TAXES- amirite!? It’s bout to be that time again and if you’re anything like me you’ve got some questionable income activity going on and maybe a little concerned about how to handle them without getting gouged by the gov’ment. And by questionable let me clarify I mean anything outside of the normal W-2. If you’ve been selling things through etsy, vending at markets, and/or getting 1099 subcontract work pay- then this may be a helpful read for you. I’ll also specify that this is relevant to Pennsylvania and at times specifically Philadelphia residents.
I’m going to start with the basics for now and assume that we’re talking about an independent artist with no employees and no rented studio or rental space. An exception would be if you work as a subcontractor that is paid from someone through a 1099; That is an easy way to get flagged as someone who should have a business license. If it is a long term gig you may want to think about going full business.
When collecting money whether it’s for an item you’ve made or for time you’ve spent working for someone else, you’ll need to pay income taxes on that money. If you had to spend money in order to make that money, you can do what’s called deducting your expenses. Any profit made after deducting your expenses is now the total that you need to pay taxes on. What percentage you’ll pay on that profit depends on how much profit there is after deductions are calculated, but range from 8-33%. Income taxes are not to be confused with Sales taxes.
Sales taxes only need to be collected if you are selling an item. In the state of PA we don’t pay or collect sales tax for things like food and clothing. Most of us reading probably make something that would be considered a luxury litem like artwork, clay items, or handmade products. If you’re selling small-time hobby type then you don’t reaaaaaally have to worry about sales tax. Now, would a tax professional say that? Probably not, because rules say that any item sold in the state of PA must pay sales tax to the state. And if you’re selling to someone out of the state you’d be liable for paying their sales tax amount to their state. But essentially we’re assuming (in this instance) that you’re considered a hobbyist if you’re making less than $13,850 per year in total.
With making less than $13,850 per year it is not mandatory to file your taxes at all. But if you are working a job with a W-2 and taxes being withheld it would benefit you to file, otherwise you won’t get any of that money back. After 3 years of not filing taxes (or filing incorrectly) you are no longer able to claim any taxes owed to you. You are able to amend your taxes if you later found that they should have given you more money, but only up to 3 years past the filing deadline for that specific year. Filing deadlines are usually halfway through April of the following year, so about 4 months after the year has ended. It would be a good idea to keep records of sales and expenses regardless of whether or not you’re doing things ‘for serious’. You can always amend your taxes with a Schedule C if you find that you made more than $13,850. You’re also gonna want to know how much money you’re putting into this even if it is a hobby. If you have your records listing all your related expenses as well you can deduct those to lower how much you’ll pay on taxes if you do end up making more than $13,850.
A Schedule C tells the government how much you made and how much you spent in order to make that money. If the two numbers equal out, then you pay nothing in taxes. Most people will apply the standard deduction which is calculated by the IRS each year. If you know you spent more in art and craft supplies than the standard deduction amount and you made more money than the standard deduction amount also, you should fill out a Schedule C to lower what you may potentially owe in income taxes.
When completing your Schedule C you will list any and all income that you made through your making, art, and crafting. You will also list every dollar you have spent in order to do those things, and they are labeled as your expenses. Expenses can include any and all materials, vendor booth rentals, internet, website costs, computer fees, uniforms, advertising, business moving expenses, insurance, telephone and professional/continuing education relevant to your business (learning a new skill is not deductible: going back to school for a different degree would not count). Anything that you spend on your hobby or business in an attempt to profit more money is a deductible. In the state of PA you can deduct the full cost of most of these things with a few restrictions. Meals for example can only be deducted if you are traveling for work, or you are ordering from a restaurant during meetings with clients, employees or directors. In order to keep record of this you would need to have a note of the date, business purpose, and the person you were meeting with in order to properly deduct that meal.
There are a handful of things you’ll want to keep track of, and the most convenient way to track these things is going to be different for everyone. An easy way to keep everything in one place would be to keep all business purchases within a separate bank account, or credit card. If all your expenses are listed on your credit card statement or bank record you can deduct direct from those files. You don’t need to keep track of receipts if you have all your purchases through a dedicated account. Obtaining a business bank account can take some hoops to jump through like registering yourself as a business. But you’re always able to open a separate personal account and keep track of your expenses without having to do any formal business paperwork for your hobby. The big motivation behind good record keeping is so that you don’t potentially get flagged for an audit by the IRS. Being audited is not a common occurrence, happening to less than 4 out of every 1,000 people. That's less than .38%. There are a few things that will raise your chances of getting flagged by the IRS. If you work regularly for someone that pays you as a subcontractor through 1099 pay, you have a good chance of the IRS contacting you about why you aren’t a registered business. You must report all income on your tax forms. Omitting any income could put you on their radar. Round perfect numbers can be an indicator that you didn’t calculate totals, but instead just guessed. On the larger scale, having excessive credits or deductions compared to your income could put you in a bad spot at tax time. This is mostly for businesses making hundreds of thousands and for instance claiming hundreds of thousands in charitable donations as well. Otherwise there’s no reason to be worried about being audited at a low level of hobby making, unless you aren’t keeping records. If you really are tracking your purchases you should feel totally comfortable to deduct anything that’s related to your business. The key to making taxes manageable for everyone regardless of hobby, business level, or the more common W2 employee- is to track spending so that you pay taxes on the smallest number possible. Well respected lawyer, judicial philosopher, and federal judge Billings Learned Hand was once quoted saying: ’anyone may arrange his affairs so that his taxes shall be as low as possible ... for nobody owes any public duty to pay more than the law demands.’ As American citizens we must pay for the programs and services that are provided for our community, but we shouldn’t be gouged to the point of personal disadvantage.If you legitimately spend money to further your business, career, or income generating source- those dollars spent should offset how much you pay in taxes. Don’t be nervous to deduct costs that you know have contributed to your career, or were in pursuit of your career even if it didn’t work out as being profitable. You’ve got to look out for your own finances, and understanding them is the first step. I really hope this bit of information has helped you become better acquainted and more confident in handling your own taxes. I’ll tell ya, I’m certainly ready for April 15th after all the research I did to write this damn thing!
Written By Craft Coven CEO (Craft Experience Organizer): Cassie Jones
Credit must be given to the Retired Tax Preparer that agreed to meet with me to answer a slew of questions while compiling info for this write up. I HIGHLY recommend Friendly Dave (herninko55@yahoo.com) who is available for informal tax advice. If he helps you out I suggest throwing $20 bucks his way or making him something nice as he is an avid art lover!
And because information helps, but taxes are still a lot to handle. Here is an org that can help do your taxes for free: FREE Taxes Through Campaign For Working Families
This info is helpful but really you're looking for next steps on turning your hobby into a legal business? Check out this site that will give you more info on whether or not you need to register as a business, and if so, build a Checklist and guide you through the process.
Definitions
Income Tax: Tax collected by a government directly on income, especially an annual tax on
Personal Income: total earnings of an individual from various sources.
Deductions: an amount that you can deduct from your taxable income to lower the amount of taxes that you owe
Sales Tax: a tax imposed on the sale of goods and services that varies by location
Expenses: the money spent on something
Schedule C: tax form that is used to report income and expenses for someone who is self employed, freelancing, or operating a single person business.
Standard Deduction: A dollar amount set annually by the IRS that most taxpayers can deduct to lower their taxable income to reduce their owed tax bill.
Audit: an official inspection of an individual's accounts