Demystifying Taxes for Etsy Sellers
Table of Contents
- Introduction
- About Janet LeBlanc and Paper and Spark
- The Importance of Understanding the Financial Side of Running a Business
- Overview of Income Taxes for Small Business Owners
- Preparing for Income Taxes as a Small Business Owner
- Filing Schedule C
- Self-Employment Tax
- Estimated Quarterly Taxes
- Sales Tax for Online Small Business Owners
- Understanding Sales Tax
- Sales Tax Permit and Nexus
- Marketplace Facilitator Rules
- Destination-based Sales Tax
- Recommended Tools and Software for Bookkeeping
- DIY Spreadsheets
- QuickBooks Self-Employed
- Record-keeping for Receipts and Mileage
- Conclusion
Understanding the Financial Side of Running Your Own Business
Are you a small business owner or entrepreneur trying to navigate the confusing realm of finances? Look no further because we have Janet LeBlanc from Paper and Spark here to guide you through everything you need to know about the financial side of running your own business. Janet, a certified public accountant (CPA), understands the struggles and confusion that creatives and makers face when it comes to accounting and taxes. She started Paper and Spark in 2014 with the goal of bridging the gap between her accounting knowledge and the maker community, providing valuable information to help creative entrepreneurs thrive while understanding the financial aspects of their business. So, let's dive right in!
About Janet LeBlanc and Paper and Spark
Janet LeBlanc, the founder of Paper and Spark, is a certified public accountant (CPA) with a background in both accounting and the creative arts. After working in public accounting straight out of college, she realized that a traditional cubicle job was not fulfilling her creative aspirations. Seeking a way to use her creative skills while also integrating her accounting knowledge, Janet taught herself how to make handmade jewelry and opened an Etsy shop called Lazy Owl Boutique. However, she soon found herself being called back to the accounting side of things as fellow makers sought her advice and expertise in navigating their own financial responsibilities. Recognizing the lack of information available to physical product sellers and handmade artisans, Janet decided to start Paper and Spark in 2014. Her goal was to provide guidance and support to creative entrepreneurs, helping them understand the financial side of running a business so they could focus on doing what they love.
The Importance of Understanding the Financial Side of Running a Business
Running a business involves much more than just creating products or offering services. It requires a solid understanding of the financial aspects, including accounting, taxes, and financial planning. While the creative side of entrepreneurship is undoubtedly exciting, neglecting the financial side can lead to confusion, financial burdens, and missed opportunities. Therefore, it is essential to gain a grasp on the financial responsibilities to ensure the long-term success and sustainability of your business.
Understanding your numbers and financial obligations is crucial for several reasons. Firstly, it helps you avoid potential fines, audits, and legal issues. By operating properly, filing the appropriate paperwork, and understanding your tax responsibilities, you can avoid unnecessary trouble and maintain compliance with regulations. Additionally, knowing your numbers enables you to make informed business decisions. Tracking your sales, expenses, and profit margins allows you to identify areas of improvement, adjust prices, or change your product line to boost profitability. Furthermore, proper financial management helps you pay yourself for your hard work and avoid burnout. When you understand the financial side of your business, you can be more confident in your financial decisions, set appropriate prices, and ensure you are adequately compensated for your time and effort.
Overview of Income Taxes for Small Business Owners
As a small business owner, you need to familiarize yourself with income taxes and how they apply to your business. Income taxes encompass federal and state taxes that are applied to your net profit. Net profit is calculated by subtracting your business expenses from your sales. Depending on your business structure, you will file your income taxes on a Schedule C form, which is attached to your personal tax return. As a sole proprietor or an LLC, you will most likely fall under this category. It is important to update your books regularly and accurately track your expenses, as they can be deducted from your income, reducing your tax liability.
For self-employed individuals, there is an additional tax called self-employment tax, which covers Social Security and Medicare. This tax is calculated based on your net profit and is in addition to your income tax liability. To ensure you are meeting your tax obligations, it is essential to determine if you will owe more than a certain threshold (usually around $1,000) and prepay your tax bill throughout the year through estimated quarterly tax payments. By estimating your tax liability and making quarterly payments, you can avoid penalties and ensure you are not hit with a large tax bill at the end of the year.
Sales Tax for Online Small Business Owners
Sales tax is a complex topic, especially for online small business owners. Sales tax is a tax applied to the end user, meaning the customer who purchases the product. When you sell a physical product, it is generally subject to sales tax, varying from state to state. It is crucial to understand your state's sales tax rules and obtain a sales tax permit if necessary. The sales tax rates and regulations differ between states, and it is your responsibility to comply with the laws of the state in which you are physically present or have a Nexus.
A Nexus is a physical presence in a state, and it determines if you are required to charge sales tax to customers in that state. If you sell on platforms like Etsy, Amazon, or eBay, they may handle the sales tax collection and remittance on your behalf. However, if you sell through other channels or have your own website, you will need to handle sales tax yourself. It is essential to keep track of the sales tax collected from customers, as it will need to be remitted to the appropriate state government.
Recommended Tools and Software for Bookkeeping
Keeping your books organized and accurate is crucial for your financial management. Fortunately, there are various tools and software options available, catering to different budgets and needs. For those on a shoestring budget, DIY spreadsheets can be a great option. You can create your own system using Google Sheets or use specialized spreadsheets designed for handmade sellers, such as those offered by Paper and Spark. These spreadsheets allow you to track sales, expenses, inventory, and sales tax, providing a cost-effective solution.
If you prefer software for bookkeeping, QuickBooks is the gold standard for professional accounting. QuickBooks offers different versions, with QuickBooks Self-Employed being the most affordable option for small business owners. However, QuickBooks Self-Employed does not include inventory tracking, so if you sell physical products, you may need to supplement it with another tracking system.
In addition to bookkeeping tools, it is essential to maintain good record-keeping practices. Save your receipts, either in physical or digital form, and keep them organized for easy reference. Taking photos of your receipts and storing them in the cloud is a convenient way to ensure you have all the necessary documentation. If you frequently drive for your business, consider tracking your mileage for potential deductions. There are apps available, such as MileIQ, that can help automate this process.
Highlights
- Understanding the financial side of running a business is essential for long-term success
- Janet LeBlanc of Paper and Spark provides valuable guidance for creatives and makers
- Income taxes require filing Schedule C, paying self-employment tax, and prepaying estimated quarterly taxes
- Sales tax varies by state and may be handled by marketplace facilitators like Etsy or require individual permits
- Recommended tools include DIY spreadsheets, QuickBooks Self-Employed, and proper record-keeping practices
FAQs
Q: What is the difference between income taxes and self-employment taxes?
A: Income taxes are applied to your net profit and are filed on a Schedule C form attached to your personal tax return. Self-employment taxes cover Social Security and Medicare and are an additional tax on your net profit as a self-employed individual.
Q: Do I need to charge sales tax on my Etsy sales if Etsy is already collecting it on my behalf?
A: No, if Etsy is collecting sales tax on your behalf as a marketplace facilitator, you do not need to charge sales tax on those Etsy sales. However, you still need to file sales tax forms to report those sales.
Q: What tools or software are recommended for bookkeeping on a tight budget?
A: DIY spreadsheets, such as those provided by Paper and Spark, are a cost-effective option. Google Sheets or specialized spreadsheets designed for handmade sellers can help track sales, expenses, and sales tax.
