Well-informed Is Well-armed
Working at home on the internet in the comfort of your own home feels safe and secure. It is nice not to have to worry about the dangers that are ever present when you have to get up and go to a job every day knowing there are bad buys out there who would do you harm. You take precautions; you pay attention to your surroundings and avoid situations that could put you in harm’s way. It is a relief not to have to worry about such things at home – right? Unfortunately, working at home on the Internet carries its own set of dangers that also require taking precautions, paying attention, and avoiding situations that could put you in harm’s way. You must protect yourself and protect Internet business
My goal with this series of articles was to make your fully aware of the lions and tigers and bears, oh my! And, to identify the sneaky snakes, poisonous plants, cannibals and unfriendly tribal leaders that run rampant in the Internet Jungle.
You now know there are many traps that can be set, irresistible bait that can be used to entice you, and shortcuts that are not really shortcuts, which are incredibly seductive as you struggle with the daily challenges of trying to get where you want to be.
Anyone who knows anything about sports (which includes most of us, at least as spectators) knows that, “The best offense is a good defense!” Your defense consists of having a clear plan for success and being well-informed and well-armed to deal with any of the creatures in the Internet Jungle who are ready to pounce if you give them the opening. You are now ready to not only protect your Internet business from the creatures; you are also ready to establish the next level of protection – legal issues, taxes and intellectual property.
Get Help to Protect Your Business
The information below is for educational purposes only – to alert you to things you should investigate. I urge you to seek advice from qualified, licensed experts in order to fully protect yourself. I suggest that you find and confer with an attorney who is well-versed in small business (and particularly online business) and a good tax accountant.
The Legal Side of Things
If you are a one-man (or woman) shop – working alone on your personal computer, you probably do not need to worry about this issue. It is unlikely that you will be affected by zoning laws, restrictions of an owners association, or a tenant agreement; but, it may be good to check anyway.
On the other hand, if you plan to store inventory and ship merchandise; or if you plan to have employees working with you from your home, you MUST check the local zoning laws for restrictions placed on you by an owner’s association agreement that you signed when you bought your home or on a tenant’s agreement or lease that you signed when you moved into your apartment.
Be sure to take this step and protect yourself. You do not want to get shut down before you get started.
Investigate this carefully. You do not want to be on the wrong side of the law when it comes to taxes. There may be a local business tax and reports that you will need to file when you run a business out of your home.
If you are selling merchandise, even electronic merchandise, you may be responsible for collecting and reporting sales tax. You should be clear about this before you make your first sale.
When sales tax is required, the seller should collect it from the buyer of the merchandise at the time of the sale; and then, the seller must report and pay the tax to the state and/or local tax entities. You also need a state retail sales license, which requires a return to be filed monthly. (In Arizona it is called a “Transaction Privilege, Use, and Severance Tax Return).
PLEASE NOTE: You WILL owe the sales tax whether you collect it or not. Your tax bill will include not only the tax you should have collected from your customers; but additional fines and penalties as well, if you do not pay the tax in a timely manner.
Income and Social Security Taxes
Unless sometime hires you to work virtually (at home), it is highly probable that you will be considered self-employed. If this is a new experience for you, be aware that you – and you alone – are responsible for reporting your income and paying your taxes.
You absolutely MUST educate yourself about what this means and do everything necessary to cover the bases. Talk to a good accountant and set up a plan for paying estimated income tax or you could be in for a big, unpleasant surprise at tax time.
No one told me about estimated income tax when I opened my first business in California – many years ago. I was incredibly successful and generated a wonderful income stream that I happily spent. At tax time, I was hit with a $12,000 tax bill. It was a huge grey financial cloud that hovered over me for the next two years as I paid off the bill, while also paying estimated income tax for the current years. Do not let this happen to you!
The following information was taken directly from the Social Security Administration Website: http://www.socialsecurity.gov/pubs/EN-05-10022.pdf
Most people who pay into Social Security work for an employer. Their employer deducts Social Security taxes from their paycheck, matches that contribution and sends taxes to the Internal Revenue Service (IRS) and reports wages to Social Security. But self-employed people must report their earnings and pay their taxes directly to IRS.
If you are self-employed, if you operate a trade, business or profession, either by yourself or as a partner, you report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on Schedule SE in addition to the other tax forms you must file.
The Social Security tax rate for 2013 is 15.3 percent on self-employment income up to $113,700. If your net earnings exceed $113,700, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings. However, effective with this tax year, the Medicare tax rate increases 0.9 percent from its current rate of 2.9 percent to 3.8 percent on net earnings
In other words, you are responsible for filing quarterly reports for estimated earnings and making deposits based on those estimates. If you are making a lot of money – estimate your income on the generous side.
Keep Good Records
Do not be that person who shows up at your accountant’s office with a box full of notes and receipts. Even if you have never done it before, you absolutely MUST KEEP GOOD RECORDS now.
Track everything – income from every source and every expenditure (amount, where spent, purpose). Develop a system that allows you to do this in a systematic and orderly fashion – either on a daily or weekly basis. Talk to your accountant and find out exactly what s/he will need.
Do not put yourself in a position of meeting with your accountant at tax time and finding out that you need a lot more information than you have – and no idea how to get the missing information. (BTW – unless you are very up-to-date on tax law, I do not recommend that you do your own income tax report.)
You also never want to find yourself sitting in the office of an IRS representative without being well armed with detailed records. Ignorance of the law has never been and will never be an acceptable excuse for not having the proper documentation for your taxes. Penalties and fines can be worse than the tax itself. Keep good records!
Protect Yourself – Find the Right DIY Tools or Get Help
When you are newly self-employed (especially on the Internet), it is easy to get caught up in the adventure of exploring new territory, in the overwhelm of trying to learn a new business, and in the excitement when things are going well and money is coming in. Don’t forget to take the necessary steps to protect yourself, legally and financially. Both are critical for your long-term success. You must research and buy the necessary tools and learn how to use them – and get the outside help in areas that you cannot or should not try to do yourself – two big ones: legal and tax accounting.
First and foremost – you MUST KEEP GOOD FINANCIAL RECORDS! They are the best defense for potential problems and difficult situations that can arise when you are working online or running an online business enterprise of any kind.
Many people handle the day-to-day record keeping themselves, which is usually OK until the business gets too big. However, if you have no bookkeeping or accounting knowledge – or are incredibly bad at it, it would be wise (if at all possible) to hire someone to keep financial records for you. Another alternative is to hire someone to help you set up a system; and then, you take it from there.
Whether you choose to do it yourself or to hire someone, the earlier you set up your system, the better – preferably from the very beginning. DO NOT wait until tax time to try to pull it all together. If possible, choose someone who lives close and who is compatible with your personality.
If you have some basic bookkeeping or accounting skills, you may be able to keep your own records by using Quickbooks or Quicken or a similar online accounting program. There are also free programs such as Microsoft Money, which is often included when you purchase a new computer. My personal preference is Quicken.
There are many different accounting programs available. Ask your friends about their experiences with them, and read reviews. Find out which one seems to fit your needs the best. Some are loaded with features that you won’t need in the beginning and may never need – others may not have enough features, so do your homework. Too much of a good thing (excessive unused features) slows down your computer and drains resources. Choose carefully.
In addition to keeping good financial records, you will also need to have a system for storing information on your computer. Be as organized as possible about this process, keep a log or some kind of identification system so that files are easy to find. Don’t try to keep it all in your head. You may think you will remember, but you won’t.
Files that you may need: (Most of these can be e-files on your computer; but, there are a few that you may want to keep a back-up hardcopy, as well, such as contracts.)
- Business contacts – names, addresses, phone numbers and email addresses, plus the name of their companies, notes of telephone conversations, emails to them and from them, etc. Outlook 2010 with Business Contact Manager is available with Office Professional Plus 2010 and Office Standard 2010.
- Media contacts – names, addresses, phone numbers and email addresses, plus the names of the radio or TV stations, newspapers or magazines they work for, telephone conversation notes, emails to and from them, etc.
- Information and training sources (anything you buy and may want to return)
- Proposals sent
- Proposals received
- E-mails and Instant Messaging – be sure to save all business related conversations. Set up the necessary files on your e-mail server and your instant messaging program.
- Articles written – where they were submitted and results of the submission, including publication dates and sites.
- E-books (Separate folders for: Book Ideas – Books in Progress – Published Books (with copyright information, publication date, ISBN (ASIN), publisher(s), etc.). Have a file for each book with the covers and final copies of every format you used and submitted to publishers: Original Word format, MOBI, E-Pub, PDF, etc. If you feel compelled to keep old versions, place them in a file that is clearly identified as “OLD VERSIONS.” Frankly, it is better to delete them to avoid confusion and limit the clutter on your computer.
The list above is by no means comprehensive. The files you will need to set up and maintain will vary depending on the work you do or the type of business you have.
Figure out what you need and create your systems immediately. Don’t worry about having everything perfect. You can always adjust and expand as you go.