Taxes
Lesson 3 from: The Small Business Simple Guide to FinancesAmy Northard
Taxes
Lesson 3 from: The Small Business Simple Guide to FinancesAmy Northard
Lesson Info
3. Taxes
Lessons
Know Your Worth
1The Foundation of Your Business
09:38 2Creating a Usable Bookkeeping System
05:52 3Taxes
06:45 4Get Paid
05:48 5Small Business Deductions
06:30 6Retirement Contributions
06:12 7Income Statements
05:26Balance Sheet
05:39The Foundation of Your Business
Lesson Info
Taxes
1 (upbeat music) 2 Welcome to lesson three. 3 Today, we're going to talk about 4 everyone's favorite thing, taxes. 5 I'll also share some tips for how 6 to stay on Uncle Sam's good side. 7 The four big tax topics I'm going 8 to cover today are sales tax, the difference 9 between self-employment tax and income tax, calculating 10 and paying quarterly estimated taxes, 11 and preparing to file your annual taxes. 12 We'll get started with sales tax. 13 Even if you don't sell products, you'll want 14 to understand sales tax in case you do sell products 15 someday, or in case you sell services in a state 16 that charges sales tax on those services. 17 Sales tax can be a real pain 18 because every state has their own set of rules. 19 The first thing you need to do is figure out 20 whether your state has a statewide sales tax. 21 There are only five states that don't. 22 Download the lesson three guide to find your state 23 and which type of sales tax you'll use. 24 There are three options e...
xplained in the guide. 25 Destination-based sales tax, which is 26 where you charge sales tax based on the final destination 27 of the product, which is most likely 28 your customer's mailing address, 29 origin-based sales tax, which is 30 where you charge sales tax based on 31 where you are physically located when you send the product, 32 and if your business is in California, 33 it's a hybrid destination-based 34 and origin-based sales tax state. 35 Once you know how you'll be calculating sales tax, 36 you'll need to submit a sales tax application to the state 37 or states where you operate. 38 Most states have an online application you can fill-out. 39 Once you've done this, you'll receive 40 your state sales tax ID number, 41 information on how to pay the sales tax 42 and instructions for how often you have to pay. 43 Put those due dates on your calendar 44 and set reminders so you don't forget. 45 This way, you can avoid late fees. 46 If you plan to physically go 47 into other states to sell your products, 48 like at craft fairs or markets, 49 or if you sell a significant amount in another state, 50 you may have what's called nexus in that state. 51 Check with that state to see if you need to register 52 for sales tax there. 53 If you have a high-volume of sales 54 in a state other than the one 55 where your business is located, 56 I recommend plugging your sales totals 57 into our economic Nexus tool linked beside the lesson guide. 58 If you meet the sales thresholds shown with this tool, 59 then you'll be required to register 60 with that state's tax department and collect 61 and remit sales tax in that state 62 even if you never physically operate out of it. 63 Make sure you keep accurate 64 and detailed records of your sales tax transactions. 65 Our second big tax topic today is the difference 66 between self-employment tax and income tax. 67 This is often confusing the clients. 68 The self-employment tax is actually made up 69 of two smaller taxes, social security tax and medicare tax. 70 When you're employed by an employer, they actually pay half 71 of these taxes for you. When you're self-employed, 72 the IRS allows a 50% deduction 73 of the total self-employment tax you're assessed. 74 This doesn't reduce your tax 50%, 75 but it does reduce your overall taxable income. 76 On the other hand, income tax is the tax taken out 77 of your overall income for the year. 78 The rate depends on what income tax bracket you fall in 79 and ranges from 10% to 37%. 80 Okay, now that you have an understanding about income 81 and self-employment taxes, let's go over how to calculate 82 and pay quarterly estimated taxes for both of those. 83 The first thing I want to mention 84 is that these payments aren't required, 85 even if you never pay quarterly estimated taxes. 86 The worst thing that will happen 87 is that you may be assessed penalties 88 and interest on your annual federal return if you owe more 89 than $1000. For your state return, 90 most states operate similarly and have a $500 threshold 91 before the underpayment penalties 92 and interest start to kick in. 93 Most people do pay quarterly taxes, however, 94 because they want to avoid making one giant payment 95 at tax time. 96 I suggest setting up a separate bank account 97 where you keep the tax money you owe out of sight 98 so you don't accidentally spend it. 99 There are three methods 100 for calculating your quarterly estimated taxes. 101 You can find the detailed steps 102 for each method on the quarterly estimated tax worksheet 103 in our lesson three guide. 104 The first two methods shown, the safe harbor 105 and percentage of net income methods 106 are easier to calculate. 107 The third method, which uses an IRS worksheet, 108 will give you the most accurate amount, 109 but it's rather tedious to complete. 110 Once you've come up with your estimated payments, 111 you can mail in a check with a paper voucher 112 or you can pay electronically at irs.gov/payments. 113 If you pay electronically, 114 be sure the person shown first on your tax return 115 is the person whose social security number 116 you enter when you make the payment. 117 The due dates for quarterly tax payments don't fall evenly 118 throughout the year, so make sure you put these dates 119 on your calendar as well. 120 The last big topic we're going 121 to discuss is filing your annual tax return. 122 There are generally two options here. 123 You can hand everything over to an accountant 124 or you can do them yourself. If you hand 125 them off to your accountant. 126 Here's the basic list of what they'll need from you 127 for the business taxes, an income statement, also known 128 as a profit and loss statement. 129 Any 1099, you've received a list 130 of any assets you've purchased 131 or sold during the year, the total business miles 132 or auto expenses, depending on which method you use, 133 and a summary of your home office expenses. 134 If you've ever thought about hiring an accountant, 135 I always recommend talking with others from your industry 136 to see who they work with and rave about. 137 Once you've got some prospects, set up a time to chat 138 to make sure you'd be a good fit for each other. 139 Now it's checklist time. 140 The checklist will walk you through preparations 141 for the four big tax topics we've discussed today. 142 I have also included a bonus worksheet for you 143 to track your business assets. 144 The next lesson, which you'll have access 145 to soon is all about getting paid. 146 We'll go overpaying contractors, employees, and yourself. 147 I'll see you in lesson four.
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