Hi everyone - welcome again to Tuesday Tips. I've been putting off this section on Taxes for our "How To Start A Reselling Business" series for quite awhile now. Two reasons for that: it'll be a major snorefest for many, and I just didn't want to run it right before the actual April tax deadline.
So now that everyone's already sent in their taxes, I'm going to try crank it out. But I'm not going to make it all pretty with pictures - it'll just be info.
Before beginning: if you're new to our blog series, you might want to read the earlier posts on Legal, Branding and Planning first. You might also want to read the two intro posts: Should I Start A Reselling Business? Part 1 and Part 2.
Also a reminder: I'm not a lawyer / accountant, I didn't take any business or econ classes and nothing we write here should be construed as "professional advice". In other words, we DISCLAIM everything. =)
I'll start off with the usual assumptions first. We'll assume:
1. You want to legally pay any taxes for your reselling business to the best of your ability.
2. You are starting a sole proprietorship - that is, there is no legal distinction between yourself and your business.
Again, I'm not here to point fingers - whether you choose to pay taxes on income from sales is your own decision.
Paying taxes for a small online business is sort of a muddled affair, with different levels of government that don't really talk to each other ALL wanting your money. It would be impossible to get into the specifics and laws for every different tax situation. Be aware that I definitely won't be able to address any specific state/city tax questions.
Similar to the "Legal" section, there are at least three different levels of government that you'll have to be concerned with for taxes: Federal, State and County/City. As I've mentioned before, It's AGGRAVATING that these levels don't coordinate between each other, but that's how it is.
I would also like to talk later about Estimated Taxes and Sales Tax.
First, let's talk about income tax on your sales through your ReSelling business. Pretty much anytime you sell something and make a profit, you have to report that as income. I don't want to hear anyone say - "But, what about..." or "How do I avoid..." Let's just accept this for the time being.
As a sole proprietorship, you're responsible for paying taxes to the Federal goverment (IRS) and usually the state that you live in on the profit for sold items. Basically, when you do your taxes (or have your taxes done) at the end of the year, you'll need to include this revenue from your sales in your return.
I'm not going to get into the specifics of it. I would really suggest you talk to a tax advisor about it, because there are different ways to report income. I also hope you've been keeping track of every inventory item and every sale in something like Excel, because it'll make it easy to total it up at the end. If you use PayPal as many do, there's an export feature that may also make your life easier. Basically, some of the important numbers you might need are:
• Total Gross Sales - total of all your sales, includes the shipping, the sales tax and does not take into account the cost of the goods sold.
• Total Shipping Costs - how much it cost to ship the items, if you are mailing them. In general shipping should not be counted as income and should not be taxed. Be careful, though, if you charge a stated "Handling" fee - that fee MAY be taxable.
• Total Sales Tax Collected - if you collected any sales tax, this should be added up. I'll go into the specifics below.
• Total Cost of Goods Sold - this one is still confusing even after we've gone through it a few times. There are different ways to treat your inventory - and it matters whether or not you are carrying over your left over inventory year after year. But basically, you are usually allowed to count the cost of the goods that you sell as an "expense". It reduces your total net profit, and consequently the income that you need to pay taxes on. The question is WHEN do you count this cost of goods as an expense - when it goes into inventory, or when it's actually sold? I would seriously, seriously talk to an accountant about the best way to treat it for your situation.
• Expense Totals - this one is also very open-ended. You may or may not be able to claim any number of things as expenses. My advice is to just keep track of EVERYTHING, total each category up, and present it to your accountant at end of year to see if it qualifies. Or as mentioned, use your software package to try and figure it out.
Here are a few of the possible Expenses that you might be able to claim to reduce your income:
2. Research, Subscriptions and Books
3. Legal Fees (DBA, Permits, Licenses, etc.)
4. Office Supplies
5. Travel and Parking
6. Trade Shows, Swap Meets, Entrance Fees
7. Third Party Fees (Ebay, Etsy, Paypal, etc.)
In general, when in doubt, KEEP TRACK OF IT. You might not think it's important, but it may make life easier down the line if you happen to have it recorded already. Keep any related receipts as well. I'm going to focus on Record Keeping in a future post - good records usually make it MUCH easier to figure out taxes.
We use an accountant for our business, but you can probably use these type of totals in order to figure out your year end income taxes for Federal and State using the software programs out there. You might need additional information too - I don't know because we have never done it ourselves. In any case, if you are going to an accountant - they're going to LOVE it if you can provide detailed excel files and totals instead of just handing them a big mess of receipts and handwritten scribbled notes...
OK, so that's the income taxes you have to pay on a reselling business for the Federal and State entities. All done, right? Nope. You also need to consider Estimated Taxes.
Basically, Uncle Sam and the state that you live in don't like it very much that you get to hold onto your income until the end of the year. They're going to want to have it FASTER than that. If you receive a paycheck at a normal job, it already has the necessary taxes taken out of it. Estimated Taxes are usually reserved for the self-employed and others who don't have taxes taken out automatically.
If you're an independent contractor or self-employed, you likely already know about this. Here's a confession - when I first started working for myself about 10 years ago (not in the ReSelling field), I didn't realize I needed to pay any estimated taxes! I'd never been exposed to the self-employed world, and so I didn't realize it was necessary.
What happened? Well, nothing really. I was still paying taxes at the end of the year as normal on income, and maybe because it wasn't that much, it didn't trigger any red flags. But in general, you DO need to pay Estimated Taxes on income if it's not already taken out. I wouldn't press your luck.
So - when do you need to pay estimated tax, and how much do you need to pay?
It likely depends on how much you make (or plan to make). For ourselves, and I believe for most other people - you will need to pay estimated taxes on ReSelling revenue FOUR times a year.
Check with a tax professional, but here are the dates and the computation quarters for a normal calendar year as far as I know it:
1st quarter is January 1 - March 31. Payment is due April 15.
2nd quarter is April 1 - May 31. Payment is due June 15.
3rd quarter is June 1 - August 31. Payment is due September 15.
4th quarter is September 1 - December 31. Payment is due January 15 of the following year.
I know these dates do not seem "symmetrical", but believe they are intended that way. Please check them, as they sometimes change. Both the Federal and the different states should have online voucher forms and instructions that you can print out in order to submit your estimated tax every quarter.
As for how much estimated tax you pay - both the Federal and State also have calculation worksheets for figuring it out. It will differ greatly from person to person, so I won't even begin to try to give any advice on how much. I do know that you can be penalized for paying too LITTLE and too MUCH estimated tax. (Geez, they SURE don't make it easy, do they?)
Still, I don't believe that they're going to follow through on penalizing you - unless you've grossly misrepresented the amount of tax owed. Make sure to record the amount of estimated tax paid for each installment, and make sure to let your tax accountant know about it.
One thing to keep in mind - paying estimated taxes quarterly is a REAL bitch. God, I HATE it. Always try and keep in mind when the due date rolls around, because it can be a really nasty surprise to suddenly have to come up with such a large amount of cash. The January due date one is especially nasty, because a lot of other year round bills tend to pile up near that time.
All right, the last part of taxes I'd like to talk about is Sales Tax.
When you go to the store and purchase an item, you'll likely have to pay Sales Tax on it (unless you live in a state that doesn't collect it). This sales tax is collected by the merchant and then remitted back to the state at the specified time(s).
As a ReSeller, you also are required to collect Sales Tax when applicable and remit it to the state. The key here is WHEN APPLICABLE. There are so many different state rules and sales tax situations that I'm not going to be able to cover all of them.
So: How much do you collect, from which sales do you collect them, and when is sales tax required to be remitted?
Let's tackle the last item first. For most folks, I believe that all the sales tax you collect during the year is likely due at the end of the year. Your state's organization that handles this tax will have a worksheet and form that you can fill out. Sometimes you can do it all online. Similar to estimated tax, I believe the frequency that you have to remit sales tax may also depend on how much you make, so check the regulations in your particular state.
I probably should give an example: for California, the sales tax is administered and collected by the California State Board of Equalization. This entity is also who you obtained your California Resale Permit from. They have a form that you need to fill out (usually something called "boe401") and submit with your collected sales tax. You can do it online nowadays. I believe the previous year's sales tax is due at the end of January. Other states should be somewhat similar - but again, check with your state government or tax advisor.
Now - on which sales do you collect sales tax? If you maintain a physical presence in the state from where you sell, and you are selling to people who reside within the state, chances are that taxes are due on pretty much all items. If you're an online ReSeller selling to BOTH customers in your state and to customers in other states and countries, then you MAY not be required to collect sales tax on those out of state orders. If I had a dollar for every time I've seen this question asked...
But basically, I think that for interstate internet commerce outside of your state, the buyer is responsible for any taxes that may be incurred. I'm not sure if this is completely correct, but in any case, YOU shouldn't need to collect the tax. If you sell online to someone who resides in the same state as you, you ARE required to collect sales tax that will be remitted at the end of the year. I believe there are exceptions and whatnot - I'm going to leave that up to you to figure out.
OK, so what percentage sales tax is required to be collected on sales?
Ah, this is a tough one.
The reason is because "sales tax" is made up not just of taxes that the state collects, but also District taxes and City taxes. They are completely different for different cities and districts. In California alone, there are hundreds of different rates for different cities, and they are CONSTANTLY changing.
Like I said, everyone wants your money, for doing absolutely no work at all.
I really thought hard about it, and finally decided that I'm not going to say anything about it. I'm sorry, but it's just not worth the questions I'll get about it. And I don't want to mislead anyone in collecting the wrong amount of sales tax.
Here's what I'd do. I'd check with your state, district, and city for the different percentages of tax required. I'd also definitely check with an accountant who is familiar with sales tax laws in your state for his opinion.
Ugh. This concludes our long post on Taxes and Reselling. I hope this has given a little guidance for those starting up, but since this is not a tax blog, I'm probably not going to answer any specific questions.
When in doubt, I would seriously think about consulting an accountant who has had experience dealing with online business taxes.
The next TT post in this series will deal with "Recordkeeping". I promise it will probably be more interesting than this post!
If you found this information helpful I would really appreciate it if you could leave a small comment. It helps me decide how much effort to direct toward this series - when there's no response or comments, then I tend to re-direct my efforts toward listing more items as opposed to blogging...
Thanks for reading!
Previous posts in our Tuesday Tips ReSeller Series:
[3/7/2011] How To Start A Reselling Business: Legal
[2/14/2011] How To Start A Reselling Business: Branding
[2/1/2011] How To Start A Reselling Business: Planning
[1/25/2011] Should I Start A Reselling Business? Part 2
[1/18/2011] Should I Start A Reselling Business? Part 1