Once again, this information relates to business in the United States.  Businesses located in other countries must comply with tax laws of that country.

They say the only sure things in life are death and taxes. For small businesses, the adage should be if you don’t manage your taxes, they will be the death of your business! Failure to keep up with tax liability is a common pitfall for business owners, but there is no reason to fear the tax man. Setting your business up to stay on top of your federal and state responsibilities is not particularly difficult, and all entrepreneurs should be eager to develop internal systems to ensure that taxes are never a problem.

Depending on your type of business, your tax liabilities will vary. For most, the list includes state and local licenses and permits, sales and use tax, employment taxes, and, for corporations, federal and state income taxes.

Licenses and Fees

Licenses and permits vary according to where your business is based and include state entity registration fees (for LLCs and corporations), county or city business licenses, and any local permits your type of business requires. It is critical that you pay these fees on time. Failing to stay up-to-date will end up costing you more and putting the protection afforded by your LLC or corporation at risk.

Protect your business by calendaring the due dates for all fees due at least 10 business days before they are due. If your expected fees are high, as in the annual franchise tax in California or any sales-based fees, be sure to work those fees into your expense budget. You can set aside some each month or plan for the full amount the month it is due, but be sure you have enough cash to cover the bill when the time comes. Keep all license and permit information filed together — a 3-ring binder can be an excellent way to store these important papers — and develop a system for tracking the due dates of every fee.

Sales Tax

Paying the government their share of sales through state and local sales tax is a common problem for small businesses. Often, the sales tax collected in the daily receipts is deposited along with the store’s income and considered available cash by the owners. Once the due date comes around (usually once per quarter), the sales tax bill is much higher than anticipated and creates a serious cash flow problem. As in, there is not enough cash flow to cover the sales tax! A few sales tax periods later, the business is on the verge of self-destruction. These amounts add up quickly — just $100 of sales tax collected per day equals over a $9,000 tax bill inside of three months!

There are a couple of easy remedies for this problem. First, consider opening a separate bank account to hold the sales tax receipts. Your accounting software or point-of-sale system will record the amount of sales tax collected each day, and you can deposit or transfer that amount to the tax account on a daily or weekly basis. This way, you are guaranteed to have the cash on hand when the tax bill is due and will be less tempted to spend the cash on other supplies or inventory. Also, you will earn interest on the deposits over the few months they sit idle. It’s not much, but it is your money!

A second method to avoid spending sales tax proceeds is to use your accounting system to determine how much cash you have available to spend. If set up correctly from the beginning, your accounting software will allocate the sales tax collected to its own account, separate from your cash on hand account. As long as you don’t rely on the actual bank balance to tell you how much you have to spend, the cash will still be there when the bill comes due.

Employment Taxes

Employment taxes are another common pitfall for small business owners. It is critical that you completely understand your responsibility as an employer before you hire your first employee. Tax liability for employees is divided between both the employee and employer — altogether, federal taxes due equal 15.3% of your employees’ pay; half is withheld from the paycheck, the other half the employer pays out-of-pocket. Therefore, the business is responsible for submitting both the amount withheld from the paycheck and the employer’s portion. If your area has a state income tax, you are liable for submitting those payments as well. Again, employment taxes are generally due quarterly, unless your payroll exceeds a certain amount or you have a poor record of paying on time.

Small business owners run into the same problem with these tax payments as they do with sales tax. Unless a system is established to set aside the correct amount due during the period, it is very difficult to come up with the full payment on time. In addition, some employers find the paperwork and withholding procedures to be confusing and just choose not to participate. As you probably have learned, ignoring a problem doesn’t make it go away! Before you hire employees, learn all you can about your tax-related responsibilities and set up your accounting software with the correct numbers.

Income Taxes

If you register your business as a corporation, you will need to file an annual federal, and possibly state, income tax return. Generally, you will be expected to submit quarterly estimated tax payments to the government so they can hold your deposits until tax time. Failure to submit the correct quarterly amounts or to file on time can result in significant penalties come tax time, so it is important to stay on top of these due dates as well. If you register your entity as an LLC, you will likely be required to submit quarterly payments for your personal income taxes. Self-employment taxes are 15.3% of your income — the same total as is normally paid by the employee and employer together. If you are taking regular distributions from your LLC, it is recommended that you set aside your 15.3% each pay period to cover your income tax due.

Bottom Line

The bottom line to tax management for your business is to understand the various types and amounts of tax due and develop a system for setting aside the cash and paying on time. Like anything else related to your business, good planning before taxes become an issue will save you a lot of headaches, and will increase your venture’s chances of success!

• About the Author

  K. MacKillop, an entrepreneur with a J.D. from Duke, is co-founder of LaunchX LLC and authors a small business startup blog. The LaunchX System, a five Unit series of step-by-step business startup procedures, key software and more answers the startup question, “Where do I start?” Visit http://LaunchX.com.

For related links or to read the original posting, click here.

This has been a Guest Author Submission.

To Your Success,

SherryD
http://www.wbobr.com

According to the law, ignorance is not an excuse nor a defense.  It is important in the realm of business to be as knowledgeable as is possible as a prevention against future problems.

In her post, Jean is answering a question received from a reader.

Another reader question about sales taxes: “I have a sales person in another state.  Do I have to collect sales tax in that state?”  Whether you need to collect sales taxes in a state is determined by whether your business has a “nexus” (presence) in that state. Nexus basically means that you are “doing business” in that other state, and if you are doing business there, you must collect sales taxes from customers in that state.

Collecting Out of State Sales Taxes
Let’s say you have a business in Iowa and you also sell products or services in several other states: Wisconsin, Minnesota, and Illinois.  If you are selling on the Internet, you probably don’t have to collect sales taxes (but that may be changing as states look to increase taxes to offset budget deficits).   But in most other cases, you will probably have to collect, report, and pay sales taxes on sales to other states where you are doing business.  Here are some examples of what nexus means (these are from the Iowa State Code):

• If you own or maintain an office, distribution house, warehouse, or other place of business, either directly or by a subsidiary
• If you are an out-of-state retailer that has a representative in the state (permanently or temporarily)
• If you have an employee representative who solicits sales in the state
• If you have an independent broker or jobber who is under contract with your company to solicit sales in the state
• If you have an employee or representative who acts as your consultant and who provides regular and significant services to a customer or customers in the state
• If you sell and install property in the state
• If you are a construction contractor performing a contract, in whole or part, within the state
• If you are a retailer that performs service work in the state
• If you regularly engage in delivery of your products by your own trucks in the state.

In other words, it seems that just about any activity within another state can cause you be “doing business” in that state. So, yes, you will need to register with the state, and start collecting, reporting, and paying sales taxes for sales in that state.

To see related links, read the original posting or view Jean Murray’s Bio, click here.

To Your Success,

SherryD
http://www.wbobr.com

Doing business on the Internet is supposed to be fun, right?  However, even fun has a price attached.  In this case the price is called PST, GST or HST here in Canada, better known as Sales Tax.

Many online businesses do not include sales tax on internet purchases that are made.  While this is a standard practice, this practice does not exempt those businesses from having to account for internet sales tax on sales they make, should those sales meet the criteria set out by the various levels of government.

The fun definitely comes to a grinding halt if the tax department determines that regardless of the fact that you did not charge tax, your business is still required to submit internet sales tax on those transactions which meet their criteria.  Nothing like having a huge tax bill or audit.  Ignorance, unfortunately, is not considered to be an excuse.

I don’t claim in any way, shape or form to be an authority on the ins and outs of when, and which transactions, fall under headings that require sales tax on internet purchases to be submitted, or when Use Tax comes into play.  That is the job of the accountants and tax experts and is an area where I encourage you to seek competent, professional advice from experts who have knowledge of accounting for an online marketing business.

In researching this topic, I have come across a couple of posts, which should give you a starting point.  They are:

1. Sales Tax on the Internet by Attorney Richard Stim
2. Ecommerce and PST by Susan Ward, About.com

It is worth the cost of setting your business up properly from the beginning. Personally, I would rather know up front if my business could be hit with an internet sales tax bill and prepare accordingly. 

To Your Success,

SherryD
http://www.wbobr.com