Disclaimer: This article is meant as a general introduction to starting a business and it does not cover all of the infinitely possible specific tax issues for your business. Be sure to consult with a business tax professional or business lawyer – do not rely on this guide for legal or tax advice.
Congratulations on your new direct sales business!
A new direct sales business is exciting, and the rewards can range from “extra money each month” to “total financial freedom”. However now that you have business income (and expenses) associated with your new self-employment endeavor, you face new compliance rules and tasks. These are mostly related to tax compliance and business organization.
Federal and State Business Income Taxes
The first and most important thing I would like to share with you is to make sure that you do not “bury” yourself with your new income tax liability.
Paying a lot of tax is a “good problem to have”, as we joke in business. It means you are making money.
The problem is that no one is putting aside the taxes owed on your business income as they do from your paychecks.
Remember when you first started working and you saw your first check? A third of it was gone to taxes and perhaps other deductions. The taxes include federal income tax, social security, medicare, and state income tax.
This withholding is required by law because the average person will spend the money as they get it – and have nothing left to pay the government when they file their tax returns for the year.
It’s human nature.
Well no one is putting this money aside for you when you earn direct sales business income – but you will still face these tax liabilities and it’s very easy to fall behind. At the end of the year you might have a very significant tax balance due – and you are still accumulating more tax liability as you try to pay that off.
I’ve seen this issue take down small businesses before they’ve had a chance to grow. Please make sure you put money aside.
Business Task #1 – Pay Estimated Taxes
The IRS (and the State of Hawaii DOT) require that you pay in your business tax liability at least on a quarterly basis. You must estimate how much you expect to owe and pay it in “as you go” or face a penalty. This is not as difficult as it sounds – but it must be done.
Hawaii General Excise Business Taxes
You have to file and pay Hawaii General Excise Tax on your gross (before expenses) commissions or sales income.
This is not income tax – it’s totally separate. It is an additional tax.
You have to pay $20 and get a GE Tax license. Then you must file periodic tax returns and pay in your GE Tax liability.
Business Task #2 – File and pay your Hawaii GE Taxes
I hate to talk myself out of a sale (we provide Hawaii GE Tax filing services) but to be totally honest you can probably figure out how to fill out these tax returns online and pay in your tax electronically. If cost is a factor for you, you might choose to do this on your own.
DISCLAIMER: If you do it yourself, and you do it incorrectly, it could cost you in both penalties and hiring someone to fix it. Officially, we recommend hiring a professional preparer for all of your tax needs.
Just make sure you are on time – penalties for not filing are quite large. We have many clients who can do it themselves but hire us anyway – that’s because our fees are less than the late penalties – and we remind our clients when their GE Taxes are due.
Unfortunately, due to legal and liability issues, we can’t “teach” you how to fill out the Hawaii General Excise Tax Return forms. Also, we cannot “help” you fill out the forms.
Either you read the instructions and do it yourself or hire us to do it – there is no in between. Sorry – it’s not that we don’t want to help.
Organizing Your Direct Sales Business
If you are looking for an easy start, the good news here is that you really do not need to do anything except register your business with the state.
Search for “online business registration in Hawaii”. It only takes a few minutes and every year you get a postcard from the state reminding you to renew your registration.
I think it costs like $35 per year or so.
If that’s all you do in the way of set-up, your business type is considered a “sole proprietorship”.
These type of business requires that you simply file your income taxes along with (it’s a part of) your personal tax returns. Any income that your sole proprietorship makes is “assigned” to you personally. You do not pay yourself as an employee of a sole proprietorship. They money that the business brings in is simply your compensation.
As you grow you will have the “great problem” of making more money and owing more tax. At that point you will likely benefit from s-corp taxation. This is something you should seek professional help with. You can contact us here if you wish as we specialize in s-corporation taxation. If you expect $50,000 or more in “net profit” (income after expenses) – let us know and we will help.
Business Task #3 – Register Your Sole Proprietorship with Hawaii.
Search for Hawaii online business registration. You can also apply for your GE Tax license at the same time. They have a “wizard” that helps you determine what you need.
Business Tax Deductions – What You Can Write Off
Keep careful track of your expenses. It’s best to have a business checking account and even a business debit or credit card. Do not pay for any personal expenses with these accounts.
You can write off a percentage of your cell phone bill as it relates to your business. Same goes for computer and internet expenses. Be sure your deductions are ordinary, necessary, and reasonable.
Home office deductions are high risk, and the IRS loves to audit these claims. The rule here is NOT like your cell phone and internet deductions. You must use the space you are claiming EXCLUSIVELY for business. The IRS will even come and take a tour of your business space.
I’m not saying that you do not have a legitimate claim for home office expenses – but I am saying to be very careful and mindful when if you decide to claim them.
One more sketchy deduction is “inventory paid for but used personally”. I know (and agree) that if you sell anti-wrinkle cream, that you should use it yourself and show everyone how well it works. The fact that your face looks so pretty is great for business – but the IRS will “disallow” these expenses in an audit because they also provide a personal advantage to you.
I know it doesn’t seem fair – but those are the rules.
The IRS actually ruled against exotic dancers writing off their breast augmentations – even though they totally proved in court that they made significantly more money by having them.
Us men are such dogs – I can’t deny!
Anyway the IRS argued that they enjoyed the benefits of the aesthetic enhancements in their personal life as well and therefore they are not deductible.
They lost. Those are the rules, that’s just how it goes.
The good news is that products that you pay for but give out as samples are totally deductible.
Other great deductions are money spent on websites, advertising, and parties/meetings used to show off your products. GE taxes are totally deductible, as well as any professional fees.
If you would like a list of potential business deductions, email us and we will send you one, just ask. Contact us.
Unlike GE Taxes, we don’t recommend you prepare your income taxes by yourself. We know just which boxes to fill in for legitimate deductions that will maximize your write-offs but still keep you out of trouble with the IRS.
All year long we see new clients who bring in letters from the IRS where they owe a ton of back taxes because they took deductions that they were not entitled to – but then in many cases they also they missed legitimate ones.
Not only can we prepare your taxes in person, but we also offer tax preparation services that are fully online. Click here for these services.
Business Task #4 – Track Your Business Deductions
The IRS requires that you keep track of them. This does not have to be complicated. Just keep a journal and save all statements and receipts. In your journal write down the date, amount, and type of expense.
Good luck with your business and go out there and build some wealth. It’s so exciting, I know!
If you think you might want to hire us to help prepare your taxes, please contact us. Our email is firstname.lastname@example.org or you can call the office at 808-744-5314. Aloha.
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