Several small business owners recently asked:
"I am starting a website that advertises products sold by online retailers. I’m just an affiliate and will not be selling anything. Do I need a business license?"
"I want to start an online store, do I need to register as a business?"
Moneymaking opportunities are plentiful on the Internet – from selling your old books on eBay to promoting products and services for online merchants, or becoming an online merchant yourself.
Below are a few common ways in which you can make money over the Internet and the tax and regulatory obligations tied to each:
Business or Hobby?
The nice thing about the Web is that you can dabble in e-commerce without spending a lot of time and money. Many online entrepreneurs have fallen into their businesses through an online hobby or selling things around the house on eBay. However you make money online, you have to pay taxes on your income. So before you begin, make sure you read over the IRS' guideBusiness or Hobby? Answer Has Tax Implications, which will help you determine your tax obligations.
One of the most common ways in which individuals can earn money on the Web is through affiliate marketing. This is an arrangement where individual Web site owners receive a sales commission by promoting products and services of other companies.
The vast majority of affiliate marketers are individuals looking to make some extra money or website owners who want to generate revenue from their site without selling products directly.
So, let’s say you have set up a Web site that includes nothing but links to affiliate sites. Affiliate marketing is comparable to being a commissioned sales person, as a result the money paid to you must be reported on your taxes as income. Affiliate companies are required to send you anIRS 1099-MISC form (instructions) showing your earnings for the previous tax year by February 1. You report your affiliate earnings on your federal taxes using 1040 Schedule C (instructions).
Opening an Online Store
The basic rules for starting a business also apply to those starting online businesses. Whether you are using a marketplace like eBay or Etsy or starting your own Web site, you will need to make register your business with the approriate government agenices, and comply with regulations around privacy, advertising, and intellectual property.
Here’s a checklist of key regulatory requirements you’ll need to be aware of:
1. Determine whether or not you need an Employer Identification Number (or EIN). Generally, if you are in business for yourself, and do not employee anyone, you do not need an EIN. Your social security number is your EIN.
2. If you plan on operating a business under a different name than you own, you may need toregister your trade name with your state or local government. This form of registration is known as “doing business as” (dba) or fictitious name filing.
3. Most small online merchants operate as a sole proprietor, which does not require any kind of special incorporation filing. Other online store owners choose to form a limited liability company (LLC). Forming an LLC helps protect your personal assets in case you are sued for products you sold. In addition, you don’t pay taxes on your LLC. Rather you report income and losses from your business on your personal tax return.
4. Check your local government office, such as your city clerk’s office, to see if you need apermit or business license. Most online merchants work from the comfort of their home. However, many city and county zoning and planning agencies require all home-based businesses to get a Home Occupation Permit. New e-tailers often overlook this requirement since all the work is done online. However, because you operate your business exclusively at home and over the Internet does not necessarily mean you are expempt from complying with local zoning regulations.
5. Make sure you understand your federal, state and local tax obligations. If you are operating your online business in a state that charges a sales tax; or levies a gross receipts or excise tax on businesses you may have to apply for a tax permit or otherwise register with your state revenue agency.
Online businesses are responsible for collecting state and local sales taxes from their customers when applicable, and paying these taxes to state and local revenue agencies.
6. Comply with online business regulations concerning privacy, advertising, and copyright. Online business owners are required to take steps to protect the privacy of their customer’s personal information. In addition, if you advertise your business online, you need to ensure you are making fair and truthful statements, and complying with all applicable SPAM regulations.
Remember, these are just the basics. In future posts, we’ll explore some of these topics (e.g., sales taxes), and other issues (e.g. domain registration) in more depth.
However you plan to earn money online – whether by helping others sell products or selling products yourself – you will need to pay taxes on your income and have some obligations to the government that should not be overlooked