Learn About Business Taxes
Most of the information herein is collected directly from the IRS. This action avoids misinterpretations and wrong information.
An eCommerce sale tax is a consumption tax enforced by the government to sell goods and services. The online retail or vendor for an eCommerce business collects the sale tax. However, the vendor collects conventional sales taxes if you have a brick-and-mortar store, also known as a physical store.
The IRS encourages everyone to use the Tax Withholding Estimator for a “paycheck checkup.” This will help you ensure you have the right amount of tax withheld from your paycheck.
There are several reasons to check your withholding:
- First, checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.
- At the same time, you may prefer to have less tax withheld upfront, so you receive more in your paychecks and get a smaller refund at tax time.
Your general business credit for the year consists of your carryforward of business credits from prior years plus the total of your current year’s business credits. In addition, your general business credit for the current year may be increased later by the carryback of business credits from later years. You subtract this credit directly from your tax.
- Most of the following credits are part of the general business credit. The form you use to figure out each credit is shown below.
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the company operates to make a profit.
Checklist for Starting a Business & State by State Tax Requirements
Small Business Tax Responsibilities
How to Handle your Business Taxes
No doubt that every business is unique so is its taxation situation. This can bring many solutions and concerns, especially for starting businesses. The best course of action for those beginning in entrepreneurship is to keep everything as organized as you can. Keep records, copies, and documents; in other words, keep your evidence handy; you never know when an auditory will fall from heaven.
Some steps can help keep your business organized and in control if you’re starting a business. The first is to set up an organizational system and put your mindset to managing. Being organized doesn’t mean going crazy; it means, finding a place for each document, paper, or anything you need. Today’s technology is so much easier to keep organized. There are apps or programs ready to help you with any task.
Other steps to stay in control of your taxes are:
- Keep all your receipts in order: plenty of apps can help you with this. You take a picture, upload it, and keep it in the category it belongs to. Here are some examples of apps that are the best to keep you organized: Zoho(from zero up to $8.00 per month), Fresh Books(starting at $7.50 per month), BizXpenseTracker ($6.99 per month on iPhone, also help you scan and categorize your receipts), Triplog (starting free) and MileIQ (starting free up to $59.99 yearly) are specialized apps for tracking mileages.
- Make your accountant or tax preparer’s life easier: the better way to receive significant taxes discounts is by supplying all the documentation. So, giving everything very well organized will make the work of your preparer easier to help you look for savings and keep you in compliance with the IRS. It is worth saving a couple of hundreds, thousands, or even millions!
- Use a business credit card: it gives you more benefits, and you also keep track of all your expenses.
- Work on your tax documents every week: don’t leave to place everything organized by the last minute. Instead, do a little every week, so it doesn’t accumulate.
- The most important on your list is to be on time on your due dates: Mr. IRS is stringent and punctual, so there are some special dates you need to be aware of, like the first and last day to file your taxes. Also, the IRS is a little strict regarding deadlines. So, to avoid being late and receiving penalties is better to have everything in order from the beginning. Penalties will affect your economics and perhaps your business.
- Use a calendar
- Set your phone’s reminder.
- Tell people around you to remind you.
- Set a board on a place you have to see every day, like an entrance door.
- File your taxes by the deadline: don’t hesitate to file your taxes. Filing before or on the deadline is crucial to make quarterly payments. Nothing is better than keeping IRS away from you; you can achieve it by filling in on time and maintaining a good record. Keep track of the deadline.
- Pay your tax liability on time: late fees will continue to increase as you continue to pay late. Always stay in touch with your accountant to avoid this situation and set a budget. If you need to request an extension, you are still responsible for paying on time. The extension carries a due date for payment.
- If you don’t know what you’re doing, ask a professional: an accountant. You can read all the articles of the world, but ultimately the person who can save you from any tax trouble will be your accountant.
- Instead of being late, requesting an extension is better than not showing up. IRS takes a no-show very seriously. Instead, use your rights as an extension. Always stay on the side of the law. Don’t try to become a rebel with the IRS. An extension will save you from monthly penalties, so take advantage of it.
- The 5 Best Accounting Software for Small Business
- Best Overall: QuickBooks Online
- Best for Micro-Business Owners: Xero
- Best for Service-Based Businesses: FreshBooks
- Best for Part-Time Freelancers: QuickBooks Self-Employed
- Best Free Software: Wave
- Stay informed about your state’s taxes: not all states require the same taxation; for example, there is 9 state with zero state taxes filling. In addition, you need to be aware of your federal and state tax responsibilities.
Stay aware of all the information and perhaps benefits for your business by visiting the IRS. Here you can find numerous resources to help you follow IRS requirements.
If you made a payment during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS. In addition, receipt of certain payments may also need you to file an information return to the IRS.
Do you need to charge Sales Tax on Shipping?
Sorry, if you’re looking for a yes or no question, that will be impossible. The truth is that charging sales tax on shipping depends on many facts. It depends on the state and the delivery method, either private or common carriers.
Each state has its own rules, so it is necessary to verify each state’s regulations to confirm if it is required to charge for shipping or not.
A general rule of thumb for charging sales tax on shipping is as follows:
- If a sales tax is assigned to the product, then to the shipping too,
- On the other hand, if the product is exempt, the shipping is also exempt,
- If you have a combination of both taxable and exempt, then you will charge tax only to the taxable part.
- If you have nexus in the state, you are collecting sales tax; you also need to collect taxes on shipping.
Keep clear that this guide cannot replace professional advice from your accountant, SBA specialist, or IRS specialist. It is recommended that you visit any previously mentioned to get the best guidance. No guidance or information from the internet can replace the wording and counseling. It is always important to find a specialist to guide you through taxation.
Starting a Business
Determining your taxable income based on a tax year would be best. A “tax year” is an annual accounting period for keeping records and reporting income and expenses. An annual accounting period does not include a short tax year. The tax years you can use are:
- Calendar year – 12 consecutive months beginning January 1 and ending December 31.
- Fiscal year – 12 consecutive months ending on the last day of any month except December. For example, a 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.
.
What is Taxable and Nontaxable Income?
Generally, an amount included in your income is taxable unless it is specifically exempted by law. Taxable income must be reported on your return and subject to tax. Nontaxable income may have to be shown on your tax return but is not taxable
Recordkeeping
General Information about Resale Certificates
First, you need to understand what a Resale Certificate is. A resale certificate is signed documentation provided per state. State sets their rules and regulations regarding using the resale certificate; 45 states have their own rules to be more specific. For example, it is permitted to use a resale certificate to purchase taxable services in some states as long as the service forms part of the resale goods. This certificate is given to a legal business owner who purchases intending to resell goods.
The resale certificate is a legal documentation stating there is no need to charge sales taxes. It is an “open” document regarding no specific products selected. The purchaser can buy any good needed for resale. You cannot use the resale certificate to purchase products for personal use. Resale certificates are used to purchase products intended to resell, rent, or purchase components of products they intend to sell.
Resale certificates must be kept on file for five (5) years in case of an audit that shows why there is no sale tax collection.
There are state resale certificates and multistate certificates. The best form to find out what the process applies to you is by visiting the Department of Revenue website of the state of your intent to do business. Some states will accept the Multistate Tax Commission’s Uniform Sales & Use Tax Certificate – Multijurisdictional Form or the Streamlined Sales Tax Exemption Certificate. Others will receive a statement of resale or purchase order. For the most part, most states request some basic information to validate a resale certificate. These elements are:
· Name and address of the buyer
· Name and address of the vendor
· Registration number of buyers
· Description of item purchased for resale
· Reason for exemption
· Statement on sale intentions, specifying the intentions to collect and remit the tax if the item is sold.
· Date, and Signature, and Title of the purchaser
· The Streamlined Sales Tax Governing Board (SST) has created the Streamlined Sales Tax Exemption Certificate, which anyone can use (you don’t have to register through SST to use this form) for all of their member states.
· The Multistate Tax Commission (MTC) has created the Uniform Sales & Use Tax Exemption Certificate, which you can use for some of their member states. Please consult the link for a complete list of the states that accept the Uniform Sales & Use Tax Exemption Certificate, subject to notes on pages 2-4 of that document.
How to Apply for a Reseller License?
A business must register in each state to get a sales tax ID for every state it intends to collect taxes. If you don’t register, you cannot request a resale certificate.
Some states will issue the resale certificate once you register; others require a separate process.
Generally, to obtain a resale certificate, you need to:
- Visit the proper state department and collect an application. Then, you can fill out the application online. You may find that each state works differently, so you need to find the correct department to apply for the resale certificate. The most convenient is to do a Google search.
- Get all the documentation required to complete the application. For example, you may need tax ID numbers, articles of incorporation or articles of organization, driver’s licenses, bank account information for the business, names, and addresses of suppliers, estimated monthly sales revenue, and others, depending on the state.
- Submit the fee payment. Not all states require payments. Once you send the fee, you will receive your certificate.
Do you collect sales taxes for the state where you sell or where your customers are?
It all depends on the company’s nexus with the place of sale or purchase.
- Origin-based Sales Tax States– if your business is in the origin-based state (or has a nexus like an office or warehouse) and makes sales in the same state, it will collect sales tax. For example, if your office is in Miami, Florida, and you make a sale in Orlando, Florida, you must collect the required charges and sales tax. However, if your business is located in California, the city, county, and state tax will be based according to the seller’s city; the district sales tax will be based on the customer’s location (destination).
- Destination-based Sales Tax States – a business with nexus (office, warehouse, affiliate, etc.) in a destination-based state. It will collect and remit sales tax and other applicable taxes to the customer’s location (customer’s state).
- Nexus and Online Retailers – e-commerce is changing the rules; you need to collect sale tax, accordingly, based on your nexus.
Which states do not accept out-of-state resale certificates?
Alabama
California
Florida
Hawaii
Illinois
Louisiana
Maryland
Massachusetts
Washington
Washington D.C. (not a state but a district)
TaxJar Map
How to Apply for a Reseller License?
A business must register in each state to get a sales tax ID for every state it intends to collect taxes. If you don’t register, you cannot request a resale certificate.
Some states will issue the resale certificate once you register; others require a separate process.
Generally, to obtain a resale certificate, you need to:
- Visit the proper state department and collect an application. Then, you can fill out the application online. You may find that each state works differently, and as such, you need to find the correct department to apply for the resale certificate. The most convenient is to do a Google search.
Get all the documentation required to complete the application. For example, you may need tax ID numbers, articles of incorporation or articles of organization, driver’s license, bank account information for the business, names, and addresses of suppliers, estimated monthly sales revenue, and others depending on the state.
Submit the fee payment. Not all states required this. Once you send the fee, you will receive your certificate.
Do you collect sales taxes for the state where you sell or where your customers are?
It all depends on the company’s nexus with the place of sale or place of purchase.
Origin-based Sales Tax States– if your business is in the origin-based state (or has a nexus like an office or warehouse) and makes sales in the same state, it will collect sales tax. For example, if your office is in Miami, Florida, and you make a sale in Orlando, Florida, you must collect the required charges and sales tax. However, if your business is located in California, the city, county, and state tax will be based on the seller’s city; the district sales tax will be based on the customer’s location (destination).
- Destination-based Sales Tax States – a business with nexus (office, warehouse, affiliate, etc.) in a destination-based state. It will collect and remit sales tax and other applicable taxes to the customer’s location (customer’s state).
Nexus and Online Retailers – e-commerce is changing the rules; you need to collect sale tax, accordingly, based on your nexus.
Recognizing Illegal Tax Avoidance Schemes
Businesses with Employees
When another person performs work for you as a business owner, you must first correctly classify that person as an independent contractor or employee.
If the person is an independent contractor, then refer to Forms and Associated Taxes for Independent Contractors for your tax responsibilities.
If the person is classified as an employee, then you must have an Employer Identification Number (EIN). Your tax responsibilities include withholding, depositing, reporting, and paying employment taxes. You must also give certain forms to your employees, they must provide certain information and documents to you, and you must send all the collected data to the IRS (Internal Revenue Service of the US) and SSA (Social Security Administration of the US).
Understanding a Federal Tax Lien
A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property, and financial assets. A federal tax lien exists after the following:
The IRS:
- Puts your balance due on the books (assesses your liability);
- Sends you a bill that explains how much you owe (Notice and Demand for Payment); and
You:
- Neglect or refuse to pay the debt in time fully.
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.
An excellent article from the experts of Avalara
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