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Furthermore, here are some of the best practices to start a new business.
The first is to decide what type of business entity you want to be. Most businesses should be fine starting out as a sole proprietorship, but you may want to consider whether you should be an LLC (typically if you have any potential liability). Once you’ve decided what entity type you want, you’ll need to file with either the Secretary of State (for LLCs, etc) or with your local county (if applicable for DBA/sole props). Filing with the Secretary of State is preferable but can have additional costs. Even if you want to be a sole proprietorship you’ll need to file a DBA (doing business as/fictional name) if you want to do business as a business name rather than your personal name. You don’t have to file a DBA if you want to just conduct business under your own personal name, but you will have a hard time getting an EIN and a business bank account. Getting a DBA doesn’t affect how your company is taxed. Minnesota requires you use the Secretary of State for DBA/Assumed names and LLC, etc.
Next up you’ll want to file for an EIN on IRS.gov, this is a special number that is your tax ID for your business. You can apply for that here.
After that take your DBA paperwork and your EIN paperwork and go to a bank of your choice to open a business bank account.
Keep in mind - websites, social media, email addresses, and business specific phone numbers are all helpful tools to help you promote your business, drive additional sales, and keep some separation between your personal life and business goals.
Any tax related question is state dependent due to various laws that are different between states. It is also highly dependent on what the nature of your services are. However, in general any service that requires labor and isn’t just the basic transfer of a digital product that already exists should be exempt in most states. Be careful here to make sure it is a service and not something that falls under the digital products umbrella for taxation, which is more split on whether its taxed or not. If you live in Texas or Connecticut, be extra leary as they have fairly strict sales tax requirements for various services.
While normally you have to have some significant economic connection (HQ , office, employees, etc) in order to collect sales tax, when it comes to online businesses a recent Supreme Court ruling (2018 – South Dakota v Wayfair) has made it so that connection can be defined differently. Most states have chosen to make it that if you collect more than a set amount you need to charge sales tax for items sold in their states. Please check out this helpful site that breaks down the thresholds per state.
Sales tax laws vary from state to state, so please be sure to check with your specific state’s laws before relying on any information below.
Digital products encompass things like graphic designs, music, eBooks, photographs, etc that are sold in a digital format. Various states treat the taxability of these items differently. Some distinguish between whether an item is rented or bought (rentals are not charged tax on but purchases are). Currently, Minnesota states that digital products are taxable as long as their non-digital format is taxable. One of the main examples is textbooks. Since textbooks aren’t taxable in their physical format then they aren’t taxable in their digital one either.
The best way to avoid sales tax on your web design business or digital marketing agency is by providing services.
Anytime you are providing a digital product that doesn’t require labor, you’re more likely to have to collect sales tax, but if you are providing a service most states shouldn’t require you collect sales tax.
When it comes to digital marketing agencies you should be a bit more cautious as advertising is treated differently by states. Most states should still allow you to be sales tax exempt as long as you are involved in some of the design or other parts of the ad. Please note, all sales tax laws are state dependent and subject to change.
A general rule of thumb is to look at your effective tax rate from last year and add 10% to that tax rate and then withhold that amount monthly. This normally ends up being around 20-25%. Best practice is to consult a CPA so they can help you plan accordingly.
Generally, labor or service based businesses don’t have to charge sales tax for their services, but different states treat web design differently. For example: Minnesota doesn’t require sales tax on web design services, but states like Connecticut and Texas do.
Please keep in mind that sales tax laws vary from state to state and are constantly changing, so you should consult your state’s specific laws to confirm whether you’ll need to pay sales tax. Also, you are only responsible for sales tax in states that you have a personal connection with. If you are HQ and work in Minnesota but sell a website to someone who lives in Texas, you won’t be required to collect sales tax (minus some specific circumstances). Your sales tax is due to the states you work in/reside in, so typically interstate sales don’t qualify.
Yes, Passageway Financial will prepare and file S-Corporation tax returns, which are corporate tax returns. 1120S Tax Return preparation happens to be one of our specialties because we help business owners get the most out of their S-Election. We can also help Sole proprietorships convert to an S-Corp with the 2553 forms and help them maximize their tax reduction from an S-Corp.
All web design services are taxable by the IRS, but exactly how will depend on the nature of your business. Please note that the services can be offset by certain costs, which means normally only your net revenue is taxable.
Tax rates for most businesses will be subject to your normal income tax rate, but please consult a CPA for more detailed information. General rules are as follows, but subject to change based on circumstances – consult a CPA to be certain.
Contact Passageway Financial for additional information regarding this question and the entities listed above.
States like Texas and Connecticut require sales tax on graphic design but most states like Minnesota, California, Florida, and New York do not. Please check your specific state’s laws to confirm
In Minnesota and most states web design services are not subject to sales tax, but there are some caveats. For example, it must be an active service for a new design or to alter an existing design. You can’t sell an already made design or website template (one that you don’t edit for them but require them to edit – similar to a digital product). However, in states like Texas and Connecticut web design services are taxable. Please check your specific state’s laws to confirm.