I’m often contacted by home-based and e-business owners who seem to think that just because their business is conducted from the comfort of home, the rules and regulations that govern brick and mortar enterprises do not apply to them.
I call these folks the “Do I Really Have To” Entrepreneurs based on the questions they ask.
Read the following questions aloud in a really whiny tone to get the gist of my point:
- Do I really have to deal with all that red tape?
- Do I really have to get a business license?
- Do I really have to get an Employer ID number?
- Do I really have to get a sales tax ID number?
- Do I really have to open a business bank account?
- Do I really have to pay taxes on the money I make?
- Do I really have to claim my brother-in-law as an employee?
- Do I really have to do all the things I don’t really want to do?
Folks, if you spent as much time working on your business as you do looking for ways to dodge the rules, you’d probably be a whole lot more successful than you are now.
Here’s the way I bottom line it:
- If you consider yourself to be an entrepreneur (home-based or otherwise), and you are exchanging your time and/or goods for money from people you consider to be your customers, then yes, you have to deal with red tape, like getting a business license, an EIN, a tax ID number, and a business bank account.
- And yes, you do have to give Uncle Sam his cut.
- And yes, if your brother-in-law works for you and would be considered an employee by the IRS, you have to claim him as such, no matter how worthless you think he is.
- And yes again, more often than not, you have to do all the things you really don’t want to do.
I know the people who ask those questions are not true entrepreneurs, because doing all those things is part of what defines you as an entrepreneur.
You’re willing to do whatever it takes to succeed in business, and that includes doing all the things you have to do to formalize and legalize your business.
Otherwise you should just consider yourself to be a hobbyist, which means you must turn in your entrepreneur card immediately and never refer to yourself as such ever again.
Or maybe you’re just a lazy bum looking to make a quick buck until you’re caught or get bored, in which case you won’t be in business very long anyway, so… yeah.
For the rest of us who are willing to do things by the book, here are a few things to keep in mind.
Make sure to check local business licensing requirements.
Operating a business out of a home office does not get you off the hook when it comes to licensing. Depending on your location you may need a city and/or county license. Luckily, such licenses are relatively easy to obtain and are not expensive. Check with your local licensing department for details.
Make sure to check the zoning laws governing home businesses.
Home businesses are often subject to localized zoning laws that regulate how property may or may not be used for business purposes. For example, if you plan to open a hair salon out of your spare room that may increase traffic in your neighborhood, there may be regulations in place to prevent you from doing so.
You should check local zoning requirements and property covenants before starting a business from home. You can find this information at the court house or by calling your local license department.
If you live in a neighborhood that has a home owners association, they may have rules about home businesses, as well, so make sure you check with them before moving ahead.
Do I really have to get an Employer ID number?
The Employer Identification Number, or EIN, is the nine-digit number assigned specifically to your business by the IRS. It’s the number the IRS uses to identify the business for tax purposes. You are required to have an EIN if you have employees, operate as a corporation, partnership, or nonprofit. You will also need the EIN to open a business bank account and conduct yourself as a business with most companies that are required to report to the IRS. You can get an EIN online at IRS.gov.
Do I really have to get a sales tax ID number?
If you provide a taxable service or sell a taxable product, meaning that your state requires you to charge and collect sales tax with each transaction, you must get a sales tax certificate and ID number. Getting a tax ID number is usually a simple process of filling out a form and paying a nominal fee. You will file quarterly reports and remit any sales tax that is due.
One word of warning: many entrepreneurs have gotten themselves into deep trouble because they saw fit to spend the sales tax money they had collected instead of sending it to Uncle Sam.
This can mean death to your business and jail time for you. Many times this mistake is innocently made when a business owner commingles funds collected as sales tax with their normal business checking account. Open a separate bank account and deposit sales tax monies into the account and do not touch it until the time comes to send the money in with the quarterly report.
Remember this: Uncle Sam has NO sense of humor and no tolerance for excuses. Collect the tax, pay it on time, stay in business.
Do I really have to open a business bank account?
Yes, open a separate account for the business and do not commingle the business funds with your personal funds. Keep them separate. Deposit all money coming into the business into the business account and pay all business expenses from the business account. And if you do have to deposit personal funds into the business account, do so as a loan that the business will repay to you once the cash flow is there.
Do I really have to pay taxes on the money I make?
It’s America. Duh.
Do I really have to claim my brother-in-law as an employee?
If you tell your brother-in-law when to work, where to work, how to work, supply him with the tools to do the work, and generally boss him around, then yes, he would probably be considered an employee by the IRS.
That means you are subject to the rules governing employees and have to do all the wonderful things employers must do to comply.
Fun things like withholding taxes from his paycheck, matching certain withholdings out of your pocket, and reporting and submitting taxes every month. If you have any doubt go to IRS.gov to learn more.
Do I really have to do all the things I don’t really want to do?
Of course not. You could just keep your day job and hope your employer doesn’t mind doing all those things you’re too lazy to do.