New ecommerce entrepreneurs can find them confused and confounded by the tax and accounting requirements of their venture. And thats a shame: If someones spotted a great new category and successfully built a web presence, heck, that someone shouldnt find themselves bogged down with the accounting minutia. The entrepreneur should focus on increasing traffic, expanding margins, and growing cash profits.
With that in mind, I offer up the following tax and accounting tips:
Tip #1: Dont Incorporate
A true corporationwhether a C corporation or an S corporationsaddles your business with more complicated tax accounting and a bunch of state filing requirements. You dont want to deal with this redtapeor at least not until youre profitable.
Instead, operate your business as a sole proprietorship. If youre concerned about legal liability protection, note that you can setup a one-owner limited liability company, or LLC. A one owner LLC is treated as a sole proprietorship for income tax purposes.
Tip #2: Start Your Business Before Making Investments
Expenditures you make before youre actually in business-in other words, before youve got a business license and before youre selling or trying to sell your stuffarent very deductible.
Specifically, you can probably deduct the first 5,000 of these expenses. But any amounts in excess of the 5,000 must be amortized over the next fifteen years.
What this means is that you want to start your business before you start spending money on advertising, training, web development, accountants and lawyers and so on.
Tip #3: Automate Your Bookkeeping & Accounting
By lawand some people dont know thisyoure required to maintain an accounting system that lets you clearly measure your income. As a practical matter, this means you need to use a product like Quicken or QuickBooks.
But you ought to go one better than simply using desktop accounting software. Make sure that youre taking advantage of online banking and bill payment features which integrate your accounting system with your banking. As much as is possible, for example, you want to be able to move money from PayPal to your bank to QuickBooks simply by typing a few keys or clicking your mouse a few times.
Tip #4: Hire a Payroll Service Before Hiring Employees
Many successful ecommerce business owners can run their operations without employees. And if thats true for you, hey, congratulations. If and when you do need employees, however, dont try to handle the payroll yourself. Oursource the payroll to one of the large payroll service bureaus like ADP, Payroll, or QuickBooks.
These services are expensive. Figure 1000 to 2000 per year. But the services let you avoid the bookkeeping nightmare called payroll and prevent you from getting into payroll tax trouble.
Tip #5: Consider S Corporation Status After Youre Profitable
Ive written and talked much about how S corporations save taxpayers money and how the right way to set up an S corporation is first create a limited liability company and then ask the IRS to treat the LLC as an S corporation for tax purposes.
Let me review the basics here again, however. Suppose that youre making 90,000 a year off your web site. If you just treat your business as a sole proprietorshipor an LLC treated as a sole proprietorshipyou might pay 12,000 in income taxes on the 90,000 and then another 15.3% self-employment tax, or roughly 13,500 on the 90,000.
If you set up an LLC and have the LLC treated as an S corporation, youll still pay the same 12,000 in income taxes. But youll only pay the 15.3% self-employment tax on that portion of the profit that you categorize as wages. If you categorize, say, 50,000 of the profits as wages, youll pay 7,500 in self-employment taxes. (The other 40,000 in remaining profits, by the way, gets paid out as a dividend-like distribution.)
Note, then, that the S corporation saves you roughly 6,000 every year. Sweet, right?
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