can use to allow people to send you payments online. That URL will display a large payment input method that will send money directly to your linked bank account. Square Cash use a special link called Cash.me to give you a unique link for payments online.

You can also text, email, or link to your Cash.me page to allow your clients to pay online. No, you do not need a Cash.me account to pay someone with a Cash.me app. You will simply be prompted to input your card information.

Square Cash also has a few physical products that you can use for your physical store to process credit cards. Their Point of Sale hardware has been installed in a lot of different stores/locations and are very affordable.

Alternative: PayPal Personalized – https://www.paypal.me/ (2.9% + $0.30 per transaction)

PayPal has been around for a long long time. They have recently caught up with allowing people to pay online with a single URL, link, or text message. You can have either a personal or business version, but the functionality is similar to Cash.me.

You can also use PayPal to handle your invoice payments from Harvest or Hello Bonsai.

Alternative: Stripe – https://stripe.com (2.9% + $0.30 per transaction)

Stripe is an online payment processing software solution that is essentially scaffolding. You register yourself and your bank account to receive payments. Its then up to you to BUILD that payment portal. Stripe takes care of authentication, payment processing, and refunds. You would use Stripe if you wanted to create your own software, website checkout, or custom in-app purchase piece.

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FHS 4: Why and How to Register Yourself

Freelancer Head Start — Fri, 10 Nov 2017 00:00:24 +0000

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Once you’ve identified your customers and audience, you can then focus on registering yourself. This episode will be talking about registering in the United States. Why and how to register yourself can seem daunting, but with a little patience, you’ll come out alright. Registering yourself is the act of telling the world who you legally are. Then you will have a barrier between your personal stuff (like money, car, and home) and your business stuff.

You can name your business almost anything you want but you’re going to pick something that is in-line with what you are doing and your market. Work on a name for you business that mixes creativity and the market research you just performed. Right now, we’re not going to focus on if it’s already been used. You want to just have a brain dump of possible business names.

When you have a few names that you want to use, sleep on it. See how you feel the next day. You’ll possibly eliminate a few names when you get a rested brain looking at them. Now we need to pick how and what you are going to register.

There are four different ways to register your business

Entity Name protects you on a state level
Trademark protects you at a federal
Doing Business As (DBA) is a “What are you going as…” type of thing. No legal protection but sometimes required based on state
Domain name for websites

We are going to focus on the Business Structure and your Entity Name. Once you’ve honed in on a single name, it’s time to work on your Business Structure. A business structure is a framework for your business that can dictate how it operates, spends money, pays taxes, and how it’s protected. They vary on what your goals are for the business, how much risk you are comfortable with, and what tax benefits you are after. Most people choose either LLC or S-Corp.

PAUSE. At this point, I want you to seriously consider hiring a tax professional to talk to and get their stamp of approval. They will be able to help guide you through the different choices with a business structure and how it pertains to taxes within your specific state. You will need to already have an understanding where you want you business to physically operate and what your long-term goals are for your business. RESUME.

LLC vs S-Corp Business Structure

LLC

In a nutshell, an LLC separates your personal assets from your business assets. This is good in case your LLC faces a lawsuit or bankruptcy. You have what is called a ‘Corporate Veil’ separating your personal things from your business things. This includes bank accounts, physical items, and other assets. Don’t you DARE mix these two. You’ll screw yourself over in the long run.

There are also tax benefits, profit/loss benefits, and legal benefits that may be attractive to you. When it comes to taxes, your profits and losses are passed through the business and attached to your personal income. This can be good because you’re not taxed twice; you don’t have to pay corporation tax. The downside though is that you are considered ‘self-employed’ and will need to pay taxes towards Medicare and Social Security.

Most people can take care of this themselves as it’s not too difficult. Most states have a single page form that you can fill out to take care of this. You’ll have to register with your specific state for your LLC….for every state you want to operate in…. This should run you between $100 – $175 per state on average if you do this yourself.

You will have to renew this registration yearly to ensure you are still valid. Expect to pay a smaller renewal fee.

S-Corp

An S-Corp is a special type of Corporation that has a whole different range of tax benefits, profit/loss structure, and legal standings. Similar to a LLC, an S-Corp has defined lines of liability protection. Unlike an LLC, you can have Shareholder, directors, officers, and employees. You can attract investors through the sales of stock in your S-Corp. The person who purchases a stock in your company is called a shareholder and is therefore a part owner. You can have a maximum of 100 shareholders and they all need to be US citizens.

With taxes, you are also protected from the double-taxation with a traditional Corporation. You will be filing your taxes once a year once created. After the owner passes away or moves on, the S-Corp still will continue to exist perpetually. There are no maximum level of members for an LLC while an S-Corp is capped at 100.

For an S-Corp route, I would strongly suggest consulting with your accountant to ensure you set this up with in line with your business goals. There are a lot of things to consider with setting up an S-Corp that would take up an entire article. On average, expect to pay about $100-150 depending on your state if you decide to register an S-Corp yourself.

It doesn’t matter what you choose, your own state has different registration requirements that will be slightly different from others. Please verify with your Secretary of State’s website to make sure you fall within the guidelines.

Now you’re ready to register!

Click Here to Get Started to Register

Check for a Domain Name

Before you officially register with your state, let take a look to see if your business name is available as a website. Quickly put in your business name into a search engine and see if a website exists. If you’ve found that both the Domain Name and Entity Name are available, go ahead and register! We’ll talk about how to grab that domain name and create a website in the upcoming episodes/article.

Register with your State

Open up a web browser and navigate to your Secretary of State website. Navigate to the corporation filings section to complete an online registration form. During registration, you will be notified if your name is already taken. At the same time, check to see if the website domain for you business is already taken THEN check your state’s Entity names. If you’ve found that both the Domain Name and Entity Name are available, go ahead and register!

Congrats! You’ve just made yourself legal. You should get a confirmation email with your official Entity registration information for your state. Let’s talk about getting your finances lined up to start taking in payments the right way.

Secretary of State Websites

Alabama Secretary of State, 334-242-7200
Alaska Secretary of State, 907-465-2530
Arizona Secretary of State, 602-542-3230
Arkansas Secretary of State, 501-682-1010
California Secretary of State, 916-653-3795
Colorado Secretary of State, 303-894-2251
Connecticut Secretary of State, 203-566-3216
Delaware Secretary of State, 302-739-4111
District of Columbia Secretary of State, 202-727-7278
Florida Secretary of State, 904-488-9000
Georgia Secretary of State, 404-656-2817
Guam Government Site
Hawaii Secretary of State, 808-586-2727
Idaho Secretary of State, 208-334-2300
Illinois Secretary of State, 217-782-7880
Indiana Secretary of State, 317-232-6576
Iowa Secretary of State, 515-281-5204
Kansas Secretary of State, 913-296-2236
Kentucky Secretary of State, 502-564-2848
Louisiana Secretary of State, 504-925-4704
Maine Secretary of State, 207-287-3676
Maryland Secretary of State, 410-225-1330
Massachusetts Secretary of State, 617-727-9640
Michigan Secretary of State, 517-334-6206
Minnesota Secretary of State, 612-296-2803
Mississippi Secretary of State, 601-359-1333
Missouri Secretary of State, 314-751-1310
Montana Secretary of State, 406-444-3665
Nebraska Secretary of State, 402-471-4079
Nevada Secretary of State, 702-687-5203
New Hampshire Secretary of State, 603-271-3242
New Jersey Secretary of State, 609-530-6400
New Mexico Secretary of State, 505-827-4508
New York Secretary of State, 518-474-4752
North Carolina Secretary of State, 919-733-4201
North Dakota Secretary of State, 701-328-4284
Ohio Secretary of State, 614-466-3910
Oklahoma Secretary of State, 405-521-3911
Oregon Secretary of State, 503-986-2200
Pennsylvania Secretary of State, 717-787-1057
Puerto Rico Secretary of State, 787-722-2121
Rhode Island Secretary of State, 401-277-2357
South Carolina Secretary of State, 803-734-2158
South Dakota Secretary of State, 605-773-4845
Tennessee Secretary of State, 615-741-2286
Texas Secretary of State, 512-463-5555
Utah Secretary of State, 801-530-4849
Vermont Secretary of State, 802-828-2386
Virgin Islands Secretary of State, 340-776-8515
Virginia Secretary of State, 804-371-9141
Washington Secretary of State, 360-725-0377
West Virginia Secretary of State, 304-558-8000
Wisconsin Secretary of State, 608-266-3590
Wyoming Secretary of State, 307-777-7311

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FHS 3: LLC vs S-Corp and the Tax Man!

Freelancer Head Start — Fri, 03 Nov 2017 18:06:19 +0000

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Business entities

Three are a few business entities that you’ll be picking as a business owner. A sole proprietorship, partnership (not covering sub classifications LP, LLP), LLC,
C-Corp and S-Corp. Based on how you’ll be classifying yourself for taxes, choose a business entity that works with your business plan.

Income Tax classification

https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

Liability

Your liability is what you are on the hook for if something forces you into bankruptcy or a lawsuit. You are essentially protected when you create a Business Entity.

Do not cross the “corporate veil”
Business entity legally separate from its owners (create for liability protection or name recognition if Sch C business); entity liable, not owners or members
May be different according to state of organization, so check on that
Liability includes creditors/lender, customers, suppliers, or other owners
Business assets used to pay off business debts, owners lose what has been invested in LLC, not personal possessions including house or car
Exceptions include illegal or fraudulent activity
Business liability and professional liability insurance should be considered

Formation

Each state has different rules about forming a Business Entity.

State Articles of incorporation/organization $100 – Georgia
State Annual registration and license $50 informational form – Georgia
Federal employer ID # FEIN – Found on the IRS.gov website
Partnership agreement is a good idea to complete even if you don’t have a partner. You never know where you business will grow.

Tax structure: LLC vs S Corp

Both Flow Through Entities (FTE), so main difference is how business owners pay Self Employment (SE) taxes (Medicare and SS)
LLC Pros: more flexibility in management (voting, ownership), distributing profits, and fewer recordkeeping obligations
LLC Cons: pay SE tax on all income
S Corp Pros: don’t pay SE taxes on net income (but have to take reasonable salary, typically understated)
S Corp Cons: fewer than 100 members, no foreign LLC or nonresident alien owners, no corps or partnerships, basically only individuals;
- Proportionate distributions, take a reasonable salary which creates payroll filings
S corp: pay reasonable salary on W-2 to owner which will pay medicare and SS taxes, that amount can be deducted from business profits, and remaining about is not subject to SE taxes, additional withdrawals taken as distributions
- Capital accounts (contributions, net income, separately stated items, TE income, ND exp, distributions)
- SE tax = 15.3%; SS 12.4% on first $118,500, Medicare 2.9%, (additional 0.9% on high income wage earners $250k Married Filing Joint(MFJ) and $200k single). Half deducted as above the line deduction when arriving at AGI

Tax filings

Financial statements (BS, IS), open own checking/bank account and keep separate records
Tax forms: 1040, 1065, 1120S, k-1s both
Threshold: any activity, really when start earning income;
- Can deduct $5k each start-up and org costs (phased out over $50k), amortized SL over 15 years, 180 months
- Net earnings from SE => $400 sch SE filing
- Estimated tax payments => $1,000 total tax liability
- UET make sure to pay in 100% PY (110% if over $150k), 90% CY tax liability, actual or expected/annualized (70% GA)
- Due dates 1120s and 1065 3/15, 1040 4/15

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