Summary: Side business is taking off and I am getting close to finalizing a deal with big corporation. I’m currently a sole proprietorship and need to know how to structure my business for legal and tax purposes. I also have a convoluted sales process and I’m not sure what taxes need to be charged/paid.
My side Business: I provide a wide variety of printed products (books, booklets, etc.), written content, workshops, presentations, consulting services. My area is psychology, so the content is related to mental health. My printed materials include the disclaimer “this is not a substitute for medical or psychological advice …” – but I do NOT provide individual or group therapy.
I do 90% of the work on this business currently, but my spouse does help (married, if that makes a difference for tax, business structure purposes). Currently we have our net income from side-business taxed as self-employment income.
Current income: sole proprietorship (net pre-tax revenue ~$25,000/year)
Future income: Based on a deal that will finalize this summer, side business income will likely work up to approximately $130,000+ net pre-tax revenue over the next 18-24 months (could go above $200k within 2 years). The bump in income will mostly come from a single service – described below. The bump in income will also require that my married spouse helps more.
Question #1
How should I structure my business for maximum tax saving and other purposes?
Other factors: A big part of my side business is literally stuffing envelopes (see “New Income/Project” below for details). On any given week or month, me or my spouse could do 90/10% or 10/90% of the work. Just depends on who has the free time besides my regular job and parenting kids to do the work. Also – my children can work on the business – they can pull the strip off of an envelope and seal it just as well as I can or put stamps on envelopes. I think there is a lot of flexibility to genuinely having my spouse and children work within the business. As my children become teens and this expands, I’d love to have this be their part-time job and then use their earned income to start Roths really early. My spouse and I don’t care who gets paid exactly what, but of course we would want to take advantage of all the possible, legal tax avoidance that we can.
I currently have a full-time job with benefits – I will likely quit within 2 years to focus on the side-business. My wife does not work outside the side-based business. What tax/company structure would be best?
Bonus question: would the answer above be the same if the business grows large enough that I’d need to hire a part-time employee? That employee might be a brother, older parent (someone from outside of our household).
I’m assuming I need to get some business-related insurance – what kind specifically?
Is this a situation where an S-Corp may be useful?
Details for Question #2 below
What should I charge/pay in sales/service tax?
New income/project: The bump in income is primarily coming from one contract with two larger companies and all three of use serve a specific type of business.
Field/Business: Mortgages/Mortgage Brokers (This is not the actual field, but the structure products are the same.
Players: (each a stand alone company)
1) Megacorp: big company worth over $1 billion that services loans and wants to be the preferred provider that mortgage brokers eventually sell the mortgages to. Like a Citimortgage or similar company.
2) MortgageMarketing: company that helps mortgage broker offices with their marketing (social media, newsletters, etc. (approx.. $5 million in revenue a year). Mortgage Marketing has a database that can keep track of names, contact information and dates about when specific cards should be sent out.
3) Smokeystache Services: That’s me. In this situation I’ve created a set of reminder, holiday, and information cards that mortgage brokers/offices send out to the families they’ve served. Like “It’s been 6 months – hope you love your new home!” “Hey rates are lowest ever, need to refinance?” “Happy Holidays!” You know, the ones you throw out right away and hate to get. I am connected to Mortgage Marketing’s database to tell me who to send which cards to at the right date.
Here’s how it works. Megacorp approaches mortgage brokers’ office they already work with and say “We can set you up with this great reminder/informational card system.” Broker’s office says yes- that sounds like good marketing. Brokers office pays Megacorp for a set number of “contacts” to be mailed. Broker’s office sends names/addresses of people they want contacted to Mortgage Marketing; they put names into database. Smokeystache Services (My spouse and I) looks at the database a couple of times a week and orders the right cards, buys the envelopes, stamps, etc and mails the cards to the contacts on the prescribed timeline. Megacorp keeps 10% for themselves, sends 10% to Mortgage Marketing for maintaining database, and sends 80% to Smokeystache. I pay for stamps, cards, envelopes out of that 80% and keep the remainder for profit.
Question #2. What sales tax should be paid in this transaction? My primary expenses are the cards (printed out of state), envelopes (purchased from MegaEnvelope – out of state), and first-class stamps (purchased tax free b/c stamps aren’t taxed). Should I be charging Megacorp any type of tax? Or is paying tax on my profits based on whatever business structure I have my only tax in this situation. I’m in Tennessee if that matters.
I’m assuming some of you would say that I should voluntarily pay state sales tax for the cards and envelopes to the various states where those businesses are located. Should I?