This article is part of a 10-day challenge designed to help mompreneurs start a business. To start the challenge, visit Mompreneur Bootcamp.
This is not legal advice and this is not tax advice. Consult with a lawyer or an accountant as necessary. I’m just telling you about my experience.
Don’t delay on today’s bootcamp task – you need a business registration for a later step, and registering a business can take a week or two depending on the state. Get it going early!
Many crafters do their business under the table. I don’t do that, and I don’t have any advice for those considering it. If you decide to do that, proceed at your own risk.
With disclaimers out of the way, let’s move on to what NO mompreneurs consider to be the most exciting bootcamp day – registering with the government! 😀
Which Type Of Business Should You Use?
To see all the options available, read this:
However, I can save you the trouble of reading boring legal talk: There are only 2 options that are likely to work for you:
This is the most popular option. Overview:
- No tax benefit
- Owner is personally responsible for all debts incurred by the business
- Costs less ($20 in my state)
Limited Liability Corporation (LLC)
This is less popular due to cost, but it’s what I use. Overview:
- No tax benefit
- Owner is not personally responsible for business debts
- Unless they don’t separate business and personal expenses
- Costs more ($225 in my state)
Caution: If you choose LLC, make sure to read the liability section in my business entity article to learn how to protect your personal assets!
I recommend you go to your state’s secretary of state or similar commerce website to figure out what is required for you to file there.
After you register with your state, you need to register with the federal government.
From your state, you’ll be assigned a business identification number of some sort (It’s called “UBI” here in Washington). With this, you can go to the IRS website and register your business for federal taxes. It’s free! Yay! They will assign you a Federal Employee Identification Number (FEIN), which you can then use to open bank accounts.
We’ll cover bank accounts on a different day, but it requires the FEIN. Translation: If you chose LLC, get your FEIN ASAP so you can get a bank account!
If you’re one of the 46 states with sales tax, you will be required to collect and remit sales tax for sales to customers who also live in your state.
Etsy will help you collect taxes for sales in your state. However, they give you the money and expect you to know what to do with it. Most states have an online payment system where you can create an account and send in the money you collect.
Sales Tax in Other States
This used to be a complicated topic, but a supreme court ruling in 2018 (Wayfair vs South Dakota) is helping to shape the rules of how each state is handling it.
The general rule has become that you are responsible for collecting & remitting sales tax in states where you do more than 200 transactions in a year (or $100k in sales, whichever comes first). Each state has different rules (and they’re changing!), so this is just a rough guideline.
If you find yourself in a position where you should be collecting & remitting sales tax in another state, you will need to register in that state to collect sales tax. This can get really messy to deal with. Sorry, mamas – I don’t have good advice for this yet because I’m still trying to figure it out. But I guess it’s a good problem to have, since it means you’re doing a lot of sales!
I use https://taxjar.com to tell me how much I owe each state, but this costs money. If you want to avoid paying their monthly fee, you’ll have to figure out how much Etsy collected on your behalf in each state and send the money to each state on time.
CAUTION: If you collect sales tax and don’t send it on to the state, you are committing a big time crime and you will be punished severely (as in, jail time)! If you hit a threshold where you need to collect sales tax but you don’t, you will be punished less severely, but it will still hurt (as in, cost you a lot of money).
Reporting Income Tax
For federal income tax:
For sole proprietorships and LLCs, you report your income as though there was no difference between you personally and the business. The IRS calls these business entities “pass through”, meaning all that the business earns passes through to you for tax responsibility.
There are a bunch of deductions available to you as a business, but it’s a complicated topic. You’ll need to spend some time in Turbo Tax for Small Business or you’ll need to pay a lot to an accountant.
For state income tax:
My state does not have income tax. Yay! So I don’t have any advice for how to deal with state income taxes with regard to your business. Sorry!
After you have set up the business entity, it’s time to start building your business! Head on to the next step:
Based on what you have learned in this article, create one action item to do something new for your business and write it down in your MOMPRENEUR JOURNAL! Then do it! Focus on one little action item at a time and soon, your business will be booming!
What's the next thing to learn? I cover it all here - browse through and find an article to read!
You got this, mama!