Re: Commercial Games - Tax Implications?
Joseph, my experiences won't necessarily match those of others, but I'll share what I can. My experiences apply to the USA only, and I have no idea what differences there would be in other countries. I myself live in Michigan, but I've heard that other states are either identical or extremely similar so this should still be useful.
I'll use the word "you", when I'm actually writing this generically for anyone who wants to know.
When you decide to set up an LLC for your personal business, find the website for your state's "Department of licensing and regulatory affairs bureau of commercial services". There will be a form you use when forming a new LLC, and you send in the filled out form along with, I believe $40. The initial set-up costs $40 and each year you are billed $25 to renew everything. The form will ask for the name you want to use for the company (must end in L.L.C.), and to descri
be the "purpose" of the company. If you only plan to produce computer games, then that's all you'd need to write. I included a few extra things, such as selling custom computer devices, so that I would be free to sell any custom hardware devices as well. Each new thing you add here has to be approved, so that's what prevents people from just listing a ton of crap they're unlikely to ever actually do. I sadly forgot to include selling card and board games, so one of these days I'm going to have to spend money and send in forms to add those things to my company's "purpose". So don't add too much more than you need, but also don't screw up like me and forget stuff you will do!
Somewhere on the site you apply for an "EIN", which I think stands for employer identification number. The number they assign your new business will be required on future forms.
Your very first year of making money with your new business is pretty straight forward. Keep records of what money you made separate from money you have coming in from things that are not your new business. When it comes time to do your taxes, they'll want all business related stuff separate from other jobs and income.
When you file your taxes I am going to assume you'll go and have them done by a tax professional. H & R block, or whatever. I used to do my own taxes but not since starting my LLC, so I can't specifically explain how to do that stuff yourself. The money your business makes in the first year is almost certainly non-taxed income. You wouldn't have had anything special in place to get taxes removed from your earnings... don't worry, not a problem! There is normally only a problem if you Should have had over $1000 in taxes taken out. The United states government gives people a 1-time pass for their first year of going over that $1000 mark. You'll still have to pay it, of course, but there are no fees. From that point on if your taxes ever owe more than $1000 at tax time, you will be fined an extra 12%.
While you're having your taxes done on your business' first year, that's when they can set you up with a quarterly payment plan. Based on your first year's profits, they'll set up a mandatory tax bill that arrives 4 times during the year. You'll pay that amount, and it counts towards the taxes for your business for the next year. Once your second year rolls around and taxes are due, you won't owe much/anything unless your profits went way up compared to the first year. Each year you can have the quarterly taxes adjusted up or down, so they'll more closely match what you're expected to m ake over the following year.
I hope this helps a bit. For me this tax stuff actually screwed me royally last year. My first year made a lot of money, but the money almost completely stopped on year 2. The way this screwed me was that I owed thousands of dollars on the first year, and I planned on using profits from the next year to help me pay them off. Well that didn't happen as planned, and this quarterly tax thing was something I didn't know about before then. I believe it was a $700 tax bill that arrived every 3 months, which was an absolute killer! My business wasn't making nearly that much, but the tax amounts are based on the profits from the previous year. So I guess the moral of the story is to make more every year from your business, instead of going backwards and making less money, ROFL!
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