# Personal question - how do you separate your money for taxes?



## mcg1990 (Nov 11, 2014)

I've just gotten my business licenses, EIN, sales tax all official so that next year I can do my taxes relatively stress free. Relatively being the operative word.

I'm a one man business - sole proprietorship - and have opened a business checking account with which to handle finances. I'm married and so I'll be filing jointly, and my wife's income is around $60,000.
From what I've learned so far I'm planning to operate this way:
1. Have all business costs paid for out of my business checking/store credit cards (Lowes Pro card for example). Those credit cards also get paid off out of the checking account.
2. Take the estimated tax out of each completed sale and transfer this into a savings account attached to the business checking. That way it's kept separate and I can use it to pay the quarterly estimated taxes per accountant's recommendations (not that I have one yet).
3. 'Pay myself' at the end of each month by withdrawing profits from the business checking, leaving a consistent float in there to pay materials costs with.

Is that about right? I'm not expecting a full run down, because I know that's what an accountant is for, but I'm just curious as to whether I'm on the right track.

For taxes, am I right to consider it this way.. with mine and my Wife's income we'll probably be in the 25% bracket, I have to pay 10% in sales taxes, and 15% in SS/Medicare etc., so 50% total. That means if I'm building a bed that'll cost $100 in materials, take 3 days and I want to earn $500 on it, then I have to charge $1100 and put $500 into the holding account to for taxes?

My next question is regarding deductions. Do I have to take those into account quarterly, or just at the end of each tax year? I know I'll be able to deduct for utilities and a percentage of the house value (as my shop is in my yard), and also a home office, but I'm not sure how this works. Let's say for 2014 I spent $10,000 on materials and received $30,000 in payments, making my net profit $20,000, if I have $5000 in deductions (no idea if this is realistic or not) will they look at my earnings and tax me X% of $15,000, or does it work another way?

On second thoughts, I think I might just apply at Pottery Barn..


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## TheWoodenOyster (Feb 6, 2013)

Lots of questions here. My first bit of advice is talk to an accountant. My second bit of advice is talk to your state comptroller about sales tax. I have been going thru a lot of the same stuff, though mine is a side business.

From what I can tell as far as sales tax goes, charge a price plus tax. If you want to sell something for $1000, you actually need to list it or quote it as $1000 PLUS TAX. That saves you a lot of headaches. If you are going to file sales tax, you want it to be easy like that. What you don't want to do is be an idiot like me and charge $1000 even, because then you'll really only make about $900 once taxes are taken out. So, quote things as x plus sales tax.

As far as income and federal tax goes, it gets stupidly confusing. I just figure add 35 to 40% onto any price. So, if I am making a table and material, labor, overhead, and profit all come out to $1000, I really end up charging about $1400 plus sales tax. It sounds crazy, but it is the only way to make a decent cut. By the time Uncle Sam and your state get their due, you'll have gotten a big chunk taken out. So prepare. I can't tell you exact numbers, but I'd stay on the safe side.

If this is a full time job, you may have to be willing to accept lower margins than many of us to keep enough business. Since this is a hobby for me, I only make stuff if I want or stuff other people want if I make a lot of money. Making a little bit of money to give someone else a big chunk of my time is a waste of time for me.

Good Luck


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## Mahdeew (Jul 24, 2013)

Lots of good questions. It all depends on the state you live-in. In my crazy state, I have to charge state tax based on county I make the sales. Quarterly reporting here is if I sale over a certain amount. I pay for my purchases with credit card and save all receipts and most of my purchases are online. Best to get a hold of your state department of finance and administration and/or find a state collage that teaches all the ins and outs of what you need to do. Most laws appear to work against the little guy.


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## JAAune (Jan 22, 2012)

Keep receipts for all your transactions and enter them into accounting software. Your accountant will probably want you to use Quickbooks because that's likely what they use.

For a small business, you'll want to do your accounting on a cash basis and set your fiscal year to the calender year. That keeps things as simple as possible. The accountant will give you more information about that.

Sales tax will vary from one area to the next but depending upon how much you make, the state will probably determine how often you have to make sales tax payments.

Deductions I don't bother with until the end of the year when the accountant gets the financial information for doing taxes. He figures out the rest and I mostly just keep track of where money gets spent and how much there is.


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## NoThanks (Mar 19, 2014)

There is no estimated *sales tax*, (as far as I know) You file sales tax/use tax every month and pay whatever the amount is that you collected or owe. There are a lot of different rules depending on your state on sales tax, such as using your resale number when you buy material and not paying tax on it, charging sales tax on free standing projects such as tables and such, or not charging sales tax on installed projects that become real property. You have to find out what the rules are where you live. 
You figure your quarterly estimated tax from how much income you Estimate you will make for the year. That's why it's called Estimated, then at the end of the year when you file if you have overpaid or underpaid you make it up or get money back. Read this from the IRS
Your deductions all come at the end of the year when you file.
You can figure stuff out anyway you want but in a nutshell, you total gross sales, subtract deductions and the rest is taxable income.

There is way more involved than can be learned in a paragraph, but it's not hard. 
Getting the right answers is the hardest part. 
You probably should set up an appointment with your state sales tax department to get your sales tax answers and then an accountant to answer your income tax questions.


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## mcg1990 (Nov 11, 2014)

Thanks everyone. Prior to writing this I did have one meeting with an accountant but it was all so new, so I didn't know what questions to ask. I had another phone call with him earlier, however, and got a lot of remaining questions answered. The level of tax we pay is quite daunting, but I feel more comfortable with the process now. As WoodenOyster said, it seems to be a matter of putting aside 35-40% for taxes and making sure you're happy with what you have left.

In my wife's previous relationship she co-owned a farm and she handled all the taxes herself using Quicken. She's supportive of my venture, though it is her income currently supporting us, and she's adamant that we don't need an accountant ($300 per quarter, which I'm sure is reasonable but tough to justify when just starting up).

Do many full time woodworkers do their own taxes? I definitely trust my wife - she's a teacher and has done this before, so she's well qualified - but just like when I was wiring my shop and people would only ever tell me "HIRE AN ELECTRICIAN!" are people just as insistent upon paying for an accountant?


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## NoThanks (Mar 19, 2014)

As JAAune said, we use Quickbooks. 
We keep track of everything with the program, then just print out the reports. We only pay the accountant at the end of the year to file everything and make sure were taking all the proper deductions allowed.


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## Yonak (Mar 27, 2014)

I can't say about sales tax but for income tax, I put 10% of all income aside and pay it quarterly. I've never owed more at filing time. ..But you're probably in a higher bracket than me.


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