Question about business license and local city taxes

[dragula]

Hey all,
Been lurking for a while as I'm getting ready to "officially" open a real estate investing business. But I actually have a question that concerns my current real job.

Myself and a coworker are both engineers that work from home. We are full time employees of a business in another state. However we are looking at small office spaces in the area that we can share so that we can work together and be more efficient.

Our new office will be within the city limits of the small town near us (15k population). I'm assuming that we will need to get a local business license which isn't a big deal. Its only $100 a year. But I know that some cities tax businesses based on their yearly revenues.

Is this something that we will have to pay also since we are just employees working for a company out of state? We will not be selling anything or performing services for anyone in the state we are in, much less the city we will be located within.

Trying to gather as much info that I can before going to the city license office.

Thanks for any help!

[Freelancier]

You need to talk with your employer about this first. By taking a "physical presence" in the state as an employee of that company, you would be possibly obligating the company to pay state taxes, like sales taxes and tangible asset taxes. As a person, you can get an office and not think twice about it, but you're an employee of a company and doing work for that company in a rented office space, so that likely means the company would now have a physical presence in the state that they may not have wanted the tax and licensing obligations that go along with that.

[Harold Mansfield]

...

Our new office will be within the city limits of the small town near us (15k population). I'm assuming that we will need to get a local business license which isn't a big deal. Its only $100 a year. But I know that some cities tax businesses based on their yearly revenues.

Is this something that we will have to pay also since we are just employees working for a company out of state? We will not be selling anything or performing services for anyone in the state we are in, much less the city we will be located within.

The only correct answer to your question is specific to the tax laws of your city.
Since you didn't mention the city, no one can really answer your question for you. You can probably just call the city and find out in a 5 minute phone call.

I would think if you're not selling anything, or performing any services then sounds like you're trying to say you will be making no income. If you're making no income, then what would you be paying taxes on?

I can only speak from personal experience since every state and municipality is different. Where I'm from it's common for people to work in Detroit, yet live in the burbs. If they worked in Detroit and made money in Detroit, they paid Detroit income tax.

[Freelancier]

You can probably just call the city and find out in a 5 minute phone call. Forgot to mention that. I've found that most of the time, the people who work at the licensing and revenue departments are happy to talk with any one who isn't going to yell and curse at them. They just want people to be "compliant" with a minimum of fuss and are usually happy to explain the rules to anyone who asks.

[tallen]

Here's my question, are you two actually true legal employees of said distant company (does your pay get reported to you on a W-2?), or are you actually independent contractors (pay reported to you on a 1099-Misc)?

If the first (employees), then Freelancier's first post is on target -- you should check with your employer before establishing an office -- ultimately it would be the employer who would have to deal with the legal and tax implications of setting up an office in your city, although they might well delegate you to handle it.

If the latter (independent contractors), then you are your own business(es) and you need to check with your state and municipalities about the legal and tax implications of setting up a office (it would seem the two of you would essentially be entering into a partnership arrangement). Maybe a good idea to consult with an attorney and an accountant....

[dragula]

Thank you for the replies.

We are W-2 employees not contractors. Our company does already have a state license (we are in Alabama) as they have other employees within the state that do different stuff than we do and they are also cutting Alabama income taxes and such.

The two of us just need to be able to work in the same office and driving to each others house isn't easy for either of us. But it's beginning to sound like it may get more complicated than we need it to be.

[Freelancier]

But it's beginning to sound like it may get more complicated than we need it to be.It could be more complicated, but if you think there might be efficiency gains by doing it, talk with your boss and see what he wants you to do.

[turboguy]

My take is a bit different from the others. I don't see any reason you would need a license or any registrations of any kind. Assuming you are renting an office just to work together and are not doing or soliciting any business, selling anything or really conducting any business you are just renting to perform the work you do as an employee for a company that you have no management or ownership of. You are basically just renting a room that you are happening to call your office. It is no different than if he came over to your house to work together. Talk to your city to be sure.

[dragula]

Thanks again for the replies.

Turboguy did a good job of explaining it kind of the same way that I feel about it.

I did learn that the city collects 1/7th of one percent of revenue for any business plus sales tax of course for any sales within the city.

I don't know how they could ever figure or enforce that on someone working from home as an employee of a larger company. I know a lot of people do medical coding/billing from home for bigger companies. How in the world could a city possibly figure out how much revenue that one person was generating for sitting at home as a date entry clerk?

[Freelancier]

How in the world could a city possibly figure out how much revenue that one person was generating for sitting at home as a date entry clerk?
Generally speaking, they wait until you file for a business license and use that to track your business and expect a return for tangible asset valuation, revenues, etc.

But if you don't file for that license, it's going to depend on how aggressive they want to get. For home-based businesses, they could just grab data from google to see who is operating within their city limits and send them a notice of non-compliance. That can scare just enough people to make it worthwhile doing, but there are political risks involved so if your city isn't desperate for money and talking about enforcing the rules to increase their revenue, they're not going to do it.