If you dream of conducting a business from your home, it’s important to remember it’s not all about showing up to work in your pajamas. Part of the reason why the entire world isn’t self-employed is that there’s a great deal of behind-the-scenes paperwork that employees at a traditional workplace never have to worry about.
In particular, there are tax rules and regulations that you must abide by in order to keep your new business on the up-and-up. So, before you put on your PJs and start your artisan cheese business from your living room, here are some of the tax issues that you’ll need to know about:
Taxes for the Self-Employed
If you’ve only ever worked in a traditional workplace, you may not realize that taxes are more complicated when you’re the boss/employee/HR department all in one. For one thing, instead of having to pay your taxes on April 15 for the entire year, you’ll have to pay estimated quarterly taxes — on April 15, June 15, September 15, and January 15. In order to determine how much money to send, you’ll use Form 1040-ES, which includes an estimated-tax worksheet and voucher to submit with your estimated payment.
The IRS requires the self-employed to have at least 90% of their tax liability paid by tax day, or else they owe a penalty — so getting this right is important, particularly if your profit margin is fairly lean.
State Sales Tax
A further potential tax problem stems from the somewhat convoluted rules regarding sales tax. If you’re selling products over the internet (services are generally exempt, as are most food and drugs), then your customers will have to pay sales tax on those products — but only if they’re in the same state as you. The rules can be confusing, but basically sales tax is due when the business has a “presence” in the state where the goods are being purchased. (This is why you pay sales tax on Sears.com purchases, since the company has a brick-and-mortar store in each state, but not on Amazon purchases.) Sales taxes are due either quarterly or monthly, depending on your state’s rules.
Even if you only have a presence in your own state — which is the case for most at-home entrepreneurs — you might be subject to a state’s “use tax” but not its sales tax. No matter what, you’ll need to track all of your taxable and non-taxable sales. In order to keep everything legal, you’ll also need to be aware of the differing tax laws in the 46 states that levy sales tax.
The Bottom Line
There’s a great deal more to creating an at-home business than setting up a website and waiting for the orders to start flowing in. You must start with all of the required paperwork and licenses, be diligent about putting money aside to pay your tax bills, and be sure that you keep excellent records. Staying on top of federal and state taxes will be an important part of keeping your new business afloat.
Luckily, these days you can take care of your taxes in your pajamas.
Did you face any tax surprises when starting to work from home?