Disclaimer: This post may contain affiliate links. None of the information in this blog post should be considered tax advice. Always consult a tax professional if you have questions about taxation as it applies to your business.
When you are new to entrepreneurship, the thought of taxes can be overwhelming. Understanding tax law and how to make business decisions that are best for your biz is an important step into the life of an entrepreneur. Even if you work with a tax professional, it is still important to understand how money decisions impact your bottom line. The top ten biz related tax questions for online entrepreneurs are answered below. Own them and put them to work in your biz!
1. Biz Structure-What Is Best?
It is often best to create a formal entity. This helps protect you against personal liability should a lawsuit or money troubles befall your biz. The easiest for start-ups is an Limited Liability Company (LLC). With an LLC, your biz income passes through your personal tax return. This makes things easier for new biz owners who are just starting to develop a revenue stream.
However, once you are consistently making 50K in net income, it is more beneficial from a tax stance to form an S-corp. This allows biz owners to treat their salary as a biz expense. An S-corp remains its own legal entity, but still utilizes pass through taxation. This means the profits are given to shareholders (you) then it is taxed on a personal level.
2. What Is The Deal With Quarterly Tax Payments?
In order to avoid underpayment penalties, you need to pay taxes on a quarterly basis. If you expect to owe $1k or more in biz tax, you should be paying quarterly tax payments. If you aren’t sure how to calculate your quarterly tax liability, find out more here. Once you set up a tax account, you will receive vouchers to pay your estimated taxes.
You are assess penalties based on the previous year’s tax liability. Therefore, if your revenue increases dramatically you won’t be assess penalties that year. However, in subsequent years, you will be responsible if you aren’t paying your estimated tax payments and end up owing.
3. How To Know If It’s A Hobby Or A Business?
The IRS expects that businesses make money, but there can be some risk involved in entrepreneurship that result in losses. The general rule of thumb is your business must make a profit three of every five years to avoid being classified as a hobby. If you are classified as a hobby, you lose the ability to deduct your biz expenses.
This might impact how a budding entrepreneur classifies their biz as they get started. Some new biz owners may wait until they are making enough sustainable income to step into a biz entity. However, if you have a lot of start-up expenses or general biz expenses, you then have to forgo deducting those initial expenses.
If your biz gets classified as a hobby, you’ll have to appeal to the IRS in order for a chance to get this designation overturned.
4. What Are The Best Ways To Maximize Tax Savings?
Obviously, the answer is deducting biz expenses on your tax returns. The easiest way to take advantage of some of these benefits is by finding places where you biz and personal expenses intersect, and determine if they can be deducted! Here is a short list of possible deductions that may intersect with your personal expenses:
- Internet
- Phone
- Office in your home
- Vacations whereby you conduct business
5. Typical Biz Deductions For Online Business
Don’t overlook the most typical biz deductions for your online biz. Deducting everyday biz expenses helps your bottom line, so don’t forget these everyday expenses that most online biz owners encounter:
- Set-up Costs including your web-hosting, plug-ins, and services that keep your website running
- Internet expenses
- Hardware including your computer, laptop, printer, etc.
- Office supplies and marketing costs
- Advertising and promotional materials
- Home office
- Insurance
- Training and consultant/coaching fees
6. What Are The Rules Regarding Where I Legitimize And Register My Biz?
Some states have more beneficial biz policies than others, so there can be a draw to organize your biz in a state that benefits you most. However, in most cases, you should be registering your biz entity in the state from which you operate. There are exceptions if you are a nomad or travel a lot in which case you an choose where to register. When you do this, you’ll need a registered agent to formalize your documents.
7. What If I Live And Work Abroad?
If you operate your biz from abroad and you happen to be out of the country 330 days per year or more, you can take advantage of a Foreign Earned Income Credit that can make you exempt from up to 104K in income. See your trusted tax professional if this applies to you.
This benefit definitely seems pretty dreamy! Earn while traveling the world and pay less taxes while doing so.
8. How Do I Handle Referral Credits?
Often times, brands offer up payment for referrals via credits. Examples of this include online biz products such as Tailwind or CoSchedule. Their affiliate structure pays you through giving you credits to use the service itself in your biz. Another common method is getting free product credits in return for promoting a product.
In these cases, you must add up the monetary value of what was received in credits and claim it as income.
9. How To Best Separate Biz and Personal Expenses?
After you have established your biz entity, set up separate financial accounts for your biz expenses and income. Keep detailed records of your expenses. Using an accounting app or service like Wave can help you organize your receipts.
When paying yourself, pay a lump sump to your personal account. Don’t conduct personal spending out of your biz account. Keep great records can be a lifesaver during a tax audit!
10. What About Sales Tax?
The best advice is to know the state law in which you operate. Every state has different rules. There may be a time in the future where sales tax will be collected no matter the biz or buyer location. Until then, use a tool like TaxJar to keep track of your sales tax responsibilities.
Hopefully, these tips have clarified some common tax questions related to the world of online business. How do you handle taxes in your biz? Drop a comment below and share your best tips.
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