By A.J. Gross, C.P.A., E.A.
In my previous article titled “Corporations” we reviewed the Corporation business structure. The next article will review limited liability company (LLC). This article is on Doing Business As (DBA).
Generally, you can start a business at any time without registering the business with the IRS or State of Michigan. A good example would be establishing a consulting service. You held top level management positions for the last 20 years. You can utilize your wealth of experience by helping small businesses succeed and grow. You decide it’s time to start your own consulting business. There are no requirements to register your business. You can start your business at anytime as Doing Business As (DBA).
A DBA is not considered a separate entity from you. This is the main disadvantage for operating your business as a DBA. You will not have liability protection from the business. If your business is sued, your personal assets are not protected. Both your business and personal assets are at stake to cover potential damages in a lawsuit.
The DBA is reported on your personal 1040 tax return. The business income and expenses will be entered in Schedule C. All profits from the DBA are subject to self-employment tax.
If you are leaving a wage paying job to start a business, we recommend you review self-employment tax and quarterly tax deposit requirements. As an employee of a company, you get a paycheck. Your employer automatically takes out taxes from your gross pay. The taxes are federal withholding, state and local withholdings, Social Security, and Medicare. The other name for Social Security and Medicare is FICA. You employer will withhold 7.65% from your paycheck for FICA. Then your employer will pay 7.65% for FICA taxes on your behalf. When you are self-employed, you don’t have an employer. Therefore, a self-employed person will pay 15.3% for FICA taxes on profits. (7.65% + 7.65% = 15.3%) The other name for 15.3% FICA taxes paid by self-employed individuals is self-employment tax.
Paying estimated quarterly deposit is important for DBA businesses. The profits of your DBA will pay two taxes: income tax and 15.3% self-employment tax. Unlike normal wages, taxes are not automatically withheld from your pay. This means taxes are paid quarterly to the government on April 15th, June 15th, September 15th, and January 15th. Form 1040-ES is used to pay estimated quarterly deposits. It is important to pay quarterly deposits throughout the year to avoid getting a significant tax bill when filing your taxes.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.
com
This column was printed in the December 14, 2014 – December 26, 2014 edition.
