How To Deal with Home Business Taxes

Whatever business your are in, the moment you say 'tax', Government is in the picture and anything you have to do with Government, irrespective of which country you belong to, is fraught with rules, regulations, laws, by-laws, registrations, forms, exemptions and notifications.

In a home business, at least to start with, you have to mantle all roles related to production, marketing, public relations and accounting. However, it may not be worth it for you to waste your time and effort on the slippery area of taxes.

1. First take generic advice from the Tax Consultant about the type of taxes you may have to pay: You will be confronted with Income Tax, Sales Tax/ VAT (i.e. Value Added Tax, if you are producing goods), Service Tax (in some countries where it is not considered under VAT), Professional Tax (in some countries/ some specific regions), Excise Duty, Customs Duty (if you are an importer) and so on.

   Depending on whether you are going to be a trader, seller, re-seller, a product manufacturer, importer, exporter or a service provider, there will be different classifications, minimum turnover limits for taxability, different tax rates, rebates, scope for adjustments between taxes paid and taxes collected, incentives for exports and so on.

2. Find out the type of taxes you will be exempted from: In many countries, small and home business with small turnover may have exemption limits for collecting and paying taxes and also concessions on the extent of book keeping and paper work needed.

   For example, in India, Service Tax is exempted up to a turnover of Rupees 0.8 million (as in the year 2007). Thus a home-office website developer whose annual turnover is going to be less than this limit need not concern himself with Service Tax. As no product is manufactured, he has no other tax issue to bother about, except of course his income tax.

3. Utilize tax consultants' services to get the necessary preliminary work done: Get registrations done at the appropriate Government departments, get the necessary forms filled and submitted, and get clear-cut guidelines on the types of taxes you have to pay specific to the type of business you are doing, the frequency of payment and the relevant forms to be submitted as returns.
4. Do not confuse INCOME TAX with other taxes: Income tax is a totally independent issue which is not connected to other taxes. Even when you were not a home business person, perhaps you were employed somewhere and hopefully you would have already obtained a Social Security Number (or Income Tax Number or Permanent Account Number - PAN in India) and are remitting your Income Tax.

   If your hitherto income is going to come from home business, perhaps you may have to switch over to a different classification of income tax assessment (it depends on the country). Once you are a business person, you get advantages of deduction of business expenses - salaries paid and office expenses (consumables, stationery, raw materials, traveling and sales promotion expenses, depreciation for computers, machinery and vehicle, etc).

   In case you have income from some sources other than home business, you have to pay income tax covering all sources of your income. There is also scope for offsetting your losses (if any) from your business. There are again rules related to the extent of accounting records you have to maintain depending on your turnover. You may have some specific exemptions from keeping elaborate accounts if you are in home business. It depends on the country.

5. Collect the taxes from customers through your invoice and pay them promptly to the Government: When the sale or service your make is taxable, you have to collect the tax from your customer promptly with your bill and pay it promptly to the Government periodically (quarterly/ half-yearly etc). There are records to be maintained, forms (returns) to be filled in and remittances to be made in-time through designated banks. In case of delay or non-compliance, you may have to pay penalties and interest.
6. Take care of social security issues if you have employees in your rolls: Next category of taxes is related to employee security (Social Security Tax/ Provident fund contribution, Employee State Insurance, etc). Here again there could be several rules/ exemptions depending on the country, nature of business, number of employees, etc.

As mentioned at the beginning, it is always the best option to involve a tax consultant in organizing and maintaining the whole activity related to taxes. Once you are stabilized in business and you have acquired enough knowledge on these affairs, then perhaps you can stand on your own legs on these matters.