questions about sole proprietorship

[iPenguin02]

I'm trying to become a sole proprietor in la county california. I but have some clarification questions.

I know I have to fill out a fbn form which is $26 and must be filed 40 days before I start business. I know I have to put an ad out 30 days prior.
Here are my questions about this part.
Should I file under my home address or a mailbox like UPS?
I know I have to renew every 5 years. Is there any other annual fees?

My second set of questions pertain to taxes. I know I have to submit a schedule c every quarter.
Am I paying taxes even if I am losing? I'm obviously gonna be losing at first because of start up cost.
How does it work if I report no income or loses in a quarters.
I guess I don't understand the whole tax aspect if someone can explain that in detail would be great.

Business bank account I kinda get it. If you guys have any advise or recommendations on who to use that would be appropriated.

If I missed anything or have the wrong info let me know. Thanks in advance

[vangogh]

It's really up to you which address you file under. Some people prefer using the PO Box so they don't have to use their home address, but it means picking up your mail at the post office or wherever you get the PO Box. I think the UPS store and maybe others will let you use their street address since some think a PO Box doesn't come across as professional. There isn't a right or wrong answer. You can always change your address too if you change your mind later.

There shouldn't be any other fees beyond the registration and renewal, but don't hold me to that since I'm not familiar with how California does things.

As far as taxes go the Schedule C essentially replaces the W2 you get when being employed. It's used to determine profit or losses and no you won't have to pay anything if you're losing money. As a sole proprietor you still file taxes as an individual as you always have, except the forms are different. No more 1040EZ if that's what you were using. You'll switch to the regular 1040 and have several other forms like the Schedule C to fill out.

The Schedule C has fields for how much money you make and it also has fields for different kinds of expenses for running your business. You're allowed to lose money for 3 years I think after which point you have to start showing a profit, though a profit doesn't necessarily mean you pay taxes, since you have the usual standard deduction plus a few more you'll be able to take now. You'll still be paying estimated taxes each quarter though if you don't make anything for the year it gets refunded to you. Odds are you won't take it and instead count it toward the following year's estimated tax. There's a form to figure out how much estimated taxes you should pay. I think it's the 1040ES.

[iPenguin02]

My biggest concern would be reporting a loss and having to pay taxes losing even more.
Am I filing my personal tax under a 1040 (my day job) and the business under the schedule c?

When the taxes are due every quarter would I be notified. Or is there a set date when they are due.

Any recommendations on how for bookeeping?? And things to look for when searching for a business bank account?

[vangogh]

You're not filing 2 separate returns as 2 separate entities. As a self proprietor you file a single personal tax return. The Schedule C part comes in because you as a person earned your money through your business and you have to fill out the form to determine what your personal income for the year was. When you work for someone else they give you a W2 that shows how much you made and how much taxes were taken out. When you work for yourself as a sole proprietor you fill out a Schedule C to determine how much you (personally) made. if you didn't have enough income for the year you won't have to pay income taxes.

However, you and the IRS doesn't know in advance that you might not owe taxes at the end of the year. When you work for someone and get a paycheck a small amount is taken out for taxes. You don't have that now so you're responsible for sending in those taxes 4 times a year. The dates are April 15th, June 15th, September 15th, and January 15th. If the 15th is a weekend then it's the following Monday. No one will notify you. I add an alert to my calendar to remind me a few days in advance. How much you have to spend depends on how much you earned in the previous year. When you're first starting there's guidelines for estimating how much you have to pay. If memory serves it wasn't a lot, a little over $200 each of the 4 payments I think. Don't hold me to that though.

As a business you're also required to pay self employment tax. When you work for someone else they pay half and you have the other half removed from your paycheck. Now that you're both the business and the person you have to pay both halves. How much is based on how much you make so if your business is losing money this shouldn't be an issue.

Bookkeeping will depend on the specifics of your business. It's not my specialty and I'm complete unorganized in how I keep my books so I'm not the right person to answer. As far as a bank account I just went to the bank where I had a personal account and had them open a business account for me. I don't recall anything special about it. I think I opened one based on how much money I could put into it initially, which wasn't a lot so there wasn't much in the way of choice. The people at the bank filled me in on what options I could choose and chose. Mostly I was interested in a place to keep money, write checks, and have a credit card and all came with the account.

Technically you can use your personal account for everything. As a sole proprietor you don't need a business account, however it's best to get one and keep the business and personal separate simply to make forms easier to fill out. When someone pays you for something business related it goes into the business account. When you buy something specifically for business it comes out of the business account. When you pay for rent, or food it comes out of the personal account. When someone gives you a check for your birthday it goes into the personal account. You can move money between the 2 accounts as you want, but when money is coming in or going out (something other than moving from one account to the other) you want it going into or out of the proper account.

[iPenguin02]

I appreciate all the help unfortunately I still have a few clarification questions..

When I file taxes will I be taxed separately from my employer and my business. If its separate I'm guessing my employer would go under the 1040 and business under schedule c

If I have to pay a minimum $200 every quarter when I'm losing doesn't that mean that ill be even more in the hole? Those guidelines you speak of does that come with paperwork when I file?

Personal bank account sounds tempting because no fees. But I also want to look professional. I wouldn't be able able to issue checks under my business name if I opened up a personal.

My business is pretty much going to be reselling items on ebay and on a website. I'm file sole proprietorship because I need a EIN to do so.

I'm sorry for all the questions. This would be the first time I I'd be opening up a business and want to know everything snd get it right rather than fail like some businesses. Any other tips or information you think I might need would be greatly appreciated.

[vangogh]

No need to apologize. Believe me this stuff can be confusing. I'm answering as someone who's already spent a few years figuring some of it out.

If your business operates as a sole proprietorship when it comes to taxes you only file as an individual, which I presume is the same as you've always done to this point. I'm guessing that up to this point you've been employed. Each week you get a check and some amount of what you earn is withheld for taxes. In April you fill out one of the 1040 forms and report as income whatever the numbers show in the W2 your employer gives you. You also report how much taxes were taken out of your check. You fill out the rest of the form taking advantage of the deductions you're allowed and depending on how much your income is compared to what you're expected to pay in taxes you either own the IRS more of you get something back in the form of a refund.

The general process will still be the same. There are a few differences. Since you won a business you'll fill out another form (the Schedule C) to report income. If you're also working for an employer you'll still add a W2 as income as well, but the income you report from your business will be based on the Schedule C. That same form also provides you with more options for deductions. For example say your business brings in $5,000 in revenue the first year, but it spent $10,000 in advertising, office space, supplies, etc. then your business shows a loss and you won't have any taxable income from your business.

The estimate tax you pay is the equivalent of the taxes taken out of your paycheck. How much you have to pay is based on how much you had to pay in taxes in the previous year of your business. In year one there is no previous year. The form offers some easy formula to calculate what you need to pay and I think the minimum was roughly $200 each quarter. The idea is really to pay in total over the 4 payments what you're supposed to pay for the year. If your business doesn't make any money and consequently you owe no taxes come April, then you'll get the estimated payments back as a refund. When I get a refund though I just put it towards next year's estimated taxes. Here's a link to the 1040ES form (PDF) (http://www.irs.gov/pub/irs-pdf/f1040es.pdf), which is for estimated taxes. The PDF has both form and instructions. After you file once the IRS will send you this in the mail, but in your first year, you'll have to print the forms.

Having said all that, if you currently hold a full time job and don't expect to make money from the business at first you probably won't have to worry about paying the estimated tax. Odds are what's getting taken from your paycheck is enough to cover everything. It's probably a good idea to check the forms anyway, but I don't know you'll need to pay anything. Once you've filled out the forms a year or two you'll know better if you need to.

You should be able to open a business account with little to know fees. I don't recall paying anything to open one and I don't pay anything monthly to keep it. Look around. My guess is whatever bank you have a personal account with will be happy to talk to you about a business account.

makes sense about why you're setting up as a sole proprietor. It really isn't as complicated as it seems at first. To get started I just grabbed the 1040 form. (Here's the form (http://www.irs.gov/pub/irs-pdf/f1040.pdf) and here's the instructions (http://www.irs.gov/pub/irs-pdf/i1040.pdf)). Both take you directly to the PDF. I started filling in the 1040 and the form itself led me to everything else I needed. One field asks for Wages, salaries, tips, etc. Attach Form(s) W-2 and so if you have one you attach it. Another filed asks for Business income or (loss). Attach Schedule C or C-EZ so I grabbed a Schedule C and filled that out.

You have plenty of time till tax season rolls around again. Grab the 1040 form and instructions and just start looking over it. You can find any of the other forms it points you to through the IRS.gov site.

Again no need to apologize for the questions. There's a lot of new stuff to deal with and no one has recently accused our tax forms of being simple and easy to understand. :)

[chrismarklee]

On a schedule C, expenses 600.00 or more have to be 1099ed if they are not an Inc.. All lawyer expenses have to be 1099ed.
Also, when you have a profit you have to pay social security taxes too.

[vangogh]

Isn't that only for expenses with a contractor? For example I might deduct something like my internet connection for my business, which will go over $600 during the year, but I don't think I'm expected to send my ISP a 1099. Similarly you can take a deduction for for item depreciation. I didn't send Apple a 1099 for the depreciation of my laptop either.

On the other hand if I hired someone (who has their own business) to manage several of my client's sites and paid that person more than $600 for the year, I would have to send that person a 1099.

[Business Attorney]

Vangogh, the 1099 reporting requirement is not limited to independent contractors, though it may often seem to come down to that.

You need to start with the premise that ALL payments over $600 require reporting, then start looking at the exceptions. Some significant exceptions include:


Generally, payments to a corporation. But there are some reportable payments to corporations; for example, you must report payments to lawyers even if the law firm is a corporation.
Payments for merchandise, telegrams, telephone, freight, storage, and similar items
Rent paid to a rental agent, but the rental agent must report the rent paid to the property owner.


Examples that you give fall into various categories. Payments to Apple are both payments for merchandise and payment to a corporation. Payments for your internet service is similar to telephone and is probably made to a corporation (small independent ISPs are virtually extinct). Depreciation is not a payment at all, it is a partial expensing of a payment made previously. If anything were covered, it would be the payment for the depreciable property that would be reported, not the subsequent deduction of the depreciation.

Many things fall into the exclusions but some notable items do not. If you pay office rent directly to an owner of a property (as opposed to a real estate agent), the rent is reportable. If you hire a web design firm that happens to be an LLC or a partnership, payments to the firm are reportable. When in doubt, it is better to report.

[vangogh]

Thanks David. That makes sense. With all the exceptions it's easy to forget what the forms are there for in the first place.

However I'm curious what the point of the forms are in the current age of filing electronically. I might be wrong, but my understanding is forms like the 1099 exist to check that the businesses on both sides of the form are reporting the same amount. When filing electronically the forms don't get sent in. Granted not everyone files electronically, but I assume more and more do every year and it's mainly the corporations (that are exceptions) that would file the physical paperwork.

For example say a client hires me to work on a website and they pay me more than $600 in the year. I contract out part of the work and also pay more than $600 during the year. Client should be sending me a 1099 and I should be sending contractor one as well. If all 3 of us file electronically none of us sends in the form. What was the point of the forms then? All I can think is in the case one of us gets audited at some point. I suppose any of the 3 of us might want a copy for our records in general too. Is there another reason I'm missing?