Tips to Managing Your Sales Taxes This Year

Let’s face it, taxes are no fun. I’ll be the first to admit that I would rather avoid the thought of taxes if I had a choice. Unfortunately though, understanding them is a major factor in making sure you run your business without hiccups. But why are taxes so stressful?

Why are Taxes So Stressful?

Tax codes are varied, complex, and ever-changing, which can feel very overwhelming. 

There’s no guidebook that they give you when you are applying for your business license, outlining the things you need to know. This can be stressful and a little scary, because you didn’t want to do anything wrong or get in trouble. 

If you pay late or underpay on your taxes, then your business may not be “in good standing”. Depending on your state or local policy, you can face stacking late fees, frozen accounts, or other complications. 

For example, in New Mexico, if you are not up-to-date on paying your gross receipts taxes then you aren’t allowed to print non-taxable transaction certificates (If that just sounded like another language to you, don’t worry. We’ll explain in a little bit). This means that you will be taxed by vendors. It feels like it’s not a big deal at first, but eventually that adds up and will cost you quite a bit of money. In cases like this, they also don’t tell you what’s wrong. We knew we were considered “not in good standing”, but aside from that it was a guessing game. It took us almost a year of back and forth to figure out why we couldn’t print these certificates. We found we were listed under the wrong category, which is good to get fixed but that wasn’t the problem. After a long arduous process, we found we owed a very small amount of money from over a year ago. We didn’t realize the charge never went through, but that’s why they froze our accounts. Once it was paid we were back in good standing and could print our certificates like normal. 

Levels of Taxation

Taxes become varied because there are multiple levels that you’ll be taxed from. There are local, state, and federal levels, each with their own individual tax code. Tax policy can also change at any time, but they will especially change after elections. Unfortunately because of this, there are a lot of moving parts to keep track of. 

In some cases you don’t just have to think about where you live or operate, you may have to consider where the sale is made. In the construction industry, there’s a possibility for multiple tax rates for one job. If the job site is located in a different locality from where you are based out of. 

There’s no way around it, you just have to make sure you check federal, state, and local websites to track the tax codes that you are dealing with.

Intervals of Taxation

There are also 3 different intervals for paying taxes (in case keeping track of each level of taxation wasn’t work enough). You may have to pay taxes on a monthly basis, quarterly, or annually. This is going to be determined by your income (as a business). 

Keep in mind though that you may start out in one bracket, and have to switch to another mid year.

When I started my design business, we were scheduled for quarterly tax payments. By the end of the second quarter though, I started to make enough that they wanted me to make monthly payments. Unfortunately, I had already gotten into the habit of paying quarterly. Two months of forgetfulness and a few late fees later, I realized I needed a better system to remind myself when to pay. 

Whether you have to set a calendar reminder or use sticky notes on your mirror, you will have to come up with your system too. 


“Everyone has hiccups. You don’t have to be embarrassed about it.”


Gross Receipts Taxes vs. Sales Taxes

Let’s clear something up, what is the difference between a Gross Receipts tax (GRT) or Sales tax. Both act in a similar manner but are different taxes. 

Sales tax taxes the sale of goods or services. The rate is set as a percentage of the purchase. The consumer pays this directly to the merchant and the merchant sends it to the government. 

Gross Receipts tax (GRT) taxes the gross receipts of a business (that really cleared everything up didn’t it?). Alright let’s break that down into simpler terms. Gross receipts are the total revenue for your business minus any refunds or discounts. Since refunds or discounts aren’t really revenue, if you didn’t collect income from that. However, this does include revenue that is put back into the business to pay for expenses. So GRT is a tax on the total revenue of your business. Usually GRT is instead of sales tax (may also be called gross excise tax).

There is no federal GRT, so if you have to pay it then it would be to your state or county. As GRT is a state and sometimes local tax, it is important to check your state’s rules and whether they require this tax type. 

The GRT will affect your profit and loss statements meaning that for businesses with tight profit margins this tax may be more impactful than business with more profit clearance. GRT is usually still required even if you are running at a net loss. 

GRT is often confused with sales tax because it looks similar however, sales tax taxes the consumer directly. The consumer will see on a receipt the separated sales tax cost. So long as this number is correct and set aside, the funds won’t get mixed in with the rest of the business’s revenue stream. Whereas GRT taxes you, the seller. In this case, you would be estimating the GRT you’ll have to pay when charging the consumer. In the end, you have to take a chunk of your revenue to pay for the tax. You will still list this price for the consumer on their invoice or receipt (basically, to them GRT and Sales tax are the same thing). The difference for you is how you calculate the tax.


Exemptions vs. Deductions

There are tax exemptions or tax deductions.

  • Exemptions: exempted activities as determined through the tax policy do not need to be reported. To be clear, you have to qualify and be registered as a tax exempt. 
  • Deductions: must be reported and retain records for receipt they are deducting. You may not qualify as a tax exempted business, but you may be able to deduct or be safe from paying tax in special circumstances.

In both cases you aren’t paying the tax on that activity/receipt, but one must be reported while the other does not. They also have separate qualifications you must meet in order to achieve them. 

If GRT is required, some states will allow for Non Taxation Transaction certificates (NTTC) on purchase of materials/services for resale. This is so the business owner is not taxed twice (like for construction company who is going to pay taxes on the receipt of that job upon completion, they don’t have to pay taxes for the materials and the revenue. 

Tax Exemption: Do I qualify?


Source: Marvin Meyer (Upsplash)


What Do You Do About it?

There are ways of remedying the stress that you might still feel when it comes to sales tax (or GRT). 

1. Talk About It

Talking to other business owners, family, and friends is honestly the easiest way of learning about it. If you are willing to talk to others about tax problems, then they may have gone through something similar. They might have the answer, saving yourself a lot of time and grey hairs from the stress. Create a network of people that you feel safe to ask a question. Everyone has hiccups. You don’t have to be embarrassed about it.

I joined a Facebook group of other designers and they would say things that make me think I might also need to do that. It was a safe place that I could ask about it, so we can share our wealth of knowledge with each other. Whether they be mentors that can give more info or people in the same place as you that can offer support.

2. Hire Someone

Sometimes you have to realize your strengths and then recognize your weaknesses. Sometimes that means hiring someone to fill the roles that you are not as strong in. Especially for something as difficult as this, hiring an accountant or bookkeeper (depending on your need) is the way to go. 

An accountant can offer recommendations for business spending and expenses whereas a bookkeeper doesn’t necessarily make financial assessments, they just keep the numbers. 

I would stress that you should not go in blind. Aim for understanding what’s going on as much as possible. For me, that means asking a million questions and giving google a lot of my time. 


3. Separate Your Funds

Open a separate bank account and transfer the sales tax into that bank account so it is never part, never gets mixed up with any of your other expenses or profit. It is very easy then to send it away to the state every month.



So…

Let’s get down to brass tax (I’m sorry but I had to include one). Taxes are scary and getting them straight is imperative to maintaining your business.


3 Main Takeaways:

  1. You’ll have to seek out the information you need. No one is going to give you all the answers
  2. Taxes come from multiple levels, each with their own policies.
  3. Do not be afraid to talk to people about it


In the end, it comes down to your own initiative. You have to learn about the taxes you’ll be dealing with, and if there are any issues you have to be the one to lead the charge to get it fixed. Whatever you need to do to be organized and clear about the taxes your business will be paying, do it!

Sources

  1. Gross receipts taxes - thebalancesmb.com
  2. Resisting the Allure of Gross Receipts Taxes - taxfoundation.org
  3. Difference Between Sales Tax & Gross Receipts Tax - smallbusiness.chron.com
  4. Frequently Asked Questions - tax.newmexico.gov
  5. The State of State (and Local) Tax Policy - taxpolicycenter.org
  6. Business Taxes - irs.gov/businesses
  7. Pay taxes - sba.gov
  8. The Difference Between Bookkeepers and Accountants - bench.co