Tax Tips for new e-commerce entrepreneurs

New e-commerce entrepreneurs can find them confused and confounded by the tax and accounting needs of their enterprise. And this is a shame: If someone has spotted a great new category, and successfully built a web presence, heck, someone they are not bogged down with the minutiae of accounting. The entrepreneur should focus on increasing traffic, expanding margins, growing profits and cash.

With this in mind, I offer the following tips and tax accounting:

Tip # 1: Do not embed

A real company - whether a company or a company C S - saddle your business with more complicated tax accounting and a number of state filing requirements. You do not want to deal with this redtape - or at least not until you're profitable.

Instead, run your business as a sole proprietorship. If you're concerned about legal liability protection, note that you can set a one-owner limited liability company, or LLC. The owner of an LLC is treated as a sole proprietorship for income tax purposes.

Tip # 2: Before starting a business to invest

The expenditure is made before you're actually in business, in other words, before obtaining a business license and before selling or looking to sell your stuff - very not are deductible.

In particular, you can probably deduct the first $ 5,000 of these expenses. But the amounts over $ 5,000 must be amortized over the next fifteen years.

What this means is that you want to start your business before you start spending money on advertising, training, web development, accountants and lawyers and so on.

Tip # 3: Automate Your Bookkeeping and Accounting

By law - and some people do not know - you are required to maintain an accounting system that measures clearly your income. In practice, this means that you must use a product like Quicken and QuickBooks.

But you should be better than just using the desktop software accounting. Make sure you're taking advantage of online banking and bill payment features that integrate the accounting system with your bank. As far as possible, for example, you want to be able to move money from PayPal to your bank to QuickBooks by simply typing a few keys or clicking the mouse a few times.

Tip # 4: hire a payroll service before hiring employees

Many successful entrepreneurs of e-commerce operations can be performed without employees. And if this is true for you, hey, congratulations. If and when you do have employees, however, do not try to handle payroll yourself. Oursource payroll offices of a large payroll service like ADP, Payroll, or QuickBooks.

These services are expensive. Figure $ 1000 to $ 2000 per year. But services can help you avoid the nightmare called payroll and prevent you from getting into trouble payroll tax.

Tip # 5: Consider S Corporation Status After six Profitable

I have written and talked a lot about how companies S save taxpayers money and how the right way to set a society S is to first create a limited liability company and then ask the IRS to treat the LLC as a corporation for tax purposes S .

Let me review the basics again here, though. Suppose you are making $ 90,000 a year from your website. If you just treat your business as a sole proprietorship - or an LLC treated as a sole proprietorship - you might pay $ 12,000 in income taxes of $ 90,000 and then another 15.3% self employment tax, or about $ 13,500 to $ 90,000.

If you set up an LLC and have the LLC treated as an S, you still pay the same $ 12,000 of income taxes. But you pay only 15.3% self employment tax on that part of the profit that you categorize your wages. If you categorize, say, $ 50,000 of wage earnings, you pay $ 7,500 in self-employment taxes. (The other $ 40,000 in profits remaining, among other things, is paid out as dividends as a "distribution".)

Note, then, that the company saves about S $ 6,000 each year. Sweet, right? ...