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New to Business need help with taxing

Discussion in 'Business Fundamentals' started by 1BadHawk, Jan 31, 2005.

  1. 1BadHawk

    1BadHawk Member
    Messages: 68

    I just started my business in November of '04. My question is, and yes I will be going to a tax consultant. But I have a question regarding sales tax. Im a little confused as to how sales tax is paid / collected.

    I bill my customers xxx amount for services which includes sales tax. Question is what do I do with the sales tax I collect? Obviously its not income/profit. I assume Ill have to pay that tax to the state when I file my taxes. Im confused on the collecting and paying of sales tax. Can someone explain it to me or point me to a web site that would explain it.

  2. salopez

    salopez Senior Member
    Messages: 873

    what are you selling? i thought you were providing a service, hence no sales tax. i could be wrong though.
  3. SteveVB

    SteveVB Member
    Messages: 66

    Talk to a CPA right away

    Get a CPA right away, as I understand it there's No tax on services in PRM.

    Sales tax is a pass through- you collect it and forward it to the state- its got nothing to do with the taxes you pay.

    If you plow a drive there should be no tax, but if you spread salt and charge them for the bag of materials then you should COLLECT tax for it- BUT you should not have paid the tax when you bought it (because you used your Tax exempt status when you purchased it) If you were to structure the salting as a service then I dont think you would collect the tax, you would PAY the tax and the supplier would collect it for the state, you would incorporate the tax cost to you into your price.

    IF you have charged people taxes-you need to talk to an accountant quickly.
    I guess you could credit their next invoice with the bogus taxes collected, or refund it. I would make sure you write a letter and enclose it with the next invoice telling them the taxes were billed in error, and thats what the credit is for. If you dont refund it I believe you are leaving yourself open to fraud charges, along with a host of tax charges.

    But check with a CPA, quickly before you send out more invoices, it looks like you'll have plenty of time his week as temps head to 50s by the weekend. :(
  4. SteveVB

    SteveVB Member
    Messages: 66

  5. 1BadHawk

    1BadHawk Member
    Messages: 68

    I dont charge tax on the plowing. Thats a flat rate. But I am charging tax on the salt, since I am in escense selling it. I buy it however, at a reduced contractors rate, but I still pay tax when I buy it. Therefore dont I have to recoup the tax i paid for it?

    CPA this week or next week, just waiting to get all my banking and financing stuff in line. If Im not suppose to cellect the tax, thats not a problem, I can always credit the customer that amount back, am I dont think any of them will mind.

    Thats why I was asking cuz I wasnt sure how its suppose to work. From what Ive found, you dont charge tax on the act of services, only the product.
  6. SteveVB

    SteveVB Member
    Messages: 66

    The collection of a sales tax is just that a collection. The state of MD charges end users a tax, which is collected and forwarded to the state by a business.
    If you "charge" a sales tax all you are doing is collecting the cash for the state and then you remit it every month. I believe you need to get a resellers liscence to pass the tax on to the customer, then you DONT pay the tax on the materials, your customer does. You would get an exemption which you file with your supplier, for tax free purchases. Then when you sell it, you become responsible for collecting the taxes. But its been years since Ive dealt with sales tax, and even then my CPA set everything up- I just wrote the checks :)
    If you pay the tax when you purchase salt then it just becomes another cost for you, its an indirect expense that would NOT be invoiced seperately, just like insurance, fuel or equipment. You wouldnt have it as a line item charge, it would be part of your unit cost for salting.
    I believe that if you provide a salting service for a set price without regard to the material cost you wont have to deal with the sales tax issue, but check it out with your CPA.
    If you can avoid collecting sales tax it would be a good idea, it will reduce you tax filing and paper work headaches.
    Good Luck
  7. 1BadHawk

    1BadHawk Member
    Messages: 68

    Well, what about me paying tax on services I have done. I had the exterminator out yeasterday. Cost 180 bones + tax. I know he didnt use 180 dollars worth of spray. What about auto repairs, youpay tax on labor. Cant snow removal be considered labor?

    I looked it up under the MD comptrollsers page and the info their is a little vague. It does say though, that a SALES AND USE TAX is applied to ALL labor and pruducts a customer pay fors. Exceptions to certain things such as food stamps and a few other gov things.

    Either way, Im still a little confused. If I sell 100 dollars worth of product, and charge 5% tax, collecting a total of $105. At the end of the quarter I have to pay the state all taxes Ive collected so far, in this case $5 bucks. Now at the end of the year when I file my taxes, say I only made $100 bucks for the year, do I pay tax on this as profit? or does the $5 bucks in tax I collected from the customer and paid to the state already cover that? If not isnt that like double taxing? Since the state will be getting paid twice for the same 100 bucks?
    Last edited: Feb 1, 2005
  8. SteveVB

    SteveVB Member
    Messages: 66

    The sales taxes you collect have NO bearing on the taxes you pay. The sales taxes are taxes that your customers pay and you are just collecting them for the state.
    If you made a 100 bucks then you would owe taxes on that 100 dollars, the sales taxes you collected and forwarded to the state have NOTHING to do with the tax you pay on your profits. You have to treat them as seperate actions, almost like another business, one business is yours trying to make money, the other is a small business you run for the state collecting taxes for them, and making no profit BTW.

    Once again Im no expert, and its been a while, but I never charged tax on labor, only materials, and only if I didnt pay taxes on it first, but check with the CPA.
  9. 1BadHawk

    1BadHawk Member
    Messages: 68

    Thanks steve, that clears things up a bit.

    Part II then. If you gross 50k at the end of the year after all expenses and such. and say you owe 7k in taxes on that 50k. Do you have to come up with that all at once at the time of filing? or do you make taxe payments throughout the tax year, and pay the difference at filing time?
  10. SteveVB

    SteveVB Member
    Messages: 66

    You would be Netting 50k- Gross is generally before expenses, net is after expenses. Your net business income is what taxes are computed on.

    If you plan ahead you should make the estimated tax declaration for both federal and state , and pay each qtr. If you didn't pay it throughout the year you pay it when you file, and in MD you file the declaration of estimated taxes for next year. I make sure I pay no less than last year unless I have the expectation of a large increase in revs then I run through the tax return really quickly and get a more accurate estimate. I think if you dont pay 90% of the liability or the same as the previous year the state and feds will add in penalties for underpayment of tax.
    There are ways around the quarterly payments to avoid some penalties or at least reduce them depending on when the income was generated check with your CPA, and if you have another job increasing the witholding throughout the year can help keep you from paying the penalties.
    As always check with your CPA.

    BTW- Ive always thought that April-MAy is a good time to pick up equipment. Guys with big tax bills need some cash and if they havent put some away for tax payments you find some equipment up for sale in the spring, when folks find out how much they really made :rolleyes:
  11. 1BadHawk

    1BadHawk Member
    Messages: 68

    Ok, so services dont get taxed. Great, one less thing to wory about.

    But what about salt. Do you buy it taxed, and then sell it non taxed as a service to your customers?
  12. SteveVB

    SteveVB Member
    Messages: 66

    From my previous post, YOU really need to talk to an accountant/CPA to get the best information.
    This is my understanding, but check with your CPA.

    you buy bag of salt for $5.00 and the supplier collects the $.25 tax - your cost $5.25
    You sell deicing service for $40.00, your costs are 5.25 for a bag of salt, 25.00 for 10 min of your time, 2.00 for insurance, .50 gas etc, all the costs of your service. If you bill them the $40.00 I dont think you collect the sales tax. The salt was taxed and paid when you bought it, you were the end user(you put it down, the customer didnt touch it).

    If on the other hand you bill de-icing service, $40 labor, and say 2 bags of salt at 10.00 ea ($5.00 marked up 100%) , or 20.00 bucks for salt. then the bill is 40 +20 +1 dollar of sales tax. You are reselling the salt to the customer. When you resell the salt you need to get the resellers liscence so you won't pay the tax to the supplier, the customer will pay you, and you will forward the sales tax to the state.

    These are technicalities which is why you need to talk to a CPA