Scenario: I have a small business (sole proprietorship or partnership) which is my sole income. I pay sales taxes on sales conducted by that business. I pay myself an income from that business. Since I own the business and the business pays sales tax, do I still have to pay income tax on the portion that I pay to myself as income? Thanks, Tammy
First, you'd better know whether you have partners in the business. You collect the sales tax from customers as an agent for the tax authorities. It isn't part of your income. And yes, you pay both income tax and self-employment tax on the net business income, whether or not you pay it to yourself. For example, if you plow all the income into buying inventory, you still need to pay tax on the income.
-- Tom Healy, CPA Boulder, CO Web:
"TheTamdino" wrote
First you need to determine if you have a sole-proprietor OR a partnership. The first would qualify if you believe yourself to be the only owner of the business, while the later would qualify if you believe that someone else is part owner of the business. In either case, your share of the profits are income to you, not the amount you withdraw from the business.
-- Paul A. Thomas, CPA Athens, Georgia taxman at negia.net
You betcha! Not only income tax, but Social Security as well, not counting state income tax (if your state has a state income tax). This is paid on the net income. Your net is your gross minus expenses (*not* including what you
*paid* yourself). Your *pay* is the net income after taxes are all paid. Sounds like a tax pro would be of great help to you.Missy Doyle
Yes.
Sales tax is charged as a percentage of the price of each item. You serve as a collector of that tax, but pass it on the the taxing authority (usually the state). However, both the feds and state also tax your personal income (in most states). You must file an income tax return to comply with IRS (and maybe state) requirements. If your (hypothetical) scenario becomes reality, you should seek professional aid in preparing your tax return for at least the first year, so you have a good handle on the proper procedures. Bill
To answer your previous post first, take some time and contact the Texas sales tax office, whatever they happen to call it, and preferably an office in your locale so you can walk into their office and speak with a real live person. Now then. Sales tax is completely different from income tax. YOU do not pay sales tax on your business sales. Only consumers pay sales tax. YOU are merely a trustee for the great state of Taxes... uh.. Texas, and hold this sales tax collected on your business sales in trust from which you monthly remit the tax to Austin. As for income tax, federal income tax of course, you are still subject to the US tax code and pay income tax on net profits from your business. ChEAr$, Harlan Lunsford, EA n LA Wed 9 Mar 2005
Short answer: yes.
Long answer: you need an attorney and an accountant yesterday. There's little hope for you on your own if you don't know whether you're operating as a proprietorship or a partnership.
-- Phil Marti Clarksburg, MD
Yes, a business does not pay sales tax, it collects sales tax on behalf of the state and forwards it to the state at a given interval, monthly, quarterly, or yearly, depending on the amount of tax collected. It has nothing to do with the money you earn from the business.
"TheTamdino" wrote:
Since no one answered this for you, I will give it a shot.
First, you are talking about two different taxes. Sales Tax is a state and local issue and Income tax is Federal, and depending on where you live, could be a state issue as well. If you record your sales amount including the sales tax then you would write off the sales taxes you pay on line 23 of the Sch C. If your sales amount does not include the sales tax figure then you wouldn't use the expense. Sales Tax is more of a pass through in that you collect the tax from your customers and forward it on to the state (usually on a monthly basis). As a sole proprietor, you would NOT ONLY pay Federal Income Tax on the salary you pay yourself but ALSO on the whole profit generated by your business. As a sole proprietor, you are not really considered an employee so you don't take any withholding on the amounts you take out of the business. Instead, you should be paying estimated taxes on a quarterly basis. This quarterly estimate can be difficult to determine since at year end you may have more expenses than you originally thought when you take things like depreciation into consideration. You could also have some credits available to you that would lower your tax bill or several dependants or itemized deductions. As you can see, it's not a simple issue. You will also be responsible for your own self employment tax. The easiest way to calculate the estimated payment would be to figure your profit for the quarter and then send in approximately 25 - 30% of it. Self employment tax is a little over 15% and your income tax could vary depending on your tax bracket. If you send in 25 - 30% of your profit figure you would most likely be OK at year end and could possibly have an overpayment. My advice to you is to spend a little time and money and go see a local tax professional such as a CPA or an EA to help you get started. They would be able to guide you as to what types of expenses are deductible and what types of records you will need to keep. Getting off on the right foot will save you a lot of headaches at year end and will keep you out of trouble with the state, local and federal taxing authorities. Good Luck in your new business.
Shirley Caylor, EA
Your question tells me you need to hire a tax professional ....NOW! Mike Lewis, CPA
"TheTamdino" wrote:
Since no one answered this for you, I will give it a shot.
First, you are talking about two different taxes. Sales Tax is a state and local issue and Income tax is Federal, and depending on where you live, could be a state issue as well. If you record your sales amount including the sales tax then you would write off the sales taxes you pay on line 23 of the Sch C. If your sales amount does not include the sales tax figure then you wouldn't use the expense. Sales Tax is more of a pass through in that you collect the tax from your customers and forward it on to the state (usually on a monthly basis). As a sole proprietor, you would NOT ONLY pay Federal Income Tax on the salary you pay yourself but ALSO on the whole profit generated by your business. As a sole proprietor, you are not really considered an employee so you don't take any withholding on the amounts you take out of the business. Instead, you should be paying estimated taxes on a quarterly basis. This quarterly estimate can be difficult to determine since at year end you may have more expenses than you originally thought when you take things like depreciation into consideration. You could also have some credits available to you that would lower your tax bill or several dependants or itemized deductions. As you can see, it's not a simple issue. You will also be responsible for your own self employment tax. The easiest way to calculate the estimated payment would be to figure your profit for the quarter and then send in approximately 25 - 30% of it. Self employment tax is a little over 15% and your income tax could vary depending on your tax bracket. If you send in 25 - 30% of your profit figure you would most likely be OK at year end and could possibly have an overpayment. My advice to you is to spend a little time and money and go see a local tax professional such as a CPA or an EA to help you get started. They would be able to guide you as to what types of expenses are deductible and what types of records you will need to keep. Getting off on the right foot will save you a lot of headaches at year end and will keep you out of trouble with the state, local and federal taxing authorities. Good Luck in your new business.
Shirley Caylor, EA
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