Taxes & Web Development

I've been developing websites for clients in a freelance like manner until about a month ago when I finally made a full time commitment to it.

Now one thing that has me wonder is...

If I'm creating a website for a client (candy store or whatever) couldn't I sell them the website as a product and only have to cover sales tax rather than self employment?

Would it depend on how I arrange the deal:

1) Them buying a website from me that was custom made to their specifications.

vs.

2) Them paying me for my time to build them a website?

Then supposing I could pull this off, is there any catch (such as the earned monies being chalked up to capital gains) on the back end?

If anyone has any insights or previously dug into this I would sure appreciate it.

In the US btw.

You need to check with your state that you are in. I would set it up as an s corp. In Texas you have to charge sales tax on web design and seo servers. But they are a little different then regular sales tax. Here you take the total less 20% and that is the amount that you will be charging taxes on.

So the best thing to do is land a CPA and a lawyer to get you all set up right thats what I did when i first started out did a trade off.

This is pretty complex - and I'm not a CPA... I guess the right answer depends on how much money and how long you plan on doing this for.

- Do it as a contractor. You get a 1099 and claim it on your taxes as income. No self employment here.
- Do it as a LP + LLC. You pass through all money to yourself on a K1 and pay personal rates. You'll end up paying $1000 or so in setup costs.
- Do it as a S/C corp. You pay self employment tax.
- Do it via your offshore persona "Ravi" and have them wire money to ICICI Bank. Get a Visa card tied to the account. No taxes.
- If it's under the 1099 limit (Is it still $500?) you don't even have to claim the income.

You shouldn't need to pay sales tax because you are giving a service instead of a product. But obviously check with your accountant.

Thanks spidermonkey for the Texas illustration (they help understand context). I've got an IRS HQ down the road, but I didn't really have the backbone necessary to feel like I had the right questions to get the specific answers I was looking for. This really helped!

Extropy you gave me the reply I was more than hoping for. I'll be beading to the IRS office on Monday with the different scenarios in mind to get some answers on how things work in Minnesota.

I plan on doing this for a couple years, projects ranging from $500-$10000. Also looking to get into flipping sites and making some long term hold cash cows (like autoblogging and aggregating).

BHW never ceases to amaze me by how awesome the support is here! Kudos!

It sounds like you want to just pay sales tax and not pay any income tax if I am reading you correctly. If that is what you are trying to do then no you can not do that and be legal.

Sales tax and income tax are two completely separate things, one has nothing to do with the other. Sales tax is paid to the state on the total purchase amount. Income tax is paid on the profit you made from the sale, most states have and income tax but even if yours does not you will still need to pay the IRS.

Selling websites is no different than if you are building and selling furniture out of your garage. Even though you need to collect the sales tax when you sell the product you will still have to pay income tax on the profit you make from your sales.

Profit= Sales -Expenses.

You will need to keep track of all your expenses and subtract them from your sales to come up with your taxable income. Things like software and your hosting costs will come off the top and lower your taxable income. If you file as an individual you will need to file a schedule B, if you form a corp or LLC then you will need to file somewhat differently depending on your exact circumstances.

Depending on how much money you are making really determines how you need to set your company up. Time to talk to a cpa or tax attorney for some advice on that one. My guess is if you are planning on making less than 10k it is probably not worth the cost to setup a corp but getting a professional opinion is always a good idea.

robotrock said:

I've been developing websites for clients in a freelance like manner until about a month ago when I finally made a full time commitment to it.

Now one thing that has me wonder is...

If I'm creating a website for a client (candy store or whatever) couldn't I sell them the website as a product and only have to cover sales tax rather than self employment?

Would it depend on how I arrange the deal:

1) Them buying a website from me that was custom made to their specifications.

vs.

2) Them paying me for my time to build them a website?

Then supposing I could pull this off, is there any catch (such as the earned monies being chalked up to capital gains) on the back end?

If anyone has any insights or previously dug into this I would sure appreciate it.

In the US btw.

Click to expand...

have them build it that way you can get the best work out of them