September 21, 2012
Taking Care Of Business (Part 3)
Now we discuss local licenses, sales taxes and record-keeping.
Generally, you get a business license from the city in which you’re running your business. Some cities charge an arm and a leg for their business licenses, some charge flat rate, and some make you go through math gymnastics to figure out what you will pay. They may ask you to estimate what you think you’ll gross (what you make before you pay expenses). When it comes time for you to renew your license, they’ll ask you what you actually did gross and, and based on their math, have you pay the difference.
Don’t forget the home occupancy permit you might have to get, as discussed in a previous post. If you’ve decided to open up a cupcake shop at the corner, you’ll also be dealing with the public health department and possibly the city planning department.
Sales Tax Hell
Many states require you to collect sales taxes on products and even services. In my industry, graphic design and web development, and in my state, California, the Board of Equalization (BOE, our sales tax entity) has the Chapter 11 Audit Manual for Advertising Agencies, Graphic Artists, Printers, and Related Enterprises. I have read this manual from cover to cover, and it’s probably the densest reading I’ve ever experienced. There are still parts of it I don’t understand, and I’ve been a bookkeeper, graphic designer, and web developer for a gazillion years. Many in my business — even large advertising agencies — just charge sales tax on everything, because the rules are so difficult to understand, and they’re afraid of getting into trouble.
One thing that concerns me is the number of times I see “rebuttable” in their examples, meaning if I assume that I do or don’t have to collect sales taxes, they can change their mind later, and I’m on the hook. I either have to pay the extra tax they’ve decided I should have collected out of my own pocket (or go after the client for the extra tax — seriously?), or if I collected too much tax, I have to figure out how much and send it back to each client.
Twenty-plus years ago, when I was still new to running my business, I managed to get on the wrong side of the BOE. Never again. Their collection tactics made the IRS look like pussycats. The BOE’s position is that I “have a fiduciary responsibility to collect the appropriate amount of tax and remand that tax when it is due.” Heaven help you if you don’t. They will happily, and without much notice, empty your checking account in order to ensure their payment.
As of this writing, California has169 sales tax districts (many are districts within districts, like cities within counties, collecting extra tax), and depending on your sales process and how far-flung your business is, you might have to track the sales taxes received in each of these districts, separately. Welcome QuickBooks sales tax groups, although the sales tax report from QuickBooks leaves much to be desired. Talk to your bookkeeper and get some direction, or let them do it.
Right now, California determines some things are tangible personal property (an ad or new website I create), and other things are services (changes to the website, or consulting), but they’re talking about new taxing scenarios. You may be required to pay your sales taxes quarterly or annually, depending on how much your gross revenues are.
If you are blessed to live in a state that does not collect sales tax or has a flat rate, thank your lucky stars. It may have come with some other scheme to collect their fair share. Find out what it is, and take care of business.
Record Management is Key
Keep excellent records. The IRS (and presumably the states) now allows electronic records in the event of an audit, so when you buy that computer, make sure it has a nice big hard drive – at least a terabyte in size. In a later blog post, I’ll talk about back-up options.
There are several good document scanners available that have a very small footprint (the amount of space they take up on your desk). They can do simplex (one side of your paper) and duplex (both sides of your paper at the same time) scanning, and the software can create searchable PDFs (PDF stands for portable document format), meaning if you or a client have the free Acrobat Reader, or something similar, you can open the file and read it. The Fujitsu ScanSnap series and NeatDesk are both good document scanning options. Play around with the settings so you have a nice balance between readability of the document vs. the file size, or your hard drive will fill up very quickly.
I prefer using Adobe Acrobat (it’s expensive) to manage my PDFs, but Reader has become a lot more full-featured. There are several cheaper PDF programs out there you can look into, too.
Keep in mind that your computer’s Print dialogue box can easily create PDFs on the PC and Mac. On the PC, you might want to download the free CutePDF. I use it on my virtual PC. You can save important emails as PDFs and put them in your client’s folder on your system.
Take advantage of downloading PDFs of your statements and bills instead of printing them out or getting them via snail mail. You’ll get the files a whole lot faster, and sometimes companies give you perks for signing up for online statements. Then you just save the PDFs to the appropriate place on your computer. You’ll usually send PDFs via emails or your online fax account. eFax and SRFAX are both excellent companies, and some companies will include a free toll-free number in your plan. Get the cheapest account you can get. People hardly fax anymore, and you can always upgrade to the next tier if you get more than the plan’s maximum.
I start off my file names with the year-month-date, then a short description of the file, like 2012-09-18 WF checking statement. You’ll probably want to keep your files organized in their folders chronologically, and your computer will starting sorting with the first character of the file name, and then the next character, and so on. After you’ve scanned your paper documents, you can shred them, although if I have actual legal papers, I scan them and keep the original copies. Make sure your file management is organized, and if it’s not, get a book or take a class on how to keep your records organized.
I have saved a small fortune on paper, toner, a fax line, and a fax machine by going with electronic files — my supplies and phone expenses are a fraction of what they used to be, and I’m about to get rid of one of my filing cabinets. You have the luxury of using electronic files from the beginning. It also wouldn’t help if you converted your personal files to electronic files. I just scan a folder or two when I get a chance.
All this file management isn’t going to do you a bit of good if your hard drive crashes, so in the next installment, I’ll talk about back-up strategies.
Image Credit: Photos.com