Summer is one of the most active seasons for small businesses. Not only do businesses start hiring more people but, according to the Paychex IHS Small Business Index, there tends to be an upswing in the number of businesses started during the summer months. The trouble is some people see their summer business as a seasonal project, rather than as an actual company, so they don’t pay close enough attention to their new tax obligations. To help summer entrepreneurs stay out of trouble, here is a quick breakdown as to what taxes their business has to collect and pay.

2015_JUN_USA_TAX - Does Your Summer Business Have to Pay Tax?

Sales Tax

A lot of people think they only have to collect sales tax if their state requires them to do so, and they are selling to someone else in state. The trouble is sales tax isn’t that straightforward. There are two groupings for sales tax – origin based, and destination based. Origin based laws require you to collect tax based on where you are located, and destination based laws require you to collect based on where the buyer is located. To further complicate matters, online retailers shipping to other states need to be aware of any nexus laws. The nexus point – or point at which a business has to collect sales tax in that state – used to be a physical presence within it, but recent laws in some states have lowered nexus so that if you make a certain amount from sales that are referred to you by an in-state resident, even if it’s through web-links, you have to collect sales tax. Luckily that amount is normally fairly high; so few small businesses will have to worry about that. TaxJar did an excellent breakdown of destination, origin, and nexus laws, so be sure to check out that post as well.

Self-Employment Tax

The threshold for having to report income and pay self-employment tax is only $400 of net profit. Trust me, it doesn’t take long to hit that point, and when that happens you need to have good records of your sales and finances so you can fill out Form 1040-SE and attach it to your tax return. In addition to paying Medicare and social security taxes, you also need to be aware that, if you expect to owe more than $1,000 in income tax, the IRS requires you to send in quarterly estimated payments. Keep a close eye on your earnings so you know exactly what you have to do to stay in the IRS and state tax agency’s good graces.

Other Fees and Fines

Despite the name, business licensing is a form of local and state tax. Unless you sell a regulated product, all you have to do to get a license is fill out a couple forms, file them with your city and/or state, and pay a fee. That allows you to conduct business within that locality. Make no mistake, though, this isn’t something you can avoid. State agencies look for any sort of business activity – including online advertising – that is done without a license and, if you’re caught, you will be fined. Just pay what you have to, and the government will have no reason to interfere with your business.

Obviously, the answer to the question pose above is yes, your summer business does have to pay some for of tax. States that levy a sales tax require you to collect and send it in, licenses cost a nominal fee and, depending on how much you make, the government may require you to pay self-employment and income tax. So even if you think this is just a summer fling, keep pristine financial records so that you can be certain you’ve paid whatever it is you owe.


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