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 $4.99, or bundle with an audio for $7.99.

Read more HERE

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)

My daughter is interested in self-publishing her own book. I’ve been checking out CreateSpace and am not sure if it is available to minors. Do you know?

CreateSpace (a division of Amazon) offers a great service to get self-published books in print! Good for your daughter.

Unfortunately, CreateSpace does put up some roadblocks for teenagers.

Here’s the experience of one dad:

https://www.createspace.com/en/community/message/69077

CreateSpace allowed his teenage son to write a book, but required that royalty payments to go to the father’s name. Dad didn’t like this because it made his taxes go up.

The problem is that CreateSpace doesn’t want to enter into an agreement (i.e. the royalty agreement) with minors.

Why not?

The laws of  most states set the age for entering into a legally binding contract at 18.  It’s not illegal to enter into a contract with a minor — just ill-advised, because a  minor can avoid obligations created under the contract (i.e., back out of it) until he/she reaches majority age.

So, help your daughter out and encourage her to self-publish her book. Here’s how you can deal with the royalty payments:

How to deal with royalty payments to a parent, not the teenager

Hope that helps.  Good luck!

Carol Topp, CPA

U.S. Tax Forms © by MoneyBlogNewz

In CreateSpace for minors? I discussed that CreateSpace (a division of Amazon that prints self-published books, CDs and DVDs), will not make royalty payment to minors (teenagers under age 18).

Instead CreateSpace will pay a parent, but not the teenager.

Here’s how to handle the situation:

1. A parent (say dad) agrees to accept the royalty payments in his name (even though his daughter wrote the book, her name is on it, and she deserves the cash from royalties!)

When dad gets a royalty check from CreateSpace, he gives the cash to his daughter.

2. Dad may get a tax form (1099MISC) at the end of the year showing how much CreateSpace paid him in royalties from his daughter’s book. If he doesn’t get the tax form from CreateSpace, he should still do step 3.

3. Dad MUST include this information on his tax return on Schedule C Profit or Loss from Business (even though he doesn’t technically have a business).

4. Dad should then include all the money he gave to his daughter on his tax return as a business expense. Put it on line 27 Other Expenses on the Schedule C with the explanation on page 2 of the form “Income assigned to Daughter’s name.”  This is to explain to the IRS that dad accepted the money (income) on behalf of his daughter, but it’s really hers (assigned to her).

If he does it correctly, the bottom line on dad’s Schedule C will show a big , fat zero. There will be no profit from his business and no additional tax to pay. It all transferred to his daughter.

5. Daughter must also fill in a Schedule C on her own tax return. I cover that in my book, Money and Taxes ins Micro Business.

Money and Taxes in a Micro Business

Price $9.95

Read  the Money and Taxes Table of Contents

View Money and Taxes Sample Pages

Carol Topp, CPA

Teaching Your Kids About Managing Money (when you’re not doing so great yourself).
And how to help your kids start a micro business.

How to Teach Kids About Managing Money (When You’re Not Doing So Great Yourself)

So you don’t consider yourself a financial role model. Take heart, you can still teach your kids financial principles. This interview offers tips on how to teach your kids the money basics as part of your busy lifestyle. We’ll also discuss what topics to teach at each age from preschoolers to college age.

Here’s a helpful handout: How to Teach Kids About Managing Money

Carol Topp, CPA

I’m being interviewed on The Sociable Homeschooler today (Friday July 22, 2011) at 9 am EST on teaching our kids about money and starting a micro business.

Listen in at http://toginet.com/shows/theso?ciablehomeschooler

Handout for How to Teach Your Kids About Money

Hope you enjoy the show!

Carol Topp, CPA

One commenter, who owns his own engineering firm, asked:

Nice, but how do you prepare them for the IRS paper, 941′s and 940′s, (withholding and federal unemployment), w-2s and w-3s, (employee reporting and employer reporting for SS and Medi)? Don’t forget the 1120′s (corporate tax filing).

Duplicate ALL of this at the state level and add Business Entity Taxes, Sales and Use tax filing,and filing the annual report with fee. If your S corp is in two states duplicate this for the foreign filings (out of state). Add the agent for the foreign S corp.

Then we get to the insurances. Property and liability, workers comp and if there is any money left, health insurance. and the list goes on, all for a 1-5 person S Corp.

Guess that there was a point in this list and that would be to give our kids a business environment that is conducive to conducting business.

Scott P. (used with permission)

 

Scott is correct there can be alot of paperwork, IRS forms and state laws for a micro businesses owner to understand.

But it’s not impossible.

My reply to Scott:

How do you prepare them? A little at a time.

I recommend that a teenager start a micro businesses as a sole proprietorship (not a corporation or partnership) with no employees (so no 941s, w-2, etc.) . I also recommend service businesses, not product sales, to (usually) avoid sales tax. If they do want to sell a product, they will learn a lot and apply math skills to calculating the sales tax. It’ll be good for them.

Finally, I recommend they create home-based businesses and I find they can usually get an insurance rider on their parents’ homeowner policy, if needed at all.

If students learn basic business skills as a teenager, they won’t be as overwhelmed when starting a small business as an adult.

I agree with your final comment and I do hope some of these teenagers grow up and try to change the business environment. I’d like to see more small business owners run for public office or influence legislation.

Carol Topp, CPA
Author Micro Business for Teens

I usually encourage teenage micro business owners to start a service business instead of selling a product, because service businesses are easier to start and manage.

But sometimes a teenager has a great idea of a product to sell. I don’t want to discourage a teenage entrepreneur, but selling products involves knowing about sales tax.

Here’s what you need to do about sales tax (from my book Money and Taxes in a Micro Business):

1. Read up on your state’s sales tax laws.

Most states have a website that explains their sales tax rules. Most states only tax retail sales. Retail sales are the sale to the final customer. Wholesale sales are usually not subject to sales tax. Wholesale sales are usually large quantity sales sold to someone other than the final consumer such as to a business or manufacturer.

This website will help you determine what your state and local laws are concerning sales tax: www.taxadmin.org/fta/link/

2. Obtain a vendor’s license

Most states require businesses to apply for a vendor’s license if they make sales-taxable transactions. Sometimes the state calls it a business tax registration or a sales tax permit. This website www.taxadmin.org/fta/link/ will lead you to the registration information for your state.

Sometimes a state’s sales tax laws can be difficult to understand, so do not be afraid to call your state’s sales tax office. Rehearse what you will ask before calling and say something like, “I’m starting a new business selling ________. Will I need to collect sales tax?” Then ask for information to be mailed (or e-mailed) to you. Do not hang up without getting confirmation that something will be sent to you.

3. Pay your sales tax

For most micro businesses, sales tax will need to be paid only annually or quarterly, but that can vary depending on your state law and the amount of sales you make. Very large retailers must pay sales tax monthly. For example, in New York State, you file a sales tax return only once a year if you owe $3,000 or less in sales tax during the year. The form and tax payment are due March 30.

Mark your calendar with the sales tax due date for your state and send it in on-time or early. If you are late, you will probably be charged a fine.

You can read more about sales tax in my book Money and Taxes in a Micro Business including: 

• What you need to know about vendor’s licenses
• Out of state sales
• Internet sales
• How to calculate sales tax

Read more about the book including the Table of Contents and a sample here.