Keeping track of tax-payment obligations is essential

QUESTION: I started working as a freelance bartender (sole proprietor) in January. I don’t get a paycheck but am paid cash. I recently obtained a general excise tax (GET) license and am wondering, do I file back-taxes since January? Will I get into trouble if I do?

ANSWER: If you are doing business in Hawaii as a sole proprietor, then your gross business income is subject to the GET at the rate of 4 percent (4.5 percent on Oahu). You must file (monthly, quarterly, or semiannually) periodic Form G-45, and annual Form G-49, GET/Use Tax Returns to report your business income and pay GET. If you missed the deadline for filing a return and paying your taxes, you should do so as soon as possible to minimize penalties and interest charged for filing and paying late.

Q:  Should I charge my clients based on the amount of tax I will have to pay, such as including the tax in the price of my services, or should I charge the tax separately and reflect the separate amounts on receipts I give to my customers? 

A: The optimum way to recover your GET expense is to separately state it on your customer’s bill. This is known as visibly passing on the tax. The maximum pass on rate is 4.166 percent, or 4.712 percent, if your GET rate is 4 percent or 4.5 percent, respectively. Visibly passing on the tax is a matter of contract between you and your customer and not required by law, so be sure your customer knows the exact dollar amount or percentage that will be added ahead of time and agrees to pay it. 

Q: Am I required to have a CPA or tax professional to track my income earned and taxes owed?

A: The law does not require you to use a CPA or tax professional. A bookkeeper can help you keep track of the accounting side of your business, and a CPA can help you to understand and comply with your tax filing and payment obligations.  

Q: I hear a lot about paying estimated taxes. As a freelancer whose income depends on the number of jobs I get, should I pay estimated tax, or just wait to file according to federal and state tax return deadlines? 

A: You should be making estimated income tax payments on a quarterly basis. If you are a self-employed individual, use Form N-1 for state income taxes and Form 1040-ES for federal income taxes. If you wait until the tax return deadlines to pay, then you may be subject to penalties and interest. 

Q: What else do I need to know, to stay compliant with the law and avoid trouble? 

A: In order to stay compliant, it is important to properly report and pay your federal and state taxes in a timely manner. If you are engaged in business and not familiar with federal and state tax laws, it would be wise to use a CPA or other tax professional to help you identify your tax filing and payment obligations.

Q: Is there some sort of industry-standard software I should use to track my business income and expenses and keep track of the probable amounts I’ll have to pay in taxes? 

A: The Department of Taxation does not require the use of specific software.

“Akamai Money” seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put “Akamai Money” in the subject line.