What You Need to Know

Information you need to know. Certainly, in the beginning stages of starting a business knowledge is key. Therefore, understanding the effects of credit and money management is crucial during the early stages. First thing first, let’s review the requirements for turning your hobby into a company.

Know Profit Motive Factors

• Carry on the activity like a business
• Your expertise
• Time and effort spent on activity
• Success in carrying on other or similar or dissimilar activities
• History of income or losses for the activity
• Amount of occasional profit if any that’s earned
• Financial status
• Elements of personal recreation. Unable to deduct expenses associated with a hobby.

Next let’s go over some important terms,

• Life Learning Educational Credit – Community College, University or Higher Education Institution. $2,000 credit per $10,000 per year.
• W-2 Wage and Tax Settlement Statement – Employee yearly earnings
• Income Statement – Business yearly income
• Form 8822 – change of address for your business
• Inventory Value equals COGS (Cost of Goods Sold)
• Sales Allowance – Merchandise vs damage or defective. As a result, buyer keeps the product. And receives a reduction on total amount due.
• Sales Return – Defective products are sent back to the seller. In addition, seller refunds buyers’ money or gives credit towards future purchases.

Know How to Start-Up

For-profit Income and Expenses –

1. Pays Self-Employment taxes on earnings
2. No limit on expenses
3. Able to claim home office deduction, to qualify you must use the space regularly and exclusively for business purposes.

In addition, pass-through taxation allows business income, deductions, losses and other tax items to flow through to the business owners. Also, an LLC dose not file its own separate income tax Form 1040. In other words, schedule C can be used or Corporate Business filing Form 1120C can be used. Generally, if you make a profit, it’s possible, you’ll owe taxes. Also, for auditing purpose keep copies of receipts for three years for goods and services. Tax credits provide dollar for dollar reduction in the amount of taxes owed. Whereas deduction reduces the amount of taxable income. Next up, taxes.

Taxes Paid Annually

• Payroll includes taxes employees and employers pay on wages, tips, and salaries. For employees taxes are withheld from their paychecks and paid to the government by employer. Included are federal, state and local income taxes and employees share of FICA taxes.
• Withholding tax is an income tax that a payer (Employer) remits on behalf of a payee (employee). Also, the payor withholds the tax from the payee income.
• FICA taxes are a condition of receiving Social Security benefits upon retirement. Since The Federal Insurance Contributions Act mandates employers to withhold Medicare and Social Security taxes from employees’ paychecks.
• Social Security tax covers old age, survivors and disability insurance. And yearly wage based.
• Medicare tax is Hospital Insurance. It funds a portion of the Medicare insurance program. Also withheld from paycheck or paid as self-employment tax. As a result, hospital insurance tax pays for Part A of the Medicare program. And it covers hospital insurance for individuals aged 65 or older and those with certain disabilities or medical conditions.

Furthermore, taxes are held in trust funds until paid to the US Treasury

Us Treasury Trust Funds

1. Hospital Insurance funded by Medicare tax. Therefore, pays for Medicare Part A.
2. Supplemental Medicare Insurance covers Medicare part B medical insurance and Medicare part D prescription drug coverage. Also, provides subsidized healthcare and hospital insurance benefits to people aged 65 and older and people with disabilities.
3. Old-Age and Survivors Insurance (OASI)
4. Retirment & Survivor Benefits Disability Insurance

In addition to the trust funds self-employment basic knowledge is needed.

Self-Employment

SECA (Self Employed Contributions Act) mandates that self-employed workers pay Medicare and social security tax as part of their self-employment tax. However, Self-employees pay the full FICA tax amount. Social Security 12.4% and Medicare 2.9%. Of course, additional resources to help understand self-employment tax responsibilities,

1. Publication 334 tax guide for small business
2. Publication 15-A Employer Supplemental Tax Guide
3. Instructions for Schedule SE (Self-employment) additional taxes employers are required to pay.

And finally, FUTA (Federal Unemployment Tax act) and SUTA State Unemployment Tax Act exempt workers still have to pay social security and Medicare taxes. Although exempt from paying self-employment tax if you earn less than $400 for the year.