Tax Preschool: 9 tax things new small business owners need to know

DeMei (00:12):

Hi everyone. Hello there. Thank you so much for joining us for today's tax preschool webinar, which will cover major tax terms and concepts that small business owners need to know. Let me introduce myself to you. All. My name is DeMei and I'm a Customer Support Specialist here at Complyant. Myself and my team answer user questions and service requests through live chat and email. And we also reach out to users directly to learn more about their businesses and business needs so we can continue to grow this platform in the ways that will best support them. If you're not familiar with Complyant, it's a must-have tool for business owners that helps them to save for and pay their tax payments on time. And we truly love educating our users about all things tax whenever we have an opportunity to engage with our community. You can get signed up for an account in minutes at www.complyant.co, and that's C O M P L Y A N T.co to begin receiving those reminders if you haven't yet. You can also find us on Instagram at ComplyantApp, C O M P L Y A N T A P P, and on Facebook at www.facebook.com/complyant app.

We're so excited to have you all be a part of the conversation we're having today with Complyant's very own Rick Bromund. As the head of our Tax Research team, Rick sets the precedent for accuracy and craftmanship within his department, and he works tirelessly to ensure that our users have access to the most accurate tax-related information we have to share. He's held sought-after positions at a few notable organizations, but he feels a true connection to the work we're all doing here to make business tax more palatable for every small business owner. Just before we jump in, I wanna take this time to remind everyone that, although we are a tax compliance software, we are not an advisory firm. Any information provided by our team members is not intended to be taken as advice or perceived as a specific position on any subject of tax law. And with that, I'll go ahead and let you take it away, Rick.

Rick  (02:27):

Great, thanks to DeMei. And thanks everyone for joining us. We're gonna kick off with some tax terms, as you can see so much to know, so little time. These are nine terms/concepts that you may have heard while starting your business, you may have heard before. Maybe you have a pretty good grasp on what they mean. Maybe you have no idea what they mean. So, we're gonna go through and touch base. Hopefully, get a little more clarity on them. And at the end, save some time for some questions as DeMei ask. And I would encourage anyone to try to overcome that hesitation if you have a question, ask it because people in the audience may have the same questions as you, and then it kind of starts a snowball effect of oh, okay. And then it leads to more, and then everyone ends up just a little more clarity at the end.

So, I won't read, this is a list that I wasn't gonna read. <Laugh> These are the terms that we're gonna go over. And again, the first two, EIN and entity refer to the initial registration process of your business.

Employer Identification Number (EI)N (3:29):

Rick (3:29):

So, employer identification number. So, you've decided to start a business, and you're taking your initial steps. You reach out to IRS. Part of the registration process is letting the IRS know your intent to start a business, you have to fill out the paperwork. The IRS issues you your employer identification number. This is equivalent to an individual social security number. So, this is how the government identifies your business. And it's in this list here because some people know it's an EIN, others may hear it referred to as tax ID number, tax registration, tax number, all these various things or some people might say, you know, I never got an EIN I just got this number when I formed my business. So that's what they're referring to. It's your employer identification number. And what's important to know, as I mentioned, it's issued at the federal level. So it's constant. So as you're operating in a state or additional states and you go to apply for additional tax types, the state will recognize your company and the employer identification number. However, when you go and apply for state-specific taxes like sales tax, or state payroll tax, depending on the state, they may use your federal employer ID number. They may use a variation of your number, maybe the digits that are already there, and add a one or two or something on the back end. Or they may give you an entirely new number, and again, that is state-specific, but your EIN, or sometimes its FEIN for federal is constant across the board.

Entity (5:12)

Rick (5:12):

So, the second term that we're gonna look at in the registration process is entity. As I mentioned, you're registering your business, they ask for what legal structure you want to be as your business. Which essentially is saying, how will you operate? So, what entity will you choose? And the entity is gonna tell you how you're taxed and what kind of liability, financial and legal liability you can face. So, we're gonna take a look at some of the most common entity types;

Sole proprietorship, a couple of things to note about a sole proprietorship. So, when you start a business, let's say you didn't even intend on starting a business. You had a hobby, you started making money, before you know it, you have this business going, you never registered with the IRS. You didn't select entity type. When you start a business without any registration or anything like that by default, you are a sole proprietor. Now you can register with the IRS and you can choose to continue as a sole proprietorship, but without anything, you default as a sole proprietor. What is also important to note is I mentioned the EIN is equivalent to your social security number. So sole proprietors, they're allowed to operate using their social security as their EIN. Now it seems, oh, that's great. You know, less numbers, less things to remember. The issue with that is that there is no difference, no separation between you, the individual, and your business at that point. And that's why it's noted that says most liability.

So if you're a carpenter or anything and something happens and someone sues you, they're suing the business, they're suing you, they're suing everything, cuz it's all combined as one.

Now some of the other entity types you can choose are limited liability company, partnership, and corporation. Now limited liability is just as it says, it's a company but it limits your liability for financial and legal obligations. There are also partnerships and then corporations, both C and S.

Foreign (7:22):

Rick (7:22):

So, this is actually from personal experience and some questions that we've had pop up, the term foreign. When foreign comes up, especially at the federal level, it's pretty straightforward. You think oh foreign, or at least I do, I think of foreign countries. You may think of foreign or international businesses in that aspect, a non-resident taxpayer, or a foreign individual. At the state level, it's a little different. At the state level, when the state's referring to a foreign or domestic business, they're referring to the state that you incorporated in. And we'll go through an example here.

Depending on what state you reside in, you may have to file an annual report. You file either domestic or foreign annual reports. Let's say you formed a company and you think, okay, well, you know, I'm domestic, I'm a US citizen, we're talking about California. I live in California, work in California, and my employees are in California. I'm domestic. The state's gonna make that determination by where you formed your company. So, let's say all those things are constant, but when you formed your company, you formed it in Delaware. That company is domestic to Delaware and is foreign in California and every other state that they do business in. So again, it doesn't matter if you work, live all that stuff. If you formed your company in a state outside the state that's in reference, you are foreign to that particular state.

Independent Contractor (8:47):

Rick (8:47):

Independent contractor. So, I know questions are abound, when you start a business, you know, I'm self-employed, does that make me an independent contractor? Something to note is that independent contractors are self-employed, but not all self-employed individuals are independent contractors. And the IRS sets out guidance and there's not really one specific qualification that makes you an independent contractor, but there's a general rule or assumption you can look at to see. And what we have on here is independent contractors deliver and agreed upon the final product. Whereas general business owners have no specific user or client.

An example we can think of is let's say an artist opens an art gallery. They are putting paint to canvas, just anything that comes to mind, and then they sell it in a gallery. They don't have a specific user in mind. They just put it in a gallery, whoever comes in buys it. That's great. Let's say that the same artist is commissioned by a city or a town to do a mural of the downtown skyline. In that capacity, they're acting as an independent contractor because they have an agreed-upon final product. They're not an employee because they're not being told how to do it or in what parameters, they're just given a final concept and they will deliver that. So again, in that instance, they're operating as an independent contractor. And a couple of considerations for independent contractors is that their income is not subject to withholding. What does that mean? They're doing that mural, right? And this is actually the same thing for self-employed as well, they're not subject to withholding. But for that artist doing the mural, let's say they're getting paid $20,000. They are given a check for 20,000. There are no taxes taken out of it. So, they're responsible for paying those taxes directly to the government. So, with that, they may have to pay estimated taxes and that's gonna lead us into our next term.

Estimated Taxes (10:44):

Rick (10:44):

So estimated taxes, I'm sure as a small business owner, you've heard that term thrown around. Maybe you think estimated taxes, do I pay them? Do I owe them? How do I know? So, a couple of points, estimated taxes are on income not subject to withholding. So let's go over that again. What is not subject to withholding? Again, the independent contractor who got that $20,000 check, there were no taxes withheld from that amount that the person who wanted that mural done would remit to the government, the same thing as a self-employed individual who's not an independent contractor. The artist working at that gallery, they just buy paintings, no one is withholding income. As if you were a W2 employee, you work for a company, when you first onboard, you fill out your W2, how many exemptions you wanna claim and from your paycheck, the employer pulls the taxes and remits them every two weeks to the IRS. So, when you're self-employed, you're not subject to withholding. No one's pulling those taxes out. So, it's required, if you expect to owe a thousand dollars or more in tax for the year, you have to remit directly to the IRS on a quarterly basis.

So with that said, the artist getting 20 grand, yes, they would most likely be expected to owe a thousand dollars or more in tax for the year. Let's say, you're still a salaried employee and you have a hobby or a little side business, maybe you're making 500 to a thousand dollars or something. So obviously on that amount, you would be expected to pay less than a thousand dollars for the year so you wouldn't be required to pay estimated taxes in that instance.

Income (12:20):

Rick (12:20):

Income. So, a couple of terms here I know, and this really refers to more on tax time when you're filling out your returns, but different types of income what we're referring to. And in this instance, we're looking at gross income, adjusted gross income, and taxable income. Simply put, gross income is all your income, every income from all sources. Again, let's say you're a salaried employee, you get your weekly paycheck, that's income. Business income, let's say you have a side business that you DJ on the weekends, that's the business income that you gotta report as well.

Dividends (12:54):

Rick  (12:54):

Dividends. If you own stocks and they issue a dividend, you have to report that. Some other things could be capital gains. Let's say you sell those stocks and you sell them for more than you paid for them, that capital gain you have to declare as part of your gross income. Now adjusted gross income is the gross income I mentioned above minus certain adjustments that bring down that gross income, certain things like student loan interest, health savings accounts, and contributions, they lower your gross income to get you to an adjusted gross income. And what AGI does it determines what or how much of certain deductions you may be eligible for. You'll see a lot of deductions may have a limit that if your AGI is over a certain amount, you don't apply. Or if it's over a certain amount, the amount of the credit or allowable deduction goes down as your income goes up. So, after the credits and deductions from your AGI, you get your taxable income, and this is the income that your tax liability is based off of.

Assets and Liabilities (13:54):

Rick (13:54):

Assets and liabilities. So, I'm sure everyone has heard asset liability, but what is it exactly, right? What's an asset? What's a liability? Essentially, it's what you own versus what you owe. So, assets, there are two classes, there's current and fixed. Current are things like cash and receivables, and it's usually a time period of less than a year. You know, receivables are usually due you hope within a year, cash is on hand in the bank, is ready to go. And then you have fixed assets. And fixed assets when talking about asset is something that adds value for longer than a year. So, this is where you're looking at machinery, equipment, furniture, computer equipment, things like that. Liabilities on the other hand same thing, you have two classes, you have current, which is payroll, payables, they're examples. Payroll, every week, every two weeks. Payables, sometimes maybe you take out short, I wouldn't say short term loan, but short-term debt. You have something to pay on 30, 60, 90-day terms. So that's payable within a year. And then you have long-term debt, which can be a vehicle loan, or maybe even a mortgage on a building that your business owns. An example of how maybe something can actually be both. Let's say your business buys a work truck, brand new, and you take a loan on it. That truck is an asset. So, it sits there and it's a fixed asset, cuz it's gonna last longer than five years. However, on the flip side, that loan with that truck is a liability. And let's say it's a five, six, or seven-year loan, it's a long-term liability on that truck cuz it goes out past the year.

Tax Year (15:30):

Rick (15:30):

Speaking of years, tax year is another term I'm sure you've heard. It just refers to a specific time period, usually 12 consecutive months, a pretty straightforward calendar year, which most small businesses are on. It begins January 1st and ends December 31st of a particular year. What's interesting to note is most deadlines you see referred to a calendar year. So, when you see the IRS, the federal income tax deadline is April 15th it's referring to a calendar year.

The fiscal year ends any other month than December and on the last day of any month other than December. And they may have deadlines reflective of that specific year-end. Let's say that a company is on a fiscal year that ends November 30th. So, the terminology will say the IRS due date is April 15th or the 15th day of the fourth month after year-end will sense that your year-end is November, not December. March 13th would be your due date for your fiscal year. Now if it's January or February, that logic carries forward. So, it would be the third month, fourth month, the 15th day after the year-end of whatever fiscal period your company chooses.

Power of Attorney (POA) (16:41):

Rick (16:41):

The last point here is power of attorney. And this is more concept and kind of just a need to know. I think it's good for small business owners or anyone really to just be aware. So, it's a legal document granting authority. It's pretty straightforward. I think people have heard POA, whether they used them or not, but that term is thrown around in their daily life, even if they haven't had a small business. It can be general or specific and it's in effect indefinitely or for a limited duration. And this is important because let's say your business is growing. You hire an accountant to handle some of the burdens, they're paying the taxes. Let's say the sales tax for a year-end, I don't know, half the states that have a sales tax, you have to do it. You're giving this accountant the authority to pay the sales taxes. They have access to the bank accounts, things like that. It's important to know what bank accounts anybody has access to and especially for how long. You wanna make sure, as a savvy business owner, that you know who has access to your money, who can do what, and for what amount of time. And that really goes right into the considerations.

You wanna understand, again, what you are authorizing to take place. Is this person allowed to just pay sales tax accounts? Are they allowed to pay your federal income tax liability? Are they allowed to pay your payroll? Things like that. And also, you want to understand and establish the duration. There's some language in a general power of attorneys that you might find the document online, you fill out and it'll have language that says this document is in effect until revoked with written authority or until a new one is issued. So that basically gives the person the authority to operate until it's revoked, which can lead to different situations. So again, establish the duration.

And there are other things to consider, depending on, I know at the state level you have agent authorizations. These tend to be more narrow in scope. You may give a particular accounting firm or even a person authority to handle this particular issue on this day. An example of an agent authorization or even a limited power attorney. Let's say you're closing on a house and your real estate agent is handling a lot of the stuff for you. You can't be there in person. You can have an authorization that says you're giving so and so access for today to operate in this capacity, to sign on your behalf for this particular closing, whatever the case may be. But it's limiting the scope to that day, to that person, and only in that capacity to sign for that real estate type of transaction. So again, it's a benefit to be aware of, who's operating your accounts, who's moving money from different accounts. And just making sure that while someone's helping you take that burden off, that you're still aware of what's going on with your obligations.

And that wraps up the presentation part of our webinar. So I'm gonna open it up to see if any questions have come in and hopefully we can answer some of that are on your mind.

Q&A (19:53):

DeMei (19:53):

Excellent. Thank you so much. That was awesome. Extremely informative. And those were great tax terms and concepts small business owners need to know that you went over Rick, really appreciate it. We did have a few questions that we got submitted so I can hop into those and then we'll see if any others come in.

Awesome. I guess maybe you touched on this a little bit when you were talking about foreign versus domestic. The question that I'm seeing here is can I be domestic in more than one state?

Rick  (20:27):

So no, you're domestic in the state that assuming you start a business, that particular business is formed in Delaware. You are domestic to Delaware, as long as nothing changes with your company, as far as the registration or the formation, you are domestic to Delaware. Any other state that you operate in, you will be foreign to, whether you reside there, or have different employees there, you will always be domestic to the one state you formed in. And that goes for even if you register to do business in other states, you're still only formed in one company. Like, you'll see, I don't know, ABC Corp, a Delaware company, or whatever the case may be.

DeMei (21:10):

Got it. Excellent. Thank you. The next question I'm seeing here... Do foreign businesses have to pay state income tax since they are foreign?

Rick  (21:27):

Again, it's debatable now because are we talking about foreign businesses, like at the state level, if a foreign company, where it's not registered in... Say we're talking about California, is a company in that's registered in Delaware subject to California income taxes? That would be yes. If they're doing business and they’re generating income in the state of California, they're subject to California income tax, even if they did not form their company in California.

DeMei (22:06):

Excellent. Great to note. Yep, I think that answers that. The next question I'm seeing here, are the EIN and the tax ID the same thing, I think you might have hit on that, but...

Rick  (22:20):

At the federal level? Yes. So, if you're talking at the federal level and the IRS says, I wanna know your tax ID, your EIN, it's all referring to the EIN, your unique number that identified your business. On the state level of just saying, what's your tax ID? It depends on what they're referring to. You would have to get more clarification at that point. Are they referring to your EIN? Are they referring to a specific state-level tax, the sales tax, property tax, things like that, cuz then they would have possibly different tax IDs.

DeMei (22:54):

Absolutely. Great point. Very important to note there. I see here, and I think you might have touched on this as well, but still a good question. As an independent contractor, do I need an EIN?

Rick  (23:07):

Good question. So, as an independent contractor, it depends on what you're operating as. So, if you're the independent contractor who is operating as a sole proprietor, again, that's the instance where you're allowed to use your social security number. So, if you're an independent contractor, haven't really registered with the IRS, you're kind of just doing your thing and operating, maybe not sure where it's gonna go. Independent contractors operating and sole proprietor can operate under their social security number. If they do register their business, you can still choose to operate as a sole proprietor. And the IRS allows you as a sole proprietor to continue to use their social security as essentially the EIN number. The only time is if you hit certain qualifications, I think if you have financial retirement plans, things like that, you'd be required even as a sole proprietor to apply for an actual EIN from the IRS.

Demei (24:08):

Got it. I see. Awesome. Excellent question. It looks like there may just be two more, we're at time, but I guess we have time for these. What are the top three things small business owners should have or should be trying to have established before they start making any sales?

Rick  (24:30):

The top thing I would say is to have a clear plan path for how are you going to operate. Let's say, best case scenario, your business blows up in a good way - are you prepared for what that looks like? Whether it's inventory or just being ready to register in different states that you may be exposed to other taxes and things like that. And really, it's debatable, it could be a top three, I would say, try to make sure you're prepared as can be. So, you have your licenses in order, you have your registrations in order, you do a lot of the work that you know can be done ahead of time.

The unfortunate thing is you don't know what you don't know. So, you didn't know that you're gonna be operating in, you know, let's say you thought you're a California company you're gonna be mostly operating right there, but your product blew up. You're operating in Maine, you're operating in New York. So there are things you didn't know that were gonna happen. So now you kind of have to play catch up on that. But doing as much prep work as you can will really lighten some of the burden for you down the road.

Demei (25:37):

Absolutely. Thank you for that. And I guess the very last question I'm seeing here, we can wrap up with this one. How do you determine how much rent to charge if you're running an LLC in your home?

Rick  (25:52):

That's a good question. I think there are probably more factors that I need to know going into it. But essentially I would say coming to mind, whenever you're determining what to charge is market value, market rent, market price is always a good base to start with. Now, again, there could be other factors where that should be adjusted up and down, but knowing what the market determines is a good starting point.

Demei (26:23):

Absolutely. A fair rule of thumb to start with there. Excellent. I think that's all the questions. We're just past time. Again, Rick, thank you so, so much for that extremely informative presentation, you're the best. Thank you for putting that presentation together for us all. Thank you everyone for watching.

If you'd like to rewatch this discussion, you should be receiving a link in your email to rewatch this later at a later time once we get it all wrapped up. So, for more information about ComplYant, or if you missed an opportunity to ask a question perhaps, you can feel free to email us at hello@complyant.co. Again, that's hello@complyant, C O M P L Y A N T. CO. We're happy to receive topic suggestions for upcoming webinars, as well as general questions you might have about the platform. And if you have any feedback about how we can make ComplYant better, don't hesitate to get in touch with us. Thank you all very much for your time. Thank you so much for your time as well, Rick. I'll see you around everyone. Have a great day.