The United States Internal Revenue Code (IRC) has grown to gargantuan proportions since its inception. It’s convoluted, and compliance is a challenge fraught with worrying about doing something wrong. It’s a legitimate concern.

Besides the IRC, there are tax laws on income, estates, capital gains, vice and sin, businesses, employment or payroll, property, import, and gifts.

In the IRS’s press release for their 2018 fiscal year report, they said that their conviction rate was 91.7% — a very high number, and one of the highest of all federal law enforcement agencies. However, they also revealed that the criminal investigation unit’s agent number was the lowest since the early 1970s. The IRS is traditionally underfunded and overworked, and the trend looks like it will continue. The IRS wants to be busy with the very biggest tax cases, so they’re more than ready to negotiate with your tax lawyer.

The right tax attorney can provide expert guidance and negotiation skills. Here is how to find the right one for your situation.

The Details about Tax Attorneys

Of course, there are situations where hiring an accountant or tax preparer can be appropriate, but there are also benefits that only tax attorneys can provide. Unlike accountants or tax preparers, tax attorneys are skilled negotiators equipped with legal expertise in the field of finance and taxes. They also have the benefit of attorney-client privilege.

Attorney-client privilege is of paramount importance in legal dealings. Your lawyer may not release any information about your case without your permission. An accountant or tax preparer cannot offer you that benefit.

Also, unlike an accountant or tax preparer, a tax attorney is there to handle complex legal issues specifically associated with your tax situation. You can hire one after a problem occurs, or you can hire one to help you avoid problems in the first place.

Other benefits of hiring a tax attorney include:

• Extensive knowledge of the tax code.
• Having all documentation completed and filed accurately and on time.
• You have someone standing between you and the IRS.
• Your assets are protected to the extent of the law.

A good tax lawyer will have completed a bachelor’s degree in finance or accounting, then obtained advanced training in the law. Some earn a master of laws degree (LL.M) in taxation or certification as a tax law specialist.

The attorney you select must have completed a law degree (a Juris Doctorate), passing the state bar exam, and becoming licensed to practice in your state. Also, the attorney must have admission to federal courts if you require it.

A tax attorney explains:

• What you can do and what you cannot.
• The requirements of your case.
• The expected outcome.
• An estimate of the cost of services for your specific needs.

Make sure any tax lawyer you retain meets these minimum standards.

Why Do You Need a Tax Attorney?

There are a variety of situations where you might need a tax attorney. Some are more serious than others. You may need to retain a lawyer for these reasons:

• Tax relief if you are unable to pay the full amount.
• Criminal tax issues.
• To remove a lien or avoid garnishment or having your accounts frozen.
• To represent you in an audit.
• For starting, buying, or selling your business.
• For estate planning to protect your business assets when you die.
• When engaging in international business.
• If you plan to bring suit against the IRS.

The truism that anyone representing himself has a fool for a lawyer is especially true when facing the IRS. Your tax attorney is a skilled negotiator with experience going up against the Internal Revenue Service and state taxing agencies.

One last benefit of tax attorneys is that they are emotionally distanced from the problem, making it easier for them to clarify and defend you.

When to Seek the Assistance of a Tax Attorney

The length of the tax law suggests there is also a lengthy list of sub-fields of tax law. Some tax lawyers specialize in one or more of these areas.

Audits

As mentioned above, if the IRS is auditing you, you may want the support of an attorney with experience in preparing for audits. A lawyer can help you throughout the audit process, ensuring everything is covered without creating additional penalties or debt.

If the audit determines you owe the IRS compensation or back taxes, legal assistance may lower your debt load through penalty abatement or negotiating a payment plan.

Business Entities

When starting up a new business, a tax attorney can help you determine the financial structure best suited to your company. If you are not operating under a sole proprietorship, you should seek assistance in filing as a limited liability company (LLC), C-corporation, or S-corporation. Even if you are setting up a partnership, engage a lawyer to set up the contract.

Each of the business entities offers different tax benefits and disadvantages. For example, an LLC or S-corporation allows business income, losses, and deductions to “pass-through” to the shareholders. Each shareholder then files the information with his or her individual income tax return. The benefit is that private assets are protected from business debts.

Other Business Operations

The larger the business, the more complicated the tax profile grows. If you hire staff, have a brick-and-mortar presence, or do business internationally, an attorney experienced in business tax law can ensure you do everything correctly.

Federal and state tax laws for businesses are complex and often integrate with other business law. A skillful lawyer can help you comply with tax law as it changes as well as negotiate with the IRS when necessary.

You will need to withhold payroll taxes for employees. Paying the taxes late or by the wrong amount can lead to an audit, as will skipping the payment altogether. You cannot negotiate payroll tax debt, and it will not be wiped away by bankruptcy. Your attorney can explain the rules and help you set up the proper bookkeeping policies.

Tax Court

If you wish to dispute a tax assessment levied by the IRS, you may do so in tax court. If the amount is relatively small, you may be able to handle it yourself. However, if the amount is significant or you don’t want to face the IRS lawyers on your own, retain a tax attorney to represent you.

Estate Planning

You may wish your business to continue after you are gone. Tax attorneys help with estate planning and, later, with probate. They can set up wills and trusts, and provide other guidance to protect against high taxes.

Criminal Tax Issues

Perhaps you made unfortunate choices and are now facing the court and prison. An attorney with tax and trial experience is your bulwark against a taxing agency with extensive legal power. In addition to the IRS’s high conviction rate, they prevailed in roughly eight of ten cases from 2014 to 2016, and the defendants went to prison. You need help.

The Characteristics of the Right Tax Attorney

Beyond the educational credentials and experience, selecting the right tax attorney for you requires a little more research on your part.

You want someone who understands the specific areas where you need help. You want an attorney who stays up to date on ever-changing tax and business law. You want one who can apply relevant precedent to your situation. However, there is more to consider.

• Do you have a good rapport with this person and the law office?
• Does the attorney listen to you and answer all your questions?
• Is the attorney readily available?
• Does the law office charge for phone calls or refuse to do phone consultations?
• Is the estimate set only after reviewing all relevant tax documents?
• Is the attorney assertive and confident in demeanor?
• Can you afford the rates charged?

The attorney can answer some of these questions. To answer the rest, obtain a list of references and contact them. Find out from others who hired this law office whether it could be a good fit for you. Don’t skip this essential research. Tax issues are serious. It would be best if you had someone you can work with comfortably over the long haul.

Conclusion

U.S. tax law is convoluted, to say the least. If your tax situation grows beyond simple tax preparation, or if the IRS or state tax agency has contacted you about a problem, retaining a tax attorney is your best hedge against legal disaster and the many penalties of tax crimes. Attorneys know how to set up and prepare your taxes to protect your assets, and how to negotiate tax relief.

If you are starting, selling, or buying a business, a tax attorney protects your interests during each phase of the transaction. He or she also protects your interests after you have died by helping you with estate planning during your life.

If you are under criminal investigation, an attorney is a requirement. Find one who understands the area of tax law in question to negotiate for you. Moreover, you enjoy attorney-client privilege, which you won’t receive from a tax preparer or accountant.

Protect your assets and yourself by finding a tax attorney that has the right experience, is available at the right time, and is the right fit for you.

The post How to Ensure You Hire the Right Tax Attorney appeared first on Invoicebus Blog.

One of the roles that the tax collected by the government has is to pay off its national debt. What is the national debt? National debt refers to the funds borrowed by a country. When a government’s expenditure exceeds its income via tax collection or other resources, the government needs to borrow money. This debt can only be paid off by levying taxes. An increase in national debt is not good for the economy of the country. Moreover, it has a direct effect on the daily life of the country’s citizens.

Paying your taxes on time no only makes you a good citizen, but also prevent you from committing fraud or crime. Yes, you heard right. Failure in paying taxes is considered as a crime by almost all countries. Moreover, penalties, fees and other consequences which one has to face for not paying taxes are quite high.

When an individual uses illegal means to avoid payment of taxes he or she might have to face criminal charges for Tax evasion. But do all tax violations are considered as Fraud?

We need to understand the distinction between tax fraud and negligence.

Income Tax Fraud- Definition

When an individual intentionally tries to defraud the IRS or evade Tax, it is considered as an Income Tax Fraud. The following acts of an individual or company are considered as tax fraud:

• Purposely fails to file an income tax return
• Intentionally fails to pay taxes due
• Deliberately fails to report all income received
• Makes fraudulent or false claims
• Prepares and files a false return

Differentiation between tax evasion and negligence

Rules and regulations of tax code are quite tricky. Even the IRS understands that for a common man, it is not easy to decipher the tax code. Hence, in the absence of any sign of fraud, the IRS considered it as an honest mistake on the part of the taxpayer. Under such condition, the auditor declares is a pure act of negligence. However, IRS may charge the taxpayer a penalty for failure to pay tax on time. This penalty is generally around 20% of the underpayment.

IRS auditors are more than capable of differentiating an honest mistake from intentional and purposeful tax evasion. They generally look for following activities while auditioning:

• Exaggeration of deductions and exemptions
• Misrepresentation of documents
• Concealment or transfer of income
• Keeping two sets of financial records
• Fabricating personal expenditures as business expenditures
• Using a false Social Security number
• Claiming an exemption for a non-existent dependent
• On purpose underreporting earnings.

Some of the common criminal tax penalties are discussed below:

Willfully failing to pay estimated taxes or keep records

When a taxpayer fails to pay final or estimated tax or maintain proper records, he is guilty of a misdemeanor. Normally, the taxpayer is subjected to civil tax penalties. However, in some cases, the individual may have to pay around $25k in as a fine and may even have to face a jail term of 1 year. An individual may either get be subjected to either one of the two penalties or in extreme cases may be subjected to both the penalties that too along with the prosecution’s cost.

Failing to file a tax return (Not filing) penalty or charge

This is also considered as a misdemeanor. Upon conviction, an individual or corporation is assessed with civil tax penalties. A taxpayer could face up to $25000 as a fine or can be sentenced up to 1 year in prison. An important point to note is that the criminal charges are applicable for not filing tax returns which are due for anytime less than six years. There is no time limit, in case of civil tax penalties.  If the taxpayer files the tax return before the IRS contacts him/her, there won’t be any problem. This kind of charge is quite common.

Pay now or pay double later

If the taxpayer intentionally avoids paying tax to the IRS, then the individual/corporate may end up paying a penalty of $2,50,000. Even If the taxpayer is not officially charged with the evasion of tax, he/she will be liable to pay fine if the return is filed after passing of 60 days above the due date. Hence, failure to file penalty is much more in comparison of failure to pay the penalty.

Willfully failing to Disclose Offshore bank accounts

In cases where IRS proves that the taxpayer deliberately failed to unveil offshore financial details or bank accounts then the taxpayer can be subjected to criminal prosecution where he/she can be sentenced up to 5 years of a prison sentence. A taxpayer might have to pay a fine more than $124,588 per year per violation or half of the balance that was present in the taxpayer’s account at the time of the violation.

IRS criminal investigation into income tax fraud

CI or Criminal Investigation is the law enforcement branch of the IRS that deals which the cases involving evasion of the tax code. IRS conducts all its investigations through CI only. The cases investigated by CI include:

• Cases related to tax crimes
• Money laundering cases
• Bank Secrecy Act Violations cases

To carry out its investigations, IRS investigators don’t leave any stone unturned. Even the information stored in computers is uncovered irrespective of their protective security measures like passwords, encryptions, etc.

The entire system is based on the principle of self-assessment of income earned or voluntary compliance. IRS tries to discourage defilements by assessing penalties, fines, and taxes. In extreme cases by asking for imprisonment for offenders.

Face criminal charges

Evasion of tax is considered as an offense. Hence if any individual is charged for committing this felony criminal offense, he/she would be prosecuted in the federal court by the United States Attorney’s Office.

Lose your property and passport

In order to settle the tax debt, the property of the tax evader (fixed assets like house or car) or the right to property (income, retirement and bank account or Social Security Payments) are seized.  The levied property will be sold and the amount received will be used to settle the tax debts.

If IRS certifies that the individual is involved in serious tax evasion cases, then The Department of State will neither renew nor issue the passport. In fact, IRS may even revoke the existing passport of such individuals.

Either pay tax or go to prison

If an individual is proved to be guilty of tax evasion, then that taxpayer can be sentenced to imprisonment for up to 5 years.

Conclusion

Hence, tax evasion is not at all the right option. No one likes to pay taxes on their income. However, purposely trying to evade tax would only create more problems in the future. An individual may end up with a much higher penalty amount or even end up in prison. Moreover, if IRS certifies that it was the conduct of tax evasion than it will also have a great impact on the credit score. To have a clear understanding of the tax code and its related penalties and consequences, it is advisable to consult an attorney.

The post Tax Evasion Penalties and Other Consequences appeared first on Invoicebus Blog.

The development of the Internet has yielded some new financial terms and innovations. Now that people trade goods both offline and online, the tax authorities are looking to get their share from both worlds. Since some people who buy or sell things online might not be aware of that fact, it’s important to learn more about the taxation rules for digital goods. That’s why we’ve prepared a short guide on the most important terms that every e-trader should know.

The broad term of digital goods

Digital goods can be defined in many different ways, and this definition may vary from country to country. The explanation provided by Business Dictionary defines digital goods as “anything that can be delivered through an information infrastructure such as the Internet”. While this is absolutely correct, it’s a bit too broad term regarding taxation. You’ll need to pay taxes only on the digital goods that are sold or bought on the Web, unlike the data that you share for free with your friends, family or employees.

Therefore, the definition provided by the US Streamlined Tax Governing Board will be more valuable for contemporary business owners. According to that authority, taxable digital goods are:

Electronic books – books that are distributed and sold electronically and used on electronic devices. For instance, if you’re selling e-books on Amazon, you’ll be eligible to pay taxes.

Digital audio format – any type of sounds, tones, music and voice and their combinations sold on the Internet are taxable.

Electronic audio-visual content – music videos, movies, cartoons, video games and any other combination of visuals and music sold on the Web can be subjected to taxation.

In a nutshell, everything you purchase and use on the Internet, in digital form, is considered a taxable digital good and you should make sure that you obey the law on that matter.

The tax eligibility of online businesses

Now that we know that the tax authorities are extremely interested in digital goods, let’s find out more about some exceptions.

Let’s say that you live in the US and you want to buy a video game from an American vendor. In that case, the vendor will have to pay the tax on the sold item, i.e. the tax will be included in the price.

However, if you want to buy a digital good from a foreign vendor, you won’t be subjected to the US tax regulations. The vendor will have to regulate the tax obligations related to the sold item with their local tax authorities.

When you’re a vendor, there are several different combinations and belonging tax rules:

Entrepreneurs with a tax nexus in the US who live abroad

If you don’t live in the US, but some part of your business is located in one of the US states (we’ll talk more about the sales tax nexus later), you’ll be eligible to pay sales taxes in that state. In that case, you’ll have to request a sales tax permit in that state, so as to get the official document that you’re both obliged and allowed to collect and pay taxes.

What’s good to know if you’re planning to launch a business that will sell digital goods in the US is that five federal states don’t impose a sales tax on their entrepreneurs. These states are New Hampshire, Delaware, Montana, Oregon, and Alaska. Still, they might have some other requirements, so make sure to check their terms before you go and register a business there.

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Businesspeople without a tax nexus in the US who live abroad

Business entities and their owners who don’t have a tax nexus in the US and don’t live there won’t have to collect or pay taxes in any of the states.

In that case, you can freely sell digital goods to US citizens, without worrying about their tax obligations.

Nevertheless, that doesn’t mean that you’re completely tax-free. You’ll need to go to your local tax office and inquire about their rules on exporting digital goods. Some countries that are trying to support the local economy don’t impose taxes on such goods, so check the status of that business niche before you make your first sale.

Business owners who work in the US, but aren’t US citizens

Even though you might not have that renowned marine blue passport, you’ll still have to register with the local state tax office, in case you have a business in that region.

In line with that, you’ll have to pay all the taxes payable by US citizens. Again, go to the local tax administration and learn more about the general rules about taxing digital goods in the US.

What is a tax sales nexus?

Having a tax sales nexus means that you need to pay taxes on the sales made by your business.

In the US, for instance, a tax sales nexus can depend on many things. That way, if you only have a warehouse or employees in a state, your business is subjected to the sales taxes of that state. Similarly, if you have business partners and affiliates in a particular state, you’ll be subjected to the local taxes.

Even if your employees are just traveling through a state, say to attend a trade show, the local tax authorities in some parts of the USA might tax you for the goods you sell there.

Naturally, the most obvious sales nexus is having a direct store or office in a certain state.

When you realize that you need to file a tax return, think about contacting a tax preparer and sorting out all the nuts and bolts of the local taxes on digital products.

Taxing digital goods in the EU and Australia

When you’re making digital sales in the EU, you need to charge the buyer with their local taxes. For example, a French vendor selling a video game to a Spanish buyer will need to take into consideration the buyer’s tax rate for that very product.

Even though this is a common market, VAT rules may vary from country to country, which then leads to differences in taxation terms. That’s why the safest thing to do is read the EU tax guide on the digital economy, just to make sure not to miss any of the tax rules.

As for Australia, each purchase that includes digital goods Down Under is subjected to the 10% tax called GST. In line with that, every product purchased from overseas by an Australian customer will have that tax included in its price.

Conclusion

Business owners need to know that they aren’t the only business subjects that are connecting on the Internet. The tax authorities throughout the world are closely following the latest trends, and they’re trying to get their share of profits. Because of that, digital vendors and customers should find out more about taxation rules in different parts of the world. This guide will help you cover all the taxation bases of your digital sales.

The post Taxation Rules for Digital Goods appeared first on Invoicebus Blog.

Buying products in digital format has become at least equally popular as getting software, movies, music and books in tangible form. Only in the US the revenues generated by music streaming services reached $3.9 billion in 2016. It was more than 50% of the total music revenues in the USA that year.

Similar trends are present in the sales of other digital products, as well. What’s interesting here is the way the IRS attributes taxes to digital products. The already complex taxation system in the States now has an additional feature – imposing taxes on intangible media features.

The terms and tax rates are different from state to state. That’s why we’ve decided to provide you with the basic information about the taxes you’ll need to pay if you’re thinking about selling digital products in the US.

The main categories of digital goods

Every single piece of art or bit of software that’s sold online, without its tangible counterpart is considered a digital product. As opposed to a printed book, a CD, or a record, here buyers get the product they’ve purchased via download or email.

Also, the aforementioned streaming services enable their users to subscribe to their digital content and access it online, without downloading it. If you’ve ever used Netflix of iTunes, you know the drill.

In a nutshell, everything you buy and use in electronic format can, but doesn’t have to be subjected to taxation.

The tax authorities categorize digital products into six main groups:

• Online streaming services;
• Electronic books, like the ones available on Amazon or any other similar service;
• Digital software, both downloaded and used online;
• Digital audio content, like podcasts and the music downloaded from iTunes, Spotify or other services;
• Online motion pictures, like movies and TV-series.
• Other digital goods.

Knowing this basic categorization of digital taxation will come in handy if you’re considering launching a career in the field of digital products. Now let’s move onto the rules and laws in different US states.

The digital tax conditions in different states

Some US states impose taxes on digital sales, while others keep that field tax-free. For instance, digital goods aren’t taxable in New York, Florida, California, and other 20 states that don’t impose any taxes on electronic goods.

On the other hand, Texas, Pennsylvania, Wisconsin and 24 additional states have taxes for digital products.

You can find out more about these two groups of states from the map available on the TaxJar website.

When it comes to the states in which digital goods are taxable, the tax rates vary from 1% to 7%.

Also, bear in mind that you’re eligible to pay taxes on digital products in a state that requires those taxes only if you’re physically present in that very state in any way whatsoever. This is officially called a tax nexus. It refers to any registered business feature you may have in a particular US state, from an office or a warehouse to official employees, affiliate partners etc.

For example, if you have a legally registered affiliate subsidiary in Austin, Texas, every digital product you sell there will be taxed, even though your main office is, say, in San Diego.

Although this might sound harsh, it has a positive side, as well: you can always move your business or some of its branches to the states that don’t require paying taxes on digital products. In that sense, the US still gives you the freedom of choice when it comes to digital products.

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Grasping the gist of digital taxation

When you start analyzing the details of digital taxation state by state, you realize that some parts of the US have really made it as complicated as it gets.

Every US state is very proud of their level of autonomy and their local laws. Therefore, they react promptly if they think any branch of the federal government is trying to take away a single bit of their self-government.

That’s why the two attempts made by Congress to bring a federal act on digital products – Digital Goods and Services Tax Fairness Act – that would be applied throughout the States have failed. The first one was rejected in 2011. The second didn’t pass in Congress in 2015. This common framework for all the US states would reduce the level of complexity and alleviate the taxation process both for sellers and buyers of digital products.

Still, if you don’t live in such states, you won’t have to bother with untangling those complex regulations. You can simply launch a digital business and start (re)selling all sorts of digital goods.

Nevertheless, your business is still eligible for other taxes, so make sure to fill out your tax return in a careful and meticulous way.

Either way, you can always get an extra hand from a tax preparer and check what taxes you need to comply with if you’re selling digital products. Also, the Stripe Atlas tax guide is a great resource if you are a startup.

Basic tips for international sellers of digital products

The global nature of digital sales often produces interesting combinations that include sellers and buyers from different locations.

For example, if you’re a seller who neither lives in the US nor has any business-related elements – the “tax nexus” from the second paragraph – in any of the US states, you don’t have to collect taxes from your US-based buyers. Still, you’re obliged to include all your revenues on your tax return and pay the due taxes in your homeland.

As opposed to that, if you don’t live in the US, but you have a nexus in a US state that has taxes on digital products, you need to pay those taxes. Also, make sure to obtain a sales tax permit. Otherwise, you won’t have the right to collect the sales tax.

Here you can check out what you need to register for a sales tax permit in the State of New York. Other states might have different procedures, so contact the local tax administration in the state of your interest and find out what’s the procedure.

Conclusion

The US taxation system has always been strict but also confusing even for experienced entrepreneurs. The fast growth of the digital market has made the entire tax conundrum even more complex. That’s why digital entrepreneurs need to learn as much as possible about the tax regulations in different states. Also, wise businesspeople will always keep a tax preparer by their side, to cover all the bases and stay informed about all the tax demands. Only such a thorough approach to digital taxation will ensure that you fulfill your tax duties and run your business without any tax-related penalties.

The post Dealing with Taxes on Digital Products in the US appeared first on Invoicebus Blog.

Over the last decade or so the self-employment industry has grown rapidly and come a long way. The growth rate of this industry is more than any other employment segment. This employment sector has created a huge number of income opportunities for individuals and makes a way for their financial freedom. But with freedom comes responsibility. And the responsibility is to manage your income, expenses and file your own taxes. But the process of tax preparation for a self-employed individual is different from personal tax preparation. So it’s better to know the process so that you can avoid any trouble.

Who is self-employed?

Sometimes people find it difficult to differentiate between self-employed individual and traditional job employee. If any person works for himself instead of working for a company and earns his income is called self-employed. If any of the following conditions apply to you then you are a self-employed individual.

• You ran a trade or business as a sole proprietor or an independent contractor.
• If you are a member of a partnership business.
• Or you have a part-time business in addition to your regular job.

Tax obligations of self-employed individual

Under the category of self-employed individual, generally, a person is required to file an annual tax return and pay estimated tax quarterly. As a self-employed individual, you have to pay a self-employment tax (SE tax) as well as an income tax. The SE tax is a social security and a Medicare tax. And it is different from income tax.

Before you can identify your tax obligations, you have to figure out your net profit or net loss from your business. You can calculate your profit or loss very easily. What you have to do is subtracting business expenses from your business income. If your business expenses are less than your income then the difference is a net profit and it’s a part of your income. On the other hand, if your business expenses are more than your business income then the difference is a net loss. You can always deduct your loss from your gross income since in some circumstances your loss is limited.

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Not every self-employed individual has to file an income tax return. If your net earnings from self-employment were $400 or more then you have to file an income tax return. In some special condition (Form 1040 Filing Requirement) you may have to pay income tax regardless of your income is more or less than $400. You also have to file income tax if you are eligible for any of the following credits:

• Credit for federal tax on fuels
• Premium tax credit
• Health coverage tax credit
• Earned income credit
• Additional child tax credit
• American opportunity credit

According to IRS, self-employed taxpayers who might owe more than $1,000 in SE taxes have to make estimated tax payments four times a year. You have to use IRS Form 1040 to file the quarterly taxes.

Preparing self-employed quarterly taxes

Estimated tax is a method of paying tax on income that is not subject to any type of withholding, which includes self-employment income. As I have stated before you have to pay estimated tax four times a year. Moreover, you have to use “Form 1040-ES, Estimated Tax for Individuals” for tax payment. Form 1040-ES is very much similar to Form 1040. Note that you will need your previous year’s annual tax return in order to fill out Form 1040-ES. So make sure that you keep track of your income tax return from one year to the next year.

The form 1040-ES contains blank vouchers. You can use these blank vouchers when you mail your estimated tax payments. Or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your 1^st year as self-employed, then you have to estimate the amount of income you expect to earn for the year. If your estimated earnings are too high then you can complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. Similarly, if your estimated earnings are too low then you can complete Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

Self-employed year-end tax preparation

If you want to file your year-end tax returns then you have to report your profit or loss from a business that you operated. Or from a profession, you practiced as a solitary proprietor. You have to use Schedule C or Schedule C-EZ for reporting. A Self-employed individual with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To help you out, there are instructions on the Schedule C-EZ form. So you don’t have to worry about it.

While filing your annual income tax you have to calculate your final taxes for the prior year. If you paid more taxes then required in quarterly tax payments, you’ll get a refund. On the other hand, if you paid less tax then required in quarterly tax payments, you owe more money to the government.

Tips to save on taxes

If you are a first-time self-employed taxpayer then you can follow these tips to save on taxes.

The tips are:

Startup costs: If your business is newly formed then you can deduct startup costs, including legal fees, the cost of advertisements.

Vehicle expenses: Apart from the mileage deduction and other expenses, a self-employed individual may be able to deduct up to $25,000 of the cost of their car or SUV.

Home office deduction: Another great way to save on taxes for a self-employed individual. If any self-employed worker uses a dedicated space in their home for business purpose then he can deduct a percentage of his home expenses from tax, including mortgage payments, utilities, and property taxes.

Supplies and equipment: You can deduct office supplies and equipment from tax if they were used exclusively for business. For example expenses on paper, computer etc.

Health insurance premiums: As a self-employed individual you can/may deduct what you pay for medical insurance for yourself and your family.

Conclusion

Preparing tax is not an easy task, but now that you have more knowledge about tax preparation for self-employed individual, you can easily prepare your tax if you are a self-employed. Moreover, this self-employment tax guide will ensure that you don’t have to pay additional fees or penalties for underpaying your taxes. Finally, the key to successful tax preparation is to keep track of your expenses all year round. And of course to submit your income tax before the deadline.

The post A Complete Tax Preparation Guide for Self Employed appeared first on Invoicebus Blog.

When you’re preparing to launch your small business, it’s smart to come up with some solutions in advance. One of these features is the tax return.

When you’re at the beginning of your business quest, you might unintentionally leave out some important elements on your tax return. The tax a­­uthorities aren’t famous for being generous to business beginners. Therefore, it’s wise to establish a collaboration with a well-versed tax preparer. Here’s what details you should pay attention to while searching for your personal tax professional.

Ask about their qualifications

Until two years ago, anyone could start working as a tax preparer. From unemployed persons knowledgeable about this area to full-time accountants and financial advisers, the number of freelancing tax preparers would suddenly rise in January and drop in May. That’s the period when tax returns are prepared and handed in.

The IRS had been trying for years to introduce some legal requirements that would prevent fake tax professionals or genuine fraudsters to trick inexperienced businesspeople that way. Finally, in 2015 the Congress brought a set of legal measures that put some stricter competency regulations into practice.

First and foremost, the greatest advantage you can use nowadays as an SMB-owner in the USA is to find your tax preparer in the Directory of Federal Tax Return Preparers with Credentials. The business owners who don’t have any other sources should be able to find their preparer here.

Therefore, always inquire about the qualifications of the tax preparers you take into consideration. For starters, ask your candidates if they have the Preparer Tax Identification Number (PTIN). The IRS started issuing these numbers in 2011 and each licensed tax preparer has to renew it every year.

Apart from that, the IRS is encouraging unregistered tax preparers to start attending their Annual Filing Season Program. So, if you’ve used the services of the same unregistered preparer for years, suggest that they pass this course.

The end goal of all these new rules is to improve the level of security of tax-paying small businesses, as well as to increase the number of properly filled tax returns. It will result in a higher number of paid taxes.

Inquire about the fees

When you’ve analyzed several tax-preparing providers, reduce their number to a few chosen ones. After that, it’s time to call each of them and ask about their fees. Additionally, you can send them emails, since that way you might get more comprehensive answers.

What you should first inquire about is whether they charge hourly rates or flat rates. In case your business has had a tremendous fiscal year, it could require a longer period of work on your tax return. Hence, hourly rates might not suit your budget.

As opposed to that, small businesses with low-profit margins might find that option perfect for their financial situation.

A rule of thumb is that the entrepreneurs who are turning in itemized tax returns pay more than the ones who file plain returns without deductions. According to the tax-related post published by American Express, the former might pay up to $273 per return, while the rates for the latter start from $173. The same source claims that a business turning in a Schedule C, together with an itemized return, might pay as much as $457 per return.

As you can see, by paying a reasonable amount of money to a tax pro, you’ll remove the risk of making a mistake by filing your tax return on your own.

Also, you can form a special saving fund and put some money aside throughout the year, to prepare the budget for the taxation season.

Certified public accountants or registered tax preparers?

A certified public accountant (CPA) is an accounting professional who has passed the chamber exams and is licensed to perform any accounting operations for businesses.

While it’s highly likely that you’ll need this type of professional at the beginning of your small-business career, not all CPAs work as tax preparers. For instance, you’ll hire a CPA in case you need a professional to help you deal with the IRS in case of appeal or issues with audits, payments or tax collections. Also, these professionals are a perfect fit for entrepreneurs-to-be or those who are getting ready to close down a business, as accounting advisers for their needs.

As for the tax preparation, it’s clever to first ask them about their previous experience with these forms.

If you’ve had a CPA by your side since the moment you started your business, it’s logical to first turn to them in search for a tax preparer. Even if that’s not their kettle of fish, they might give you a reliable reference for tax preparers.

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Think about enrolled agents

Enrolled agents are tax preparers who have passed an IRS exam covering various aspects of taxes, from company and individual tax returns to tax planning.

The most interesting thing about enrolled agents is that they usually concentrate on one tax field and specialize it for their professional work. So, make sure that you find the one that is proficient in the type of taxes you need on your tax return.

The easiest way to find them is to search the database of the National Association of Enrolled Agents. On the one hand, you won’t waste your time looking for the right tax preparer in other sources. On the other, you can easily spot an enrolled agent in your geographical area. This is a great advantage, due to the fact that some tax regulations differentiate from state to state.

Tax attorneys for troubled businesses

If the IRS finds any irregularities in your tax return, they’ll report your business and file a suit against it. Some people would say that this is the right time to hire a tax attorney.

However, this might be just too late for such a move. As a matter of fact, it would be clever to consult a tax attorney before you’ve even set up your business. For instance, they can help you choose the right business structure, tax-wise.

What’s more, tax attorneys – as experts in tax law – can provide you with the information necessary to master international tax rules. This will be of great help for entrepreneurs working with foreign companies.

As for the references, check if your potential tax attorneys are members of the Federal Bar Association. That way, you’ll know that you have an experienced and licensed tax professional behind your back.

Conclusion

Finding a tax preparer for your small business is one of those fundamental business prerequisites. They’ll do their best to make your tax return impeccable and avoid any potential issues with the IRS. What’s more, keeping a tax preparer by your side before and after the tax season, as well, will help you run your business more efficiently and develop it in a successful way.

The post How to Choose a Tax Preparer for a Small Business appeared first on Invoicebus Blog.

No matter what country in the world you work in, the taxes you have to pay depend on the type of your business. Since many new business owners don’t fully understand how their business structure affects their taxes, we’ve prepared a guide that will clarify this link. From the Limited Liability Company (LLC) to the corporation and the sole proprietorship, you’ll get a better insight into different forms of business. As a result, you’ll have more information about the best option for your particular case.

Taxation for the Limited Liability Company (LLC)

The greatest advantage of the LLC is the fact that your personal and business assets are two separated features in this type of business. This is an extremely practical option when your business is in financial dire straits and you get sued or the bank blocks your account.

If you’re the owner of an LLC, you’ll only be liable for the business-related assets. Your home, your car(s) and any other personal assets aren’t considered a part of your business assets.

Regarding the taxes, as the owner of an LLC, you’ll have to pay taxes on your part of the profit that the business makes. For example, let’s assume that you’re the only owner of an LLC and that your venture has made $50,000 during one fiscal year. If you want to leave a part of that amount – say, $15,000 on your account for some business expenses that you’ll have in the following fiscal year, you have to report the entire annual income to the IRS and they’ll charge you for that sum.

Moreover, if you don’t only own an LLC, but you work in it, as well, you’ll also require covering the taxes pertaining to the self-employment status.

Additionally, you can choose to have your LLC treated as an S-corporation by the IRS. In that case, you’ll be able to divide the income into two parts. The first one will be used as your salary and the other one will be assigned to the distributions. However, it’s important to give yourself a common salary for your niche, since your social security tax and Medicare payments are deducted from your salary. The IRS will check that sum, so don’t try to trick them by setting too low a salary and leave more money in the distributions.

The corporation business structure and taxation

A more complex and advanced form of business, the corporation, completely separates you from your business. The biggest benefit of this business structure is the fact that your personal assets are completely independent of your company assets.

For instance, if someone wants to file a legal complaint against your corporation, your private assets will stay intact, regardless of the court decision.

Also, when you and your business partners want to take a loan for the corporation, the credit bureau will check the rating of the corporation and not your personal credit history.

As for the taxes, the corporation is a taxable entity, which means that taxes are paid directly on the profits of the corporation.

However, there’s a difference between taxes for S-corporations and C-corporations. The former structure is a more viable option for business owners who want to have their income and losses forwarded to their personal income, as shareholders.

The C-corporation, on the other hand, enables business owners to retain some part of the income within the business. That way, they’re taxed only for the amount they get in the form of distributions.

Going for the C-corporation taxation system is the best solution for the business owners who are planning to expand their business in the near future. Those assets will serve as the future investment for that purpose.

However, going for either of these two business structures will result in increased paperwork.

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Sole proprietorships for business loners

Some fields of work and projects don’t support teamwork or having employees. If you work in such a niche, the best choice for you is to register your business as a sole proprietorship.

On the positive side, you don’t have to bother with too many administrative works, but you can simplify the business accounting process. You need to file your entire income on your Schedule C, together with the Form 1040 for your business.

The negative aspect of this business structure, tax-wise, is the fact that your personal assets are liable for your business losses. What’s more, everything you make via your business is reported on the same tax form. When your personal income is considered your personal income, you might experience certain inconveniences your business is sued or falls in debt.

Also, as a sole proprietor, you’ll be obliged to pay the self-employment tax – read social security and Medicare.

For all these reasons, choosing the sole proprietorship business structure is the most practical solution for business individuals who aren’t planning to make too high annual profits. Moreover, it’s a suitable solution for the entrepreneurs who aren’t running high business risks. As a result, they won’t expose their personal assets to any hazardous business moves, which is a dangerous thing to do in this form of business.

Conclusion

When choosing the best type of business structure for your business is to start from the least complicated one. In line with that, individual entrepreneurs should start with a sole proprietorship. On the other hand, a group of aspiring business owners will find the best business combination in the LLC business structure. Also, more ambitious and determined pros can use the benefits of the corporate business form.

Finally, your tax preferences will also affect your choice of business structure, as well as your business plan, i.e. whether you want to invest the earned income in the future deals or pay yourself a salary. Only when you weigh the pros and cons of all these tax aspects should you go and register your business.

The post Get Ready for Taxes – Choose the Right Business Structure appeared first on Invoicebus Blog.

When the taxation period comes, business owners need to take into account the key tax considerations. The end goal for every entrepreneur during the tax season should be going through that stage without inducing too much stress. In order to reduce the taxation-induced tension, it’s vital to be well-prepared for all the requests your local tax administration might have. Especially if you’re a business novice who still doesn’t know all the tricks of the trade. Since the USA have one of the most progressive tax systems in the world, we’ve decided to help future business owners by presenting some essential American tax rules.

Make a stash of bills and receipts

According to the IRS regulations, every business owner is obliged to keep a business receipt or a bill for six years from the date of the tax return. Also, the copies of these documents are acceptable, as well.

Therefore, it’s extremely important to make a stash of your bills and receipts, so that you can justify every single expense you make for your business.

Nowadays, you can connect your business bank account with a wide range of expense-tracking apps. That way, you won’t miss a single expense, since your software will record every single purchase you make for the business. What’s more, this tool will help you spend your money in a more responsible way.

Additionally, don’t forget about your travel and leisure expenses. For instance, if you go to a business conference in Palm Springs, make sure that you keep all the receipts, from your plane tickets to specified hotel expenses.

Nevertheless, it’s not necessary to send all those separate bills to the IRS. You should include them in your tax return as expenses and save them. That way you can prove your tax return in case the tax officers knock on your door.

Work with a tax preparer

When you’ve only set your foot onto the business ground, you might not be able to deal with all these regulations by yourself. This is why you’ll need to choose the right tax preparer for your business, to assist you in sorting out your tax duties.

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First of all, this professional will tell you what tax form your business is eligible for. In a nutshell – LLCs owned by one person and sole proprietors should file Form 1040, with a Section C attached to it. On the other hand, LLCs owned by several people and business partnerships will file Form 1065. You’ll learn more details about these conditions from your tax preparer.

What’s extremely important when it comes to the tax preparer is to prepare all the documents in advance. Those professionals aren’t Salvation Army and their services will cost you a fair amount of money. To make your work with them efficient, deliver your balance sheet and income statement in advance, as well as your journal entries. That way, they’ll be able to go through your books before they get to your office. It will save both your time and assets.

Keep your business information updated

Apart from details about your profits, losses, and expenses, the tax authorities will need the accurate information about your business. In line with that, it’s vital that you provide your physical address, social security number, and your business name. So, make sure that you correctly write the registered brand name and don’t omit a letter or symbol.

When it comes to your personal name, you need to inform the Social Security Administration at once in case you’ve changed something. For instance, if you got married and changed your last name, those changes have to be registered by the SSA.

As opposed to that, if the name on your SSA file doesn’t match the name on your tax return, you might have inconveniences with the IRA. If nothing else, it will cost you some time. So, make all these changes on time, to avoid any additional problems.

Finally, if you use a different Employer Identification Number – EIN – for your enterprise, don’t forget to include that figure in your tax return, as well.

Track your assets sales/purchases

No matter what field you’re in, you’ll always have some expenses pertaining to your business assets. For instance, if your business requires an office computer, you might have to buy one. Also, you might need to buy some new equipment for your office, such an air-conditioner.

On the other hand, selling office items is another way to free some money to buy some new assets.

All these transactions need to be recorded and kept in your books, in order to try to make any deductions.

What’s necessary here is the price of the item in question. The date you started using it for your business and the date you sold it. Also, the money you made by selling it should be taken into account, as well.

All these elements will be used to calculate whether your business has gained or lost money via that purchase/sale. That way, the IRS will decide whether it’s deductible or not.

Insist on timely payments

One of the major tax considerations is late taxation. What new business owners need to know from the very beginning is that filing a tax return after the deadline is an expensive option. Not only that you’ll face a penalty, but you’ll also get a special mark in your IRS file. Consequently, all your tax returns in the time ahead might be under greater supervision. What’s more, your business could get more attention than you’d like.

What could lead you to break the taxation deadline are untimely payments. In this part of your business, it’s essential that you set some strict rules and hold on to them. In line with that, you could tolerate late payments only to a handful of reliable, long-term clients. Even then, make sure to send out regular reminders.

For all other clients, speak your mind at the beginning of your collaboration and inform them about your zero tolerance policy on late payments. As you set the firm invoice payment terms, it will be much easier for your business to handle the payments. Hence, you’ll be able to fill out and file your tax return on time and avoid any problems with the IRS.

Conclusion

When you’re dealing with your tax considerations, make sure that you always keep educating yourself. The more you learn with every new tax return, the less stressed you’ll be for the next one. You’ll do a great job, if you keep all your business papers and records in order. Still, always track all your expenses and don’t tolerate late payments. Following all these steps will take you through the tax season in a smooth and efficient way without stress.

The post How to Survive a Tax Season without Stress appeared first on Invoicebus Blog.

Since the collaboration between the members of the EU and other countries is increasing, both EU-based and non-EU business owners need to learn more about the taxation system of this large market and the differences within it.

The most important tax for everyday business transactions in the EU is the value-added tax – VAT.

According to the definition provided by Business Dictionary:

VAT is an indirect tax on the domestic consumption of goods and services, except those that are zero-rated (such as food and essential drugs). It is levied at each stage in the chain of production and distribution from raw materials to the final sale based on the value (price) added at each stage.

In order to break it down to more understandable bits, we’ve prepared a guide that will help you get the gist of VAT and learn what details you should pay attention to no matter whether you’re located in the EU or you collaborate with EU-based companies.

Who pays VAT and when?

To cut a long story short, VAT is paid by the seller of goods. However, since this tax refers to the value added with every new step of the production process and every new sale, the direct payer is the consumer.

For instance, if the standard VAT rate is 20% and you want to buy a chocolate that costs €1, you’ll pay €1.20 for that chocolate. As the customer, you pay the 20% VAT rate on that product. The seller is charged that 20%, which is in return collected by the state.

Nevertheless, if the buyer uses the purchased products for their business, they can deduct the tax paid for those goods from the tax charged to their customers. In that case, the government collects only the difference. On one hand, it’s a practical strategy to subsidize businesses and reduce their payments. On the other, the government still gets some amount of money via VAT.

That way, everybody who pays VAT is a taxable person, while every business entity that is charged VAT is an accountable person. You can find out more about this categorization on the example of the Irish VAT system.

When to register?

If you’re a domestic business in any of the EU-members, your eligibility for VAT will depend on the VAT threshold in your country of residence.

These limits vary from country to country, which is why every new business owner should gather information about the conditions in their country. Find out more about these thresholds here.

As for non-EU companies, the governments of the EU-members apply the nil-threshold rule. So, here’s when it’s obligatory to register for VAT:

• If you run a business that sells goods in several different countries inside the EU, i.e. importing from one member country to another.
• If you run a non-EU business that makes transactions in one of the member countries. You can learn more about this here.
• If you’re organizing any events in an EU-country (e.g. business conferences, training sessions, entertainment events) and charge the tickets.
• If you run a company outside the EU, but stock your goods on the territory of the EU and deliver them from there.
• If you’re an EU-based business that sells to entities inside the EU and exceeds the domestic threshold for distance sales, you have to be registered as a non-resident, VAT-charged company.

At this point, it’s vital to know not to play with the tax authorities but to register for VAT if you meet any of the registration conditions. Otherwise, you’ll face severe penalties that could put your entire business at risk.

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How to get and use the VAT-number?

Now that we’ve clarified who pays VAT and who is obliged to register, it’s time to explain the importance of the VAT-number. In a nutshell, this number is assigned to your business by the local government taxation office for every identification and taxation purpose.

As you register your business that way, it becomes eligible to collaborate with other EU-based businesses.

Moreover, the existence of VAT-identification numbers reduces the risk of being scammed on the territory of the European Union. To be more precise, you can search the European Commission VIES search engine for any business you’re interested in and check if they’re a VAT-registered entity.

This option enables EU-based companies to gather more information about their potential business partners and get a better insight in their professional status. As a result, they can make their decisions on the basis of thorough business facts.

How to charge VAT to (non)-EU businesses?

When you’re selling a product to the resident of another EU-country, there are two possible situations and belonging scenarios:

• Selling goods to an EU-business – Collaboration between two EU-based businesses is VAT-free if the other party has a valid VAT-number. Still, you can deduct VAT from the amount of money you spent to ensure proper conditions for this collaboration.
• Selling to customers – If you’re below the aforementioned VAT-threshold, there’s no need for registration in the buyer’s country. On the other hand, transactions that exceed those limits require registering and paying VAT in that country.

Conversely, when you’re buying from an EU-business, you need to pay VAT in your own country. Such a transaction is treated as if you yourself sold the products. However, this taxed amount is deductible later, since it will be treated as an investment for your business.

Furthermore, there are certain rules regarding collaboration with non-EU enterprises:

• Selling to a non-EU business – In this case, you won’t charge VAT. Nevertheless, you can deduct the VAT on the amount spent for the materials used to make those products you’re about to export.
• Buying from a non-EU business – The amount included in this transaction has to be charged. VAT is paid upon the reception of the goods in question, at the point of import.

The amount of money you’ll need to pay will depend on particular VAT-rates. Although VAT is a universal tax in the EU, its rates may vary. Apart from that, every country has some reduced rates, in addition to standard VAT-rates.

This is why it’s wise to find out more about different VAT rates before you set out for a business deal with other EU-based businesses.

When to submit a VAT return?

Business owners should know that their obligations related to VAT don’t end with charging VAT for individual sales and purchases. Depending on their country of residence, they will have to hand in VAT returns several times a year.

For instance, entrepreneurs residing in the UK have to submit this return quarterly. When it comes to its content, this return should contain the following financial details:

• The total number of purchases and sales performed by your business during the accounting period.
• What amount of VAT you are eligible to reclaim.
• How much assets on account of VAT you need to pay.
• The amount of VAT you can refund from your tax authorities.

No matter whether or not you use an accounting software tool, you should always keep a reliable accountant by your side. They will come in handy to help you make your VAT-reports and returns.

Also, bear in mind that you need to hand in a VAT-return even if your VAT sheet is clean, i.e. your business doesn’t need to reclaim or pay any VAT.

How to issue eligible invoices?

If you want to keep your financial documentation in order and work in accordance with the law, it’s vital to maintain proper invoicing.

When it comes to the sole process of issuing invoices, today you can use various automation tools and invoice providers such as Invoicebus to make this procedure as smooth as it gets. However, relying on software is pointless if you don’t know when and how to issue your invoices.

The major rules related to invoicing on the EU market are the following ones:

• Printed and electronic invoices are valid in equal measure. Every business can choose which type they prefer.
• Businesses are allowed to redirect invoicing to other enterprises – outsourcing – if they don’t have the capacity to perform that action on their own.
• Companies can store and keep invoices in any way they prefer (in the cloud, on paper etc.)

Moreover, invoicing rules can vary from country to country.

The rule of thumb is that you need to issue an invoice if you provide another business or a non-taxable organization with some services or products.

In this case, the organizations in question should be VAT-free entities.

On the other side, in some cases, it’s obligatory to send an invoice to a person. Such situations include distance selling when the products are taxable in the country where you send them, as well as providing vehicles for a customer in another EU-country.

Apart from that, when selling services or products to a business outside your country but inside the EU, you won’t include VAT in your invoice. It will be calculated and charged by the tax authorities in your client’s country of residence.

The same rule applies when providing goods for non-EU clients, in which case the local tax authorities will impose their own importation regulations.

Do I need to fill in Intrastat reports?

Due to the diversity of the EU market and the growing desire to unify it as much as possible, businesses working on this territory are obliged to fill Intrastat reports if their annual revenues exceed the Intrastat threshold set for their country.

Here you can check out these limits for each member of the European Union.

On the one hand, it serves as the central database for the governments to track statistical data on trade inside the EU and their position within this system.

On the other side, Intrastat plays a major role in reducing the number of VAT frauds. So, if the total amount of sold and purchased goods exceeds the threshold in your country, your Intrastat filling needs to consist the following information about each transaction:

• Value and quantity of the goods
• Country codes for departure and arrival.
• Detailed description of the sold and purchased products.
• Commodity code for the products included in the transaction.
• Conditions regarding delivery.
• Shipping costs, if any.

By delivering data about your business and its VAT-returns, you contribute to keeping the European Union a transparent economic system. What’s more, all the information gathered that way will be used to create new business agendas for the benefit of business owners across the EU.

E(U)ntrepreneurs will be treated to advanced market conditions, which is why every eligible business owner is required to provide accurate data about their transactions.

Conclusion

The European VAT-system is meant to maintain fair conditions for businesspeople participating in the market that comprises more than 740 million people.

Although there are differences between the members of the EU, the existence and proper implementation of VAT ensures that no business is taxed twice for the same transaction.

As a result, we have a volatile market that offers equal opportunities to millions of businesses working inside the EU.

The post How to Master VAT in the EU – 7 Major Tips appeared first on Invoicebus Blog.

With a GDP of $16.229 trillion and a population of about 750 million people, the European Union is one of the most important business regions in the world. This vast geographical and economic area is made up of 28 independent countries. Their individual economies are joined together into the European Single Market. This common market enables the free movement of people, services, capital and goods across the countries who are members of the European Union.

Due to the benefits provided by free trade, the EU represents the unique and most populous economic commonwealth of different countries in the world. And while the general tendency of the European Commission – some sort of the government of the EU – is stronger unification of rules and regulations, some important laws and measures are left to be set by the governments of the EU-members.

This specific nature of the EU forces enterprises that have headquarters outside the European Single Market to learn more about the economic rules, both of the entire community and its individual countries. One of the most important such measures is VAT (value added tax).

After reading this piece, you’ll get a better insight into the structure of this tax and how it can affect your business.

Consumption tax paid by customers

In a nutshell,

VAT is a special tax on a consumer’s purchase, paid by customers when they buy a product or a service on the territory of a member of the European Union.

While the US taxation system is directed towards incomes and revenues, the EU and its members apply a different taxation strategy. Although there are also separate taxes on incomes and other financial transactions, VAT serves as a special leverage used by national governments to increase their budgets. This tax is usually justified by a wide range of social services that governments of the EU-members provide for their citizens.

Contrary to that, critics of this taxation model claim that it’s completely unfair. Their arguments are that both well-off and poor consumers have to pay the same tax. Moreover, there are some serious objections that excessive regulation of VAT and other taxes would put small businesses at risk.

Nevertheless, those rules are here and non-EU companies have to comply with them.

Different countries, different rates

The European Commission brings general directives when it comes to VAT and other taxes related to non-EU digital companies. Nevertheless, they don’t interfere with the local taxation policies of its members. As a result, VAT rates differ significantly from country to country. Some governments want their economies to embrace the innovations in the IT-sector and develop this of economy. For instance, Italy has a reduced 4% VAT rate for digital publications. Moreover, France keeps a low 10% VAT-rate on cable TV.

On the contrary to that, some countries lead a high-rate VAT policy. That way, the VAT rate in Hungary is 27%. Here you can see an overview of full and reduced VAT rates for all the EU-countries.

As you can see, local VAT can differ a lot, which is why non-EU business should inquire a lot before they start selling their services in EU-countries.

(VA)Taxation of digital services

The Information Revolution has been gradually changing the VAT rates and regulations throughout the Common market since the beginning of 2000s. The first major decision was brought in 2003, when it was determined that non-resident businesses are obliged to pay VAT on digital products and services sold in any of the EU-members.

In accordance with these taxation rules, the VAT rates that were to be paid were the ones valid in the country where the business was registered – there were still only 15 “old” members back then.  However, although this was an official decision, it was interpreted loosely by international businesses working in the EU (mostly US companies). To be more precise, there was a legal loophole for non-EU businesses, since VAT depended on the country of registration. Hence, companies registered in USA or any other non-EU country managed to dodge paying VAT.

As the share of the digital market in the total GDP of the EU was growing, its members had to consider new mechanisms for collecting VAT on digital goods. After more than a decade, the European Commission had to bring new regulations.

As of 1 January 2015, the VAT rate is determined by the location of the consumer.
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Those new conditions force non-EU businesses to take care of their financial reports and pay VAT in one of the countries in the EU.

Which digital services are taxable?

The number and range of available digital services are rapidly growing. Therefore, it’s important for every business planning to start selling their services in the EU to learn whether or not their services have to comply with the VAT regulations.

• TV and radio services – Any audio-visual content that can be listened to or watched on different media channels by users in a particular EU-country.
• Web streaming – Any live streaming program that’s aired at the same time via local broadcaster
• Electronically provided services – SaaS solutions, hosting services, music, films, video games, online magazines, photos, e-books, commercial PDF-files.
• Various forms of telecommunication – Internet-provided telephone services and any form of video calling. Voice mail, caller identification and other calling options performed via the Internet.

If your business offers any of the aforementioned services to EU-residents, you have to register in the EU-country where you offer your services and make your business accountable for VAT. Also, there are some services offered and sold via the Internet that aren’t in the VAT system. Read more about them on the website of the UK Government.

Detailed sales data for VAT documentation

So, due to the firm VAT regulations valid from January 2015, the sellers and providers of digital services and products in the EU are required to collect and keep details regarding every purchase they have in this area.

What’s more, they also need to gather data about the location of each customer that buys digital goods from them. In line with that, every non-EU business working in the field of digital services will have to use special accounting features that will be able to locate their consumers. That way, the local tax authorities in every EU-country in which the seller manages to sell a digital item will have a clear insight in the sources of the seller’s revenue. Moreover, the seller will also need to calculate its VAT liability on the basis of that revenue, so that all the figures in their reports match.

What is different, however, is the business-to-business (B2B) digital collaboration. In this case, a non-EU business can use the 0% VAT rate. This is so due to the reverse charge system. If a non-EU business wants to prove that they’ve had deals with some EU-based businesses, they have to include VAT registration numbers of each and every EU-business they worked with. That way, your business won’t be penalized, since you’ll have clear evidence for the business deals closed with other companies.

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Consumer data and privacy policy

Gathering and keeping consumers’ data is a red zone when it comes to their privacy. According to the reform of the privacy law conducted by the European Commission, the European Parliament and the Council of Europe, Internet users living in the EU will have better protection from data theft in the future.

What a non-EU business owner might wonder here is how they will be able to collect and keep the data regarding their consumers if the EU authorities are preparing such a strict law concerning online privacy.

• First of all, every online sale will include a simple form that every buyer of your digital products or services will have to fill in. They will have to give you their country of residence. Here you’ll need at least two proofs that will support their claim. It can be the IP address, the country code of their mobile phone number, the buyer’s landline phone, the billing address of the consumer, or the location of the bank through which the payment has been made.
• Secondly, your buyers will need to type in their VAT number in that form. This is an extremely important piece of information since it will tell you whether it’s a business or a person. If it’s a business client, you can check their VAT identity with the VIES search engine.
• Thirdly, this form will need to contain the price of the purchase, so that the total amount invoiced can be calculated.
• Finally, the peak of this procedure is the amount of VAT charged for the purchase in question.

When your financial reports are inspected by tax authorities, those data will be thoroughly analyzed. This is why you have to make sure all of them are collected and kept in your business reports. Some software accounting tools might also come in handy, so as to automate those calculations.

On the other hand, don’t keep any other data about your consumers, such as their credit card of bank account numbers. The aforementioned privacy law will penalize companies that retain such data.

The MOSS taxation program

All the taxation features described in this piece might repel some non-EU businesses from working on its territory. Since the EU-authorities must have thought the same, they’ve also included some mechanisms that make the entire VAT-registration much easier. The most important system for both EU-based and non-EU businesses is the

The most important system for both EU-based and non-EU businesses is the Mini One Stop Shop service (also known as MOSS). In order to avoid filing a tax return in every EU-member your goods are available in, companies can use the benefits of this practical system. So, when you hand in your quarterly tax return, the VAT collected on that occasion will be distributed to all the countries where your consumers reside. This helpful mechanism reduced the financial hassle for businesses making sales in the EU.

This helpful mechanism reduced the financial hassle for businesses making sales in the EU.

Consequences of avoiding VAT

Just like in any other system, you can try to dodge some rules. However, if you decide to play that move, you need to know that it might be an expensive game. On one side, it might happen that your sales don’t catch the eye of the national tax authorities in the country you’re working in. On the other side, if you get caught, the consequences your business will have to face will be unpleasant.

Firstly, you’ll have to pay high penalties as a tax avoider. Those repercussions won’t only include the current year. On the contrary, the tax officials will go through your financial reports backwards. Therefore, you’ll have to pay all the unpaid taxes retroactively.

Secondly, your present business deals will become impossible, since you’ll spend a lot of assets to cover all the VAT debts. Such a situation will undoubtedly put your entire enterprise at risk of being swept away from the business map. For instance, Apple survived their €13 billion penalty tax violation, but a smaller and less powerful company would most probably have to close down.

What’s more, if you don’t pay the penalty, you might be sentenced to jail, as well. Since the tax regulations in the EU are getting harsher, the future will bring stricter penalties, so bear that in mind.

Every business that wants to work in the EU and sell their digital services to its citizens has to get familiar with all the rules in that vast community. From the central directives, brought by the European Commission, to individual VAT-rates and regulations of each of the EU-members, gathering information is the crucial preparatory action.

We have to accept that every business region is trying to protect their interests and make profits from companies that aren’t registered on their territory. Nonetheless, if your non-EU business offers innovative digital services and cutting-edge equipment, it won’t be a problem to find a place for your business deals within the EU surroundings. For all these reasons, don’t hesitate to start your business venture in the European Union. Just make sure you report every single sale in your tax return and enjoy long-term benefits of such business policy.

The post What non-EU Enterprises Need to Know about VAT appeared first on Invoicebus Blog.