If your passion for creating has earned you an audience and an income, it’s time to get serious about managing taxes for online sales and in-person payments. After all, any time you make money, the IRS wants to know. Sure, they probably won’t hunt you down for a one-off garage sale, but they do want to know if you’re consistently making a profit elsewhere. Are you planning on selling your products both online and in-person? Here’s how to figure out all the necessary financials behind your two revenue streams.
Understanding Taxes for Your Craft Business
Most crafters will be required to file federal and state income tax whether they’re selling online, in-person or both. That being said, if you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, you’re off the hook when it comes to state income tax, but you’ll still need to report your income federally.
As a solopreneur, you’ll likely be required to file quarterly taxes to avoid underpayment penalties — whether you’re accepting payments via an online marketplace or during in-person sales. When you’re just starting out, quarterly taxes can be a tricky process to understand, especially if your profit hasn’t yet been consistent. Generally, individuals who owe less than $1,000 in taxes per year after federal income tax can file annually rather than quarterly.
If all this tax info is still a little over your head, don’t worry. Meeting with a qualified tax professional can help you sort everything out. Ultimately, the longer you’re in business, the more you’ll understand quarterly taxes — but here are a few tips and tricks to help get you through that first payment.
Tracking Sales for Tax Payments
The best way to keep track of your taxes for online and in-person sales is to use the same payment platform for both. When you’re selling in-person, you can use card readers and apps from sites like Etsy, PayPal and Square that allow you to accept credit payments, generate receipts, easily charge sales tax and track your income through sales reports. Plus, you can pair some payment platforms with your own website to accept online payments, or use online marketplaces that are already set up to accept payments through these platforms.
Before you select your payment platform, know that you will have to pay a fee to use these sites and devices. For example, Square and Etsy both charge a 2.75 percent processing fee of the total transaction, and PayPal charges 2.7 percent. It’s important to note, however, that you can write these fees off as deductible business expenses when you file your taxes. Square gives their basic card reader away for free and charges $49 for a chip reader, while Etsy provides free readers and PayPal’s devices start at $14.99. You can also choose to keep track of every sale with a bookkeeping program, like QuickBooks or FreshBooks.
Filing Income Tax for Online and In-Person Sales
At the beginning of the year, you’ll receive a 1099-K for the prior year’s sales from any payment processing company you’ve used — if you had more than 200 transactions and made at least $20,000. This data will also link up with any in-person sales collected on a payment platform when you use that platform’s card reader — creating a scenario in which your online and in-person data will be consolidated into one form.
Once you receive your 1099-K, you’ll report the income value from the form on your Schedule C (Form 1040) on line 1. Just keep in mind: If you don’t receive a 1099-K form, you’re still accountable for reporting all of your income on Schedule C.
There’s no need to dread the process of filing taxes for online sales. By discovering the best method of tracking your various sources of income and learning how to file your tax payments in a compliant manner, you can ensure your business continues to thrive for years and years to come.