Just remember, you are on your own when you pay taxes by yourself. When something goes wrong, "someone in this forum told me it's ok" does not suffice.
You can start out small, but you need to keep it personal (1040 Schedule C). You will need to put every nickle you earn back into the business to grow it. In the process you will learn to track every sale and get a good handle on what your obligations are. Quarterly estimates are exactly that, an estimate. If you guess low then plan on writing a check to the IRS in April, if you guess high, then a tax refund is coming your way. What truly matters is what you file at the end of the year. Don't play games with the IRS, and don't lie, especially to yourself. Since you plan on going to college, get a business degree and read everything you can about being an entrepreneur. By the time you graduate, then you will have a good knowledge base to start a business. If you reinvested everything you made back into your personal business and grew it, then you will have the capitol to start a formal business where you can start to draw an income.
You need to read and study this book. http://www.amazon.com/Statistical-Analysis-Business-Decisions-William/dp/0256004919 I still have my original copy from my college days if you want to borrow it.
Tim, Take this for what it's worth - there has been a lot of good advice here, now I'll give you some from my perspective. I started my business 10 years ago this year and incorporated as an "S" corp which gives me slightly more liability protection than a sole proprietorship. I have a business checking and saving account and have a separate personal checking and savings account. Make very sure you do that as it provides a clean delineation between the person you are and the "person" the company is. Years ago, company owners would not give themselves a salary (or would give themselves a small one) and pay themselves in dividends that were taxed at a much lower tax rate. The IRS caught up to that and now the smart thing to do is to pay yourself a a fair salary and then distribute dividends when appropriate; however, since you are a sole proprietorship it will all be taxed at regular income tax rates based upon your tax bracket. As a "S" Corp, if I have other folks I pay a dividend to as shareholders then the lower tax rates apply. For my particular business, I have very few assets since the majority of the assets are "inside my head" (a couple of my ex-wives might talk about the "depreciation of THAT asset, but...!). My assets are a couple of laptops and a couple of printers, but nearly everything else is "consumed as used." My taxes are easily done, but I do pay a lady (a former IRS audit supervisory employee) about a $1000/yr to do my personal and business taxes and believe she would be worth it at twice that amount. My advice to you is to be scrupulous in keeping records your first year and err on the side of caution as if you're bunking with an IRS auditor. Then when tax time rolls around next year, find a good tax person and turn your documentation over to them and then ASK ABOUT 100,000 questions about what you can and can't deduct as business expenses. Some things you may be surprised about, somethings not. You should realize that you do need to do quarterly tax payments and, while they should be as accurate as you can make them, I wouldn't worry too much about the accuracy for this first year; just remember to make the payments. Also, please realize you will automatically have a self-employment tax of 15.03% to pay that counts as both you and the employer side of the taxes required for social security. Don't play games until you know the rules and then PLAY BY THE RULES.
I too have an S-corp. I think it is a great corporate structure for a small business. The problem for Tim is, he lacks the capitol to pay an accountant $200 to help him with his finances. When I started my business...it cost me $1500 to have an attorney setup the corporation. If he can't afford an accountant, I don't think he can afford an attorney.
Well, being a little older than Tim and a little more savvy, I used LegalZoom to incorporate (I also have an LLC through them as well). Both cost me less than $300 total. Since I knew capital expenses and inventory wouldn't be an issue for me, I didn't use an accountant. Despite the accountant, I think a good tax person is critical (or was for me).
There you go. I'm fairly young and when I purchased my dental practice...I needed it to be done correctly. I wanted to focus on dentistry first and business second...so I let the professionals help me do it.
I think a big thing being missed in the responses is hubris. Tim already filed for an EIN/TIN for his business, so he should have already used that number to set up the checking account. Based upon his previous posts, it's entirely possible that he: A) Doesn't have the capital to open a business checking account. B) Is blocked by ChexSystems from opening any new accounts. C) Has a different reason. Whatever the reason may be, he's made it clear by asking if it's okay to use his personal checks for the business that he intends to use his personal checks for the business unless someone clearly shows him that it's illegal. He also asked if it would be okay to write-off coin purchases he makes for his own collection against his business. Obviously, this is his plan, and he might already be doing it. All that said, here are my opinions: 1) No, you can't write-off coin purchases. Inventory is considered an asset until it is divested from your books. You can deduct the cost basis of inventory from the final sale to calculate your net profit (different in Hawaii, since we're required to pay taxes on the gross sales, not net sales, at the business level), if your state allows it. However, you can't write off product inventory as a cost, since you're not consuming it. Additionally, if you start co-mingling your personal assets with your business assets (exactly what you're planning on doing or have already done), it's unlikely that you would be protected by corporation status anyway, but verify that with a corporate attorney. Then, after that meeting, ask the same exact question to a tax attorney. Unless BOTH say it's okay (and you hire one as your attorney), odds are you'd be viewed as a sole proprietor regardless of what status you claim for the business. 2) Quarterly reporting... Read: http://www.irs.gov/publications/p505/index.html http://www.irs.gov/publications/p334/index.html Then read: http://www.irs.gov/pub/irs-pdf/f1040es.pdf http://www.revenue.state.il.us/Businesses/ Then look at: http://www.illinois.gov/dceo/Pages/default.aspx Your state has terrific resources available online for the exact questions you're asking here. Go check with them.
1. Do I need so still pay federal income tax on top of the SE tax? 2. According to something I read on a website, if I purchase inventory (say supplies for instance), I can only deduct them once sold. Is that true?
In most states...yes, you must sell them and then deduct the cost from the total sale (to get your net profit). Inventory is considered an asset...therefore isn't deducted at the time of purchase. This may be true in all states, but I know it is in most.
According to the link NK gave me, I don't need to pay Illinois income tax if my AGI is under $6,100 a year. What's really confusing, is I already have a job. So I don't really know if I have to pay taxes due to the fact my job is already withholding taxes on both the state and federal levels.
Now, different states and entities have different laws. My guess would be (and this is a guess)...since you are a sole proprietor and thus have no tax protecting entity, any income derived from that business should be treated like a second job. If I have a job that pays $50,000 a year and a side job that pays $5000...I pay taxes on $55,000 of income. Just because the second job doesn't yield more than $6100...doesn't mean that it isn't taxed. It's your total income.
Also, I have to make tax payments quarterly with IL just the same as I do the IRS. Also, I plan on moving by year end, which is going to create a giant headache since I will have to file two tax returns...one for the state I'm in now and the one for the state I'm moving to, then I would have to make sure any income I make before moving is appropriately filed with the current state and then appropriately filed with the state I'm moving to. Then I would have to cancel the current tax number with the current state I'm living in, and get a new tax number for the state I'm moving to. Then any tax OVERPAYMENT from moving between tax quarters most likely would not transfer to the account with the old state, and then I would be penalized if I underpay the state I'm moving to if I did not pay enough. Not only that, I would need to collect sales tax for my state (not on coins since there is no ST on coins, but on supplies) and then turn around and collect sales tax for the state I'm moving to. Then again there would be a cut off date and I would have to be sure I don't overpay or underpay either state. I think the previous poster is right, I should just" play it safe this" year. The type of accounting I would need done, due the fact I'm moving, with cost well over $500 and $500 is about all I expect to make this year. I can see why people don't start small businesses, it seems like the amount of time spent working on taxes would be a job all in itself.
Honestly Tim, if you are going to be moving in a year...here is what I would do. Save your money. Spend the next year saving for your business so you will have some capitol when you move to then start your business. In the mean time, put together a business plan. Try and plan out exactly what your goals are...what you want to spend and make and try and come up with a real plan. Once you move, and have some capital in the bank...then actually start your business.
With the tax refund you received (just posted in another thread). You could have used that money to hire an accountant and or lawyer to answer all these questions and had some start up capitol for your business. Maybe next year...
I agree...some of that money could have been used to help jump start your business. One thing you will have to learn Tim...if you are serious about owning your own business and making it a success is you have to sacrifice, especially early. I quit my very well paying job six months ago (at age 28, I was making more than most people ever will) to start my own business. I have taken a serious income hit in the short term and I haven't been able to buy the things I want right now. But, my goal is long term financial success. I believe sacrificing and working hard today will payoff in the long run.
I sure hope so too, I dont how long I can maintain working at the break neck speed I am going. I would sure be disappointed if in 10, or 20 years I am still stuck spinning wheels. Only time will tell though, and none of the success we are all striving for is guaranteed anyway, shoot tomorrow may not even make it here for some of us. God forbid. Anyway, I salute all you hard workers out there and may peace and prosperity befall us all.
