Tax tips and tricks for teen entrepreneuers

april_15_calendar

Kenneth over at Teen Business Forum asked,

My name is Kenneth and at the moment I am a freshman in college. As you probably already know, tax season is here! I do plan on filing them soon, but I was wondering what tips and tricks I could do to increase the amount of the refund.

Kenneth,

Tips: Read all you can about tax deductions. My blogs at http://TeensAndTaxes.com and http://TaxesForWriters.com are a good place to start.

Buy my ebook Teens and Taxes at http://TeensAndTaxes.com. The $3 cost is a business deduction!

Keep good records. Consider using accounting software like Quickbooks, Outright.com, Freshbooks.com or Wave accounting.

Tricks: Keep track of mileage. It’s a bigger deduction than just gas.

If you travel out of town you can deduct a per diem amount for meals that is higher than actual meal expenses (unless you’re a really big eater!).

The standard rate of $46/day for meals is set by the General Service Administration which has higher per diem rate for high-cost cities. On the day of traveling to and from home, you can only deduct 75% of the per diem rate, but it still adds up.

For a trip to Orlando (with a per diem rate for meals of $56/day) my per diem totaled $196, a lot higher than my actual expenses of $94.97.

Hope that helps.

Money_small-259x300Money and Taxes in a Micro Business has several chapters devoted to federal , state and sales tax. There’s quite a bit to learn about taxes, but this book is written in clear English so a teenager easily can understand taxes in running a micro business.

 

Carol Topp, CPA

 

Get a 1099MISC? How the IRS will tax you.

Form 1099-MISC for 2010 with calculator and pencil on it

If you received a Form 1099MISC then you worked as an independent contractor sometime last year.

The IRS considers independent contractors as business owners.

You will need to file your own tax return. If you’re a teenager you need to prepare a separate tax return from your parents.

Tell your parents not to panic, they can probably still claim you as a dependent!

Report the income from the 1099MISC on Schedule C Business Profit or Loss.

You may not owe federal income tax (if your total income is under $6,100 on 2013), but will owe self-employment tax at 15.3% of your net income.Ouch!

teens_and_taxes

I cover this in detail in my ebook Teens and Taxes including an example with the forms filled out.

It’s worth the $3 to do it right. Buy a copy here.

And read this blog post from another parent whose son received a Form 1099MISC.

 

Carol Topp, CPA

P.S. If you think you should have been treated as an employee and not an independent contractor, you can complain to the IRS. I cover all that in the Teens and Taxes ebook. Here’s an excerpt.

What’s new in taxes for teenagers?

teens_and_taxes

Teens and taxes ebook available at TeensAndTaxes.com

Not a lot changed in the US tax code for teenagers for 2013, except a few thresholds:

Income tax is paid on earned income greater than $6,100 in 2013 (up from $5,950 on 2012)

Income tax is due on unearned income (usually investment income like interest and dividends) over $1,000 in 2013 (up from $950 in 2012).

The tax for teenagers with both EARNED and UNEARNED income are more complex. The guidelines involve comparing a teen’s gross income (meaning their total income from all sources) to the greater of

  • $1,000 or
  • earned income plus $350 (up from $300 in 2012).

 

If you purchased the Kindle version of my ebook, Teens and Taxes, be aware that it is based on 2012 thresholds. Just keep in mind these 2013 thresholds when preparing a teenager’s tax return.

 

Carol Topp, CPA

 

Free tax software for teen business owners

 

 

There are several sources for you to file a teenager’s tax return for free:

 

Tax Act is the software I use. I use the package for professionals, but you can try their free version: https://www.taxact.com/

 

IRS Free File e-badge
The IRS partners with several software providers in the Free File program: http://www.freefile.irs.gov/

 

For more information on taxes for teenagers visit my other website TeensAndTaxes.com

 

What do I need to know about crowd funding and taxes?

crowd surfer © by Photos by Mavis

Question: I’m interested in accepting donations from a crowd funding website. What do I need to know about the taxes?

I’ll do my best to answer your questions, but I have to include this disclaimer:

The Internal Revenue Service hasn’t published specific guidance on the tax consequences of receiving money through crowd funding sites like Kickstarter.

I’ll also explain that I am a very conservative CPA. I do not take risky or unsupported positions. You may get a different answer from another CPA or tax professional.

As the term suggests, crowdfunding is funding from a crowd of people; that is, many people provide small amounts of money to finance something. Crowdfunding has its roots in charitable causes, including the advent of microfinancing to provide financial services to poor people, but has progressed to the online funding of creative and other projects via sites like Kickstarter and Rockethub.

Crowd funding income can be treated as the following:

  1. A donation to a 501c3 tax exempt charity.
  2. Investment in a business by an investor seeking a share of ownership (called equity owners)
  3. Gift given by an individual to an individual. Gifts are typical when no business or potential profit motive is evident. Examples of gifts include a wedding, funding an adoption, helping a family whose house was destroyed by fire or a person with a medical illness.
  4. Taxable income for a for-profit business. Most businesses give a reward in exchange for the income. This reward may be considered a sale of a good and subject to sales tax in your state (and you thought all you had to worry about was federal income tax!)

 

For a micro business owner, #1 and #2 do not apply. It is my opinion that #3 Gift does not apply to micro business owners either

#4 taxable income is the only option that applies to micro businesses launching a crowd funding campaign.

 

Carol Topp, CPA

Here is my disclaimer:

Nothing contained in this email was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.

 

Using crowd funding to raise money for your book, music CD or film project

Credit http://banklesstimes.com/2013/01/10/kickstarter-vs-indiegogo-tale-of-the-tape/

wrote a blog post over at Publishing Basics on

Pros and Cons of Kickstarting Your Project

Kickstarting (or, more broadly, crowd funding) as Phil explains, is  “an Internet-based program where creative people can pitch potential supporters to raise funds to produce a short- or feature-length film, record music, publish a book, and many other products.”

Here’s an excerpt from Phil’s article:

Other People’s Money – Maybe you don’t have the cash or credit to fund your own book, but if you can convince others that your book is worthwhile, you might be able to raise the money. You can remove your risk by raising all of the funds you need.

Don’t underestimate the value of helping others feel good. You’re helping others pay it forward. There is great value in allowing others to help you reach your dreams.

Pre-selling With a New Spin – Pre-selling is tough enough. With Kickstarter you’re basically pre-selling copies of your book (and recognition for the assistance) to your network of friends, family, co-workers, and anyone looking for a way to help.

Read the other pros and cons of crowd funding  here.

 

That got me to thinking (with my CPA-tax mind): How does the IRS see income from crowd funding sources like Kickstarter?

The accounting software company, Outright.com, has an informative page about taxes from crowd-sourcing income.
http://outright.com/blog/accounting-for-crowd-funding-what-you-need-to-know-before-starting-a-kickstarter-campaign/

The IRS will probably see income from crowd funding as exactly as Phil described: pre-selling books. That means the income from Kickstarter is taxable to a micro business owner selling a book or CD.

Sorry, to be a downer here, but you need to know that there is no free lunch when it comes to crowd funding!

Carol Topp,CPA

What is crowdfunding and can a teenager get in on it?

Credit: http://www.salon.com/2013/04/10/kickstarter_just_might_get_you_audited_partner/

What is crowdfunding?

The word seems to be a hot term that’s used everywhere. Anytime someone needs to raise some money for a project they turn to crowd source or crowd fund. But what exactly does that mean? Well Venturebeat.com best describes it as:

“crowdfunding is funding from a crowd of people; that is, many people provide small amounts of money to finance something. Crowd funding has its roots in charitable causes, including the advent of micro financing to provide financial services to poor people, but has progressed to the online funding of creative and other projects via sites like Kickstarter and Rockethub…” Read more on VentureBeat

Can a Teenager Start A Crowdfunded Project?

Crowdfunding may not work for micro business owners under age 18, because legal contracts with minors are not legally binding, so most investors will not make a contact with a teenager.

But with that said, there are a few teenagers that have used sites like Kickstarter to launch their project. In fact, I just wrote a blog post about a teen who crowdsourced an iPad app last week, you should check it out. You might also want to check out his Kickstarter page to see that the project wasn’t launched under Emerson Walker’s name, but his father’s instead. This is most likely because of my reasoning mentioned above, legal contracts with minors are not legally binding.

Keep Good Records and Be Careful Not To Get Audited

Another thing to keep in mind is that any funds that you make off of your crowdfunded project are considered “taxable income” by the IRS. Even though you are not selling a product via a crowdfunding site like Kickstarter, the IRS will see the transaction as a taxable income because the IRS defines gross income from ‘whatever source derived,’. You can read more about this on Salon.com.

But crowd funding is definitely something to keep in mind for your future.

Carol Topp, CPA

 

P.S. Here’s a neat story of how some students pay for college through crowdfunding: New crowd funding site helps kids with little money achieve big college dreams

 

 

For being generous, I get a 2 star review on Amazon?

TandT_Book_Large

My ebook Teens and Taxes recently received a two-star review on Amazon.

Here’s what the reviewer, Gary Marble, said:

This is a very short booklet, offering little detail. It does have some helpful information in it, to be fair, but it offers little more than is already stated on her website. I was not happy to pay $2.99 for the e-book (more like a pamphlet in size).

I never respond to negative reviews on Amazon, but if I did here is what I would write:

I spent several hours researching and writing my ebook, Teens and Taxes. I spend several more hours updating it every year. I answer questions on my TeensAndTaxes.com website from readers without charging them my hourly rate as a CPA. I am generous with my time and share my expertise in a short ebook (40 pages) for only $3 and for all this I get a 2 star review?!

I am criticized for offering little more than what is already stated on my website. So I’m being criticized for being generous by offering free advice on my website? The ebook offers quite a bit more than the website. It complies all the information on taxes for teenagers in a way my website and certainly the IRS website does not. It includes samples of tax returns for teenagers that are not on the TeensandTaxes.com website. It offers a lot of detail for parents who are confused by the IRS tax laws.

If you’ve read the ebook or have been helped by my TeensAndTaxes.com website, you would consider adding a positive review to the book’s Amazon page? I’d appreciate it.

Feel free to reply to Mr Marble’s 2 star review, if you wish. I won’t comment, but you certainly can!

Thanks for letting me rant, everyone.

The 2013 version of Teens and Taxes will be available soon.

 

Carol Topp, CPA

 

What You Need To Accept Credit Card Payments For Your Micro Business

 

Paul McNeal over at the Teen Business Forum blog posted a great blog about what you need to accept credit card payments.

If you’re a young entrepreneur or small business owner, chances are you’ve overcome plenty of obstacles already. Whether your baby face, inexperience, or busy schedule got in the way, it’s easy to make mistakes in the beginning and learn as you go.

When you’re just getting started in the business world, you will likely face a lot of rejection. Investors will shy away from your ideas, funding will be slow, and you might find it difficult to get banks on your side.

Start-ups and first time business owners are often considered “high risk” entities and many financial institutions fear setting up accounts or allowing traditional payment processing solutions.

Luckily, there are companies that set-up high risk merchant accounts for businesses that otherwise might never get off the ground. Read on for seven recommendations for what you need to accept payments for your first business.

1. A smartphone
These days, a simple smartphone goes a long way. You can download apps to track sales, to chart progress, and to accept payments on the go. A smartphone can work as an in-store or mobile payment processing tool so you can accept cash or credit from anyone, anywhere, at any time.

2. A Square card reader
The Square register app allows small businesses to accept transactions anywhere. As long as you have a smartphone or tablet computer, business owners can download the app, plug in the card reader, and start accepting payments with no set-up fee and without getting locked into long-term contracts.

 Read more here…

I really like my Square card reader. I really saw my book sales increase when I started taking credit cards at conventions and presentations.

Paypal and Intuit (makers of QuickBooks accounting software) also have card readers that work with your smart phone or tablet.

Carol Topp, CPA

P.S. If you haven’t checked out Teen Business Forum, go there today. It has a great forum for you to discuss business with other teen entrepreneurs from around the world. Right now, the forum is by invitation only and for entrepreneurs age 13-

Child labor laws and entrepreneurs

Snow-shoveling

Do child labor laws affect teenage micro business owners?

The attorneys at Home School Legal Defense Association  HSLDA have some helpful insights into entrepreneurship and child labor laws.

Entrepreneurship and Child Labor Laws

What about a student who wants to start his or her own business? Young people can spend as long as they like writing a book, filming a video, programming a website, painting a picture, or in any other creative endeavor, as long as they are not being paid. If the student is 16 or younger and being paid, he or she is subject to child labor laws.

Typical entrepreneurial activities, such as shoveling snow or babysitting, theoretically count as “working for” an employer—i.e., your neighbor. Restrictions on hours and types of work still apply.

These jobs (shoveling snow or babysitting) involve a teenager working in or around a private residence. These teenagers are considered household employees by the US government. That’s why child labor laws apply to them. I explain this more in Money and Taxes in a Micro Business.

Limits on work hours for teen employees

Typically, the child is limited to 3 hours of work per day during a school week, or 18 hours a week. He may not work before 7:00 a.m. or after 7:00 p.m. except from June 1 to Labor Day, when evening hours are extended to 9:00 p.m. When the public school is not in session (such as during the summertime), children under 16 may work up to 8 hours a day or 40 hours a week.)

Employee or business owner?

Child labor laws apply to children working for an employer, but not to a teenager running a business! You can put in as many hours as you want working on your business.

The US Department of Labor  website explains,

Young entrepreneurs who use the family lawnmower to cut their neighbor’s grass or perform babysitting on a casual basis are not covered under the Fair Labor Standards Act (FLSA)

The FLSA and it’s child labor laws covers employees. Micro business owners are not employees. They are their own bosses.

So work hard at your micro business!

Money_small Need help understanding whether your are an employee, household employee or micro business owner? My book Money and Taxes in a Micro Business explains all that and much more. Order a copy today.

Carol Topp, CPA