HN Explorer

Ask HN: Taxes on App Store earnings

10 points by droz ↗ HN
Hey HN-

I'm a software developer and have been thinking about getting some additional revenue each month by developing an iPod/iPad/iPhone application (game or util etc...) and have been looking at the number of downloads I'd need to break even, and one aspect that's still hazy to me is the tax implications.

I've read that the app store treats earnings as commissions, so my understanding is that I have to pay the 15.3% federal self employment tax and 4.xx% state tax on those earnings after apple takes their 30% cut.

1) do most folks end up paying estimated taxes on these earnings quarterly or do this wait until the end of the year?

2) At what level of revenue do I need to establish myself as a business (s-corp, sole proprietorship, etc..) rather than an individual?

3) if I change my revenue model to be ad based, it seems like a lot of the ad service providers will just send out a 1099 misc at the end of the year and deal with the taxes directly- is this "mostly" accurate?

I am planning on talking to a tax professional to get definitive answers here, but want to get a sense of what to expect from people that are already in this situation. Thanks for any feedback.

4 comments

[ 2.8 ms ] story [ 22.6 ms ] thread
moge
not a tax expert so won't touch 1 or 3 but as for #2 the answer is that there is no limit. Incorporating really just offers you protection. From a tax perspective filing as an LLC is no different that filing as a non-incorporated business. It's call 'pass through'. S or C corp would be bad as you would be double taxed. If you are thinking of incorporating you should as an LLC. From there you can start doing deductions, etc.
aonic
I've been in a similar situation before but not from the App Store. Since Apple basically collects all the sales revenue and pays out 70% to you at a later time you might actually get a 1099 from Apple as well, so it might be no different than ad revenue. Hopefully someone with App store experience can confirm or deny this.

1099 is the same as any other revenue, you'll have to file federal, state, and city taxes on it just like any other sales revenue, so don't let that affect your decision.

1) Once you're incorp. and have been in business for at least a year the IRS will want you to do quarterly estimated payments, but as an individual, you can stay on the normal April 15 schedule.

2) I would recommend S-corp when your showing revenues of 100K/yr on your schedule C (non-W2 income). With an S-corp you will not be double taxed as you would with a C-corp (at corp level and then again at personal level). With an S-corp all the company profits come to your taxes on Schedule E and you pay taxes on it like you would with a schedule C. But as an S-corp you might be able to get away with more expenses and deductions at the corp level than as an individual

tachibana
One thing to be careful of is the liability protection of the pass-through entity, and this will be different for each state. While on paper, corporations provide limited liability, there is a lot of prior cases that show that the corporate veil can be pierced by many means (i.e. charging orders). Depending on the state of incorporation, an LLC may be the better way to go.

YMMV, but another great tip I got from my accountant was to set my fiscal year to end in July. It's right between the April 15th deadline and the October 15 extension deadline, when business tends to be lighter for most accountants.

gallerytungsten
As others noted, you need to form a business entity. Along with that, you'll get a TIN from the Feds. When making your business arrangements with the App Store, you'll use the TIN, rather than your SSN. Thus, all income is credited to the company, rather than you personally.

Of course, the company has expenses. Maybe it needs to buy you a new computer? Perhaps a couple iphones for testing. Whatever; the point is, you want to use the company to spend money "pre-tax" so that the net amount left is hat's paid as income. Consult your tax professional on the different ways this income can be paid from the company to you.