taxes

[thebillionaire]

alright im new to all this, although I am exempt from taxes right now (under 18) I still need to know how it works.

Ok so I am to recieve my first check from google in a month I will cash that in, now how would the government know that I am earning money from the internet, will I have to contact someone? Will I be sent some sort of tax reciept from the gov. asking for the tax money?

[Chris]

Which country are you in?

[thebillionaire]

im in canada

[AndyH]

I doubt you are exempt. Unless you make under a certain amount in the financial year.

[James]

You are most certainly not exempt till you're 18. A friend of mine was being taxed at 11 years old.

But you only need to declare it if it's over a certain amount, or something along those lines.

[Masetek]

If it's the same sort of system as here, you get a tax free threshold. Ours is around the 6k mark I think(?). Even if you don't earn over that amount, you may still be required to report the money you made and how you made it.

If I were you, I would speak to an accountant. They don't cost much these days

[thebillionaire]

ok fine if im not excemp, can someone answer my question?

[r2d2]

...can someone answer my question?

An accountant is probably your best bet. Do your parents have one you can speak to? Or someone you know?

[thebillionaire]

no, but I was asking you uys because you guys pay taxes. I just wanna know if the gov sends like a form or something asking for the tax money

[Westech]

You'll probably want to wait for an answer from a Canadian since what applies to people in other countries won't necessarily apply to you.

In the US, the government doesn't send you any kind of form or bill. It's your responsibility to keep track of what you earn and what you spend in expenses for the year. At the end of the year it's up to you to report it all to the government and pay what you owe. If you don't and they find out then you face fines and/or jail time.

[Shockt]

Can anyone give some tax advice for an 18-year-old American for an online income? What do I need to do? Who do I need to contact? What do I need to know?

[ozgression]

Who do I need to contact?

An accountant. You should never get advice on such a serious topic from the internet. 15 minutes with an accountant will do the trick.

[Shockt]

An accountant. You should never get advice on such a serious topic from the internet. 15 minutes with an accountant will do the trick.
Thanks for the advice.

[thebillionaire]

how much will that cost? for n ccountant, will I be paying for just that advice?

[Dural]

Accountants are a great start, but don't accept their advice on blind faith. I'm continually amazed by how many accountants don't know what they're doing or just lie down and play dead to the IRS.

In the United States, creating a separate legal entity for your business is the most important step for preparing for taxes. If you set things up correctly, you'll save a lot of money. The reason is entities like corporations generally pay taxes on their profit, not on income.

The difference in what you pay is huge. If you keep your income in your individual name, you'll pay taxes on your entire income. On the other hand, if you run everything through a legal entity, you're able to subtract legitimate business expenses from your income and then pay taxes on the profit.

For example, one of my C corporations made approximately $200,000 last year but it had $204,000 of expenses. Guess how much I paid in taxes? Nothing. I actually carried forward a loss. Now, did I really lose money? No. That particular corporation pays for my car, traveling expenses, most of my meals, and several employees. In personal benefits, I took in about $100,000 from the corporation and paid no taxes on it.

It sounds exciting, but it's actually pretty complicated. Talk to accountants and start educating yourself fast. You might start with a web site like entrepreneur.com.

[Chris]

The difference in what you pay is huge. If you keep your income in your individual name, you'll pay taxes on your entire income. On the other hand, if you run everything through a legal entity, you're able to subtract legitimate business expenses from your income and then pay taxes on the profit.


You can subtract business expenses without a making a seperate entity. Not that making a seperate entity isn't a good idea, but this isn't one of the benefits. A sole proprietor can deduct business expenses fine.

[Dural]

Yup, I looked it up and you're right, Chris. Thanks for clarifying that.

I suppose the major benefit is liability protection.

[Chris]

yup, thats the main one.

So you have a C Corp? Most small businesses get S corps for the tax benefits.

[Dural]

The main reason I use a C corporation is because it provides greater separation between myself and my business. I have a medical condition that costs about $200,000 per year to keep at bay, and by hiding all of my income through a rather complicated structure of LLC's, corporations, and trusts, I'm able to legally claim that I'm broke and pass on 100% of these expenses to Medicaid. So, my situation is different than the average business owner.

Still, I think S corporations are a horrible choice for most business owners that want transparent tax flow-through. It's been a while since I studied it, but if I remember correctly, S corporations cannot sell shares to non-US residents, nor can they have more than 100 shareholders. LLC's don't have either of those limitations. In general, I've also found LLC's to be much easier to maintain and explain to investors. Liability coverage is the same.

Of course, if you don't ever plan to have investors, I don't suppose it matters that much.

One last note. C corporations have several tax advantages when you're working with shareholders. I can't recall exactly what they are, but it's worth it when you're working on a large-scale. Of course, when you get to that point, it's worth shelling out $500 an hour for a tax attorney to make you bulletproof.

[Chris]

LLCs can't have more than 20 share holders... but it might differ from state to state.

LLCs also can't issue dividends, the profits just automatically pass through. Whereas with an S corp you can pay yourself a salary and issue dividends and the dividends will only be taxed at 15% (or whatever capital gains is at).

[Westech]

My understanding was that an LLC allows you to pay yourself a set salary that is reasonable (as interpreted by the IRS) for the type of job you do for the LLC. This salary would be fully taxable for regular income tax plus the 14% self-employed social security tax. Any additional income can be taken as capital gains from ownership of the LLC and is taxed at a lower rate. This sounds similar to what you're describing for an S-corp, Chris.

Am I mistaken about the ability to do this with an LLC? I actually have a meeting scheduled with a lawyer/accountant to discuss setting up an LLC, so I guess I'll find out soon enough.

[Chris]

I think you have them switched Westech.

[Dural]

It might vary by state. I'm a part owner in eight LLC's right now, spread between North Carolina, South Carolina, and Mississippi. In three of those, the LLC pays the managing member a salary. One LLC has 34 members, the last time I checked. No problems.

[Chris]

I'm sure it does vary by state.