Taxes and Games, Part II

Last time, we discussed how Happy Bishop Games does not have to collect sales tax on the games it sells. However, it’s not free from taxes. We still need to pay self-employment taxes.

These are taxes for government programs like Social Security and Medicare. Most people have these taxes automatically deducted from their paychecks, and these make up the bulk of your taxes when you file tax returns each year. Since I will not be receiving a paycheck, I have to deduct these taxes myself from the profits of selling games through HBG.

HBG is a sole proprietorship, meaning it’s a tiny business run by one man (me!). This type of business has a unique tax status called “pass through”. That means all of the business profits and losses pass through to me, and I put them on my regular ol’ tax return. So if I manage to earn a profit in 2011 from selling Triune to the amount of $1000.00, that one grand will be taxable.

(Just to make sure we’re all on the same page, I’m talking about profits, not sales. For example, I recently paid an artist $200 for the Triune corebook. I will deduct that $200 from whatever sales I make, along with other costs, to get our profit. Taxes only affect profits.)

So, do I just slap that figure into my income on the trusty 1040 EZ? Not so fast! Since I’m self-employed under HBG, I need to pay a quarterly estimate to the IRS. That means I have to take a guess on what my profits will be each year, and then pay ¼ of that to the IRS every three months. Yes, these figures get revised as the calendar year progresses and I’ll get a refund if my estimate is really high. But the point is this–I need to prepare to pay taxes every three months.

How much? The 2011 rate is 13.3%. So if I somehow make a cool grand in 2011, I will need to pay  $133.00 to the IRS. (Since I’m starting HBG in the middle of the year, I’ll likely pay that amount over two quarters instead of four.) The rate can change every year, and it’s my responsibility as Grand Poobah of Happy Bishop Games to figure out what has changed and pay correctly and timely.

Not fun, but that’s the price for becoming a Famous Game Publisher.