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Taxes implications of a part-time business
Dear Small Biz Adviser:
I have just started a part-time home
business making and selling handmade greeting cards. I have the
sales and tax registration, but I am not sure what tax forms I need
to fill out and at what time. I also work full time. Do I combine
taxes or separate income taxes?
Sabira
Dear Sabira:
From the lack of detail in your inquiry and my years of
experience in these types of situations, I feel safe in assuming
you are not incorporating a business with the greeting-card venture.
In such a situation, your needs and paperwork tasks will not be
difficult.
Before we discuss your tax questions, let us look
at some basic startup issues. I don't know the extent to which
you intend to make a living from the venture, but you may want to
first consider securing occupational licenses from the city and
county or parish in which the business will be conducted. These
are clearly revenue opportunities for each of the jurisdictions,
but are required of any business venture. If you are treating this
as a one-time, seasonal project, I would not worry about the licensing
process. Rather, I would look at it as a season-long garage sale,
that is, a one-time event that will end after the upcoming holiday
season. However, if you intend to make this a long-term income venture,
then get the licenses.
If you are not going to create a company name (meaning
checks and money orders will be made out in your name only), there
is no need to apply to your state for a fictitious name. Otherwise,
you will want to fill out the state fictitious-name registration
form and post the announcement of the fictitious name with your
local newspaper. The announcement of your company doing business
under a specific name is posted one day only in the local paper.
As mentioned earlier, the nature of your venture and
its part-time operation mean that incorporation probably isn't an
issue you need to consider now. Likewise, assuming you will not
have any employees, there is no need to secure a federal employment
identification number.
Tax-filing requirements
Now to your taxes. Internal Revenue Service Schedule
C will now be a part of your regular Form 1040 personal return
filing. It is not a difficult form, but you do need to pay attention
to the costs and inventory associated with the business.
Likewise, you will need to note whether your bookkeeping
for the business is based on the cash or accrual method for collection
of sales. In other words, will you be conducting a cash business?
Will you collect revenue at the same time you make sales? This is
called the cash method, and is the easiest way to maintain the books
for the business. You can use the cash method even if sales are
collected in the form of a personal or business check. It will also
mean that any sales made up to Dec. 31, regardless of whether you
have collected the money, will count as income for the tax year.
For a better understanding of this procedure, review IRS
Publication 583, Starting a Business and Keeping Records.
You'll also need to start keeping records on the material
purchases you make for the greeting cards, as well as office supplies
and any other expenses directly related to the business. They will
be deducted from your total income on sales. That adjusted gross
income will then be added to line 12 of your Form
1040.
Sabira, that is just about the extent of the
issues you need to address with your part-time venture. I wish you
well.
-- Posted: Dec. 11, 2001
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