Taxes, Accounting and Expenses
Taxes are probably not at the forefront of your mind when just getting started on your business. And why not? They aren’t exactly the glamorous and exciting part about running your own company!
But then tax time rolls around and the stress starts stacking up.
How do I even do this? Am I paying the right amount? What kind of taxes do I need to pay??
Let me try to break it down into something not quite as scary! And do keep in mind, you should always consult a professional because each and every situation is unique. This basic information is a good starting place and should help ease your mind a bit.
US FEDERAL INCOME TAX
This is the big one that comes up every year. Most of you are probably familiar with it. It’s a tax on ANY income you have made. You should have been filing this since you became an independent adult.
When you run a business, even if you are just on Etsy, you are a sole proprietor and will need to fill out a Schedule C (Profit or loss from Business). You also may need to file a Schedule SE (Self Employment Tax).
You must pay taxes on your net profit-also known as, the total amount of income you made minus your business expenses.
When you work for someone else, every pay check you see taxes taken out. This is the ‘pay-as-you-go’ model. The IRS does expect business owners to follow a similar model, but on a quarterly basis. So every quarter (April 15, June 15, September 15, January 15) you are expected to pay a fourth of your taxes owed.
To do this, you would fill out a 1040-ES and send it to the IRS office near you, or file electronically.
Since you can’t be entirely sure of your annual net profit and expenses, this is considered estimated. So as long as you pay an amount equal to what you paid the previous year, you shouldn’t be far off the mark. If you’d like to get a better idea about this, here is further reading material. I also suggest reading the IRS’s tax guide for small business.
STATE INCOME TAX
Mostly, you are expected to pay this both annually and quarterly estimated. It varies state from state so you will want to read more about this on your state’s Department of Revenue website. This is also a great opportunity to talk with your accountant.
Every state collects sales tax to pay for things like roads, schools and other publicly-funded local endeavors. A percentage is added to each sale, and it is your responsibility to collect that from buyers.
This will vary from state to state, but the general rule is you collect sales tax from a buyer when that buyer lives in a state where you have a physical presence. Generally this applies to tangible products. To read more about sales tax and determine the rules in your state go here.
Best practice is to keep good records throughout the whole year! This will keep you from scrambling to pull together everything you need come filling time. You need to know how much money is going in and out, and track your expenses. Not only to save you the headache, but to avoid penalties and fines from missing something.
Tracking your income should be pretty straightforward. You can keep a Google sheet of all incoming sales. It's important to notate the taxes and shipping in there as well. Why should you notate shipping income separately? Well because it can be a deduction!
Tracking your expenses is where you will need to be a little more tedious. If you don't claim any deductions, you could be looking at a pretty bill to the IRS. This is why you want to keep good records and keep your expenses straight. Make sure you also keep receipts. I'd advise taping your receipts to a 8.5 x 11 sheet of paper, scanning that, and keep digital records to share with your accountant when you file. The IRS may not ask for this, but it's in your best interest to have them on-hand just in case.
So what are some common expenses you should be tracking?
- Postage and Shipping Expenses
- Mileage and Vehicle Deductions
- Home Office Expenses (if you have a dedicated workspace a percentage of your home may be written off)
- Costs of Goods Sold (materials, supplies, etc)
- PayPal, Bank, Merchant, Processing Fees
- Listing Fees
- Advertising Fees
- Website, Domain, Email Expenses
- Meals, Meetings, Coffee (related to business)
- Accounting Taxes (costs of filling, etc)
- Subscriptions (websites you use for business, trade magazines, apps, etc)
- Portion of Phone Bill
Again, this is something you should absolutely discuss with your accountant as they may offer additional insight and be able to get creative about your expenses.