Hi Everyone,

I thought this article from the WSJ might be of interest to some of you building Internet businesses. 

The IRS is going to require income that is being funneled through Paypal and merchant accounts in excess of $10k per year to be reported on a 1099.   This will allow the IRS to see if that income is being reported.  For many people, eBay starts out as a part-time thing, even a hobby, and it progresses into a real business….    

Rob

Here is the article…

Online Sellers Face New IRS Rules

By MARTIN VAUGHAN
July 30, 2008

If you regularly sell items on online auction sites, you may find yourself on the Internal Revenue Service’s radar. Recent legislation aims to help the IRS collect more taxes from online enterprises, many of which either don’t know about their tax obligations or are ignoring them, according to the agency.

The provision, part of the housing rescue package that President George W. Bush is expected to sign within days, will require PayPal and other processors of online payments to report annual gross receipts to the IRS for all but the smallest online merchants.

Processors’ Requirement

The new reporting requirement is similar to a proposal the Bush administration has put forward in its most recent budgets as a way to ensure that taxes owed are being collected. It also applies to intermediary banks that process card payments for restaurants and brick-and-mortar retailers. Congressional tax estimators predict the reporting change will help the IRS collect an additional $9.5 billion in taxes owed by online and traditional businesses over the next 10 years.

The payment processors will be required to file a 1099 form for each merchant to the IRS and to the merchant. They won’t have to file for merchants with less than $10,000 in gross sales and less than 200 transactions in a given year.

And they won’t start reporting until 2011, giving the banks and the merchants a couple years’ head start to make sure everything is in order.

Business Transition

Confusion about taxes may be more prevalent among eBay sellers than brick-and-mortar firms because it is comparatively easy and cheap to set up an eBay business. The transition from casual seller to profit-seeking business can seem almost spontaneous.

Like many eBay sellers, Sarah Davis didn’t set out to be a business owner. But somewhere between her first online sale and last quarter’s $560,000 in sales of second-hand luxury handbags, it dawned on her that she had become one. From the time she started selling in 1999, Ms. Davis reported income from her eBay sales on a Schedule C. By 2005, her business had grown large enough that she sought tax advice. Soon after, she incorporated her business, Fashionphile, as an LLC.

“You start out selling some stuff from your closet, and then the random clearance handbag,” Ms. Davis said from her Beverly Hills, Calif., office. Mix in some shoes you never wore and “It’s hard to say when you are really, ‘in business.’ ”

Here are a few suggestions to help eBay entrepreneurs protect themselves and their profits, while complying with tax laws:

Report all income from online sales, even from casual or hobby selling. If you made a profit from goods sold on eBay — whether vintage KISS action figures or hand-knitted doggy sweaters — you owe income or capital gains taxes, and likely self-employment taxes, too. No taxes are owed, however, on used items that you sold for less than what you paid for them, essentially using the online service as a virtual garage sale.

If you mean to deduct expenses, act like a business. One of the most common mistakes eBay sellers make on their tax returns is to claim deductions to which they aren’t entitled. The tax code allows deductions for business expenses, but deductions are limited for individuals who sometimes make a little money on the side from hobbies.

One rule of thumb the IRS uses to determine whether an individual is engaged in a business is whether they made a profit in any two of the past five years. Another is if the person would still, say, frame landscape photographs, or carve garden gnomes, or buy and sell rare 45s, regardless of whether or not they made any money from the activity.

“If the answer is yes, you may be on the wrong side of an IRS argument that you are taking a hobby loss,” said Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants.

Keep your personal and business accounts separate. Make sure you have a PayPal business account separate from your personal one, an eBay business account that is separate from any casual buying and selling you do, and a separate business checking account.

These steps will not only make it easier for you to determine how much you owe, but may help protect your deductions by signaling to the IRS that you are serious about running a business. “Everything you can do to treat it like a business will help,” says Kristine McKinley of Beacon Financial Advisors, based in Independence, Mo. Ms. McKinley specializes in tax advice to eBay sellers.

Claim the home office deduction. While this deduction has fallen out of favor because of a popular belief that it triggers IRS audits, it is still a valuable deduction if you have a separate space in your home that you use exclusively for business purposes, according to Ms. McKinley. It’s true that you will owe more taxes when you sell the home on amounts that you have depreciated. But the deduction can still be a major benefit because it will reduce your income for the purposes of self-employment tax, she said.

Happy Tax Day everyone! 

First, a quote by one of my favorite sci-fi authors…

“Be wary of strong drink. It can make you shoot at tax collectors… and miss”.   – Robert A. Heinlein

 

When you work for an employer, they dictate the terms of your Retirement Savings plan.  And retirement savings allow you to reduce your current income and save in a tax advantaged account for later in your life.  So, once you are making beyond what you need to live in the present, you can put money away and escape taxation on the money.

Companies can setup a 401(k) plan and invest up to 25% of their wage salary plus about $16,000.  So, for a business owner with a $70,000 salary, this would allow them to invest about $33,500 into their 401(k) and not have to pay any tax on that money in the present tax year (and it is not taxed until the money is withdrawn).  You do not have to be income-rich in order to be paying 40-50% of your income in taxes, and this retirement savings allows you to invest 100% in your account, rather than just 50-60% that is left after taxes.

There are also other plans like SEPs (Simplified Employee Pensions) and DBP (Defined Benefit Plans) that can be used and may even allow you to put away much more money in a tax-advantaged way.

As the owner of the business, you have the ability to call the shots on how this plan will be setup.  And if you have a spouse or children working in the business, money can also be put away in their retirement plans.

Consult a professional tax or financial advisor for more details on the tax advantages of retirement savings plans.

Have a fantastic Tax Day, and go join in a local Tea Party to protest the ridiculously wasteful spending plans now being rammed down our throats…

Rob

Good morning all… today is a short one because it is very simple.  As a business owner you have more flexibility than a regular wage-earner employee because you can sometimes choose to defer business income from one year to another.  You can also choose in many cases to time your purchases of business expense items when they are most favorable.  Since the way our tax system is set up punishes you for high income with much higher marginal tax rates, you can often use this ability to time income and expenses to your advantage.  I told you this one would be simple.

I thought of a fourth way to reduce your taxes that had slipped my mind originally, and it is a HUGE ONE that many people aren’t even aware of.  I’ll share it with you tomorrow on Tax Day…

Have a great day… 

Rob

Morning All…

There are two major types of limited liability business… the Corporation and the LLC.  For most small businesses, you are going to be choosing between these two.  Specifically, for most small businesses the choice is between an S Corporation (which is just a regular corporation with one extra form filed one time) and an LLC.

It is Mainly a Tax Decision

I believe that this decision is primarily about potential tax savings. The information below may not be accurate for all states and situations, you need to figure this out yourself or with the help of your accountant and attorney if you don’t know what to do.  I am going to greatly simplify this decision below as it applies to many small one or two owner businesses…

The biggest drawback with an LLC is that, as an owner, you have to pay payroll taxes on all of the corporate profits, not just on salaries and wages.  This can be a significant amount of additional taxes that you pay with an LLC and was the main reason I went with the S corp.

Let’s look at an example to clarify this.  If we assume that the business is generating $200,000 in total income and total deductible business expenses of $100,000 then the net profit is $100,000.  With an LLC, you will report this as personal income and be required to pay payroll taxes on this entire amount.  

How Much Are Payroll Taxes?

Payroll taxes are the taxes that are paid on salaries to fund the government Social Security and Medicare programs.  The employee pays a certain amount towards each and the employer is required to match that same amount.  When you own your own business, you pay both parts, so it is double what you are used to seeing on a paystub. 

In 2008, the payroll tax calculation is 15.3% of the first $102,000 plus 2.9% of everything over $102,000.  The $102.000 number increases every year and in 2009 it will be $106,800. 

Going back to our example of $100,000 profits, the owner of the LLC would be required to pay $15,300 in payroll taxes on that $100,000. 

S Corporation Payroll Tax Savings?

So, an LLC generating $100k profits you pay $15,300 in payroll taxes.  How about an S Corp?  With an S Corp, you can pay the owners a reasonable salary for the job that they do.  And you pay the payroll taxes on this salary.  The rest of the profits are considered the income generated by the fact that you took the risk and invested the money to start the corporation and you pay income tax on this money but not payroll taxes. 

If we assume that you determine that a reasonable salary is $55,000 for your job then you will pay $4207.50 in payroll taxes, the corporation will also pay $4207.50 in payroll taxes for a total of $8,415 in total payroll taxes.

Remember that the LLC owner paid $15,300 in Payroll taxes. 

So, the S corp in this example saves you $6,885 per year in payroll taxes.  Assuming that you are going to be in business for a while, this can add up.  In under 15 years this is $100,000 savings.  And the payroll taxes just keep going up…

With these tax savings, why would anyone start an LLC instead?  Well, one reason is that if you are already maxing out your payroll tax contributions at a regular job, or in another business, then these tax savings are greatly reduced.  Here are few other factors…

Limitations and Requirements of an S Corp…

There are a few limitations on S corps which might affect some people:

□      Can’t have more than 100 shareholders

□      Can’t have foreign owners

□      Can’t be owned by other corporations or LLCs

□      S corp profits need to be distributed according to the percentage of ownership

And, S corporations require the owners to follow a bit more corporate formality… to “follow the corporate rules”.

It is not too big of a deal, once you understand the rules and have an easy to use system in place to stay ahead of the game.

My simple Cover Your Assets package is a Clear, Concise, Step-by-Step program to assist small business owners to know what to do and when to do it with regards to their corporate record keeping requirements.

Have a great day,

Rob

[Disclaimer: None of these posts should be considered legal or financial advice.  You should consult an attorney or CPA in your area to advise you on the specifics of your situation.  Life Tip: Don’t believe anything you read on a blog on the Internet unless you have checked it yourself.]

Hello Reader… 

Are you dreading Tax Day April 15? (If you want a place to blow off steam, there is a big Tea Party movement underway here in America protesting the current direction of our government bailouts- you might want to join them on April 15 in your town– google it)

I think that we reap the benefits of living in America, and we are obligated to pay the exorbitant taxes that the various levels of government confiscates from our earnings each year under threat of imprisonment.  However, I do not believe that there is anything good or patriotic about paying more taxes than we are legally obligated to do.  Our only choices is to vote for more economically-literate politicians or to move to another country.    

I believe that the most important thing that you MUST DO in order to minimize your taxes is to own your own business…

Besides the tax advantages, you also get liability protection for your personal assets should your business “harm” someone resulting in a lawsuit and you are looked at as more professional by many people you want to do business with.  We’ll discuss these aspects in more detail later, but let’s concentrate on the tax savings…

There are three ways owning your own business allows you to reduce your taxes legally… We’ll talk about one each of the next three days. 

1. Business Expense Deductions
2. Payroll Taxes
3. Timing of Income and Expenses

Business Expense Deductions

In the most simple explanation, businesses have income or revenue that comes from their customers in exchange for goods or services.  And they have expenses that are generated in the course of doing business.  For tax purposes, we take the income and subtract the expenses (also called Deductions) and we pay taxes on the profit that is left over.  So we want to keep track of as many deductions and business expenses as we possibly can, while remaining within the law. 

Regular individuals do NOT have the same ability to total up and subtract deductions without setting up a business. (even a Schedule C sole proprietorship business which I wouldn’t recommend in most cases)

As a simple example, if you have a small jewelry business, then you will have all of the revenue from selling the jewelry in all the many ways that you can find to sell it.  You will have a number of expenses such as:

¨     the jewelry that you purchase from the manufacturer

¨     the commissions you pay to those who sell your jewelry

¨     your automobile expenses incurred in the operation of the business

¨     your travel expenses (plane, hotel, meals) incurred in the operation of the business

¨     advertising, website and Internet expenses (including training and Education)

¨     computer, phone, etc.

¨     office supplies

¨     rent- office, warehouse, storage

¨     and a whole lot of other things that you spend on your business (you just need to keep good records and document the business use)…

In many cases, people build their businesses out of things that they are passionate about, and turning this into a business allows you to “write-off” a lot of expenses that might otherwise be paid for with after-tax dollars.   Since most of your income is reduced by 35-50% in taxes (add up 7.65% Payroll Tax plus 15-35% Federal (and going up) plus whatever State and Local taxes (6% in GA) and you are often paying 40-50% in taxes on any dollars that you earn in wages.  If you can pay for some things using untaxed dollars (and deduct them from your business, and thus from your reported income) then you are able to get things at an effective 40-50% discount.

So, you must have your own business.  Tomorrow, we’ll talk about what kind of business allows you to Minimize Your Taxes the best…

Have a Great Day,

Rob