Owning a business often comes with questions you never considered before being your own boss.
How much should I pay myself? (It depends.)
Do I need business insurance? (Probably!)
How do taxes work for self-employed people like me? (WAY too much to explain here. Check out our services by taking our Fit and Pricing Quiz.)
Business owners without the benefit of a professional tax advisor like TSJ might just be out of luck. But because you’re hanging around in our tax-savvy corner of the internet (lucky you!) you’ll have no problems getting your questions answered.
Today’s question focuses on sales tax.
This can be a stressful topic for coaches and consultants. You might be wondering if you have to charge sales tax on your services, or if sales tax is only required for physical deliverables. Are the rules the same everywhere, or do they change depending upon where your client is located?
Keep reading to find out.
What are Consulting Services?
Consultants provide expert guidance to established businesses in a specific industry.
They have usually spent years studying, working in, and mastering their niche. Their experience provides a strong foundation for analyzing problems and designing strategies to help businesses succeed.
What Kind of Consulting Services Are There?
Consulting services exist in pretty much all industries.
Typical consulting services could include things like leadership or executive consulting, marketing consulting, and sales consulting. Wherever there’s a need in the business world for expert guidance, there’s probably a consultant somewhere who can help.
These days there are also plenty of consultants who offer services in new and burgeoning industries. Think fitness or wellness consulting or sustainability.
All consulting niches offer industry-specific help with goal setting, problem solving, strategy design, and solution implementation.
What’s the Difference Between a Coach and a Consultant?
Generally speaking, consultants help businesses and sometimes groups of people within that business. Coaches typically work directly with a single client.
How Are Consultants Paid?
Most consultants charge set fees for their services. Some charge hourly while others may work on retainer.
What Is Sales Tax?
In the United States, most individual states levy a tax on the sale of goods and services. The tax is usually a percentage of the item or service’s total cost.
According to available information at the time of writing this blog, Alaska, Delaware, Montana, New Hampshire, and Oregon have no sales tax at all.
The states of Hawaii, South Dakota, New Mexico, and West Virginia tax services by default.
The remaining states have their own unique laws about how consulting services are taxed. This can present a problem for service-based business owners.
Do you need expert guidance on how to handle taxes on consulting fees?
Take our free Fit + Pricing Quiz to learn more about our services.
Should I Charge Sales Tax On My Consulting Fees?
This issue can be tricky for a number of reasons.
For example, if you live and work in the state of California, but you have clients in several states, are you obliged to follow the sales tax laws for each individual state?
Are you then required to file an income tax return for each state where your buyers live?
You can see how this would quickly become very complicated.
My first advice is always to work with a qualified tax professional.
With that in mind, here are some general guidelines:
- Determine Your Sales Tax Nexus: Research the tax laws for the states where you provide consulting services. Use these rules to determine if you need to charge sales tax.
- Determine If Your Consulting Fees are Taxable: Some states charge sales tax on all services by default, while others differentiate between personal services, professional services, and business services.
- Determine the Sales Tax Rate: Rates vary from state to state. Sometimes states do not have a sales tax, but smaller municipalities do.
- Determine How to Collect Taxes: You may have to collect taxes directly, or your selling platform may do it on your behalf. It depends on the state.
Do I Have To File an Income Return in Every State That I Have Buyers?
Possibly. First, you’ll need to determine if the states in which your clients live require sales tax for consulting services. If not, then you don’t have to worry about sales tax.
If sales tax is required, you’ll need to file a non-resident tax return and pay taxes in that state based on your income there. But pay attention to sales tax thresholds. Some states only require you to pay taxes if you earn over a certain amount of money in that state.
You’ll need to file a resident tax return in your home state where you’ll be taxed on your worldwide income. But you’ll receive a credit for taxes paid to other states, balancing out your overall tax burden.
Want Expert Help? Let Tax-Savvy Jessica Handle Your Taxes!
If your blood pressure is rising simply by reading this article…I get it. Taxes in the U.S. can be really complicated. Especially if you’re selling goods or services across state lines or even on the international market.
And because tax laws are always changing, information that’s accurate today could be outdated in the near future.
Don’t let the overwhelm of handling your business taxes bring you down!
Tax Savvy Jessica has 13+ years of experience helping her clients navigate complicated tax rules like these.
Let us handle the taxes so you can run your business in peace.
Take the Fit + Pricing Quiz to learn more about our services.