Weekly Q&A | April 18, 2018
(Please refer to this section for sales tax, not the recording! I got a couple things wrong there.)
Happy tax season! I know many of you just filed your taxes and are hopefully breathing a sigh of (somewhat) relief. Taxes for small businesses can be extremely confusing and frustrating, and I hope to bring a little clarity.
*Disclaimer* I am NOT a tax professional, so please consult an accountant with any questions you have concerning your taxes; this is just my experience + research.
So you've made your first sale as a business! Woohoo! Now you're also responsible for taxes! #buzzkill
Here's the scoop on sales tax: sales tax generally must be collected for all physical and digital products sold at the tax rate where your customer orders from
Every state is different. Some states use origin-based rates, so you only charge sales tax to in-state sales, and pay the sales tax based on where you live, not on where your customer lives. Unfortunately, most states use destination-based sales tax. In this case, you'll need to pay sales tax based on where your customer lives.
For example, I'm living in Denver, CO (a destination-based state) and sell a font (digital product) to someone who lives in Miami, FL. I would charge 7% sales tax to the customer and need to file sales taxes with the state of Florida. This would continue for every state my customers live in (so the more states you sell to, the more states you need to file with).
On the other hand, if I'm living in Nashville, TN (origin-based state), where the sales tax rate is 9.25%, and sell a font to someone who lives in Clarksville, TN, where the sales tax rate is 9.5%, I would collect 9.25% sales tax because of where my business operates from. The same applies if the interest rate is lower – it's all about where you're located, not where your customer is located (as far as in-state is concerned). Let's say now that I sell a font to someone living in Idaho. Because they don't live in Tennessee, I am not responsible for collecting sales tax from that customer.
Again: this varies from state to state. So do a Google search of your state's sales tax laws to figure out what you need to be collecting for your digital and physical products.
(Origin-based states are Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia)
Services are a little different. There are some states that require collecting sales tax on certain services, although many states do not. Tennessee doesn't require sales tax for services; however, if the service involves creating, repairing, or installing a product, then you're responsible for sales tax on the product.
Things get a little hairy here, so it's best to check with your own state laws (some good links below)
Here's my understanding within my own business: If I design a branding suite for someone who lives in Tennessee, I am responsible to charge them sales tax because of the true objects test. They are, in essence, coming to me for a tangible website or logo (a digital product), not an intangible service. On the other hand, any marketing consulting I do is not subject to sales tax because the service leaves the customer with no tangible good.
Income tax is another thing that varies from state-to-state.
The following states do not have a state-level income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee is scheduled to follow by 2020.
For everyone else, you're responsible not only for federal-level income tax, but also state-level income tax. You are also responsible for the "self-employment tax", which currently sits at an additional 15.3%. All of this, of course, adds up quick, which is why I cannot emphasize enough: PAY YOUR TAXES QUARTERLY.
We paid our taxes in one lump sum for the 2017 year and it was SO stressful. You can also be subject to penalties if you pay annually and not quarterly, so pay quarterly and stay on top of it.
A quick note on the "self-employment tax" – this isn't a unique tax on the small business self-employed underdog, being held down by the government (that's what I used to think). The truth is, everyone pays self-employment tax. Self-employment tax is Medicare and Social Security – the same two things you see deducted from your paycheck every month. The only difference is when you're employed by someone, they pay half and you pay half. Once you become self-employed, you become the employee and the employer, and are responsible for both halves. You can, however, deduct half of the self-employment tax you pay from your return, so that's helpful.
So as far as preparing for taxes, a good general rule of thumb is to save at least 30% of your income for taxes. Just put it into a separate savings account so you don't see it and aren't tempted to feel the "financial security" of having a bunch of money your main savings or even checking – it's not real, and it's not yours.
Make sure you're also keeping track of every expense you make, as well as your mileage if you're driving to meetings or the office. Many of your expenses can be deducted, and you want to have a detailed record of all of them (with receipts, in case you get audited).
Lastly, use an accountant! They will make your life SO much easier, they'll usually save you money, and the cost-to-benefit basically pays for itself. They are definitely worth the investment.
How do you pay yourself?
With where I'm at in my business, I'm able to pay myself a salary – so I take the same income every month, regardless of how great the month is sales-wise.
I figured out my salary after some trial and error, watching sales patterns throughout the last couple years. The digital goods business, like any business, is very cyclical, so I'm able to predict when my sales will be higher or lower. It's easier to figure out an appropriate salary once you're able to see those patterns.
For my salary, I took a look at my post-tax and post-expense profit last year to get an accurate idea of how much I could "afford" to pay myself. I put that in quotes just because making the money doesn't mean it should go straight to you. I wanted to be able to save enough money month-to-month to pour back into the growth of the business, invest in collaborators, increase my advertising presence, etc. All of these things cost money, and none of those things can happen if you're paying yourself every extra penny.
So take a look at how much is coming in over the course of the year (it'll help account for cycles where sometimes you make more, and sometimes you make less). Then, figure out an appropriate amount to pay yourself that still allows you make investing into the business a priority. If your business is growing, keep your salary the same. If it's not, pay yourself less (hey, it's part of the job). Then, you can reevaluate at the end of the year, track your growth, and adjust your salary accordingly.
For those of you who freelance, the place to start is asking yourself how much money you'd like to make per hour of work you get. If you want to make $100/hour, charge $150-$175/hour. You have taxes and expenses to consider, so charging $100/hour never means you make $100/hour. It at bare minimum means you make $65-70/hour, and that's if you have no subscriptions, office costs, supply costs, etc.
So start by setting your rate accordingly – do some research and see what other similar-skill designers are charging. Just because you want to make $100/hour doesn't mean you can. There still has to be demand for what you have to offer.
But! Like I've said before, I believe it's better to charge too much than too little. You may get less work, but once you find that pricing sweet spot, the lower-volume higher-priced work you get will balance out the loads of cheap work you were doing before.
Once you figure out your pricing, the same principle as salary applies as far as making sure you're still able to invest into your business. Don't pay yourself every cent you make – pay the business, invest into growth, and make sure your paycheck doesn't get in the way of taking care of the business and the people working with you.
How do you structure your week as someone who's self-employed?
If you work from home, get on a schedule like you don't. Scheduling your time like you work for someone else and holding yourself accountable to that schedule will make you so much more productive and make your days much more rewarding.
This is basically how each week goes:
- Set and prioritize goals for the week
- Divide those goals into tasks (usually 3-7 tasks depending on the size)
- Distribute those tasks M-F according to priority
- Work till they're done
My day-to-day schedule has been totally out of sorts with moving and trying to get the studio set up for Aaron, but this is usually how it looks:
7:00 - wake up, eat breakfast
7:30-8 - gym
8:30-9 - morning coffee + reading w/ Aaron
9-9:30 - review + prioritize tasks for the day
9:30-12 - work on main task
12-1 - lunch, home tasks (laundry, dishes, etc.)
1-3 - continue working down the task list
3-3:30 - emails
3:30-4 - break
4-7 - continue working on tasks; if those are done, dream + plan
I love ending my days with dreaming and planning. It usually leaves the day on a really inspiring note and gets me excited to go back to work in the morning.
Having a schedule is one of the most helpful things for me as someone who works from home. It gives me the structure I need to stay focused and also helps me get excited for different parts of the day. Otherwise, I'm usually wandering through my day aimlessly, which means I don't get much done (and that's never fun at the end of the day).
Content Marketing Vs. Social Media Marketing
I read a really interesting article the other day about how content marketing and social media marketing are vastly different.
In a lot of my Q&As, I've been talking about the Gary Vaynerchuk concept of putting out as much content as possible, making it a priority to post on every social media outlet you can, as often as you can, with as great quality of content as you can.
That's still true, but I think it's really great to note that there is a big difference between content marketing and social media marketing.
The difference is this: content marketing is consumption that leads to behavior; social media marketing is participation that leads to behavior.
It resonates what Jenna Kutcher says about social media – it's the handshake and hello, not the sales pitch.
What this has really done for me is change the way I want to approach social media. I need to be better at engaging my followers in things I post, inviting them to participate and be a part of the conversation.
Knowing that participation is the source of behavior on social media will also change how you sell your product on social media. It works a bit more like attraction marketing (discussed in a previous Q&A here), where you let people engage and then pitch your product after they ask about it, and according to their needs. So basically, social media is the conversation at the dinner table where products come up as part of that conversation.
Content marketing, on the other hand, is more focused on consumption than participation and engagement. This blog, for example, is a great source of content marketing for me. It's a place where people who are interested in marketing and business can come and have their questions answered without having to participate directly. It's focused on consumption rather than engagement, so the information is a bit more dense and less focused on inviting the reader to respond.
Both social media marketing and content marketing are fantastic and necessary for your business, and oftentimes they can still bleed into one another. But it's good to be able to make the distinction so that you can better focus each outlet and engage each audience appropriately (which is, again: consumption>>behavior vs. participation>>behavior).
A couple quick things on great web design. I am the type of person who wants to change my site every 6 months. You might be the same!
But I've begun within the last few months to realize that if my site is beautiful and doesn't generate sales, it's not effective.
It is better to have an ugly site that generates sales and conversions than a beautiful site that does nothing for your business.
So here's what I'm going to do with my next site redesign, and it may help yours too!
- Figure out goals for the site (sales, engagement, email list growth, etc.)
- Look at the analytics and determine where people are landing (your home page isn't always where people will see your site for the first time)
- Create funnels according to the site goals (So if your goal is to generate sales, you have to link product on pages where people are landing – even if it's a blog post. If you're wanting to grow your email list, you need to have signups in multiple locations on each page (think sidebar, footer, etc.)
- Once your funnels are in place, THEN you can make it pretty (Ugly sites that convert are better than beautiful sites that don't, but if you can have both, you're GOLD!)
That's all I got!
Thank you guys SO much for tuning in to the Live Q&A! Please comment, email, or DM any questions you have for the next one and I'll be sure to answer them!