You’ve gotten used to it. From the time you started our first job in high school and probably until you can no longer have a job, you have had the same experience. You open up your paycheck and see the amount that your company has taken out of what you have earned to cover the taxes you owe the government. You get so used to it that you expect taxes to be taken out of whatever you make some money. You assume that is what happens whenever you have money coming in, even if you sell something online on places like Etsy.com.
Uh oh… no it isn’t!
When you sell anything in your business, it is subject to tax. And not just sales tax! Eventually you will have to pay income taxes on the income you make from your business. The difference is that now, unlike when you were an employee, you will not have taxes taken when you get paid. There is nothing in Etsy that takes out the amount of federal or state income taxes from the sale price. As a business owner, you are now solely responsible for your income taxes.
You will end up paying income taxes on these sales when you complete your Schedule C on your personal tax return at the beginning of the next year. Unless you either (1) were able to accurately forecast your sales for the year when you completed your prior year tax return and have been making estimated tax payments during the year, or (2) had a loss and will not owe taxes on what you sold, you will have to pay something to the government for the income you made by selling on Etsy when you complete this year’s tax return.
So what do you do? Do you have to keep track of every sale and figure the amount of income taxes you are going to owe on that sale? That is probably a little extreme. As a business owner, you are probably keeping track of how much you sell, as well as how much you are spending (if not, start keeping track of Etsy income and expenses yourself or contact an accountant to give you a hand). Since you are keeping track of what you have sold, you could take what you sold in a month and take a certain percentage of that amount (say 25%) and put it in a separate account.
You actually don’t need to wait until you do your taxes to pay the income taxes on what you have sold. You can actually make payments to the IRS on a quarterly basis for what you think you may owe on your tax return. Why would you want to do this? You could actually be assessed a penalty if the tax you owe is greater than either:
- 90% of your 2012 tax liability, or
- 100% of your 2011 tax.
Therefore, you probably want to make some prepayments to the IRS so you don’t lose any more money through IRS penalties. Talk to your accountant about how to do this.
Understanding the tax rules is one of the hardest things to do. However, if you have a business, you have to get a basic understanding of the rules or you could have a much harder time running your business. However, if you have any questions, contact a good accountant (such as the author of this article) who can walk you through the right steps to take. Have questions right now? Check out Outright’s Online Sellers Guide to Taxes or ask a question in our community forum!
In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.
The author, Chris Peden, CPA, CMA, CFM, has over 15 years of experience with helping people and companies with organizing and making sense of their finance information, as well as meeting their regulatory compliance requirements. He is also available as a freelance blogger if you need an article on finance, accounting or taxes for your blog. He can be reached at firstname.lastname@example.org, and you can view his website and blog at http://cmpfinancialconsulting.homestead.com/.