1099, invoices, and taxes

[Tylers86]

Like many here, I have just started performing jobs as an Ind. contractor shooting interior architecture. I have agreed with this company I am doing this for on a flat rate of $400 for a half day's work which all of my jobs will take.

I submit invoices that I have created to the Accounts Payable department of the company for the rate, and receive checks exactly at $400. I know that at the end of the year I submit these to the IRS and will be taxed on what amount I invoice them for. So that makes me ask, should I be charging a percentage like a sales tax? Sort of the sellers do when selling retail goods, they charge sales tax to their customers at time of payment to avoid paying this tax themselves.

[RDKirk]

You're talking about two different things.

IRS cares only about income tax, and will levy taxes based on profit after expenses and overhead.

Your state cares about both income taxes and sales taxes. Your state will tax your income in roughly the same way (although at a different rate) as the IRS.

However, sales taxes between states vary wildly, and not just in rates and deductions. Even the fundamental concepts of sales taxes are all over the map from state to state.

Some states tax all retail transactions, some only the sale of tangible goods (not services). Some states are actually taxing the retailer for the privilege of making the transaction, not the goods themselves. Illinois considers photography a mix of service and goods, and taxes differently based literally on how you state your fee in your invoice--the tax can be a hundred dollars different depending on whether you itemize versus charging a flat fee.

[tracknut]

So contact the state Board of Equalization in your state, to find out whether you are required to collect and pay sales tax on the product you deliver to the customer. Whether you charge it (i.e. add to the $400), is distinct from whether you pay it to the BOE (i.e. you may owe it regardless of whether you've tacked it on to the price the customer sees).

Dave

[Pearlallica]

In Canada we only must charge sales tax after your income exceeds $30K

Did I grasp your post correctly, Kirk, in that you must charge sales tax immediately upon conducting business?

[RDKirk]

Originally Posted by Pearlallica

In Canada we only must charge sales tax after your income exceeds $30K

Did I grasp your post correctly, Kirk, in that you must charge sales tax immediately upon conducting business?

States with a sales tax will require it on every taxed transaction, regardless the total amount. If I had one taxable sale of $10.00 all year, the state would expect me to file and pay. If I did not file, the state would come up with its own estimate of what I ought to have paid and charge me for it.

I include sales tax within the price of my products, so the client doesn't see "tax," although in my documentation I do state that I collect it.

[letsbewild]

Originally Posted by Pearlallica

In Canada we only must charge sales tax after your income exceeds $30K

Did I grasp your post correctly, Kirk, in that you must charge sales tax immediately upon conducting business?

depends greatly on what state you're in. All the state laws have their own quirks - for instance in California, if you're delivering images to clients in a physical medium like a cd or prints, then both the product and the service that produced the product are taxable (for sales tax).


Some states (usually the ones with enormous deficits) vigorously enforce their sales tax laws.

Sounds like you guys in Canada are quite lucky.

[Pearlallica]

Kirk,

it's interesting that you include the sales taxes in your advertised prices. If you are looking at prices in the $0-2000 I can see this being effective. Your clients would being saying, "Oh! That includes the sales tax! That is the final price?! Perfect!"

I charge a service above 3K, and being that people naturally expect sales tax on top of everything they pay, it makes my prices appear smaller at first glance. But before I charged sales tax (the 30K cap I mentioned before) people were always very excited that their purchase was tax-free. But as you said, you've outlined this for them to see later when reading through your documentation. Very nice.

The sales tax law in the US is interesting when compared to Canada. I would think it would be an annoyance for the little old lady that wanted to started a mickey mouse sewing business and just wanted to deal with those hassles at the end of the tax season.

I know, as you said, every state's laws vary from one to the next, but what would a typical timeframe look like for the little old lady making, say, 2K per year with her sales tax submissions? Bi-weekly, monthly, annually?

[mike_d]

Originally Posted by Pearlallica

I know, as you said, every state's laws vary from one to the next, but what would a typical timeframe look like for the little old lady making, say, 2K per year with her sales tax submissions? Bi-weekly, monthly, annually?

It depends on expected sales volume. When I got my sales tax permit in California, they started me out paying annually. Then when my volume reached a certain level, they switched me over to paying quarterly. Higher volume businesses will pay monthly. Someone making $2000/yr would definitely be in the annual category.

[Pearlallica]

Originally Posted by mike_d

It depends on expected sales volume. When I got my sales tax permit in California, they started me out paying annually. Then when my volume reached a certain level, they switched me over to paying quarterly. Higher volume businesses will pay monthly. Someone making $2000/yr would definitely be in the annual category.

Ok, that's not too bad then.

My volume went up up this year and I'm learning the tax laws up here as I go along. It's better to be informed before it's too late and get yourself in a crunch. My ignorance led me to not filing for my 1st quarterly income tax payment which just went by because this year I've tripled my business (a first). Gotta make up up for in in the 1st half and pay up!

[j-dogg]

Anything over 600 I don't think you need to do a 1099 for......or so I have been told.

[mike_d]

Originally Posted by j-dogg

Anything over 600 I don't think you need to do a 1099 for......or so I have been told.

Right. A payer doesn't need to 1099 any vendors to which they've paid less than $600 in a year, but the vendor who received the money will still need to declare that income and pay taxes on it.

[J Michael]

You should also discuss your federal (and possibly state) income tax payment schedule with your CPA.

[watt100]

Originally Posted by Tylers86

I submit invoices that I have created to the Accounts Payable department of the company for the rate, and receive checks exactly at $400. I know that at the end of the year I submit these to the IRS and will be taxed on what amount I invoice them for.

actually you are taxed on net income, not the total amount of checks. You get to subtract all of your expenses related to that income such as mileage, equipment depreciation, advertising, communication expenses, etc. You might want to consult with a tax professional before filing next years taxes!

[S.Horton]

Originally Posted by Tylers86

Like many here, I have just started performing jobs as an Ind. contractor shooting interior architecture. I have agreed with this company I am doing this for on a flat rate of $400 for a half day's work which all of my jobs will take.

I submit invoices that I have created to the Accounts Payable department of the company for the rate, and receive checks exactly at $400. I know that at the end of the year I submit these to the IRS and will be taxed on what amount I invoice them for. So that makes me ask, should I be charging a percentage like a sales tax? Sort of the sellers do when selling retail goods, they charge sales tax to their customers at time of payment to avoid paying this tax themselves.

What country are you in?

You're providing pure services, correct?

You don't do things like give them a price list for a product such as a book then sell it to them, right? Unless you are, I don't think you ever charge sales tax. And if you do, that varies by state, and it is really a nightmare in full.

Since you said '1099' and used $, think you're an American, and I think you're just work-for-hire.....

So, go see an accountant now.

Here's basically what's going to happen to you. You will not enjoy this.

You will pay an estimated federal tax quarterly. You will pay an estimated state tax quarterly. If you're subject to it, and smart, you will pay an estimated income tax to your local municipality quarterly. You will pay both full social security tax (about 14%), medicare tax <?%> and may pay unemployment tax to the state. At least where I live, I paid unemployment tax even though, as 1099, I could not, in practice, collect unemployment.

For planning (saving) purposes, figure no less than 20% in taxes, but you may get hit for >30%. The upshot is you better save $100 for every half day of $400 work for taxes. If you don't use all of it, great.

The accountant will tell you which expenses you can deduct and how to track them. Do that, because every dollar is a full tax shield on the federal level.

The accountant is worth every penny you will pay for advice.

Do not take advice from a pal; see someone whom you will pay to file your taxes. That will cost you $250-$700 a year, depending upon where you live. If you get a quote lower, run.

BUT, when you talk to the accountant, see if you will make so little that you're really just getting paid for a hobby while you have a W-2 full time job, in which case it won't be nearly as bad.

Congrats on getting the gig!

[Tylers86]

Thanks for so much generous advice, everyone. I am indeed American and live/work in the state of California.

The situation is that I am employed by a web development and design company, and I am doing the photo's for one of our "whale" clients, an LED lights company. Im estimating, Ill probably be doing another 6 or 7 of these at the same amount before the end of the year. Thats an estimated $3,200 total income generated this way.

Im delivering these images digitally, to be used on their website as well as in promotional material online and print. But thats not included in the invoice at all.