The relationship between a micro business owner and accountant is very important. As a new business owner, you have a lot to learn, so seek out an accountant with the heart of a teacher. Interview several accountants looking for someone that you understand. If you leave an interview more confused than you entered, keep looking. You should leave the meeting saying, “I learned a lot.”

Grill Your CPA

Ask an accountant these questions:

• Tell me about your small business clients? Are they similar in size and industry? Any teenagers for clients?

• Could you share 2-3 names as referrals?

• How much do you charge?

• How often am I billed?

• What is included in your services?

• What is NOT included?

• How often will we meet? Where?

• What do I need to bring to our meetings?

• Why is bookkeeping important?

• Explain the reports that I will receive from you.

  
  

Test Your CPA

A good accountant will explain difficult subjects in a clear, understandable way. Use a few test questions like these to see if your accountant communicates well.

• What is depreciation? Why can’t I deduct the cost of equipment in the year I purchased it? (You can, and the accountant should explain something called a section 179 deduction)

• What are the advantages of Limited Liability Incorporation? What does limited liability mean? When should I consider forming

  an LLC?

Need more information for your micro business? Check out my book, Money and Taxes in a Micro Business, to clear the confusion!

Carol Topp, CPA

Teen jobs and Tax Issues

By Kay Bell • Bankrate.com

Highlights

* Teens who earn less than $5,800 (in 2011) may not have to withhold tax money.
* But self-employed teens or contractors likely have to pay SE taxes.
* Some teen jobs are exempt from SE taxes, like babysitting, lawn mowing.

A  job is a classic rite of passage for teenagers. But teen jobs can be a source of aggravation for young workers and their parents who aren’t prepared to deal with the potential taxes.

When it comes to income, the IRS generally wants its cut regardless of the earner’s age. But some special tax rules apply to young workers, based not only on age, but also on amount of money earned and even the type of job.

First, the good news: The teen worker might not owe the IRS a dime.

A youngster who is a dependent of another taxpayer generally doesn’t have to file an income tax return unless the youth makes more than the standard deduction amount for a single filer. For 2011 returns, that’s $5,800.

If a young person doesn’t expect to earn more than the threshold amount, he or she needs to note line 7 when filling out a W-4. That’s where the teen might be able to claim exemption from federal income tax withholding.

In fact, novice workers should pay close attention to all employment paperwork. It could dramatically affect their tax responsibilities.

“Sometimes teens go out and work as technical employees, but are paid as contractors,” says Sharon Lechter, a CPA in Paradise Valley, Ariz., and member of the President’s Advisory Council on Financial Literacy. “So make sure the employer classifies you correctly.”

Pushing the worker categorization boundaries is appealing to some companies who then don’t have to deal with various tax withholdings and potential employee benefit payments. And young workers looking to pocket as much cash as possible each payday might think such an arrangement advantageous, too.

But being a contractor poses new, and costly, tax concerns.

Contractor Tax Complications

If paid as a contractor, which means earnings are reported to the worker and the IRS on a Form 1099-MISC rather than a W-2, the youth is for tax purposes self-employed.

That designation means that even if the young worker doesn’t earn enough to owe federal income taxes, he or she could owe Uncle Sam self-employment, or SE, taxes.

This is the 15.3 percent tax on earnings that is the self-employed equivalent to Social Security and Medicare payroll taxes withheld from employees’ checks and usually noted as FICA on pay stubs. That tax is required when any self-employed worker’s net earnings exceed $400.

“There is no special tax treatment for teenagers running their own business,” says Carol Topp, a Cincinnati CPA who is also the founder of TeensAndTaxes.com. “If you make a profit of more than $400, you must pay self-employment tax.”

The rest of the article continues here.

Looking for a way to explain taxes to teenagers further? Take a look at my book, Money and Taxes in a Micro Business, for clear, easy to understand tips for dealing with taxes in a teen’s micro business.

Carol Topp, CPA

Need some money to start up your micro business?

Did you know that more than half of all young companies get their money from their own savings to start.

The “Money Game” from the Kauffman Foundation

Many teenagers make money by babysitting for neighbors and friends. Babysitting is a terrific job for a teen and has some tax advantages that you may not know about:

Several years ago a special category of workers was created called household employees. Parents reading this may remember that during the 1990’s, several federal cabinet appointees were found to be in violation of tax rules concerning their household help, specifically nannies and gardeners. Congress addressed the issue by updating and enforcing the “nanny tax,” so that employers would start paying Social Security and Medicare taxes on their hired nannies.

Suddenly, Americans started asking about their teenage babysitters. Would they be required to pay employer taxes on their 15-year-old neighbor girl so they could have a night out? It seemed pretty ridiculous.

Fortunately, sanity prevailed and there are exceptions to the nanny tax rules! An employer does not have to pay employer taxes if these three conditions exist:

• the employee is under age 18 at any time during the year and
• the work is in or around a private residence as an employee and
• the employee’s main occupation is not providing house hold services.(For a teenager, their primary occupation is to be a student, not a babysitter.)

Should a teenager file his own tax return apart from his parents?

Usually, teenagers should file their own tax returns separate from their parents’ return.

If a teenager has earned income from a job or his own micro business, he should file his own return. A teenager’s earned income should not be added to his parents tax return. The parents will probably pay too much income tax if they add their teenager’s earned income to their return.

Most of the time, a teenager can still be claimed as a dependent on their parents’ tax return, even though he files his return separately.

The only time the IRS allows parents to include a child’s or teenager’s income on their tax return is for unearned income belonging to the child. Unearned income is income from investments such as interest on a savings account, dividends from stock or mutual funds and capital gains distributions from a mutual fund owned by the child or teenager.

Parents, if your child or teenager has unearned income, do not simply add it to your income. You must complete a Form 8814 Parents’ Election to Report Child’s Interest and Dividends. The IRS warns that electing to include your child’s investment income on your return could result in higher income tax.

For my tax clients, I always file a separate return for the teenager or child. It keeps things clearer by separating the income between the parent and child.

If you have been running a micro business, you need your own separate tax return. My book, Money and Taxes in a Micro  Business discusses the forms and gives several samples of tax forms for a teenage micro business owner.

Carol Topp, CPA

Record keeping is extremely important to the success of every business.

Micro business owners should focus on simple record keeping.

Here are some great tips to help:

1. Use duplicate checks.

2. Separate your personal and business checking accounts.

3. Do not mix personal and businesses expenses.

4. File your receipts by category, not date.

5. Use the memo line of a check to explain the expense.

6. Keep a mileage log, even if it’s just a calendar with the destination noted. Look up mileage using Google Maps or Mapquest.

7. Keep a calendar of appointments.

8. When buying equipment that you will use for longer than a year, make note of the date and total price including sales tax and shipping. Your accountant will need this information to calculate a depreciation deduction.

9. Estimate the business-use-percentage on items that are both personal and business such as Internet usage, or cell phone usage.

10. Count your inventory at the end of the year.

11. Keep records of income such as sales slips, deposit slips, and invoices for services.

12. Use a petty cash account and balance it frequently.

13. Get a W-4 form from every independent contractor you hire before paying them. A W-4 form records their legal name, address, EIN or SSN, and is needed at tax time.Record who paid you on your bank deposit slips. Use carbon-less copy deposit slips.

Looking for record keeping software? See my post on Record Keeping Software and find the option that best fits your needs.

Carol Topp, CPA

I have a website, TeensandTaxes.com , to help teenage business owners understand if and when they owe any taxes on their business income.

Taxes can be confusing, so grab a copy of my ebook, Teens and Taxes: A Guide for Parents and Teenagers.  It will clear the confusion for you.

A 42 page ebook with chapters on

• employees
• independent contractors
• household employees
• kiddie tax on investment income
• business income

Read more about the ebook here

Read a sample chapter here

View the Table of Contents here

Available for immediate download for $2.99

Kindle version $2.99

Nook/Other Ereader versions $2.99

Pdf version $3.00

Carol Topp, CPA

I want to start my own small business selling crafts. What (US) tax forms do I need to file?

Congratulations on living the American dream of being your own boss! Since you mentioned you are the only owner, your business will be a sole proprietorship. In the US, the owner of a sole proprietorship is considered self-employed and you will pay two types of taxes: income tax and self-employment tax. Self-employment tax is the same as Social Security and Medicare tax for self-employed people.

You will report all your income and expenses on an IRS form called Schedule C Profit or Loss from Business, which is part of the Form 1040. You should file your own tax return, separate from your parents. They can still claim you as a dependent on their tax return even though you file a separate return.

You will also fill out Schedule SE to calculate the self-employment taxes owned. The self-employment tax is 15.3% of your net income (profit). Many teens that own small businesses find that they may not owe federal income tax, but do owe self-employment tax. The threshold to start paying self- employment tax is $400 of net income (profit). So if you made over $400 in profit from a micro business, you need to fill out a Schedule SE and pay self-employment tax.

Keep good records of everything you earn and everything you spend in your business. This can help reduce your taxes. It is a good idea to talk to an accountant when you start your business. He or she will also be able to help you with issues like sales tax. 

My book, Money and Taxes in a Micro Business, covers taxes for business owners.

Price $9.95

Read  the Money and Taxes Table of Contents

View Money and Taxes Sample Pages

If you still have questions, I would be happy to answer them! Drop me a line at my contact page and we can get started.

Carol Topp, CPA

Start with a simple spreadsheet

Microsoft Excel or the free Open Office Calculate programs work well for keeping records for  thousands of micro businesses. Business expenses can be categorized in columns to make tax preparation easier. Totaling income by month, by customer, or by product is quickly accomplished. You can get a little more sophisticated and use multiple worksheets for each month that flow into an annual summary sheet. The spreadsheet is a powerful tool because of its simplicity and flexibility.

Personal Money Management Software

Some micro owners find that personal money management software like Quicken can work well for record keeping. Although these programs were not designed for business use, these may already be familiar software from your personal life. They are very intuitive because they look just like a checkbook register and they will generate simple reports showing income and expenses.

But personal finance software cannot create invoices or bill customers, record payroll, record sales tax, or track inventory. For those business-like functions you’ll need accounting software.

Small Business Accounting Software

Accounting software such as Quickbooks works better than personal financial software if you send your customers forms such as invoices, receipts, or statements for progress billing, or if you manage inventory. Accounting software can:

• Print checks, pay bills, track sales & expenses

• Reconcile bank accounts
• Create estimates, invoices & reports
• Track employee time and calculate payroll withholding
• Generate reports
• Download credit card & bank transactions
• Track inventory and set reorder points
• Create business plans, budgets & forecasts

Start with the simplest method you can for keeping your micro business records and graduate to more sophisticated systems as needed. A good CPA can help you set up an easy to use system whether on a spreadsheet or using software.

The important thing to do is to keep good records.

Carol Topp, CPA

The Old Schoolhouse Magazine is offering their fall issue digital edition to read online.

My article on The Benefits of Starting a Micro Business–More Than Just The Money! is on page 144!

(click the picture to read the digital edition)