Here are Tax Tips for Online Entrepreneurs
A collective groan from the business community typifies the tax season. This is because business owners have to sort their financial records and determine how much they owe the government. The whole process can be very daunting or even frustrating in some regards. If you are operating an online business, you might feel the same way as the experiences are pretty much the same for all business owners. That being said, for online entrepreneurs, there are plenty of tips you can follow to ease your woes during tax season. Herein we will look at some of them.
Make Use of Tax Deductions
The number one tip is to take advantage of home-based business tax deductions. Typically, most online business owners usually operate from their homes. As such, chances are that you operate your business from your home. If this is the case, and you meet certain IRS conditions, you are entitled to make some tax deduction, which can be very significant. Understand tax and VAT with VATGlobal.
To be eligible to these tax deductions, you must use your home office “regularly” and “exclusively” for business purposes. To this end, you must use this space to conduct business with clients whether in person or remotely as well as manage your books. You must use this space to conduct business. However, should you need to use the space for other personal reasons, you can divide the time, say 75% for business and 25% for children’s playtime and doing homework.
Another condition you must fulfill is having your home office as the main space you conduct your business – your office space must be the main place you conduct your business. As such, you must not use another space, say a rented office to conduct your business.
If you meet these conditions, you are eligible to make deductions such as utility bills, insurance, cost, property taxes, rent or mortgage payment, and even maintenance costs. That being said, you should note that you deduct the mortgage cost depending on the portion of your house you use as office space. For instance, if your mortgage is $800 per month, and your office space occupies 10% of the total square footage of your home, you can only deduct claims amounting to 10% of the mortgage. Following this example, you will deduct $80 every month, which amount to $960 per year. This applies to all other expenses that relate to your home.
While calculating deduction pertaining to your home office, you cannot use these deductions to demonstrate a net loss over a particular tax year. For instance, say your online business generated $60,000 in revenue over 2005. However, during that tax year, you had claims totaling $70,000. You cannot claim a net loss of $10,000. You can only report a zero net gain and carry the remaining $10,000 in claims into the next tax year, therefore reducing your overall tax burden. To calculate your tax deductions on your home office, you should complete the Form 8829, making sure you report the total amount on Schedule C. These forms are available on the IRS’s website.
Some of the other deductions you can make for running an online business from your home include the deductions on the cost of your domain name, the cost of hiring a web design company, the cost of accessing the internet, the cost of pay your host company and other related costs. Your deduction do not have to strictly based on your property. However, it is important to note that these fees need to be pro-rated especially in the case of the internet being used by your family for non-business-related endeavors and activities.
Tracking and Reporting Payments Made to Service Providers
It is also important to have in mind the third parties that offered your business services. By law, you are required to report how much you paid the service providers during the tax year period. Moreover, you need to know the form to give your service providers and how to report this information. For instance, you need to track how much you pay the web-design company that designs and maintains your website. You should also track how much you pay your copywriters who create content for your website and email marketing endeavour. Even the customer-care team payments need to be tracked.
Businesses have the choice of dealing with these service providers as employees or independent contractors. There are big differences between the two. For instance, with the independent contractors, you do not pay Medicare, Social Security, or unemployment taxes. However, when they are your employees, you will incur these expenses. With this in mind, you probably want to work with independent contractors to reduce your tax burden.
The IRS has established a method of establishing whether a service provider is a contractor or employee using a set of 20 questions. The CRA (Canadian Revenue Agency) has a similar system. However, to make this determination, just ask yourself one question: “Do I control what is done and how it is done?” If the answer to both questions is a YES, then you are dealing with employees. As such, you should send him a W-2 form, regardless of how much money you have paid him/her or how long he has worked for you.
Conversely, if you answered NO, then you are dealing with an independent contractor, as per IRS classification. The big difference with an independent contractor is that you can control “what is done” but not how it is done. For independent contractors, you need to send them a Form-1099 if you paid them $600 or more during the tax year.
Please note that misclassifying an individual who works for you can have dire consequences, whereby the IRS back taxes you and or penalizes you. As such, it is important for them to sign a contract whereby they sign that they rendering their services to your business as independent contractors. Ensure the contract stipulates that both parties understand what the relationship is right from the beginning. This negates having to sort out these issues during the tax period.