October 26, 1999

How you can start a home-based business

By NOELLE KNOX
AP Business Writer

Q: I want to start my own business and work from home. What paperwork do I have to fill out? And what taxes do I have to pay?

A: The first step is getting a business license, which will cost between $5 and $100. Start with your local city and/or county government, and remember to ask if any other licenses or permits are necessary to operate your business from your home. Licenses can take anywhere from an hour to a month to obtain.

Next, you will have to file a fictitious name statement to let people know you are doing business under another name. Usually, you must advertise your fictitious business name in a legal or daily newspaper in your community for three weeks.

Getting a business license also may be required by your bank to open a business account.

If you will be selling products, you will probably need to get a resale license or permit. This is issued by your state taxing agency.

You may also need insurance to protect your equipment and supplies against theft or fire, or a fidelity bond to guard against dishonest employees.

Workers Compensation Insurance is required if you have employees. Your insurance broker can set you up.

Once you have your licenses, you can start making money. That's the good news.

The bad news is you have to have to pay self-employment tax, state and federal income tax, and maybe collect state sales tax.

"Many small businesses fail because they do not understand or plan for taxes," said Julie Frattini, author of "The Survival Guide for Starting a Home Based Business," a 90-page book she published herself and sells over the Internet.

Frattini learned many of the lessons "the hard way," and her first business, a vitamin distributor, failed because the franchisors defrauded her out of $50,000. She is now on her second business, Physical Inventory Consultant, which audits inventories for retailers.

Frattini notes that the best money a small business owner can spend is the $150, or so, to hire an accountant.

"An accountant will set everything up so all you have to do is enter your expenses and income," she said.

The most important new tax you will have to pay is the self-employment tax, which is your contribution to Social Security and Medicare. For 1999, the tax rate is 15.3 percent on your income up to $72,600 and then drops to 2.9 percent on every dollar earned after that.

Business owners also have to pay Federal Income Tax. You cannot wait until April 15th to file a tax return; you have to pay on a schedule, usually April 15, June 15, Sept. 15 and Jan. 15.

You will probably also have to pay state taxes.

An accountant can advise you on which taxes you have to pay, and what expenses you can write off -- the cost of an extra phone line, for example.

If you are spending more than you are taking in to develop your business, you can use that loss to offset any other income. If your business losses wipe out all of your income, then you can use that loss to offset your income for the previous two years by filing amended returns, or carry it forward to offset your income for up to 20 years.

If you sell merchandise, you may also have to collect state sales tax. If that's the case, you will have to give it to the state on a regular basis.

First, determine if what you are selling is taxable. If you run a mail-order business, you may only have to collect sales tax for people in your state.