 |
|
|
Story by
SarahSays,
Vanessa
Published on January 29, 2008 in How-To |
Photo by gusfink |
It's tax time again — you know, that time of year when indie artists and crafters to weep and tear our hair out. But fear not! SarahSays, who is not an accountant but understands tax law a bit better than many of us, shares some tips below for US-based artists and makers of all things handmade.
While looking through the shops on Etsy, I often muse about the fuzzy boundary between professional and amateur, hobbyist and businessperson. Well, turns out that there are real tax ramifications for this. Read on...
Debits, credits, deductions, it’s enough to make your head spin! It seems that only a genius, the IRS, or a certified public accountant (CPA), can understand the federal tax and state tax muck-a-muck. Although many Etsians may choose to hire qualified tax professionals, some Etsians of seemingly average intellect manage all things taxable in a DIY fashion. Whether you go it alone, or whether you’d prefer to leave your tax matters to an expert, here are some tax time considerations regarding your Etsy business.
- Keep accurate records. Save and organize documents, checks, and spreadsheets related to your business and any additional income (such as your Etsy income). Also, if you use an item, for example your cell phone or your computer for both personal and for business uses, then you should document the dates, times and reasons you use the items for your business. Although tedious, this can help you with deductions that reduce your taxable income and save you money. To qualify for a deduction, the expense must be ordinary and necessary (it must help your business in some minor way); related to your business (you must use the item for your business); and the deduction must be reasonable. But be careful, if the amount of deductions is large relative to your income, you may be audited. Common deductions for artists include advertising costs, attorney and accounting fees, banks fees, commissions and fees paid, insurance costs, license fees, office utilities, postage and subscriptions for professional or business publications.
- Beware of the "hobby loss rule." The IRS wants to prevent taxpayers from taking advantage of the fact that business deductions reduce taxable income. For example, a teacher has been making jewelry for years and years and has never earned a profit from it. In this case, the IRS would decide that her jewelry making is a hobby, not a business. This year, the teacher spent $1,000 on jewelry supplies but only earned $100 total. She wanted to deduct the travel expenses from summer craft fairs and other receipts and expenses from her taxes. But these expenses would only be deducted from the $100 income. She can't deduct expenses from her teaching salary. The IRS recognizes the goal of her business is to make a profit, but she can only claim a loss for a few years at the most. The goal of a hobby is for personal satisfaction. If the IRS views what you do as a hobby, there will be severe limits on what expenses you can deduct. In general, if you earn a profit in any three of five consecutive years, the IRS will presume that your business is for profit. According to the IRS, a profit is when the gross income from an activity is higher than the deductions for it. Don't try year after year to claim expenses if you're not making a profit; you may want to recognize that you're a hobbyist (there's no shame in that!).
- What to leave home (or recycle). Although, you can be audited for six years if you fail to report more than 25% of your gross income and can be audited without time limits if you file a fraudulent return, these are exceptions to the rule. In general, the IRS is prohibited from asking you about returns that are more than three years old.
- It’s your tail on the line. The ultimate legal responsibility for your taxes lays with you, even if an accountant files your taxes. So, remember to be truthful and act in good faith!
Take your time, keep organized, and if you have any questions, speak to an expert. To find someone you trust, ask around. Ask a friend, co-worker, or other small business owner for a recommendation.
Please share any tax stories or tips in the comments below! Which are you — hobbyist or businessperson?
| Tags | accounting, business, HOW-TO, law, Seller Handbook, selling, taxes, tax time |
|---|
21 comments Login to add your own!
stilettoheights
it would be great if you could also add a list of what the commonly used forms are, for people who are filing for the first time...I think that would be really beneficial.
this was a great article by the way.
JJMFinance
I am a CPA and have put together a useful group of links for Etsy shop owners to look at straight from the IRS.
http://www.etsy.com/forums_thread.php...
This article is good advise.
As my experience as an accountant, I have seen that lack of organization is often the biggest hindrance to filing an accurate tax return.
I hope this link helps some of you out! :)
JJMFinance
Another often overlooked business expense is mileage.
http://www.irs.gov/newsroom/article/0...
You have to keep up with quite a bit of record keeping though, but it is probably worth it.
CharmStar
Tax time is super scary - especially when the government takes about 30% of your profit! Don't be afraid to hire an accountant - they are great at finding deductions you might have forgotten. Mine also told me I don't need to keep up with my travel "eating" receipts, because there's a flat amount you can claim per day, depending on the city and that is so much easier.
I am terrible at keeping up with mileage...
beeskneesindustries
I use TaxCut for my taxes, and it makes things so much easier. It's $40, I think, but I feel that it's well worth it, especially if you go in on it with a few people. (I split a copy with my parents and boyfriend, which makes it cost next to nothing.)
kimdeane
TheSickChick
I'm a little confused by the Hobby Loss rule. If I spend $1000 on supplies for my craft but only sell a little bit of it (say $200 in sales for a profit of $50) then because my expenses for the stuff I didn't even try to sell are much bigger than my sales, I don't have to pay income tax on the sale revenue/profit? Do I still have to declare the income and the losses or will that just annoy the IRS?
(For the record I am definitely a hobbyist, I haven't started selling yet but it would only be a small fraction of what I make. And I don't live in the US but as a US citizen I still have to file, even if I almost never have to pay US taxes.)
HomeMadeOriginals
Thanks for the article. I would also like to know more about the hobby loss rule. I've been reading but haven't found the information I am looking for.
I think every one of us hopes we can have a profit with our Etsy business/crafting. However, if you don't have a profit for three years, can/will you lose the deductions you took in the years you were operating at a loss and be required to pay additional tax for those periods? Or is it enough to recognize at that point that you are a 'hobbyist" and change how you are reporting?
awdesignsuk
Interesting points mentioned here most of which are relevant to any country.
CreationsByEvelyn
I would like to know the answer to blusaffron's question and also would like to know if when you sell something to someone in your state, do you have to charge them sales tax. I have not notice anyone adding sales tax. Do they incorporate this in the price of the article or is it not necessary if this is your hobby?
amacjewelry
I am looking into selling, and have been looking for information on how to charge sales tax. I have sold in the past at art fair's and charge the state sales tax. I also have a tax id #. Could any please fill me in.
bellojardin
If the our shop specifies state tax is included in the $40 price, can we just keep records of that and put the tax from $40 in a pot to pay the state?
kooymandesigns
Like others I would really like to know how I can charge sales tax to those who purchase within the state I run my shop. We do have tax id so do already file a state return already. Hope I didn't miss anything in my set up of shop.
KandyKaneInc
I am trying to find information on when to charge sales tax. My business is TN. Do I only charge sales tax to those who purchase within TN?
ANTIKABOUTIK
Hi there,
what about being in Canada? What considerations to make?
Thanks.
JudiPaintedit
So much to know...Its scary!
I need step by step (taxes for stupid people) instructions on where to go and what to do.....
TheLovelyLady
Yes - any guidance on sales tax, tax id #'s .. when/if to get one ... is much needed and appreciated!!!
AccountingSPOT
Tax time really doesn't have to be scary! As the article says, accurate and timely records will give you the foundation for a breeze of a tax return.
I have a simple Profit & Loss spreadsheet you can download for free from my blog. It is a great way to track your income and expenses and keep your business finances organized.
gigilaroux
19 comments thus far and not a one solution or person or advisor on this whole website to direct and answer people's questions regularly, it's really pretty frustrating. People are trying to be honest upright citizens and Etsy is nowhere to be found helping their sellers out with someone writing more than an article who is "not an Accountant". They can do alot better....
gigilaroux
Just found this article people might want to perk up to as it deals with the aforementioned hobby-loss rule - which is coming under scrutiny by the IRS and tax preparers.
http://www.forbes.com/2009/07/10/irs-...
D'OH!
Previous Page
wow i love your picks !!!
by AnnaLela
on Etsy Finds Decor: Sw...
woooooo so cool. I love it
by vivilian
on Etsy Finds Decor: Sw...
Some great stuff!
by HeyChica
on Etsy Finds Decor: Sw...
Some great stuff!
by HeyChica
on Etsy Finds Decor: Sw...
Beautiful!!
by SpiralsandSpice
on Etsy Finds: Shades o...
who can resist all of those wonderful worn pine cupboards ...
by 5gardenias
on Etsy Finds Decor: Sw...
I have been creating and printing mhy own zine for ...
by Blambert1
on Zine Scene...