When starting your first business, taxes are usually the last thing on your mind. But when tax time does crop up, suddenly you experience a mountain of worries: Am I doing it right? What kinds of taxes do I need to pay?
If you are selling with the aim of making a profit, rather than just as a hobby, then in the eyes of the HMRC you ARE running a business.
When you file your tax return, fill out Schedule C. You only pay tax on the net profit — the total amount after you deduct eligible business expenses, such as:
- Fees paid to the online site/marketplace
- Cost of materials and equipment
- Shipping costs
- Bank fees
- Use of dedicated space in your home/studio for a workshop
Generally, you must pay self-employment taxes if your net profits are $400 or more. Self-employment taxes are Social Security and Medicare taxes. Use Form 1040SE to help you determine how much tax to pay.
Generally, you must pay self-employment taxes if your net profits are $400 or more. Self-employment taxes are Social Security and Medicare taxes. Use Form 1040SE to help you determine how much tax to pay.
Income taxes are due on income as you earn it. If you estimate you will owe taxes of $1,000 or more by the end of the year, the IRS wants you to make estimated quarterly tax payments.
If you don’t make these payments, you could be charged a penalty and interest for not paying the taxes in a timely manner. To help you estimate your quarterly payments:
- Look to last year’s taxes for guidance
- Use a software that will help you with taxes and your pricing and inventory as well such as Craft Maker Pro.
In addition to federal taxes, you may also need to pay state taxes. Because this varies from state to state, check with your state’s taxing authority.
Here are useful guide to know more about taxes:
- Taxes 101 for Etsy Sellers
- 5 Ways to Make Tax Time More Serene
- Income Taxes: An Intro for your Creative Business or Blog
- Tracking Expenses & Keeping Records for your Creative Biz
- How to account for charitable donations
As a seller, it is up to you to determine the sales tax rules that apply to your business by checking with state Departments of Revenue. Sites like Etsy and HandMade at Amazon will collect sales tax for you, but only according to your instructions.
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