I’m so excited to have Amy Northard sharing some serious wisdom with us today. Amy is my personal CPA and I trust her with all manner of taxes and numbers and mathyness. I asked her to clarify this very common question that I know stresses out so many crafty business owners. There is a link at the bottom of the page to get more info from Amy and join her course which is designed to help creatives navigate taxes and bookkeeping. – Danielle
I hear from a lot of business owners that their passion / hobby turned into something that was actually making money and then the business side of things like taxes kind of snuck up on them. To make sure this doesn’t happen to you, I’m sharing when you need to start worrying about paying federal, state, and sales taxes.
Federal and State Income Taxes
Let’s start with federal and state income taxes. You’re familiar with these if you’ve ever filed an annual tax return (you know, that one that’s due April 15 every year). If you’re a sole proprietor, which is the default business structure, or a single-owner Limited Liability Company (LLC) you’ll be reporting your income and expenses on an extra form that gets filed with your personal taxes. This form is called a Schedule C.
It’s a common misconception that if your expenses are larger than your income, you don’t need to report anything. Here’s the thing, if you were paid $400 or more (not including expenses), then the IRS and most states want to hear about it.
You may or may not actually owe taxes at this point. It depends on quite a few other things, like if you’re married, have a full time job, have kids, the amount of business expenses, etc. All those things will affect your total tax due to the IRS and your state.
The other misunderstood part of federal and state taxes is estimated taxes. This is a whole blog post in itself, but here are three important things to know:
- Estimated taxes are different than filing taxes. This is just a check you’ll write to the IRS and your state (if they have income tax) to go towards the total tax calculated on your year end tax return.
- It’s generally a good idea to save about 30% of your income after expenses are taken out in case you owe tax from your business.
- If you forget or choose not to make estimated tax payments, you won’t receive a notice in the mail. Instead, the IRS will charge you an underpayment penalty and interest if you end up owing more than $1,000 on your annual tax return.
Now, on to sales tax. This one is a little simpler. If you sell a tangible product to people in your state, then you definitely need to look into your state’s sales tax rules. Only a few states don’t have sales tax, so most likely this will apply to you. You’ll only charge sales tax to people in your state or if you travel for craft shows, you may be required to charge that state’s sales tax on those purchases from the show.
One thing to be aware of is that many states are starting to charge sales tax on digital products, too. If your state doesn’t spell this info out on their website, you can probably save a lot of time on Google by just picking up the phone and asking if you should be charging sales tax on your digital product. Now that you know when you need to start worrying about these taxes, make sure you don’t ignore them. If sales tax is something you’ve been putting off, schedule a business meeting with yourself and get it taken care of.
Amy’s course Be Your Own CFO teaches creative business owners what they need to know to feel confident in their book keeping and tax prep and overall financial health of their business. She is offering my readers a special discount through October 1! Snag Amy’s course This course will get you set up to prosper and feel like you finally know what you are doing when it comes to taxes and bookkeeping. So basically it is priceless.
Amy is a Certified Public Accountant (CPA) who has a passion for working with creative entrepreneurs all over the US and making the tax and accounting side of owning a business less stressful. When she’s not working with numbers, she loves to knit and cook. Visit Amy online here + join her mailing list!
You might also enjoy hearing from Amy on the topic of tax reform on The Merriweather Council Podcast