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?
{ read the comments below or add one }
This is wonderful. If I were in the process of starting a home business, I would work the tax treatment into the plans and calculations… I really hate surprises.
Another way of starting a business from home is by scarcely lifting a finger, but could allow passive income.
If you have the space in your home and not keen on giving-up your job away from home, why not consider using the your spare room (or two with access to a bathroom) and rent out the rooms as offices for other businesses.
This assumes you can isolate your living space for privacy.
There are of course tax considerations and include tax deductions as well as income tax.
Depending on the type of business office your rooms are to be used for, some consideration for parking access may be useful for your tenants. Supplying parking space could also be added to rental fee and can offset property taxes such as council rates (Aust). Decent light into the rooms and adequate power outlets and land-line phone outlet is another consideration and inexpensive when consider providing the power and phone line outlets is tax deductible (Aust). Advertising for suitable office tenants is also tax deductible.
There could be a bonus, if you are unemployed or chose not to go out to work, there could be an opportunity for you to answer phone calls for your tenant’s businesses or even do some other form of work for them such as some administrative chores. Providing cleaning of offices and bathroom could also be included in the rental cost if you provided the service.
Of course, the location of your home may be important for many types of business offices. Being in the hub of the CBD may not be the ideal choice anyway for your potential tenants, so don’t be discouraged if you live in the suburbs or outer ring of city.
When you no longer want to rent your home space, the rooms used for offices can be easily re-converted back to a home again. Two story dwellings are probably the most ideal for this purpose, but not limited to these types of dwellings.
Only wish my home was of a design that would allow for such an idea!
The IRS is looking harder at home-based businesses, so you must keep good records to prove items such as computers are used for business and not for pleasure. I recommend ordering (free) Publication 334 from irs.gov. The advice to seek an accountant or tax expert before you start the business is solid advice.
I like the concept of home business. The good thing in home business is that, it does not requires you to rent office or storage space and you can work on it at your own home. There is no need for you to travel or to use your car everyday going to work place or business office.
If you must have your own business from home, you should first get yourself a good accountant who can help and guide you in all taxes and deductions that you may do, do it first – not after, then it may be too late.