Taxes Don’t Have To Be Pain

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.

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4 Comments on “Taxes Don’t Have To Be Pain”

  1. Phil Says:

    The federal taxes are not all that bad, it’s the local taxes that send me to an accountant. Here in Maryland to stay incorporated every year you have to file a Personal Property tax form, that is kind of complicated. Local county governments can impose taxes on that property. Now even that’s not too bad, but once you have property like servers and computers, you can depreciate them over a few years, and then theres debt, and carrying over losses, etc… Sure, most smart people can do these on their own, but if it takes me more then an hour, I’m happy to send it to my accountant for $300.

  2. renotiko Says:

    That’s useful stuff!! I’ve always wondered about that. Thxs!

  3. microisvstartup Says:

    When it comes to taxes, I believe that if you have anything more complicated than 1040EZ, you have to let the pros do it. Call me a wimp, but I don’t have the time to read up on all of the tax stuff and try to master it on top of everything else.

    I have consulted (IT stuff) for several small business startups and observed how they’ve gone through their startup processes. From what I’ve seen, it’s a fairly common practice for small businesseses to purchase an accounting program like QuickBooks Pro ($300), hire an accountant to set it up for them ($500-$750 depending on size) and then every quarter the SB backs up their data to disk, deliver it to the accountant who then does their magic and files appropriate tax forms for whatever fee. I have spoken to the accountants about this arrangement and for a new startup, they love it. They know the books have been setup properly and they have the ability to give you very sound advice because they had to take the time to learn about you and your business from the ground up.

    Aside from what little Patrick had to do, I would say leave it to the pros. I’m busy coding the feature that’s going to put me over the top….

  4. Paul Davidson Says:

    Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a form 1040EZ, I found a blank form here http://goo.gl/H0pWhN. This site PDFfiller also has some tutorials how to fill it out and a few related tax forms that you might find useful.


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