Accidental Entrepreneur Wants to "Get Legit" with a Small Business

[Tech Support]

With no real experience running a business, I've been operating an iPod/iPhone repair shop out of my house since the iPhone came out. It started when I found an iPhone at a night club. I dropped it a week later at the same exact club and cracked the glass. I fixed it and next thing I knew, people were asking me to fix theirs too... Fast forward: I'm now one of the top leaders in this market, recently performed my 1000th repair and haven't paid any taxes.

It's not that I'm trying to evade paying taxes, it's just one of those areas I'm completely stupid in. So in attempt to "get legit" I went down to City Hall and got my occupational license, registration and all that good stuff. Sure enough, in 1 month the city came knocking at my door. They told me to pay back sales tax and that they'd arrest me if they had to come back again.

The city sends me these monthly sales tax forms and I'm not quite clear as to how I'm supposed to go about calculating all this. The good thing is that I've kept all my receipts so I'm wondering if I should just take them down to FastTax and have them do it. I charge for both parts and services and from my understanding, I only have to pay taxes on merchandise sold and not the services? Also, I don't charge my customers sales tax. Is the city going to have a problem with that or do they not care just as long as I pay them the sales tax owed?

I really don't mind paying the sales tax on parts because it's not that much, but I'm wondering if I even need to. I basically just act like a middle man and order the part they need and perform the service. I don't mark them up, I just have the customer reimburse me. Should I charge the customer sales tax on the parts or should I simply not charge them at all and write it off on my taxes as a business expense?


Then there's the IRS... Here's where it get's REALLY confusing. In fact, I've never dealt with them at all. (Before this business, I lived off my parents.) I vaguely read some documentation that I had to register as an employer, pay myself a salary???

Thanks very much for your help.

[Encrypted]

This is all stuff you would probably need/want to take up with a tax professional, H&R Block, etc.

[allrelative]

did you report your past services?
how do they know what you have been doing under the table?

[Tech Support]

did you report your past services?
how do they know what you have been doing under the table?

no.
someone reported me.

This is all stuff you would probably need/want to take up with a tax professional, H&R Block, etc.

Are those guys expensive? Is it something FastTax would handle?

[Encrypted]

no.
someone reported me.

Are those guys expensive? Is it something FastTax would handle?

I wouldn't have the slightest clue. I need to look into it myself actually because someone's been making quite a bit in the stock market.

[Aletheides]

So in attempt to "get legit" I went down to City Hall and got my occupational license, registration and all that good stuff. Sure enough, in 1 month the city came knocking at my door. They told me to pay back sales tax and that they'd arrest me if they had to come back again.

What a bunch of thugs

Since you decided to walk down this path you should probably consult an accountant

[paul2145r]

I agree about contacting a tax professional, but I still don't understand how they know how many phones you've fixed, etc. Did they have any type of proof regarding what you were doing? Heresay doesn't work in these sort of situations without concrete evidence that any crime was taking place. For all they know the people were providing you with the parts and you were doing the repairs as a 'friend'. They can subpoena bank records and other such documents to try to build a case against you, but I don't see this happening for such a small venture. At the most, you could have made $100k in profit during the entire time that you were doing this. If people paid in cash, you would have a hard time tracking that anyways. Your "1000 people served" would probably be more akin to "100 friends helped".

As far as income taxes, you have to report anything over $600 for a specific venture. Find out exactly how many repairs you can potentially be liable for (how many paid via check/credit card, how many screens you ordered, etc). Bring all of this to a tax attorney-- stay away from CPA's and H&R for anything that may potentially turn into a criminal or tax evasion situation. With a tax attorney or law firm you'll have attorney-client privilege, while a CPA or big-name company can end up causing more problems by testifying against you. Conspiracy to commit fraud (discussing potential options, etc) is still punishable by jail time and fines.

You have to collect sales tax for any Taxable Goods sold (check your local/regional regs for the definition). Screens and accessories could be categorized in this manner, IF you charged them for the screen and not for a service. For example- if you were charging $250 to fix the screen, you wouldn't have to charge the sales tax. The screen is a replacement part that was necessary to complete the service. You'll count the $250 on your income tax, but then will be able to deduct for YOUR cost on the screen, plus any other such deductions (If you have a phone line specifically for this business, internet usage, the sq. feet of your home that you use specifically for this business, etc). All in all, most small businesses end up running close to or in the red on their tax statements. Much of this depends on how you register your business (S-Corp, LLC, Corp, Sole Prop, etc).

A disclaimer- I'm not a tax professional by any means, and everything I mentioned above only applies within the U.S, and in most states. Some states and municipalities have their own crazy laws set up to keep small businesses from getting anywhere. My #1 suggestion is, once again, to see an EXPERIENCED tax attorney that has dealt with this situation before.

At least you are going through all of this with the locals, and not the big bad wolf (IRS). There's always a silver lining ;-)

[peteVA]

You DO NOT need a tax professional. You don't state where you are and this makes quite a bit of difference. Not many cities do their own sale tax collection.

Also, depending on where you are service billed separately may not be taxable, only physical products, although service included in a support contract or simply billed as "fix phone" may be.

Again, depending where you are you will have some or all of these -

A local business license. It seems like you now have one.

A state business license.

File to collect sales tax. It seems you have now gotten that done.

State income tax, if there is one in your state.

Federal income taxes.

Fast Tax, H&R Block, etc usually only do income taxes. They don't do sales tax returns.

I have set up many businesses in a number of states for people and in general here is what you need to do -

First, if you bill parts and service separately, all you are going to owe taxes on is the parts sales.

Keep in mind, you are the state's tax collector. You have now taken on that function. Some states even give you a slight bit of the amount you collect for your efforts, others do not.

You are required to collect the proper percentage on all parts sales. If you do not collect, you are still responsible! This is your current condition.

You need to go back to the beginning and compute your parts sales by month. That's all, not a big deal if you have the receipts.

Then, you need to get copies of the monthly (or quarterly in many states) blank forms and go back to when you started and fill them in. It's simple, in most cases it will be -

Total Sales For Period
Less Exempt Sales
Taxable Sales

So, do it that way, total sales, less your service fees billed as such, should equal the amount of parts sales for that period.

Then you multiply that Taxable Sales figure by the sales tax percent rate for your state. That is how much you owe for that month.

There will probably be a further section for figuring out fines and penalties for late filing. Ignore them. Just figure the actual taxes for each period and then pay them. Send in by mail, or in many cases you can do all of this online, including the payment. Online it may automatically figure fines and penalties. If not, just pay the tax and move on with your life.

Then, one day, maybe several months later, you will get billed for the penalties and interest. You will also receive instructions on how to file an appeal. So, pay the interest, you will have to do this, no matter what. But, instead of paying the penalties, write a tear-jerker letter, I did not know about this, I was just doing favors for my friends and it mushroomed, etc.

The letter may, or may not help. Worst case, you will still have to pay all of the penalties. Possible case might be you only pay penalty for one period, not for each.

Best case, of course, is a stern warning to never be so lax again.

That is sales tax.

For any other taxes, just include the profits - not the total sales - in with your other income when paying any income taxes. Two entirely different deals. Sales tax is one thing, income tax is something else again.

And, come the first of the year you will probably have to renew and pay for your business license, as you will each year for as long as you continue this business.

[Lambo]

mo money mo problems

[bkendra5]

I didnt read all these other long responses, but I feel ya, I was in the same spot, basically you just need to file for an EIN (employee identification number) and you can pay quaterly monthly etc. Look into microsoft accounting 2009 the free edition.
Let me know if you have any other questions.