Paying taxes and saving on taxes are both going to change when “going professional”. Once you register a business, you are going to be permitted to take deductions that would not be possible with just a salary or hourly earnings from a job. On the other side of the fence, there are certain taxes that you will be required to collect and remit as part of your new business. Failure to collect those taxes could result in not only fines, but also having to pay the government the amount owed that you neglected to collect. Plus, they will not take an amount that you decide, they calculate the liability based on their estimation of your sales.
Certainly taxes fall into different categories which may include corporate tax, state tax, income tax, sales tax, employer taxes, and city taxes. In addition, depending on your business associates and specific business dealings, you may be forced to adhere to rules regarding the VAT (Value Added Tax in Europe) and GST (Goods and Services Tax in Canada). Understanding your tax responsibilities is going to be important right from the beginning. And remember that you cannot just take the good and forget the bad. Just because your business is a hobby and you want to benefit from the deductions does not mean that you can “lower” your real sales figures to pay less tax while at the same time reporting all the deductions.
Depending on how your business is registered and structured will also impact or change how you pay taxes. For example, a sole proprietorship may be allowed to complete a simple Profit and Loss Statement (Income Statement) and do their personal taxes together with the business taxes for income reporting purposes. For others, incorporation will mean paying different levels of taxes that are set out for corporations. Then the individual will pay her income tax from the wages she took from the corporation. This is why it is so important to review your options when registering a business. The tax implications could be a detriment to you or an advantage.
A lot of people make the mistake of assuming that online businesses are exempt from tax law. It seems that because the internet is global, they think that rules do not exist. An online business is a real business and is held up to the same laws and penalties as a physical business. And just because you hide everything with private domain registrations, and out-of-country servers, does not mean there is no trail.
To give you an example of the “paper or audit trail”, and to let you know how serious governments are about catching online entrepreneurs who evade any type of taxes, two recent examples in Canada and the US clearly show that dues must be paid.
- In July 2009, the Canada Revenue Agency (CRA) issued a press release reminding residents that the CRA had been awarded a decision by the Federal Court of Canada to force eBay Canada to submit to the CRA the names, contact information, and sales records of Canadian eBay sellers. They would then use the information to audit tax records of those named individuals.
- Several American states such as North Carolina and New York to name a few, have become tougher in the enforcement of sales tax collections. As a result, many affiliate programs have terminated affiliates in those states. And the debate still rages as companies try to reduce their tax liabilities.
Indeed, there is no doubt that you can expect taxes to change when going professional. You can also expect that governments who have the resources and the will to fight will take what is owed them.
There are quite a few legal aspects of online business – we even have a dedicated section on our web site!
*** Please be aware that this article is not meant to replace the advice of an accountant. Each situation is different and tax code is interpreted in many ways depending on the type of business, where the business is located, and with whom the business trades. ***