1If I become an LLC, will it help me save on taxes?
Well, like most tax questions, the answer is, it depends. The IRS does not at the federal level recognize an LLC. It is a state level designation. The IRS recognizes a C-Corp, an S-Corp, Partnership, and Sole Proprietor. The taxation is different at each entity level and that is where you decide the best structure for your business.
2Should I have a separate bank account for my business?
Here’s a straight answer: yes. You should also have a separate credit card for your business if you use one. Here’s why: in an audit, the IRS typically asks for proof of the income/expenses. The best way is through bank statements and credit card statements. If you have mixed your personal and business, then you will be giving the IRS all your personal data along with the business data. Not the best idea.
3My friend and I want to start a business together – what do you think?
Personally, I think of a business arrangement is much like a marriage. When you go in together, you need to have a written agreement about everything related to that business. Who handles the finances, who makes the final decision when there is a disagreement, etc. Much like a marriage, dissolving a business when one wants out can be time consuming and very painful. Know the business partner well or start two businesses and work as one.
4I make things and sell them on the side, do I have to report the income?
Yes. The IRS expects you to pay tax on all the money you earn. If you are running something on the side for fun, keep up with the expenses, track the money coming in, even if it’s cash. Remember that the IRS receives a report now that tells them how much money is collected by credit cards. If you are selling online, do expect that they already know about the money coming in. Also, expect the newer ways to pay to have reporting requirements. It’s easier to claim all the income and write off your business expenses than it is to have to go back and dig through years of documents when the IRS questions you. They have no problem counting all the money coming in and they expect you to produce documents for the money going out.
5What’s the difference in earned income and unearned income?
Basically, you have to pay social security and Medicare tax on earned income. Earned income is money someone pays you to do work or supply a product. As a W-2 taxpayer, you pay 7.65% and your employer matches that 7.65% when handing it over to the government. If you are self-employed, that’s right, you pay both sides, so 15.3% of your profit (income minus expenses) will go to the government.