Psst! Sell on other platforms or even from your own website? Check out our handy downloadable Online Seller’s Guide to Filing Taxes!
When it comes to running a small business on Etsy, most people think about the products they want to sell and the customers they want to attract. The idea of paying taxes on their sales never comes to mind. No matter how small your business transactions may be on Etsy, you will need to pay taxes on the money you make. The question then becomes: How much money will you owe in taxes, and how will you file your tax returns in the coming year? The guide below provides the answer to those questions and more so you can be prepared this tax season.
Self-Employment Tax at a Glance
Some people have a hard time identifying themselves as “self-employed” because they still work under an employer during the day. If you are running a business on your own, you are self-employed. There is no way to get around that. This categorization includes side projects on Etsy that provide a secondary income for you. Here is a quick look at the taxes you will pay as a self-employed individual.
What is self-employment tax?
Self-employment tax is a fee that some people pay the U.S. government to cover the cost of Social Security and Medicare. This tax is similar to the tax that most traditional businesses pay, but all of the tax falls onto the self-employed individual. In a business setting, the employer takes care of half the taxes and the employee take care of the other half. In your Etsy business, you will have to cover all the taxes on your own.
How much is self-employment tax?
Typically, self-employment tax is 15.3%, or roughly 1/6 of your income. However, the 2010 Tax Relief Act reduced that rate to 13.3% for 2011 and the years following. For now, expect to devote about 1/7 of your income to self-employment tax until the laws change again.
Who has to pay self-employment tax?
Self-employment tax is reserved for individual business owners who earn more than $400 a year. If you only sell one or two items on Etsy every month, you may not have to pay self-employment tax. However, if you rely on this site for your sole source of income, you will have to cover this tax every year.
How to File Taxes as an Etsy Business Owner
Filing your taxes as a self-employed person is not as easy as filing taxes with traditional W-2 forms. In a standard business, all you have to do is plug in numbers from your W-2s and calculate your tax refund/balance from there. In a self-employed business, you have to calculate an entirely different set of numbers, and none of them will come from a W-2. Here is a simple guide to filing taxes for your Etsy business. (Hint: Using Outright to track your income and expenses and deal with taxes is way, way easier!)
|With Outright||Without Outright|
Step 1 – Sign up for Outright Sign up for a free 30 day trial of Outright. This program will track all of your PayPal transactions for you, so you don’t have to gather the data on your own.
|Step 1 – Print Your PayPal StatementsYou will need to gather all of your PayPal statements for the year to calculate your earnings. There are several ways to go about this. Log into your PayPal account, and hover over “History” in the top menu, under the “My Account” tab. Then click on “Reports.” There, you can gather financial summaries and transaction histories for the year. You may print them by month or print them altogether, depending on what you want to see in your income. Find the forms you want to use to calculate your sales, and print them off to review.|
|Step 2 – Link Your PayPal and Bank Accounts
Set up your Outright account to synch with your PayPal and bank accounts. This will keep a tally of your profits and expenses in correspondence with the lines on standard tax forms.
|Step 2 – Get Your Tax Documents
To file for self-employment taxes, you will need a Schedule C, Schedule SE, and a Form 1040 from the IRS. These are available in most IRS offices and on the internet. The Schedule C allows you to calculate your profits and losses for the year, and the Schedule SE allows you to calculate the amount of self-employment tax you will have to pay. The Form 1040 is your overall tax form that will require information from the other forms.
|Step 3 – Get Your One-Click Taxes!
Print your pre-filled tax forms directly from your Outright account, and turn them into your accountant or the IRS. No fuss. No fury. No frustration. With Outright on-hand, you’re all set! PHEW, that was easy!
|Step 3 – Fill out Your Tax Forms
If you are filling out your taxes online, you will need to go through the steps on the website to complete your taxes, using the numbers from PayPal as a reference. In most cases, you will need to calculate your overall earnings, fees, and expenses for the year with those documents based on the questions the tax program asks you.
If you are filing your taxes on your own, you will need to start with the Schedule C. This will ask for information about the money you made and paid out throughout the year. Fill it out according to the information in your PayPal account, and then move on to the Schedule SE. Once you calculate your taxes on that form, you can complete the Form 1040.
If you have trouble with your tax documents at any time, you may refer to the instructions for the individual forms provided by the IRS. These instructions discuss each section of the tax forms in detail, and they should answer any questions you have about them.
Tax Write-Offs for Etsy Business Owners
In order to save money on self-employment tax, you should take advantage of every tax write-off possible. These deductions will reduce the amount of income you have to pay taxes on, and they may help you avoid a huge debt to the IRS. Common tax write-offs for Etsy business owners include:
- PayPal Fees: Calculate the amount of fees you paid to PayPal throughout the year, since those are considered business expenses.
- Rent: If you rent your home, you may be able to use your office as a tax deduction. Calculate the amount of square footage in your office compared to your home, and use that percent of your rent as a business expense. If the office comprises 10% of your home and your rent is $995 a month, you can consider $99.50 a month as a tax write-off.
- Internet Costs: Determine how much of your internet is used for business purposes, and compare that to the amount of money you pay for web access every month. That, like your rent, can be used as a tax write-off.
- Utilities: Using the same calculations as you did for rent, determine how much of your electricity, water, and gas is used for your office. Report that money as a deduction on your taxes.
- Materials and Office Equipment: You may deduct money for the materials you use to create Etsy products and any office equipment you may have used to sell those products. If you bought a new computer, printer, wireless router, or similar, you can remove the cost of those products from your taxable income. Just make sure you save the receipts for them, in case you get audited in the future.
Scope out as many tax write-offs as you can find to make up for the money you may have to pay to the government.
How to Pay Self-Employment Tax
Most Etsy business owners do not have the luxury of getting a tax refund at the beginning of the year. Instead, they have to pay money to the government based on their annual profits. If you are in this predicament, there are several ways you may go about paying back your business taxes. Possibilities include:
- Estimated taxes: You could start estimating your tax payments early on in the year by making quarterly calculations. The IRS has an estimation form to fill out so that you are not overwhelmed by your taxes at the end of the year. Maintain your payments this way, and you will only pay a small amount every quarter. Look under the “Taxes” tab on our Outright.com dashboard to see how much you owe in quarterly estimated taxes each quarter.
- Balance payments: If you have the ability to pay the balance of your taxes after you file them, do so. Send the money to the IRS online or through the mail so you do not have tax debt looming over your head.
- Monthly installments: If you cannot afford to pay your self-employment tax all at once, you can set up a payment plan with the IRS. This will allow you to pay for a small portion of the debt over the course of a year or two, much like you would for a loan or credit card. Note that there will be fees involved with this process, which will increase the amount of money you pay to the IRS.
You may make your Etsy tax payments through an online service or by sending money directly to the IRS. Pay back whatever you owe in a timely manner, and then you can start saving for next tax season. If you keep up with the taxes on your Etsy business early on, you should have no trouble making money and still upholding your commitment to the government.