Hello and thank you for your question.
The sale of services where no tangible personal property is
transferred or where the transfer of property is incidental, are not
subject to sales and use taxes.
California Publication 61,
Sales and Use Taxes: Exemptions and Exclusions
http://www.boe.ca.gov/pdf/pub61.pdf
page 23
There are some exceptions to this, which you can read about in
Publication 61, but none apply to the business you describe. [The
nearest exception, where sales tax would be due on in-state sales,
would be if customers sent you computer parts and you provided the
'service' of fabricating hardware from the parts.]
The 'use tax' is not a tax on services either - - it's just the way
that California hopes to collect tax from you or me on our Amazon.com
purchases and the like - - goods that we purchase from an out-of-state
seller and "use" in our home state:
"Generally, the same types of items that are subject to sales tax are
subject to use tax. Sales and use tax applies to the sale or use of
tangible personal property in California. Section 6016 of the Revenue
and Taxation Code defines tangible personal property as "personal
property which may be seen, weighed, measured, felt, or touched, or
which is in any other manner perceptible to the senses."
http://www.boe.ca.gov/sutax/faqusetax.htm#1
So what sort of tax will you need to pay?
Whether you do business as a sole proprietor or if you form a wholly
owned LLC to serve as the business entity, you will pay the usual
federal and California income tax on your personal taxable income
(generally, your income minus ordinary and necessary expenses,
depreciation, etc.):
California Forms
http://www.ftb.ca.gov/forms/
California Rates
http://www.ftb.ca.gov/individuals/tax_table/index.asp
California Law
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=17001-18000&file=17071-17078
Federal Forms
related:www.irs.gov/pub/irs-pdf/f1040.pdf
Federal Rates
http://www.irs.gov/formspubs/article/0,,id=150856,00.html
Internal Revenue Code
http://www.access.gpo.gov/uscode/title26/title26.html
Search terms used:
california services tax
"income tax" site:ca.gov
joint 2006 rate site:irs.gov
"internal revenue code"
Thanks again for bringing us your question. If you have any specific
concerns, please post a Request for Clarification and I'll be happy to
help. I would appreciate it if you would hold off on rating my answer
until I have a chance to respond.
Google Answers Researcher
Richard-ga |
Request for Answer Clarification by
mrosen-ga
on
07 Jan 2006 16:39 PST
My business is a business very similar to PayPal, where I will be
receiving funds from one party, and redistributing these funds to
another party.
I will be taking a transaction fee from each transaction. For
example, the bank may charge me a 2% fee for accepting credit card
payments through my merchant account, but I will be charging the user
a 2.5% fee to the user. Will I be taxed on the entire 2.5%, or just
my revenue of .005%? And what are the exact federal and state tax
percentages? Thank you.
|
Clarification of Answer by
richard-ga
on
07 Jan 2006 18:39 PST
Hello again
You would only pay income tax on the net income, that is, the .5% that
you make on each transaction (and even this figure would be reduced by
most other expenses you incur in earning the income, for example the
costs to you of maintaining the website, telephone charges you might
incur in setting things up, etc.).
The tax percentages run on a sliding scale. If you will tell me
whether you are married or single, how much taxable income you (and
your spouse assuming you file jointly) earn from all other sources,
how much net income you expect to earn in a year from this activity,
and approximately what your other deductions are (the total of things
like mortgage interest, charitable contributions, etc.) I can figure
out the tax bracket I need to compute the state and federal tax (and
self-employment tax, which is a social security-type tax) you'll pay
on the income you earn from this activity.
Looking forward,
Richard-ga
|
Request for Answer Clarification by
mrosen-ga
on
07 Jan 2006 19:54 PST
Thanks for your response!
I am not married.
First year net income should hopefully reach approx.
$30,000.00-50,000.00...but will increase every year hopefully.
Deductions would include: computers, internet connection, office
lease, office equipment, transportation, phone, etc.
I don't pay a mortgage.
Thank you very much for this clarification!
|
Clarification of Answer by
richard-ga
on
08 Jan 2006 08:36 PST
Thank you for the rating and tip!
I have calculated the tax rates you can expect to pay if you net
$30,000 to $50,000 before deductions. These are 2005 rates, but the
2006 rates won't be significantly different.
For the California tax, your situation is simple enough to base an
estimate of on the California 'short form' 2EZ tax table, which has
the standard deduction and personal exemption built in.
http://www.ftb.ca.gov/forms/05_forms/05_5402eztt.pdf
Income of $30,000 incurs a California tax of $ 679;
Income of $50,000 incurs a California tax of $2,225.
Because you will want to take advantage of deductions for expenses,
you probably will not end up filing the short form 2EZ because the
business expense deductions will give you some further savings on the
regular tax form.
As far as California tax rates, $679/$30,000 gives an overall rate of
about 2.3%, and $2,225/$50,000 gives an overall rate of about 4.5%.
On the federal side, we can also use the 'short form' 1040 EZ as the
best estimate of your federal tax, even though you'll be filing
regular Form 1040 and Schedule C (see below).
http://www.irs.gov/pub/irs-pdf/f1040ez.pdf
The tax table starts on page 24 of the instructions
http://www.irs.gov/pub/irs-pdf/i1040ez.pdf
Here the federal tax on $30,000 is $4,171, and the
federal tax on $50,000 is $9,171.
Again, because you will want to take advantage of deductions for
expenses, you probably will end up filing the regular Form 1040 and
Schedule C
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
which is where you will lower you tax by taking the business expense deductions.
So the federal tax rate on $30,000 is about 14% overall, and the
federal tax rate on $50,000 is about 18% overall. [This includes your
personal exemption and the standard deduction.]
Finally, don't forget self-employment tax
http://www.irs.gov/businesses/small/article/0,,id=98846,00.html
The self-employment tax rate is 15.3%. The rate consists of two parts:
12.4% for social security (old-age, survivors, and disability
insurance) and 2.9% for Medicare (hospital insurance).
$30,000 * 15.3% = $4,590
$50,000 * 15.3% = $7,650
Again, you'll pay a little less than this because deductions for
expenses on Schedule C will reduce you income subject to tax.
So in answer to your question, the state + federal tax rate that you
can expect to pay is
(2.3% + 14% + 15.3%) = 31.6% on about $30,000 of self employment income
or
(4.5% + 18% + 15.3%) = 37.8% on about $50,000 of self employment income.
Thanks again for giving me the chance to work on your question!
Richard-ga
|
Clarification of Answer by
richard-ga
on
08 Jan 2006 08:59 PST
Sorry, I found an error in my calculation.
The tax table that we used for the federal tax has a 7.65% employee
social security tax built-in (half of the 15.3% that a self employed
person pays), so since I charged you the full 15.3% for
self-employment, we need to subtract 7.65% from the federal income tax
that the table gives.
Here is the corrected answer:
------------------------------------------------------
I have calculated the tax rates you can expect to pay if you net
$30,000 to $50,000 before deductions. These are 2005 rates, but the
2006 rates won't be significantly different.
For the California tax, your situation is simple enough to base an
estimate of on the California 'short form' 2EZ tax table, which has
the standard deduction and personal exemption built in.
http://www.ftb.ca.gov/forms/05_forms/05_5402eztt.pdf
Income of $30,000 incurs a California tax of $ 679;
Income of $50,000 incurs a California tax of $2,225.
Because you will want to take advantage of deductions for expenses,
you probably will not end up filing the short form 2EZ because the
business expense deductions will give you some further savings on the
regular tax form.
As far as California tax rates, $679/$30,000 gives an overall rate of
about 2.3%, and $2,225/$50,000 gives an overall rate of about 4.5%.
On the federal side, we can also use the 'short form' 1040 EZ as the
best estimate of your federal tax, even though you'll be filing
regular Form 1040 and Schedule C (see below).
http://www.irs.gov/pub/irs-pdf/f1040ez.pdf
The tax table starts on page 24 of the instructions
http://www.irs.gov/pub/irs-pdf/i1040ez.pdf
But we need to subtract 7.65% because Form 1040EZ includes the social
security taxes that an employee pays, and I'm calculating your self
employment tax separately, below.
The table puts the federal tax on $30,000 at $4,171, and the
federal tax on $50,000 is $9,171.
So after subtracting 30,000 * 7.65% and 50,000 * 7.65%, respectively,
you will pay $1,876 of regular income tax on 30,000 or $5,346 on
$50,000
Again, because you will want to take advantage of deductions for
expenses, you probably will end up filing the regular Form 1040 and
Schedule C
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
which is where you will lower you tax by taking the business expense deductions.
So the federal tax rate on $30,000 (not counting self-employment tax)
is about 6.2% overall, and the federal tax rate on $50,000 (not
counting self-employment tax) is about 10.7% overall. [This includes
your personal exemption and the standard deduction.]
Finally, don't forget self-employment tax
http://www.irs.gov/businesses/small/article/0,,id=98846,00.html
The self-employment tax rate is 15.3%. The rate consists of two parts:
12.4% for social security (old-age, survivors, and disability
insurance) and 2.9% for Medicare (hospital insurance).
$30,000 * 15.3% = $4,590
$50,000 * 15.3% = $7,650
Again, you'll pay a little less than this because deductions for
expenses on Schedule C will reduce you income subject to tax.
So in answer to your question, the state + federal tax rate that you
can expect to pay is
(2.3% + 6.2% + 15.3%) = 23.8% on about $30,000 of self employment income
or
(4.5% + 10.7% + 15.3%) = 30.5% on about $50,000 of self employment income.
|
,
0 Comments
)