This post isn’t aimed at anyone who already pays taxes on their uISV. If you do, you already know that its not terribly difficult in the base case. Its more aimed at allaying the fears of folks who are thinking of starting a uISV, but worried that the IRS will steal their lunch money after making them fill out 10,000 pages of forms.
I haven’t actually filed these yet (overseas Americans get an automatic extension) but as they’ve resulted in tax liability I paid them (through the new and soon-to-be-indispensable EFTPS service). My return was four forms this year:
- Schedule C-EZ (Profits & Loss from a Small Business)
- Schedule SE (Self-Employment Tax)
- Form 1040 (Individual Tax Return)
- Form 2555 (Overseas Earned Income Exemption)
I won’t show you my 1040 (private, sorry) or my 2555 (you’d find it boring), but I’m happy to show you how easy it is to dispose of all accounting and tax issues for a (very) small business.
Many folks think you have to be superman to navigate the IRS’ maze, when they are actually decently taxpayer-focused and charged by regulations to make things easy for someone with a six grade reading level.
My tax process for Bingo Card Creator was quick and easy: First, run the e-junkie and eSellerate reports for sales in 2006. Sum totals, copy into important boxes. Then, look at all outgoing payments on Paypal and my credit card, figure out which ones to strike because they were not business expenses, sum totals, copy into important boxes.
Then you have to do a wee bit of math — a subtraction on Schedule C-EZ. Oh no! You then go over to Schedule SE, copy in the information from Schedule C-EZ, do some multiplication as instructed by the form, and you get a self-employment tax number. Copy to the place it tells you to on your 1040. You’ll also get a credit against your income taxes for paying self-employment tax — copy to the place it tells you to on your 1040. There, your uISV taxes are done, now you just finish your 1040 and associated forms and file them off to the IRS.
On my Schedule C-EZ:
Line 1 (Gross Receipts): $2480.05
Line 2 (Total Expenses): $1224.68
Line 3 (Net Profit, copy to 1040 and Schedule SE): $1255.37
On my Schedule SE (Short Form, almost all uISVs should qualify):
Line 1 (Farm Profits): $0
Line 2 (Copy Profits from Schedule C or Schedule C-EZ): $1255.37
Line 3 (Add Line 1 and Line 2): $1255.37
Line 4 (Multiply Line 3 by 92.35%): $1159.33
Line 5 (Self-Employment Tax: Simple math by instructions. Most people just have to multiply Line 4 by 15.3%): $177.38
Line 6 (Self-Employment Tax Credit: Multiply Line 5 by .5, copy to 1040): $88.68
And there you have it. On the outside, counting the two blog posts, data collection, downloading forms, and reading up on the Foreign Earned Income Exclusion that I have to do every year, my 2006 taxes took me three hours to prepare. Reports of the impossibility of taxes have been greatly exaggerated.
Now, granted, if I had alternative minimum tax (AMT), a home office, or some other brain-intensive situation this would have been ugly. However, I don’t. When I do, I’ll pay an accountant to have the headache on my behalf.
Sidenote for folks who start a uISV: if you’re profitable, your SECOND year of business will probably get you to the point where you have to pay estimated tax. Its also easy (requires you to be able to subtract and divide by four), but I’ll cover it another day.