Taxes, what should I expect?

[Squeakin000]

Hi everyone! Hope you all had a wonderful Christmas!

I have hopes of starting my own Etsy shop in the new year as I am currently working on some stock of simple speckled mugs for now and building a following on a social media platform. But the self employment taxes are extremely intimidating to me and would really appreciate some guidance going into this before I start selling on Etsy and eventually moving to my own website if everything goes well.

How do I go about estimating how much I need to save for self employment taxes for state and federal?

What forms would I need to get or can I report it on my personal tax return? 

What is the best way to keep my records of sales and savings for taxes so I won't be audited?

Here's some information that might help:

I am an Oregon resident in Multnomah County

I am planning on making this a part-time business as I will still work a full-time job with a w-2

Thank you so much for any advice and guidance! This stuff is really intimidating..

[Sorcery]

All the online do it yourself tax prep things are pretty easy to get thru, as just additional income or with a business tax ID.

I just set up my site with SquareSpace and it's pretty easy. There's Videos for everything. Real easy. 

Shipped for the first time today with PayPal. That was easy too.

Don't be intimidated! It was hard for me to get this going but every step of the way I had signs I was doing the right thing. Every phone call I didn't want to make was informative and easy too! I hate talking on the phone!

Don't worry about being audited either. Just file! She keeps telling me there are a lot of small business advantages right now. 

Sorce

 

 

[Callie Beller Diesel]

So taxes can vary pretty widely from jurisdiction to jurisdiction, so the first thing I would do is actually track down an accountant in your area who is familiar with selling online as a business model. If you find taxation daunting, learn about it from a professional and eliminate the worry in your own mind.  Get them to set you up with a bookkeeping system you can use and fill out the way they need, so all they have to do is the filing. Get them to tell you the types of things you can and can't deduct, what to save and what to not bother about, and at what threshold you need to be collecting and remitting what. Getting set up properly from the get go will make things run more smoothly. Doing the bookkeeping yourself allows you to keep an eye on your finances in a clear way, which is essential.

Next: set up a bank account that is only for your business expenses. Keep this separate from your personal expenses at all costs. If you have to go through a bank account, paypal and two different credit card statements at the end of the year trying to remember what was a personal expense and what was for your business, you are going to HATE your life!

Accounting is something that can be pretty straightforward. But managing your cash flow and determining if you are actually being profitable is a topic that isn't addressed as much. A book on the topic that I only found last year and wish someone had pointed me at a LOT sooner is Profit First by Mike Michalowicz. It's a quick, easy way of setting up your cash flow that will reveal holes in your pricing if you haven't got it right very quickly. It also sets you up so you're insulated from the severe income swings that we can experience as makers. It's one of those unicorn books where the principle works in different countries, and at different income levels. He does explain how to scale the system if needed. If you're a fan of envelope or jar systems for household spending, this is similar, but easier. See if you can find it at your local library, but if they don't have it, it's not too expensive. 

I personally think that if you've never built a website, Etsy isn't a bad place to start and learn on. However be sure to build your business as though you were a full time professional with an intent to eventually move off the platform. Taking the time to create proper shop policies and fill out all the forms on Etsy as thoroughly as you can is important, and will take some time. Doing that will help you communicate with your customers for a better experience, but it will also cover your backside in the event something goes sideways. It'll also be information that you can copy and paste onto your own separate website when you go to build it. Try and save the copy for these things in a document somewhere off site  as backup.

 That said, don't assume Etsy as an entity cares if you succeed as a seller or not, despite the extensive propaganda to the contrary.  If you need assistance, I found that some of the local small business and Etsy groups are better resources than their forum. Some of the things that Etsy encourage sellers to do are not, in fact, in your best interests as a professional. (Note when I say professional, I'm not talking about the number of hours you put in. You can be a part time professional at your business.) Lowering your prices or offering too frequent discounts might get you (and them) money short term, but it shoots you in the foot and trains customers to have a set of expectations that aren't in line with a sustainable business. 

[Squeakin000]

16 hours ago, Sorcery said:

All the online do it yourself tax prep things are pretty easy to get thru, as just additional income or with a business tax ID.

I just set up my site with SquareSpace and it's pretty easy. There's Videos for everything. Real easy. 

Shipped for the first time today with PayPal. That was easy too.

Don't be intimidated! It was hard for me to get this going but every step of the way I had signs I was doing the right thing. Every phone call I didn't want to make was informative and easy too! I hate talking on the phone!

Don't worry about being audited either. Just file! She keeps telling me there are a lot of small business advantages right now. 

Sorce

 

 

What I'm worried about is making it legal so I don't get sued or fined for selling online or at markets, did you make a paypal just for your business? did you file as a sole proprietor or an LLC? And what kind of licenses and permits do you need to register for?

[Mark C.]

Every statre has its own deal. In Cal. I'm sole proprietor 

Some here file as LLC (more $ and work) than sole Prop. All my fellow potters are sole props as well.

I have a state reasale # but since Or does not deal with taxes on goods bought and sold  you do not need that. You need a business name and report your earnings on your federal  schedule E and state forms. I suggest a meeting with a tax advisor to get you off on the right foot. You will need a federal tax number if I recall (I have one)

Self emploment taxes come out of sales and you can pay quarterly or yearly 

I have not looked but maybe these days its all on you tube if you like spending time there.

since you are a w2 person all this sounds tough (most w2ers do the easy tax form) but a short appointment with a good tax person can get you started easy.Once its all set you can rest easy.

Taxes are more complex as you have income from self employment which also means you can deduct in the 1st year (the 1st year is when you can only do this with existing equipment) on all equipment (wheels ,tools, kilns filing cabnets,desk etc) You also can take office space for home office (the square footage of space against the home square footage turns int a % figure which you can now take off gas and electric fees as well) This all seems like a lot so a good tax person is key when starting out. After 45 years I only think this way now (I have not had a w2 since 1982)

If its just a small hobby business talk to your tax person on that aspect  as I have zero experience in that.

Find a good tax person (not a chain tax outfit)

good luck 

[Sorcery]

34 minutes ago, Squeakin000 said:

And what kind of licenses and permits do you need to register for?

This will vary by municipality. 

I started with a personal paypal and recently upgraded to business for checkout on my store. They charge 2.9%+.30cents per transaction. The same I same on shipping through PayPal. Stripe for CC and apple pay is the same cost. No other fees and they take their cut off top.

I went through legal zoom and setup a LLC as a sole proprietor. They offer Tax help for $30 a month which I cancelled. Our business is quite simple. So "extra services" are just that...extra!

 

Sorce

 

[GEP]

2 hours ago, Sorcery said:

went through legal zoom and setup a LLC as a sole proprietor

It isn’t possible to be both an LLC and a sole proprietor. Possibly you meant to say you are a single-member LLC?

A sole proprietor reports their business income on their personal tax return. An LLC is a separate entity that files its own tax returns. I file as a sole proprietor, on the advice of my CPA when I became self-employed 20+ years ago. He said I could pay him to prepare one tax return, or two, with no practical difference. He has a “keep it simple” approach. 

[Mark C.]

30 minutes ago, GEP said:

It isn’t possible to be both an LLC and a sole proprietor. Possibly you meant to say you are a single-member LLC?

A sole proprietor reports their business income on their personal tax return. An LLC is a separate entity that files its own tax returns. I file as a sole proprietor, on the advice of my CPA when I became self-employed 20+ years ago. He said I could pay him to prepare one tax return, or two, with no practical difference. He has a “keep it simple” approach. 

Yes same with me only it was over 40 years ago-keep it simple.With the cheviot of 20 or so categories of bookkeeping

[Bam2015]

If you are going to operate as a sole proprietor, make sure that you have adequate liability insurance. Your personal assets (house, cash, etc.) will not be protected as a sole proprietor if there is a judgement against your business. 

[GEP]

1 hour ago, Bam2015 said:

If you are going to operate as a sole proprietor, make sure that you have adequate liability insurance. Your personal assets (house, cash, etc.) will not be protected as a sole proprietor if there is a judgement against your business. 

True for businesses in general, but the nature of a one-person pottery studio does not really present any risk of being sued. 

There is no “one size fits all” answer to this choice, it all depends on an individual’s priorities,

[liambesaw]

38 minutes ago, GEP said:

True for businesses in general, but the nature of a one-person pottery studio does not really present any risk of being sued. 

There is no “one size fits all” answer to this choice, it all depends on an individual’s priorities,

Unless you decide to make flameware, candles, baking dishes, or other risky things which require special use or instruction.

I have general liability insurance but it doesn't cover any of the above.

[Mark C.]

I have a full business liability policy-used to cost $300 now it $500

I'm a full timer making candle holders, baking.  dishes and 33 other forms in large numbers and have lots to lose if sued . You can swallow a sponge holder if drunk I think (just a guess ) or cut off your finger on a broken mug. If you fill one of my teapots with black powder and light it, it will hurt you and your family so I carry this as I want my stuff as i have lots of stuff. Its a two million policy if I recall .

I hate insurance  and I mean hate it,did mention that my father sold insurance when I was kid.

[liambesaw]

A lot of people drive around with no insurance because they have nothing to lose (equivalent of an LLC with no liability insurance).  If you have something to lose, get it.  Also an LLC is not absolute protection of your personal property, if you end up going to court for something like gross negligence or fraud, the judge has discretion. You also lose all protections if you're mixing finances.  So even if you have an LLC, you should still carry a liability policy for your LLC so it never comes to that.

[neilestrick]

On 12/28/2020 at 5:01 PM, Squeakin000 said:

How do I go about estimating how much I need to save for self employment taxes for state and federal?

My wife and I are both self employed. We set aside 30% of our profits for taxes. There's a lot of 'it depends' at play here, but it's a good starting point.

[Stephen]

looks like you have lots of good advice. Thought I'd throw out our experience since we also combine the pottery business with W2 income for me and also have an LLC with business insurance (all things you mentioned). If you make less than I think $600 I don't think you need to do anything unless you want to write off equipment and/or expenses. If it is a hobby business then you should go to the IRS website and read up on that because you can only write off some stuff with that designation.

I'm in Texas and we are an LLC, have a sales tax id from the sate, work from a home studio in a garage and have business insurance through a commercial insurance company. If your kilns burn down your house your regular insurance and/or home owners  will not cover your house if you sell anything from your home studio. I am pretty sure that is true no matter where you live in the country. I trusted my agent when he said it was fine but when I moved from WA to TX and pushed for clarification Allstate made it clear that it we sold stuff my homeowners would not cover it if the damage was caused by the studio. It cost us about $800 a year to have the insurance but we also have some riders added to cover some show liability, some lost sales and some inventory value as well as just covering incident damage.

I file our personal taxes jointly using Turbo tax small business edition online and the business income is on a schedule C on our 1040. No employees and no federal tax ID. I have had an in-house comptroller/book keeper and an outside corporate accountant in my day life so I get the value of that and if that's the way you want to go then don't read the rest of this post, just keep your receipts and hand them over at tax time with your Esty reports and it will be easy once your guy sets everything up.

.... I only spend an evening each year dealing with our taxes and we just have a few quarterly reports for the local stuff so if you are pretty savy working with basic numbers its certainly doable on your own and, at least with us, not worth the expense of outside help.

Since I felt just fine doing my own I started doing ours on TurboTax have never felt a need to do anything else. When we started selling as a business I converted all the studio equipment to business equipment using market value so I could then take advantage of being able to depreciate it. We had about 20k of stuff to depreciate and in the aftermath of the 2008 financial crisis there were some extra benefits for a few years so it did matter. If you have existing equipment you bought for personal use in the past you can convert it to business use and then write it off every year on a schedule based on what it is.  Any new studio equipment beyond consumables and small incidentals and hand tools you will need to write off like this as well.

Turbo tax small business handles all of this with just a few questions answered so you don't need to do anything but tell it about the equipment and what the cost or market value is and it does the rest. It will ask you every year if you bought anything.

We have pretty much all the same expenses and categories each year so we just keep an envelope with all the receipts that are not online and I pull it together and knock it out in an evening. Texas does not have personal income taxes but I think it will handle Oregon State stuff as well.

The feds don't care about the LLC and you don't need to report anything until you have income over I think $600 unless you want to have write-offs and I think $400 or so before dealing with self employment if you just file as a sole proprietor. A single member LLC (husband and wife qualify as single) you can file for federal income tax purposes as a sole proprietor if you want to and you probably do.

TurboTax deals with the self employment as well. If you start making a lot of dough (10's of thousands) you will at some point need to pay that quarterly. I do that with a direct pay from bank to the IRS website and its not hard to set up and a few clicks but you only do that the first year following clearing a certain threshold and Turbo tax will clue you in when you need to. 

Good luck. My sister-in-law just opened on Esty with fused glass work and had several dozen sales her first month. She took advantage of all the marketing options and at the end of the day it all added up to about 30% of sales so not bad.