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After receiving numerous questions the last couple weeks about business licenses, taxes, finances, accounting etc. I decided to answer a few. I’m no accountant or tax expert by any means so my knowledge is limited, but I do know some basics.
1. Do I need to be charging sales tax?
Anytime you are giving your client a tangible product, one they can hold in their hands, you need to be charging sales tax. However, that being said sales tax in the US can be extremely more complicated than you might think. Sure, you could look up the tax rate for your city and state and think, ‘okay I’m good,’ but it’s unfortunately not as simple as that. First you must have a sales tax license in order to charge sales tax. If you’re just starting your business and you have been charging sales tax without having a license, stop charging sales tax and get a license as soon as possible.
2. How much should I set aside for income taxes?
When you started your business the lure of being able to work for yourself, set your own schedule and all of that sounded great right? Well, one thing they didn’t tell you was you’d have to pay more in income taxes than you would at that corporate desk job. Your first year in business you’ll have more expenses than profit so it’s fairly safe to set aside 30% and it’s more than likely you’ll have some of that left over. Afterward you can reinvest the leftovers into your business. For the years after that it’s recommended to set aside 40%. I can imagine the jaws dropping. 40% is a good safe amount and depending on your expenses and how you file your annual taxes you may not end up paying all of that back. It’s better to be safe than sorry.
3. What kind of business license do I need?
This will vary incredibly from state to state as well as from county to city and so on. You’ll need to go to your state’s website in the business section to find out what the requirements are for you specifically.
4. What can I count as an expense?
Again, this may vary depending on your business, how much you spend, what you already have, and more. My best advice is to record all expenses related to your business and have a tax guy sort through and tell you what works and what doesn’t at the end of the year. A tax expert or accountant will know best and until that time of year comes around again if you keep tabs on anything you spend at all you’ll have a full list to go over with him later.
5. I want to start being able to accept credit cards, do you know any companies that allow me to do this without a fee?
Nope, sorry. Unfortunately all companies that process credit cards do take a percentage. Most companies are within the same range and don’t vary much. I highly recommend www.square.com as an easy company to work with to process credit cards almost anywhere. I’ve been incredibly satisfied with them. The important thing to remember about processing credit cards is that you cannot charge the fee that the company charges you to the customer. That is against the law. That fee though does count as an expense you can take on your taxes.
This is a good place to start with taxes and business licensing and stuff like that. In The Shop we have a guide to ‘Making Your Business Legit’ that can help explain all the types of taxes, how to calculate sales taxes correctly, use taxes, and help you get started in the right place figuring out what types of licenses and registrations you might need. This guide isn’t going to tell you exactly how to do your taxes, but it is an excellent place to start that will give you a much better understanding of taxes, registrations and licenses as a business owner.
Also remember that 20% of your purchases today through Saturday will be donated to helping Colorado’s Wildfires!!
As always feel free to ask a question if you have one or contact me carrie@ photographyawesomesauce.com
Holly - I’m curious if that 30-40% that you have mentioned for part 2 is for income taxes only or if that also includes what you have to pay out to Social Security?
Carrie - That includes social security.
Stephanie - Are you required to pay estimated sales taxes or do you just set aside the 40% and pay what you owe at the end of the year?
Carrie - The 40% I set aside is for income taxes which are a whole separate bunch of shenanigans than sales taxes. I pay my sales taxes annually because they don’t hit the mark to be paid quarterly. I usually don’t even set aside for sales taxes at this point because it’s so little. I just keep a tally of how much I owe for sales taxes and where and at the end of the year I fill out the form and mail a check and it’s done.