In the midst of doing all the fun stuff like designing my website, playing around on Instagram, and networking with other like-minded individuals, I forgot about some pretty important stuff, including:
State Sales Tax
It wasn’t until I met up with an old college teammate (more on that later), that I realized, business expenses are real. Even though I’m selling a service and conducting most business online, I need to account for some expenses….and I need to figure out exactly which ones.
When you’re a business in the state of Texas (as well as other states, I assume), the state wants a cut of what you’re making. If you’re a business residing in Texas and you sell a product to a Texas resident*, then you owe the state 8.25% of your product’s or service’s cost in sales tax (the exact rate depends on where you live).
Seems pretty straight forward.
Now that we know the law, will you charge this on top of your service’s price or include it in the overall cost?
There are, of course, positive and negatives in each method. If you’ve done your homework and know how much to charge your clients, then you can build the sales tax right into your product cost or hourly rate.
Say you charge $100 an hour for web design. If you are choosing to include the sales tax in your final price, you would quote $108.25 per hour, and then pay the state their cut. Or, say you run a different pricing model and you charge $2,000 for a website redesign. To include the state sales tax in one quote, you would bill $2,165. What works for this model is that you give your client one number and they don’t have to worry about state sales tax on top of the product’s cost. Many people respond favorably to the one number/one quote business pricing model.
The downside to this model is that you are artificially inflating the cost of your services. That $165 is not actually your money and isn’t providing your client with better services or products; it’s money that’s simply going to the state.
The other method is to include state sales tax on top of your product or service’s cost. You would quote the website redesign at $2,000 for the services, and then the $165 for state taxes. This can make things tricky if you’re trying to advertise packages, but is a solid method to go with as it is the most transparent.
The simplest solution when you’re starting out? Be up front with your clients ((I cannot express how important constant communication is!)) When it’s an appropriate time to talk about money, let them know your services cost X and state taxes are Y. Most companies are working with a budget – this way they won’t be blindsided if you’re billing them for more than they thought the services cost.
While taxes are never fun, they are definitely a piece of the puzzle when running a business. Getting them right the first time reduces a lot of stress and headache. I’m so glad I was told about this before I found out the hard way.
Have you ever been surprised by a business expense you weren’t expecting? If so, what did you do?
*Note: If you’re a business operating in Texas and you sell products to individuals outside the state, you do not pay state sales tax.