Federally, you report your income minus your expenses on a schedule-C. The math on that will charge you 15% of your net profit as Social Security and Medicare taxes. There's basically no way around those two taxes if you make any profit at all. Net profit = gross total income minus expenses like "cost of materials" and "pay an accountant to figure this out for me".
If you do something like buy equipment just for the business (like a better sewing machine), you can deduct the cost of the equipment on an amortized scale, depending on the type of equipment, likely over the course of 5 years. You have a couple of different choices for how to amortize it, and the law has been changing on this every year. If you're lucky, you can deduct the whole cost in the first year.
If, during the starting-up phases of your business you spend more on equipment than you make in income, you can take a loss on your 1040 that offsets your spouse's income or any other income you may have. You can only do this in 3 years out of every 5, otherwise they call it a "hobby business" and you can't deduct the loss any more, even if you haven't finished depreciating your stuff yet.
If you also use your equipment for personal use, you can deduct only part of the cost -- for example, my video camera for my video business is declared as 50% personal and 50% business use, so I'm deducting half the cost over the course of 5 years.
Circling back to the schedule-C, if you make a profit, 15% goes straight to the Feds. All of it (including the 15% I believe, but my accountant handles that part) also gets added into your "AGI" number on your tax forms, to be taxed at your marginal rate.
Every state is very different in how state taxes and sales taxes are required and collected, thus making some states more "business friendly" than others. Likewise every city is different. Where my mom lives, she doesn't have to register with the city until she makes 10K profit annually. Where I live, I have to pay $130 every 2 years with even $1 in gross income -- not net, gross. [I closed my business at the end of 2012 when they started requiring me to file quarterly "paper bag use reports" or face a $500 fine. Seriously?? I have 1 customer annually... Sunnyvale is not micro-business friendly and has been getting worse over the last few years.]
In CA, to pay sales taxes, you register to get a wholesale number with the Board of Equalization (which sends notice to your city that you're doing business, btw) and if you're small enough, you just fill out a form annually stating gross income + purchases you didn't pay sales tax on (if you bought materials wholesale) - cost of purchases that went into making your stuff - sales out of state - cost of shipping and then you allocate your customer purchases to any of 128 different tax districts in the state depending on the location of your customers, and then you send the state a check for the taxes you owe (which presumably you collected from your customers when they bought stuff.)
Some states require you to charge sales tax on shipping and handling charges, others don't. CA requires it on handling, but not shipping if the cost of shipping was directly passed on to the customer and not grossed up (that's why it gets subtracted).
Whew!
Don't ask about hiring someone in CA -- I hired a housekeeper, and I spent more time figuring out how to legally pay her and do taxes on her than she did cleaning in the first month, and it was another nightmare this April.
There may be a local Chamber of Commerce to help you with all the details. Also search for "small business administration" I took several classes from them when I started. Starting a business legally is very hard.
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chiming
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Date: 2013-04-20 04:45 am (UTC)From:If you do something like buy equipment just for the business (like a better sewing machine), you can deduct the cost of the equipment on an amortized scale, depending on the type of equipment, likely over the course of 5 years. You have a couple of different choices for how to amortize it, and the law has been changing on this every year. If you're lucky, you can deduct the whole cost in the first year.
If, during the starting-up phases of your business you spend more on equipment than you make in income, you can take a loss on your 1040 that offsets your spouse's income or any other income you may have. You can only do this in 3 years out of every 5, otherwise they call it a "hobby business" and you can't deduct the loss any more, even if you haven't finished depreciating your stuff yet.
If you also use your equipment for personal use, you can deduct only part of the cost -- for example, my video camera for my video business is declared as 50% personal and 50% business use, so I'm deducting half the cost over the course of 5 years.
Circling back to the schedule-C, if you make a profit, 15% goes straight to the Feds. All of it (including the 15% I believe, but my accountant handles that part) also gets added into your "AGI" number on your tax forms, to be taxed at your marginal rate.
Every state is very different in how state taxes and sales taxes are required and collected, thus making some states more "business friendly" than others. Likewise every city is different. Where my mom lives, she doesn't have to register with the city until she makes 10K profit annually. Where I live, I have to pay $130 every 2 years with even $1 in gross income -- not net, gross. [I closed my business at the end of 2012 when they started requiring me to file quarterly "paper bag use reports" or face a $500 fine. Seriously?? I have 1 customer annually... Sunnyvale is not micro-business friendly and has been getting worse over the last few years.]
In CA, to pay sales taxes, you register to get a wholesale number with the Board of Equalization (which sends notice to your city that you're doing business, btw) and if you're small enough, you just fill out a form annually stating gross income + purchases you didn't pay sales tax on (if you bought materials wholesale) - cost of purchases that went into making your stuff - sales out of state - cost of shipping and then you allocate your customer purchases to any of 128 different tax districts in the state depending on the location of your customers, and then you send the state a check for the taxes you owe (which presumably you collected from your customers when they bought stuff.)
Some states require you to charge sales tax on shipping and handling charges, others don't. CA requires it on handling, but not shipping if the cost of shipping was directly passed on to the customer and not grossed up (that's why it gets subtracted).
Whew!
Don't ask about hiring someone in CA -- I hired a housekeeper, and I spent more time figuring out how to legally pay her and do taxes on her than she did cleaning in the first month, and it was another nightmare this April.
There may be a local Chamber of Commerce to help you with all the details. Also search for "small business administration" I took several classes from them when I started. Starting a business legally is very hard.
--Beth