tax returns
As a small business personslashadvice columnist I dread the first quarter of the new year. Not because in my mind my own business fortunes start at zero again every January or because I have already dismissed every New Years resolution I made when the clock rang out the New Year.
No the reason I dread the first quarter of the new year is that my email box floods with questions about business taxes and the IRS my two least favorite subjects on earth. Its not that I am opposed to paying my fair share of business taxes. Its that I consider the IRS to be a little like Beetlejuice the movie demon who appeared only after his name was called three times in a row. My fear is if I write too many IRS columns their dark agents may appear on my doorstep ready to drag me away to an uncertain fate.
Oh well one must do his duty no matter the consequences so here we go.
Q: I am starting a small retail business. While talking to a potential supplier last week he asked for my EIN number. I had no idea what he was talking about so I told him I would have to get back with him because I didnt have the number handy. What is an EIN number and why do I need one Robert P.
A: Robert do you remember the old Johnny Rivers song Secret Agent Man There was a line that said Theyre giving you a number and taking away your name. An EIN isnt as cool as a secret agent number but it works much the same way when it comes to your business relationship with the IRS. Instead of identifying your business by name the IRS identifies your business by EIN.
EIN stands for Employer Identification Number and is also known as a federal tax ID number. The EIN is a ninedigit number that the IRS assigns to businesses and is used to identify taxpayers that are required to file various business tax returns.
Does your business need an EIN According to the IRS the answer is yes if:
Your business has employees
Your business is a corporation or partnership
You file returns for Employment Excise or Alcohol Tobacco and Firearms tax
You withhold taxes on income (other than wages) paid to a nonresident alien.
Your business has a Keogh plan
Your business involves trust estate real estate mortgage investment conduits nonprofit farmers cooperatives or plan administrators.
Applying for an EIN is a relatively painless task. You can apply online at the IRS website (irs.gov) apply by mail or telephone or if you do business in a state that participates in the Federal Employer Identification Number project you can apply through you local IRS office (sorry Alabama is not one of them).
You will need an EIN number prior to filing business returns with the IRS so make sure you give yourself plenty of time to obtain one. For more information on EINs and your business consult your accountant.
And while were on the subject
Q: I made extra money selling things on eBay last year. These were items I picked up at yardsales mostly. My husband says I am responsible for paying income tax on the money I made but I disagree. This is just my hobby not a business. What do you think Gladys A.
A: With so many people selling on eBay these days this is a question I get quite a bit. In fact I have plans for a future eBay and taxes column but I believe your question is more is it a hobby or is it a business
Again I went to the horses mouth (at least I think it was the mouth) for the answer. According to the IRS there are a number of factors that help determine if your hobby can be considered a business and thereby make you susceptible to the IRS tax rules governing business.
Do you carry on the activity in a businesslike manner If you conduct your eBay activities like a business i.e. you keep business records track your profit and loss keep a separate checking account etc. then whether you think so or not your hobby is considered a business.
If you put considerable time and effort into your venture the IRS may contend that you do so for profit and not fun. It seems the folks at the IRS dont believe in doing things strictly for pleasure. My guess is neither do you. If you werent making money selling on eBay I doubt youd be bothering getting up at 4am to hit all those yardsales. Then again maybe you would
If you depend on income from your eBay activities for your livelihood its a business not a hobby.
There are a number of other factors the IRS considers to determine if a hobby is really a business but in your case I think that covers the basics.
For detailed answers to any tax question you should consult a qualified accountant or tax attorney. God forbid you rely on a guy who is afraid to mumble the letters IRS three times in a row.
Tim Knox
Entrepreneur Author Speaker
Tim Knox is a nationallyknown small business expert who writes and speaks frequently on the topic.
For more information or to contact Tim please visit one of his sites below.
http://www.dropshipwholesale.net
http://www.smallbusinessqa.com
http://www.timknox.com