Your Affiliate Business and Taxes
Starting a home-based business on the Internet is easy you say.
You have your web page built, your affiliate links and you're
ready to go. Not really, you need to make sure you have all your
i's and t's crossed when it comes to taxes.
Getting Started
First, you will need to register your business name with the
city government. When I registered my business name with the
city I was charged $11 -- so expect to pay a small fee when
filing this legal document with your local goverment.
Second, you need to apply for an Employer Identification Number
with the Department of the Treasury (IRS). To file for an EIN,
you will need to complete Form SS-4. You can find these forms in
post offices, public libraries, online, or by contacting the IRS.
Once you receive this document, keep it in a safe place -- in
other words, don't crumple, stomp, or throw away -- this
identifies you and your business with the U.S. government and
you will need this number when you file your taxes.
Third, you will need to check with your state government to
determine if you need any specific licenses. Such as Retail
Sales Tax Permit -- if you are planning on selling items offline
or online.
Fourth, you may want to open a Business Account at your local
bank once the money starts to roll in. Keeping your money
separate from your family account -- helps you to keep your
accounting accurate for your business.
What percentage of your income will go to your State and Federal
Government?
You will need to pay the following taxes, at the following rate,
on a quarterly basis:
States Taxes -- 3.7% Federal Taxes -- 11.3% Social Security --
12.4% Medicare -- 2.9%
The first year in business is difficult, because you have no
idea what you will be making--You will need to make a
conservative guess. However, you will only pay what you owe
against that of your expenses (your net income). For example, if
you believe you will have $3000 in expenses during the year --
and you believe in your first year, you will make $6000-- you
would report the following:
$6000 (Money Made)- $3000 (Expenses) = $3000 (What you owe)
This amount would be divided among the four quarters within the
year and paid to your State Government and the Federal
Government. If you find that you will be making more and you
have paid in for one quarter -- you will have to adjust the
balance and divid it between the remaining quarters.
The following is what you will submit to the Federal Government:
1) Federal Taxes-11.3%, 2) Social Security-12.4%, and 3)
Medicare payment-2.9%.
The State Government will receive only the 3.7% of your net
earned income.
(Please note: If you are unsure about anything, you should
enlist the help of a CPA, regarding tax matters).
Your estimated taxes are due on the following dates throughout
the year:
April 15 June 15 September 15 January 15
To obtain more specific information you can read IRS Publication
505: Estimated Tax payments.
Note: You are not required to make estimated tax payments until
you have income not subject to withholding on which you will owe
tax. If you don't make your first payment until a later period,
you must divide your entire estimated tax by the number of
payment dates remaining. If, for example, you have three payment
dates pending, you would pay one third of the total tax by June
15, the other third by September 15 and the last by January 15.
Typical Expenses To Deduct
Here is a list of some of the expenses you can deduct.
1. Your home mortgage -- If you use a room solely for conducting
business then you can take this deduction. There are a couple of
different formulas to determine the percentage of your home that
is used for your business.
You can use the "number of rooms" method or the "area method". I
would suggest using the "area method" because I can't imagine
having a home where all the rooms are the same size.
With the area method, you would take the area of your home
office divided by the area of your home. Example:
Your Office= 10' X 10' = 100 square feet YOur home is 1000
square feet Your deduction = 100/1000 or 10%
2. Indirect Expenses -- with indirect expenses you will only be
able to deduct the area percentage (Note: use area percentage
calculated above) of the total cost. These indirect expenses
would include such things as:
House payment Utilites Telephone Garbage collection Internet
connection (If other people are using the Intenet)
3. Direct Expenses -- these are expenses that relate only to
your business.
Supplies Advertising Business account bank charges
Keeping Track of Expenses
To keep track of all your expenses. and you are comfortable
working with a spreadsheet software, I would suggest purchasing
a small business accounting package such as QuickBooks or
Peachtree Accounting.
To conclude, this definitely is not an exhaustive list of what
you need to know. However, this will give you a beginning as to
what you will have to be aware of when starting a home-based
business. As your business grows, your CPA will be able to
assist you and keep you on the straight and narrow to your
success on the Internet.