16

I apologize if this is the wrong site to post on, perhaps someone could point me to the proper place if it is not.

Hello,

I am 17 years old and currently develop applications/games for Android and iPhone as well as develop internet websites and code a variety of my own projects. I have been very fortunate and have made a large amount of money and continue to make money online to the point where I do not need a stable job, though I'd like to get one after college.

I've never held a job anywhere, and have never had to pay taxes. I'm coming into a lot of issues and I am quite confused. I get money from MANY sources- 15 different advertisement networks(!), 4 different payment processors, 5 different affiliate networks and a variety of other sources. All of them pay to different places and at different times (checking account, PayPal, reloadable debit card, ect.)

I essentially have a list in a Notepad with names and login information for each source. I have also created a PHP script that uses cURL to grab all the revenue from each service, add it all up, then text me every few hours so I can keep track. It's a mess, but it's working OK, and I can create custom reports (for IRS?).

But enough of that, my questions are about taxes in the US, and how indie developers handle it all. I'm at slightly over $250k so far this year, with negligible earnings last year. I have it all stockpiled in a bank account and haven't touched it, I'm a bit scared to.

  • What do I file as? A sole proprietor, a business, just a regular person?
  • How can I handle all of the different revenue sources? (AdSense, CJ, LinkShare) So far none of them have sent me any paperwork on taxes and I've read that I'm supposed to pay taxes quarterly?
  • Do I need paperwork from EACH source to file? Or can I just say I got $x total and that'd be it?
  • What percentage do you pay of total earnings? Average?
  • Should I create an LLC? A corporation? Or stay as a developer?
  • What would be the cheapest options?
  • Could I go to jail? I haven't touched the money except a few dollars to help my parents pay the mortgage once.

Any insight would be great. My parents have no idea what I should do, both have no forms of higher education and both have no high school diploma's. They just live day by day with simple jobs.

I appreciate any help or experience with this.

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    Get help. You can spend your money, but if you don't have money left for taxes when they are due then they are still due. So don't let that happen. You should get a professional at least to get you started, but a quick way to get an idea might be to buy Turbo Tax (or something like it) and see what your taxes would have been last year (with this year's numbers). This will help you find out what documents you need, and your accountant will basically ask you all the same questions anyway, so the work isn't really wasted. – psr Jun 11 '12 at 22:09
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    Find a good accountant. If you are in SoCal I know a good one (rwwcpa.com). You need to worry about taxes and implement some strategies to minimize them. – tomjedrz Jun 12 '12 at 5:32
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I think the best advice you're going to get on the subject is: If you made $250k in half a year, you definitely have enough to hire an accountant! Get professional help on the subject, and they'll make sure you don't end up getting in any legal trouble.

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    If your parents claim you as a dependent, that will have an impact on their taxes, too. Bring them along. – Blrfl Jun 11 '12 at 21:34
  • Thank you. I didn't know if anyone had their own personal experience with this they'd like to share. I'm assuming it would be OK to use my untaxed profits to pay the accountant? – Connor Jun 11 '12 at 21:41
  • @Connor: Probably not. Law isn't really my thing, but AFAIK income taxes are generally supposed to come out first. But I'm sure the accountant would be just fine with assessing his fee against the net. – Mason Wheeler Jun 11 '12 at 21:44
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    @Conner - pay your accountant out of those funds.. unless you're doing something illegal, it will all work itself out.. you will undoubtedly have left over money after you pay your taxes.. and you have that money right now, so go ahead.. just keep track, and set aside a bunch of it for when the taxes are due – hanzolo Jun 11 '12 at 21:56
12

This is not an end-all answer but it'll get you started

I have been through accounting courses in college as well as worked as a contractor (files as sole proprietor) for a few years but IANAA (I am not an accountant). Following @MasonWheeler's answer, if you're making that much money you should hire a bean counter to at least overlook your bookkeeping.

What type of business?

First, if you're the sole owner of the business you will most likely file as a sole proprietorship. If you don't have an official business entity, you should get it registered officially asap, and file under that name.

The problem with sole proprietorships is liability. If you get sued, not only are your business' assets vulnerable but they can go after your personal assets too (including house/cars/etc). Legally, you and your business are considered one and the same.

To avoid liability issues, you could setup a S corporation. Basically, the business is considered it's own entity and legal matters can only take as much as the business owns. You gain more protection but if you don't explicitly keep your business finances separate from your personal finances, you can get into a lot of trouble. Also, corporations generally pay out more in taxes. Technically, since the business is it's own entity you'll need to pay yourself a 'reasonable salary'. If you skip the salary and pay yourself the profits directly (ie evade being taxed on income/salary) the IRS will shut you down (that's one of the leading causes of corporations being shut down). You can also pay distribute bonuses on top of that but it would be wise to burn the words 'within reason' into your memory first. The tax man gets mad if you short him on payroll taxes.

S corporations are complicated, if you go that route definitely seek help from an accountant.

Bookkeeping

If you're not willing to pay a full time accountant you'll need to do a lot of studying about how this works.

Generally, even if you have a sole proprietorship it's best to have a separate bank account for all of your business transactions.

Every source/drain of money will fall into one of 3 categories...

Assets - What your business owns:

  • Equipment
  • Consumables
  • Inventory
  • Property
  • Accounts Receivable (money others owe you)
  • Cash
  • Trademarks
  • Patents
  • etc...

Assets can be categorized by liquidity. Meaning how fast you can transform them directly into cash. Just because a company is worth a lot doesn't necessarily mean it has a lot of cash. Some assets depreciate (lose value over time) whereas some are very hard to transform back into cash based on the value and/or market fluctuations (like property).

Liabilities - What you owe others and what others owe you:

  • Bank loans
  • Credit cards
  • Accounts Payable (money you owe others)
  • Taxes Payable (taxes owed)
  • etc...

Everything you owe and everything that is owed to you gets tracked. Just like credit cards, it's completely possible to owe more than you own as long as you can pay the interest to maintain the loans.

Equity - the net worth of the company:

  • Initial investment (seed money)
  • Revenue (any money your company earned)
  • Expense (any money your company paid out)
  • Retained Earnings (reserves)
  • Distributions (money paid out to investors)

The approach they commonly teach in schools is called double-entry bookkeeping where they use the equation:

Assets = Liabilities - Equity

In practice I prefer the following because it makes more sense:

Assets - Liabilities = Equity

Basically, if you account for everything correctly both sides of the equation should match up.

If you choose to go the sole proprietorship route, it's smart to track everything I've mentioned above but you can choose to keep things simple by just looking at your Equity.

Equity, the heart of your business...

Basically, every transaction you make having to do with your business can be simplified down to debits (money/value) increasing and credits (money/value) decreasing.

For a very simple company you can assess this by looking at net profits. Which can be calculated with:

Net Profit = Revenue - Expenses

Revenues, are made up of money earned by services performed and goods sold. Expenses are made up of operating costs, materials, payroll, consumables, interest on liabilities, etc.

Basically, if you brought in 250K but it cost you 100K to make that happen, you've made 150K for the year in profit.

So, for your taxes you can count up all the money you've made (Revenues), subtract all of the money you've paid out (Expenses) and you'll know how much profit you've made. The profit is what you pay taxes on.

The kicker is, there are gray areas when it comes to deducting expenses. For instance, you can deduct the expense of using your car for business but you need to keep a log and can only expense the miles you traveled explicitly for business. Same goes for deducting dedicated workspaces in your house. Basically, do the research if you're not 100% sure about a deduction.

If you don't keep detailed books and try to expense stuff without proof, you can get in trouble if the IRS comes knocking. There are always mythical stories about 'that one guy' who wrote off his boat on his taxes but in reality, you can go to jail for tax fraud if you do that.

It comes down to this. At the end of the year, if your business took in a ton of money you'll owe a lot in taxes. The better you can justify your expenses, the more you can reduce that debt.


One last thing. You'll also have to pay your personal federal/state taxes (including self-employment tax). That means medicare/social security, etc.

If this is your first foray into self-employment you're probably not familiar with the fact that 1099 employers pick up 1/2 of the 15% medicare/social security bill. Typically, if you have an idea of what you make annually, you should be paying this out throughout the year. My pay as a contractor was always erratic so I usually paid it out once/twice a year. It's better to pay too much than too little because the gov't will give you back the money you overpaid.

At the end of the day, paying taxed sucks more if you're self-employed but it balances out because you can make a lot more money. If as you said, you've broken six figures, hire a damn accountant/adviser to help you out and start reading.

When people say, "a business degree will help you advance in any field," it's subjects like accounting are core requirements to become a business undergrad. If you don't have time for more school and don't want to pay somebody else to take care of it, there's plenty of written material to learn it on your own. It's not rocket surgery, just basic arithmetic and a lot of business jargon (ie almost as much as technology).

4

First of all, consult an accountant who is familiar with tax laws and online businesses. While most accountants know tax laws, fewer know how to handle online income like you describe although the number is growing.

Right now, since you're a minor, this complicates things a bit. That's why you'll need a tax accountant to come up with the best business structure to use.

You'll need to keep your own records to estimate your quarterly taxes. At the amount you're making, you'll want to do this since you'll pay a substantial penalty at the end of the year if you don't. You can use a small business accounting software package for this or just track everything using Excel or the like.

As long as taxes are paid, you won't go to jail. But you need to pay them along with any penalties by April 15, 2013. If you don't do this, then the IRS will want to have a 'discussion' with you.

2

First of all congrats... very nice work indeed..

Secondly, i do not offer this as legal advise.. lol.. anyhow.. you need to make sure to hang on to as much as possible, being a single earner, our Uncle (Sam) is going to want what's due... That being said, you should probably look into investments, for starters, purchase a primary residence or start a business, or purchase a primary residence and use that as a business residence (both).. what you basically want are write-offs.. you need to bring your "taxable" income as low as possible so you pay minimal taxes.. in your case, you're in danger of paying a hefty sum in taxes... i'm sure you can shield yourself with various business expenses (a car, workplace, computers, etc.. ) that you could benefit from, both professionally and individually.. and then seriously bro... making 250k leads me to believe you've got at least more than half a brain, and that you're using more than half of that.. so dude.. get an accountant... and one you can trust.. ask your parents, colleagues, people you've worked with in the past.. etc.. there are professionals who are equally as talented in helping you keep your money as you are in making it..

-OR-

you could get married, make sure your wife stays at home and start popping out kids asap... those keep my taxable (and excess) income pretty low.. LOL!!!

I'm going to add to this... as a contractor, i've generally put any "estimated" taxes into some kind of interest accruing account so i can at least make a little money before i have to give it away.. in your case, i'd say put away at least 2/3's into some kind of interest earning account.. start by talking to your personal banker wherever your money is.. you'll be surprised at how nice they treat you... you ARE going to have to pay taxes.. so until you do, try to make a little money while it sits..

again, nice problem to have!

  • boooo to the negative nancy for not having a sense of humor – hanzolo Jun 11 '12 at 21:40
  • I appreciate your help – Connor Jun 11 '12 at 21:41
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    @Connor - no problem.. i cannot emphasize enough to find a tax guy you can trust.. taxes are super complicated and yes, while you probably wont end up in jail, you could get audited, and end up paying penalties.. again, good luck – hanzolo Jun 11 '12 at 21:46
1

The "hire a pro" is quite correct, if you are truly making this kind of money. That said, I believe in a certain amount of self-education so you don't follow a pro's advice blindly.

First, I wrote an article that discussed Marginal Tax Rates, and it's worth understanding. It simply means that as your income rises past certain thresholds, the tax rate also will change a bit. You are on track to be in the top rate, 33%.

Next, Solo 401(k). You didn't ask about retirement accounts, but the combined situations of making this sum of money and just setting it aside, leads me to suggest this. Since you are both employer and employee, the Solo 401(k) limit is a combined $66,500. Seems like a lot, but if you are really on track to make $500K this year, that's just over 10% saved.

Then, whatever the pro recommends for your status, you'll still have some kind of Social Security obligation, as both employer and employee, so that's another 15% or so for the first $110K.

Last, some of the answers seemed to imply that you'll settle in April. Not quite. You are required to pay your tax through the year and if you wait until April to pay the tax along with your return, you will have a very unpleasant tax bill. (I mean it will have penalties for underpayment through the year.) This is to be avoided.

I offer this because often a pro will have a specialty and not go outside that focus. It's possible to find the guy that knows everything about setting you up as an LLC or Sole Proprietorship, yet doesn't have the 401(k) conversation.

Good luck, please let us know here how the Pro discussion goes for you.

0

Congratulations!

I would start with an attorney. As a 17 year old, you legally cannot sign contracts, so you're going to have to setup some sort of structure with your parents first. Get attorney references -- your parents can ask around at work, if you're friendly with any business owners, ask them, etc. Talk to a few and pick someone who you are comfortable with.

Ask your attorney for advice re: sole proprietor/S-Corp/LLC. You have assets, and your parents presumably have some assets, so you need advice about isolating your business from the rest of your life.

Do the same thing for accountant references, but ask your attorney for a reference as well.

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