From Dean: “If I don’t make a profit do I still have to pay Self employment tax? Federal or State?”

I’m assuming your talking about operating as a sole proprietorship, as that’s the structure that requires the dreaded Self Employment tax.

The short answer is “no,” you shouldn’t have any tax to pay. For your business structure, you should be filing Schedule C for Form 1040. For the 2005 version of this form, line 31 states:

If a profit, enter on Form 1040, line 12, and also on Schedule SE, line 2 (statutory employees, see page C-6). Estates and trusts, enter on Form 1041, line 3.

If you don’t have a profit, then according to IRS documentation, then you shouldn’t need to file Schedule SE for Form 1040 which determines the amount of self employment tax you owe. Even if you did file Schedule SE with no profit, if you run your numbers correctly you’ll calculate no tax is needed to be paid.

These are references to the federal forms, so your states forms may be slightly different.

When starting an affiliate business, generally the “business” portion of it is the last thing on your mind. After all, you’ve got articles to write and keyword research to do.

But don’t be fooled; setting up the proper business structure or changing it can better protect you from legal action and even save you some money, too.

Here’s a general breakdown of the most common business structures available to you in the United States (other countries may be the same or different). I plan on posting more indepth details for each structure in the near future. (more…)