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November 2014 • www.CPAPracticeAdvisor.com 23 Even the Self- Employed Can Face Sales Tax Issues By Ken Barry D o you have clients that began a business out of a spare bed- room, garage or basement? Tese entrepreneurs may start of as self-employed individ- uals, selling their wares on e-bay or etsy or at flea markets. In some cases, a humble beginning can mushroom into an interna- tional conglomerate. A Year in the Life of a SALT Accountant is sponsored by Avalara S e l f - c c o u n t a n t b y A v a l a r a November SALT Checklist Open Items – Work with clients to resolve any defcien- cies and penalties for past due state and local taxes Payments – Help clients set up budgeting plans for monthly and quarterly SALT payments Online Businesses – Discuss online selling activities with clients and make sure they are aware of sales tax re- sponsibilities (see related article) Planning – Start talking with your clients about 2015 SALT requirements now and determine if they need software support to stay current with their obliga- tions in various states Legislation – Recent legislation has affected taxes in Alabama and Oregon. Make sure you stay current on SALT-related legislation in states where your clients are doing business Ballot Box – Tax issues were on the November election ballots in California, Georgia, Missouri, Ohio, and more. Make sure you check the election results in states where your clients are doing business Amnesty – 2014 tax amnesty programs are winding down - if you have clients doing business in Louisiana and New Jersey, these programs are set to expire in November The ranks of the self-employed keep s wel l i ng. A ccord i ng to t he Bureau of Economic Analysis of the U.S. Department of Commerce, 99 percent of the employment increase from 2000 to 2011 occurred in the self-employed sector. In comparison, self-employment accounted for only 22 percent of the increase in jobs in the 90's. (Source: http://www.new- geog raphy.com/content/0 03761- toward-a-self-employed-nation). W hat about ta xes? Frequent ly, fedgling business owners have litle clue, if any, about their tax obligations. It's up to you to set them straight. Here are the four primary areas of concern. 1. Federal and state income tax: Nat u r a l l y, you w i l l owe f e der a l income tax on the proft from your self-employed business, as well as state i ncome ta x i n a l l but seven j u r i s d i c t i o n s (A l a s k a , F l o r i d a , N e v a d a , S o u t h D a k o t a , Te x a s , Washington and Wyoming). But the taxable amount isn't just the difer- ence between the amount charged and the cost of good sold or services provided. By maximizing deductions, where warranted, you can reduce the amount subject to tax for both federal and state income tax purposes. 2. Self-employment tax: Tis is the equivalent of the Social Security and Medicare ta x that a corporate employee has to pay. Because the employer is normally responsible for its share of these taxes, you're efec- tively paying twice the amount of tax a n employee does. For 2014, t he self-employment tax is equal to 15.3% on income up to $117,000 (increasing to $118,500 in 2015) and 2.9% on amounts above that threshold. Saving grace: You can deduct half of the self-employment tax you pay "above the line" on your Form 1040. 3. Other employment tax: Te ta x buck s don't stop there. I f you employ workers beside yourself, you must pay half of their Social Security and Medicare taxes, plus unemploy- ment tax and, in some cases, tempo- ra r y d isabi l it y ta x , to t he proper a ut hor it ie s . I n a d d it ion , y ou'r e responsible for withholding the req- uisite employment taxes and depos- iting those amounts with the IR S. Clients ofen disregard or ignore these rules with painful results. Under the "100% penalty," a business owner may be held personally liable for under- payments if they are due to willful failure. Advise clients to pay the IRS frst. 4. Sales and use taxes: Tis is a lightning rod for controversy among online sellers. Generally, a state will impose its ow n state sa les ta x, so you're bound by the applicable laws of the state of where your tax home is located, at a ba re m i n i mu m. But you're also responsible for collecting sales tax from buyers in a state where your business maintains a physical presence. You will have to investigate the laws in each of those states to fnd out the procedures for registering and paying over the proper amount of tax. Note that the rules can vary widely from state to state (e.g., goods that are excluded from sales tax in one state might be subject to tax in another). Online sites like ebay provide some assistance. Some states have enacted "use tax" statutes where the user, rather than the seller is responsible for paying the tax. Tis type of tax usually applies to purchases of big-ticket items like cars and boats. Te law continues to evolve in this area. Under the Streamlined Sales an Use Ta x A g reement (SSU TA), a consortium of 40 states and the Dis- trict of Columbia have joined together to simplif y sales tax collections for sellers across a multitude of states. Currently, compliance is voluntary for online sellers, but the SSUTA is ofen cited as a linchpin for proposed federal legislation. Keep your self-employed clients apprised of their obligations under existing law as well as new develop- ments that could afect them in the future. Contact them now before they call you in a panic.