Sales Tax and Accounting Basics For Interior Designers
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June 06, 2022
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Why is Accurate Accounting Important for Interior Design Businesses?
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Hopefully, it’s not a surprise to learn that some parts of a business are complicated and, well, a little bit boring. Unless you started a professional accounting firm, you likely haven’t planned on spending time and energy sorting through invoices, receipts, purchase orders, bank statements, and all of the other financial documents that are essential to store and track.
Proper accounting practices are not only essential for your business’s financial health and longevity, but they’re also a matter of legal compliance. Failing to document and pay all taxable income or transactions can put your business at risk of overdue bills resulting in fines, audits, lost business, and more.
Our goal isn’t to scare you, it’s just to emphasize that understanding how taxes impact your interior design business is critically important. Additionally, these tax and accounting issues are crucial to understand and follow no matter what stage your business is in, from startup to an established company.
Let’s set aside all of the other aspects of accounting and focus specifically on the taxes that could be (and likely are) relevant to your interior design company:
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As an interior design firm, much of your billing likely results from time spent working on projects according to an agreed-upon rate (i.e., billable hours). This is particularly true if you focus on e-design services. However, many interior designers also help source and procure items for their clients, and this can provide an additional revenue stream.
Interior designers are eligible to purchase items at wholesale prices from manufacturers and then resell items to clients. However, the wholesale purchase is not usually subjected to sales tax. For example, if you purchase a light fixture from a manufacturer for $500 at a wholesale price then turn around and sell it to the client for $750, that means you made a profit of $250 on that sale.
But, you’re not actually the end-user of the light fixture, and the end-user is the individual typically responsible for paying sales tax. Thankfully, there are some simple ways to avoid paying sales tax to vendors by registering as a valid reseller.
Below we break down exactly why and how sales tax applies to interior designers. Before diving in, it’s important to note that these taxes and the applicable rules vary on a state-by-state basis, so you’ll need to refer to official government guidance for your specific region.
1. What is sales tax?
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2. Why do interior designers pay sales tax?
Situations, where designers would pay sales tax, include:
Situations where designers would not pay sales tax:
While some interior designers opt to always pay sales tax on behalf of their clients and then pass the cost through in the final bill, experts recommend not paying sales tax on behalf of clients because it can make final calculations difficult and is not truly how sales tax was designed to work. Instead, separate taxable items from the total charge on your invoice to the client (highlighting tax due, as this is an additional expense).
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3. Obtaining a Resale Certificate
4. Calculation of sales tax (example from reference)
How can you determine to which entity taxes are owed and the total amount? There are a few basic rules to follow, and these are primarily concerned with the location from which the item was purchased and where the client site has a physical presence (as local taxes can sometimes be difficult to ascertain):
Calculating how much tax you owe. It’s impossible to give advice that applies in every US state (state sales tax guidance varies significantly). However, when calculating what taxable sales apply in your specific scenario, follow these guidelines:
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All revenue generated by your company is subject to some form of taxation whether you’re a sole proprietorship and the business’ revenue is taxed as your personal income would be (when you receive a tax return), or you incorporate with a different legal status. In general, the legal structure of your business will determine how much you owe in taxes.
Tax advisors have differing opinions on which corporate structures work best, but these opinions typically depend on whether or not you have employees, not necessarily on tax law.
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It might not seem fair that the government takes so much of your hard-earned money! But, there are actually a lot of ways that your legitimate expenses can save you money. You can write off qualified expenses and these will significantly reduce your tax burden. What kinds of expenses are eligible for tax write offs? The most common expense categories, including those that apply to self-employed business owners, are listed below:
1. Self-employment tax
3. Office Supplies
4. Home Office Deduction
5. Health Insurance Premiums
6. Vehicle Use & Mileage
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Businesses can hire multiple types of employees to work with them, and these relationships can be full-time or part-time. The most common types of employees or freelancers are:
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1. Document every single financial transaction for tax purposes. There are multiple benefits to obsessive documentation, and these benefits are substantial.
2. Be consistent with your process for covering sales tax for clients. Stick with one procedure for passing sales tax to your clients, rather than attempting to make the transaction more convenient for them. There are companies who are adept at calculating and paying the sales tax cost on behalf of their customers (e.g., car dealerships in many states).
3. Get your resale exemption certificate, and get resale certificates in any states where you will be conducting business on behalf of a client (e.g., New York State).
4. Hire a tax professional to assist you with difficult or complicated issues. This is far preferable to sorting out an issue later on when the IRS is conducting an audit.
5. Purchase or subscribe to a simple accounting software that will allow you to track invoices, purchase orders, business expenses, inventory, and any other assets, expenses, or income that is related to your business. This will provide a detailed record that a tax preparer can use to help you estimate, plan for, and make needed tax payments.
6. Make sure that you include sales tax in your estimates, or be clear with clients on exactly which services and items will be subject to sales tax so they aren’t surprised by a large addition when the invoice is due. If a project is tens of thousands of dollars in total and much of the services and products are taxed, this could add thousands of dollars in additional expense for the client.
7. Plan for tax payments from your very first invoice. We recommend at least meeting with a tax preparation specialist so they can help you estimate exactly what you should be withholding (saving) for your quarterly tax payments. Accurate estimates can help prevent a large, surprise bill from the IRS.
Taxes may feel complicated at first, but with the right tools and expert support, you can establish a process for estimating, collecting, and paying taxes with accuracy. Even better, as you keep close track of your deductible expenses, you’ll learn how to take advantage of write-offs to preserve more of your hard-earned income!
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