Starting a home-based business on the Internet is easy you say. You have your web page built, your affiliate links and you're ready to go. Not really, you need to make sure you have all your i's and t's crossed when it comes to taxes.

Getting Started

First, you will need to register your business name with the city government. When I registered my business name with the city I was charged $11 -- so expect to pay a small fee when filing this legal document with your local goverment.

Second, you need to apply for an Employer Identification Number with the Department of the Treasury (IRS). To file for an EIN,you will need to complete Form SS-4. You can find these forms in post offices, public libraries, online, or by contacting the IRS.

Once you receive this document, keep it in a safe place -- in other words, don't crumple, stomp, or throw away -- this identifies you and your business with the U.S. government and you will need this number when you file your taxes.

Third, you will need to check with your state government to determine if you need any specific licenses. Such as Retail Sales Tax Permit -- if you are planning on selling items offline or online.

Fourth, you may want to open a Business Account at your local bank once the money starts to roll in. Keeping your money separate from your family account -- helps you to keep your accounting accurate for your business.

What percentage of your income will go to your State and Federal Government?

You will need to pay the following taxes, at the following rate, on a quarterly basis:

States Taxes -- 3.7%

Federal Taxes -- 11.3%

Social Security -- 12.4%

Medicare -- 2.9%

The first year in business is difficult, because you have no idea what you will be making--You will need to make a conservative guess. However, you will only pay what you owe against that of your expenses (your net income). For example, if you believe you will have $3000 in expenses during the year -- and you believe in your first year,you will make $6000-- you would report the following:

$6000 (Money Made)- $3000 (Expenses) = $3000 (What you owe)

This amount would be divided among the four quarters within the year and paid to your State Government and the Federal Government. If you find that you will be making more and you have paid in for one quarter -- you will have to adjust the balance and divid it between the remaining quarters.

The following is what you will submit to the Federal Government:

1) Federal Taxes-11.3%, 2) Social Security-12.4%, and 3) Medicare payment-2.9%.

The State Government will receive only the 3.7% of your net earned income.

(Please note: If you are unsure about anything, you should enlist the help of a CPA, regarding tax matters).

Your estimated taxes are due on the following dates throughout the year:

April 15

June 15

September 15

January 15

To obtain more specific information you can read IRS Publication 505: Estimated Tax payments.

Note: You are not required to make estimated tax payments until you have income not subject to withholding on which you will owe tax. If you don't make your first payment until a later period, you must divide your entire estimated tax by the number of payment dates remaining. If, for example, you have three payment dates pending, you would pay one third of the total tax by June 15, the other third by September 15 and the last by January 15.

Typical Expenses To Deduct

Here is a list of some of the expenses you can deduct.

1. Your home mortgage -- If you use a room solely for conducting business then you can take this deduction. There are a couple of different formulas to determine the percentage of your home that is used for your business.

You can use the "number of rooms" method or the "area method". I would suggest using the "area method" because I can't imagine having a home where all the rooms are the same size.

With the area method, you would take the area of your home office divided by the area of your home. Example:

Your Office= 10' X 10' = 100 square feet

YOur home is 1000 square feet

Your deduction = 100/1000 or 10%

2. Indirect Expenses -- with indirect expenses you will only be able to deduct the area percentage (Note: use area percentage calculated above) of the total cost. These indirect expenses would include such things as:

House payment

Utilites

Telephone

Garbage collection

Internet connection (If other people are using the Intenet)

3. Direct Expenses -- these are expenses that relate only to your business.

Supplies

Advertising

Business account bank charges

Keeping Track of Expenses

To keep track of all your expenses. and you are comfortable working with a spreadsheet software, I would suggest purchasing a small business accounting package such as QuickBooks or Peachtree Accounting.

To conclude, this definitely is not an exhaustive list of what you need to know. However, this will give you a beginning as to what you will have to be aware of when starting a home-based business. As your business grows, your CPA will be able to assist you and keep you on the straight and narrow to your success on the Internet.