Disclaimer: The information provided in this article is based off of my personal experience and the guidance of my accountant. You should consult with your own accountant for any tax related information and/or guidance.
Woohoo, it’s tax season! – Said no business owner ever! Ugh, there’s seriously so much involved with taxes when you own your own business. Things can be a bit confusing, so this year I took the plunge and hired a business accountant.
After meeting with him earlier in the week I thought that I would take the time to write about a few tax tips for Etsy sellers. Keep in mind that I am not an accountant or an attorney. The following tips that I’ve collected are soley based on my experience. Consult with an accountant if you have any questions.
Let’s get started, shall we?
You do Have to Report Any Extra Earned Income
Okay, I’m just going to clear the air and set things straight. If you earn money with your Etsy shop you are required to report your income and pay taxes on any money that you profited. Even if it’s a few hundred dollars.
I’ll be honest with you, when I first started selling on Etsy I thought that if I earned less than $20,000 in a year then I didn’t have to report the extra income because Etsy isn’t required to file a 1099. Boy, was I wrong! Don’t make this mistake, please! Just know that you are required to report any extra earned income to the IRS.
Speak with an Accountant
My second tax tip for Etsy sellers is to speak an accountant. Even if you’re new to selling on Etsy, you should look into speaking to an accountant to determine if you’re starting out on the right foot. When you first start selling on Etsy, you’re basically selling as a sole proprietor, which is a sole owner and operator. However, depending on how fast your business is growing and what you’re earning, it may be wiser to switch to an LLC or a S corp. This is where an accountant comes in handy. An accountant will guide you in the right direction depending on how things are looking for your business. Choosing the correct legal structure could end up saving you thousands in taxes!
Have a Business Bank Account
I highly recommend that you have a separate bank account that is strictly for your business. Having a business bank account that’s separate from your personal account is essential, especially if your business is growing. You certainly want to avoid mixing your personal finances with your business finances. Not only can it become a big headache to manage, but it can cause some serious trouble with Uncle Sam.
All I had to do to open up a business bank account was to provide my EIN, my state registration, and a small deposit. I think I started with a deposit of $50.
Use a Bookkeeping System
You should also find a way to keep track of your books. If you’re just starting out you can track all of your expenses for free with a computer program such as Excel or Numbers. If you find that you’re logging things in regularly and you want something easier to manage you can always try a free trial of Outright or Quickbooks. I personally use Outright which only costs $10.79 a month. The great thing about Outright is that it automatically imports my sales and fees paid to Etsy, which saves me hours of work logging that information in myself.
You’ll find things to be so much easier when using a bookkeeping program. I can log my purchases through an iPhone app, which is amazing when I’m on the go. It also provides an estimate of my quarterly taxes which is a lifesaver!
Know What You Can and Cannot Deduct
Once you’ve got a bookkeeping system in place you should learn what expenses you can and cannot deduct. Any monthly bill that you pay that’s directly related to your business should be payed through your business bank account and logged as an expense. A good example of this would be a monthly bill for a bookkeeping system.
If you’re unsure of what you can and cannot deduct then be sure to ask a business accountant.
Track Your Milage and Auto Expenses
Did you know that you can also deduct some of your auto expenses? If you use your vehicle to travel for any business then you can deduct a portion of your auto expenses. With that being said, it’s a good idea that you keep track of your milage. You should log each trip that you spend with the date and number of milage driving. This information will help determine your auto deduction at the end of the year.
Have a Set Place for Business
Assuming that you work out of your home, you can also claim a home office deduction. A home office deduction can be a bit tricky. A lot of people shy away from a home office deduction, but as long as you’re qualified for a home office deduction then you should surely save at the end of the year! As long as you have a set area of your house that you use for business that is separate from your living quarters, then you should be okay. For more information about a home office deduction, here are a few helpful articles:
Keep All of Your Receipts
Another great tip for tax time is to make sure that you keep all of your receipts for any business expenses. If you don’t keep your receipts and the IRS audits you it could land you into trouble. For that reason it’s also a good idea to have all of your receipts organized.
I personally organize all of my receipts in an accordion file separated by month. At the end of the year I combine the months into quarters (Q1, Q2, Q3, Q4) and I file them away in a filing cabinet.
The IRS recommends that you keep your receipts for 3 years after you file your return.
Save for Estimated Taxes
If there’s one piece of advice that I would recommend to every new Etsy seller, it’s this one. If you’re making any sort of money online (even if it’s only a few hundred dollars a year) you should save money for tax time just in case you’ll owe taxes.
I see so many sellers that don’t save anything for taxes and they come to find out that they owe hundreds, some owe thousands! Please don’t make this mistake.
I’ll tell you what I do. Every week when I get my weekly deposit from Etsy on Tuesday, I immediately transfer 30% of that into my savings account for taxes. That way, when it comes time to pay Uncle Sam, I have no problem writing that check. In fact, because I do the 30% BEFORE any expenses, I usually have money left over to spend. It’s like I give myself a little extra quarterly bonus!
Do a Monthly or Quarterly Review
Finally, the last tip that I have for tax time is to do a monthly or quarterly review of your expenses. Keep a list somewhere of the bills that you pay toward your business. That way, you can see if you missed logging a bill into your bookkeeping system. Or, better yet, review your business bank statement and/or business credit card statement every month to make sure that everything matches up. It will be so much easier for you at the end of the year if you do this monthly or quarterly, so you’re not scrambling around last minute.
And, that’s a wrap! I hope that these tax tips were useful to yourself and your Etsy shop. Do you have any tax tips that I may have missed? Let me know in the comments below!