Do Your Taxes, Without the Hassle
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Christine Keck's funky fleece hats are a hit in her hometown of Brookville, Indiana. Keck's Happy Hats business is thriving, and her headgear is sold in stores all over town as well as at craft shows. It's no wonder, then, that good record-keeping is essential in helping her keep track of her inventory--and make life a whole lot easier come tax time. "I number all my products and put price tags on them," explains Keck, 15. "Then I write out two lists--one for me and one for the store, showing the numbers on the hats I am leaving with them. Then I ask the store to write down the number of the hats they sell or put the price tags with the sheet, so I can see what they sold."
Like Keck, 13-year-old Emil Motycka of Longmont, Colorado, is careful to keep detailed records, but for a different reason. Motycka, whose lawn-service business has pulled in about $100 profit a week since 1998, uses QuickBooks Pro to track his revenue and expenses as well as print invoices.
Step One: Keep Good
Young 'treps like Keck and Motycka know that whether on paper or on the computer, good records are vitally important in running their businesses on a daily basis. But there's another reason reliable records of revenue and expenses are vital to any business: federal income taxes.
You may own your own business, but, chances are, you owe the IRS money at the end of each year just like your friend Julie who works at the local movie theater. The difference? Julie's employer will tally her earnings and tax withholdings at the end of each year and then give her a W-2 form, which she'll use to fill out her tax return. You, on the other hand, are the boss, so it's your responsibility to figure out whether you owe Uncle Sam money and, if so, how much.
Try doing that without good records, and, after many a sleepless night trying to reconstruct your revenues and expenses from the entire previous year, you may still find an IRS auditor knocking on your door.
Step Two: Figure Your
So you're really on the ball when it comes to record-keeping and have all the information at your fingertips. Now comes the hard part. How do you know if you owe money, and how do you figure out how much?
Most Americans are taught from a very young age to fear and loathe the IRS, but the agency can be very helpful when it comes to answering your tax questions. Taxpayers can go to www.irs.gov or call the toll-free help line at (800) 829-1040. The IRS has experts standing by to answer your questions, but you can also request publications as well. Two that may be especially helpful to young 'treps are the Tax Guide for Small Business and the Student's Guide to Federal Income Tax. Many publications and forms are also available at your local post office.
Your taxable income is what the IRS refers to as the money left over after business expenses are deducted (see Step Three for examples of common deductions). A percentage of your taxable income is what you owe Uncle Sam. As your taxable income increases, so does the percentage you owe--the different percentages are called tax brackets. The forms and publications you receive from the IRS contain tables showing the different amounts.
Step Three: Know Your
Here's where the records of your business expenses will come in handy. Since the IRS only taxes your income after your business expenses are deducted, it literally pays to know what you can deduct. Some of the most common deductions are:
- Material and labor costs related to your product
- Postage and shipping
- Supplies and equipment
- Repairs and maintenance
- Interest on business loans
This is only a partial list, so be sure to do your own research and talk to other business owners or professionals who can help you figure out what to deduct.
Step Four: Watch Out for
In addition to federal income taxes, your friend Julie has a portion of her paycheck withheld for Social Security and Medicare taxes. You are entitled to the same benefits these programs offer other wage earners; therefore, you must pay the same taxes if your earnings are $400 or more. This is called a self-employment tax.
Likewise, most states require their citizens to pay state income taxes. To find out what taxes your state requires you to pay, visit www.taxadmin.org/fta, the Web site of the Federation of Tax Administrators in Washington, DC.
Step Five: Don't Be
Afraid to Ask for Help
If you've attempted to complete the previous steps and are still unsure what your tax responsibilities are, it may be time to enlist the services of a Certified Public Accountant (CPA), a tax attorney or an enrolled agent (EA), a tax expert whom the IRS has approved to provide tax advice and prepare tax returns. Their services may not be free, but you'll be paying for the peace of mind that comes from knowing your tax returns have been prepared correctly and that the dreaded IRS auditor will have to knock on someone else's door. Sounds like a fair trade, doesn't it?