Tax and shareware

[Steven]

This has probably been covered, but a search turned up nothing and I can't search too much on this @#$@ 28.8kbps modem (on vacation, lucky to have it at all :) )
Are there any issues as far as tax goes for selling shareware games? (I'm in California, but the buyers aren't necessarily here too)
Thanks,
Steven

[FCCovett]

Well, it's like any other source of income. Basically, you are selling a product and the IRS will surely want you to report all the money you make through that activity.

It seems that the smart thing to do is to open a small business so you can deduct a few expenses as your home-office space, gasoline (for when you go to a business meeting), car repairs, meals, and any other work-related expenses.

There's plenty of advice online, MSN web-site and other business web-sites, but you ought to talk to a CPA ultimately.

[Frank C.]

It depends on your sales model. If you open a merchant account with your bank or handle cash sales directly then you're obligated to charge tax when applicable and possibly need a vendor permit (depending on your state/provincial laws).

I work out of Toronto, which means I need an Ontario vendor permit, and collect Retail Sales Tax for Ontario residents, as well as GST for all Canadian residents (it's not software however).

If you go through a third party, you can avoid sales tax all together. If you sell software through Esellerate for example, sales tax, VAT/GST etc. is their responsibility, you merely make a commission (albeit a large percentage of each sale).

You must of course report any money you make on your income taxes regardless of how you collected it, or risk getting fined (or worse). Some regions don't require small suppliers to remit tax or report income though (say if you make less than $10,000 a year from your software sales) but you'll need to check the laws where you live.

[Steven]

Ok, would Paypal fall under the rules where it's their problem? And I've never had to report income - I'm 15 and I make like $500 a year...

[FCCovett]

In the US, you are exempt if you make less than $600 a year from a single source, if I am not mistaken.

[Steven]

Most of that is from my parents - allowance :p
Sounds like I'm good, unless selling registration codes via Paypal is taxable... Should I be worried about that?

[Frank C.]

Originally posted by Steven
...unless selling registration codes via Paypal is taxable...
Paypal is an odd situation, but if I had to guess I'd say you would be liable for collecting taxes. AFAIK, Paypal isn't a vendor service, it's just a convenient way to collect payments.

Some people call them "donations" or "gifts" instead of payments though, but I'm not too comfortable giving advice on grey areas like that...

[Steven]

Ok, thanks. Anyone know of a reliable source where I could find something like that? I don't want to hire someone, the cost would be too high (I'm looking in the $10 range)... Any good websites?

[Fenris]

I would suppose that your local IRS office has some kind of customer service you can call?

Mind you, you will step into a minefield when selling codes over the internet into the EU. I've been investigating this lately, and you'll have to handle upwards of five different cases. In short, at least in Europe, selling registration codes isn't like selling goods, it is considered a service. This exempts you from VAT.

[FCCovett]

So why the heck has eSellerate been collecting VAT on all my sales to customers in the EU???

Anyway, the bottomline is:

1. If you have a distributor, they will collect sales taxes; if you sell directly, you are supposed to collect sales taxes in you state/city.

2. Regardless of sales taxes, you are supposed to report your yearly income and pay taxes if it goes over a certain limited determined by the IRS.

3. If you are selling to EU, they request you to collect and send them VAT (or whatever sales taxes that are applicable). If you choose not to do it, they may create some problems for you in the future, when you want to open a branch office there or something equally far off (duh).

You can find some information here, but still talk to your parents if you are underage and ask them to get advice from a CPA so THEY don't get audited because of your activity: http://moneycentral.msn.com/tax/home.asp

[applekid]

But isn't shareware sales considered "under the table" like getting an allowance or baby-sitting?

Any of our programmers want to share their experiences?

[MattDiamond]

Originally posted by applekid
But isn't shareware sales considered "under the table" like getting an allowance or baby-sitting?


It's not automatic. As someone else pointed out, there is a threshold below which your income is considered a hobby and isn't taxed. It used to be $600, I think. The IRS can't be bothered if you earn less than the threshold amount, but even there you probably want to keep track because if you are ever audited you may need to show them the amounts you made to claim that you are under the "hobby" threshold.

Another reason to track it, as someone else has pointed out, is to claim expenses. If you use you computer 50% of the time for your shareware development than theoretically you claim 50% of it as an expense. However, I'd heard that they were real sticklers about that. The burden of proof is on you because everyone and their uncle wants to claim their PC upgrade as a business expense. You might need to track how long you spent using the PC for business versus all other uses by you and your family.

It's enough to make you stick with freeware. :-)

[FCCovett]

I think the allowance you receive from your parents could be considered, for tax purposes, as a money gift . In that case, it is exempt if under $10,000 a year from a single source.

There are a few misconceptions about what's taxable or not. For instance, if you make a purchase over the Internet from a retailer that doesn't have offices or warehouses in you state, that doesn't mean there's no need to pay state taxes; in that case, the buyer is supposed to pay for the tax sales instead of the seller.

The point is that most people won't bother and it's difficult to track this sort of transaction, but it doesn't mean the law doesn't exist or apply. That's why the government is trying to change the law so that retailers/sellers must collect taxes for all kinds of sales, in or out of their state.

[KenD]

If you use a service like Kagi or eSellerate, they handle any sales taxes if needed.
Kagi and eSellerate collect VAT from sales to EU countries because that's the new EU law. Nothing we or they can do anything about.

Like other have said, if you have an income over a certain treshold you need to pay income tax on it.

KenD

[Fenris]

Oops, yes, you're exempt from VAT when selling _within_ the EU. At least my IRS office told me so.

[AnotherJake]

Originally posted by applekid
But isn't shareware sales considered "under the table" like getting an allowance or baby-sitting?
I don't know about the sales tax issues, but just to be clear on this, there is no such thing as "under the table" as far as income is concerned. ALL PERSONAL INCOME IS TAXABLE in the U.S. An allowance is taxable. Baby-sitting money is taxable. Tips are taxable. Income from gambling is taxable. Income from illegal sales of narcotics is taxable. A twenty dollar bill that was given to you by a stranger for no reason whatsoever, is taxable. If you steal money, that income is taxable. Whether or not YOU can claim an exemption on any of your personal income is another story altogether. It doesn't even matter what your age is. If you earned income and you're a dependent, then your guardian or parent must file for you if you don't do so yourself. If you earned income this year and you die, then someone else has to file for you. There's no such thing as "under the table" in the eyes of the IRS. If this scares the pants off you then you've just learned your first lesson in U.S. tax law. Welcome to the club!

Okay, so after all of that, here's my advice. Don't worry about income taxes if you aren't making any money yet. I'd say that if you earn a couple grand in a few months then contact a CPA for a little advice. If you earn a couple grand every week then RUN to the nearest CPA immediately! Don't worry though, this would be A GOOD THING and a CPA would be more than happy to help. You can handle all your personal income tax yourself but I don't recommend it for small business owners. At least not for the first year or two unless you really know what you're doing. Better to be safe. And just remember, don't ever try to think that the IRS doesn't need to know about it.

[AnotherJake]

Oh yeah, and you live in California. They're miserable about their state income tax, so don't forget about them. Dealing with the feds is probably easier than the state of California. ...Or you could move to Texas! We don't have state income taxes roun' here. Companies like Pangea and id love it! Me too;-)

[Bachus]

Don't worry about giving away a bunch of your hard earned money if you only make a couple thousand (or less!). While you still have to file, you won't have to pay any income tax until you make a certain amount of money. I forget the exact number, but it's something like $8,000. But you should always file unless you made exactly $0.

The great thing about declaring yourself a business (and being filed as such) is that you can start claiming everything as an exemption. That new computer you bought? You use that to make your games right? Write it off! That Dr. Pepper you drink while "on the job"? Write it off!

[AnotherJake]

On another note, for SALES TAX here in Texas you must file every quarter even if it's filing to tell them that you took in $0. You also have to have a permit to collect it in the first place. I assume it's the same in California.

[Steven]

Looks like I should really research more - even if only to find out that I should claim $0 in income :p
I just asked my mom- she says she'll ask her CPA next time she calls.

One more question: is it essential to be registered as a real business, or can we just 'pretend' to be one?

[AnotherJake]

Let us know what the CPA has to say if you can. You don't need to file if you're just a kid -until you start pulling in good sales of software;-) Earning serious income changes all the rules at any age.

For taxation purposes you don't need to be "registered" to be considered "doing business" as I understand it. You can call yourself a sole-proprietership and file accordingly without anything else. For your local laws, however, things may be quite different. Most municipalities and states require that you have a whole bunch of stuff like home occupancy permits, a registered business name with the county courthouse and so on. You really need to check with people in your area. Most of it is just government speaking out of both sides of its mouth for the registration fees when it comes to just selling software out of your house, over the Internet. For instance, a home occupancy permit may require that your home is inspected by a city inspector and that you answer a few questions about the intended nature of your business. I did it years ago. It's just pure bullshit for what we're talking about here with selling software and I didn't do it myself this time. The only thing it's good for is if a neighbor complains that they don't like you because you have lots of people going over to your house all the time for that business. The city could shut you down for that. The registration with the courthouse just means that if somebody in town wants to start a business locally with your name, then they can do that if you weren't registered there first. So you don't have to do that either really. But it's usually pretty cheap ( $7 here last time ) so it couldn't hurt. Again, you should ask around your area but it shouldn't be a problem to skip most formalities with the shareware business if you really want to. If you start making tens of thousands of dollars a year, I would suggest jumping through the hoops and getting everything signed correctly for liability reasons but otherwise... Prolly ain't that big a deal. Don't skip the taxes though!

[FCCovett]

You can work as a sole proprietor, but since your are a minor, your parents would have to sign some papers for you.

I think you don't really have to open a business to receive and report money for services rendered, but the rules for selling merchandise are somewhat more involved, depending on the nature of the goods (flammable, toxic, perishables, etc.).

Of course, if you are just selling software over the Internet, you shall not need to get your storage facilities inspected for safety and health reasons (better start picking those dirty socks up from the floor, anyway). :)

[AnotherJake]

Yeah, that sounds right. BTW, I just happened to notice this above:

Originally posted by FCCovett
over a certain limited [amount] determined by the IRS.

That's actually determined by the U.S. congress, NOT the IRS. The IRS only collects, it does not set policy...

[Steven]

Cool, thanks. It's not actually a sole proprietorship - there's two of us. Hopefully that doesn't change the rules too much.

[AnotherJake]

As long as it's called a "partnership", as opposed to a "sole-proprietership", the rules stay pretty much the same. -IOW, both of you "own the company" and file separately as individuals. If one of you, or anybody else for that matter joins the fray and is called an "employee"... All Hell breaks loose and definitely becomes something you simply do not want to delve into.

[Steven]

Well, I guess we'll be the first 1,000 person partnership then... :D

[AnotherJake]

Exactly:)

One last thing, if you live around the San Fransisco Bay Area, avoid signing up for anything that requires a home inspection. Your parents will not like it when the inspector notices that you have some speaker wire going behind the walls without a permit. I have prior experience with that one. They're really tough there!

[Steven]

Heh, thanks. I'll keep that in mind; you should see our house :)
Hey, these squarlies aren't so bad. I kinda like that one...

My dad has this ridiculous audio/video system strung up - we can set up music in one area and have it play over the entire system. Of course, behind the neat cabinet is this tangled mess of wires. It's almost as tall as me, and as dense as the junipers out front :p

When we got some extra satellite receivers, the installation guy unplugged one wire. It took a week or so to find out...__fun :cool:

[Bachus]

Starting out as a sole-proprietership or partnership is fine at first, but eventually you'll probably want to file as an LLC (limited-liability corporation). Think of them as all the benefits of a corporation with all the ease of use of the sole-proprietership. There's no rush until you start making real money though.

[GoodDoug]

LLCs are a bad idea in California. They cost more than a corporation, and don't have the same benefits. If you go that route in Cali, do yourself a favor and look into S corps

[KenD]

Originally posted by GoodDoug
LLCs are a bad idea in California. They cost more than a corporation, and don't have the same benefits. If you go that route in Cali, do yourself a favor and look into S corps

Well, you do have at least the $800 yearly "tax" even if you don't make a cent. But one big advantage with an LLC is that you don't need to do all the paperwork with keeping meetings and minutes as a corp is required to do. If you run a corp and don't have your minutes and meetings in order, the corporate shield is gone and you are personally liable. There's a lot more to it than just that of course...

KenD