Security Self-Employed Business Structure and Sales Tax

When working on your business, be sure to make time for administrative tasks. Many of these tasks include filing quarterly estimated taxes. This quarterly estimated tax depends on your total income all your sources of income including full time jobs and businesses. This tax is also figuring FICA, Medicare and any profits your business earns (total sales minus expenses).  This applies for full time self-employment and if you have a side business in addition to a full time job

Managing taxes is sometimes and easier endeavor when filing as a sole proprietary entity, especially where state jurisdictions are concerned. Limited Liability Corporations (LLC) or other corporate entities are more complex and administrative tasks will pull you from your primary business role. In addition to consulting or providing other security products and services, you will have to handle mundane but important administrative responsibilities. So, as you form an LLC or other incorporated entity, do your research up front. For example, I just recently converted my business into an LLC. Red Bike Publishing, LLC has a new structure and is expected to maintain that structure according to our state sales tax laws. Tax and business entity rules vary according to where the business is formed as each state has its own requirements. In my state, a business must pay $100 per year, regardless of whether or not the business makes any money. This is called the business privilege tax (BPT). Yes, it's a tax assessed for allowing my company to perform business here.

Red Bike Publishing, LLC only has to pay $100 per year because it does not exceed the multimillion dollar sales threshold. If we did make that kind of money, we would have to pay $200 per year or a percentage of revenue, at least that's how the tax office justified it.  Also, LLCs and incorporated business entities must file sales taxes monthly or face a penalty, regardless of whether or not the business actually makes sales within the state. File late and a $50 penalty is incurred. It is the business' responsibility to track sales and collect local and state taxes. For internet businesses like Red Bike Publishing, LLC, our sales are out of state, but we still have to file “$0.00” or face penalties and fines.

Red Bike Publishing as a sole proprietor did not have to worry about the BPT. But as soon as the corporation was formed, Red Bike Publishing, LLC not only owed the tax, but also owed two months of late fees since it took two months to get records back from the state and set up an online tax account. By the time we filed our first $0 sales tax return, we owed almost $200 in fines. Fortunately the state was understanding and agreeable to waive the late fees. Another comparison is that LLCs are also responsible for filing property tax on all office equipment and supplies on hand; not a requirement for sole proprietorships.

When to charge sales tax

Any time you do business providing a service or product, you should pay sales tax to the local and state government. However, if your business is an online business, you may only have to pay sales tax to the local and state governments of where your business is addressed. Since this is not one size fits all law, get advice from your state about setting up an internet business. This is what Red Bike Publishing, LLC has done. When we sell products online, we make arrangement to pay state and local government sales tax for sales going to customers within the state and local government jurisdiction where our business is registered. Those in other states do not get charged sales tax.

As a self-employed entity, you might be established to conduct business in state and pay the privilege of doing business tax. Even though you might not have physical store, your responsibility is to collect state and local taxes from local customers and those located in state.  For example, you might be set up to sell security cameras. Customers within your state and local area must pay sales tax. To apply appropriate sales tax, simply select the sales tax options on your online shopping carts or other payment collection options. Some shopping cart software will allow you to charge varying rates based on selected zip codes. For example, for anyone in my area of zip codes who buys my security books online, I must charge county tax, city and state tax. Anyone from outside of the local area, but within the state, is only required to pay state tax. Anyone purchasing from outside of the state do not pay sales taxes.

However, if your products also include performing a service in another state, you will have to charge taxes for that state. For example, if you sell security cameras installation services online, but travel to another state to do the installation, you will have to apply the appropriate sales tax to where the service is performed. It’s tricky to figure out, so be sure to know state tax laws.  In another example, I asked state tax employees about providing security training in another state and whether or not I would have to charge sales tax for that state.  For example, if I travel to Los Angeles, California to teach NISPOM training I would need to charge sales tax to applicable students.

For those of you experienced in self-employment, this may not be news to you. I hope this has been a refresher. For those of you new to self employment or are contemplating such a move, make sure you are prepared. There is a lot of opportunity for security related business. Just make sure you do the research to avoid fines, penalties and sleepless nights.

Jeffrey W. Bennett, ISP is the owner of Red Bike Publishing Red Bike Publishing . He regularly consults, presents security training, and recommends export compliance and intellectual property protection countermeasures. He is an accomplished writer of non-fiction books, novels and periodicals. Jeff is an expert in security and has written many security books including: "Insider's Guide to Security Clearances" and "DoD Security Clearances and Contracts Guidebook", "ISP Certification-The Industrial Security Professional Exam Manual", and NISPOM/FSO Training".