Tax Time Made Easier: Start Preparing for Next Year Now

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Paperwork and CalculatorAs far as the IRS is concerned, selling handmade items as a hobby and selling them as a business are two very different things. When it’s just a hobby, you’re required to pay tax on the income but there are limits on what you can deduct. Once that activity becomes a business, the IRS allows you to deduct almost all of your expenses including a portion of travel and meals while at a craft fair and the electricity it takes to run your home office.

How do you know when you’ve crossed from hobby to business? Having a site here at IndieMade is a good sign that you’re moving on up. The IRS doesn’t have specific rules about dollars earned or hours put in. Actually, the standards that separate hobby from business are open to interpretation. If you have any doubt about your status, refer to this page from the IRS. (Which incredibly hasn’t been updated since 2007).  

For the Record

Once you’ve determined that you are indeed running a business, it’s time to get serious about recordkeeping. Ugh. I know. It’s no fun, but there are plenty of free and inexpensive tools that will help you track your numbers now so you won’t have to stress about it later.

Start with an online accounting system.

Quickbooks has a new Self-Employed option that tracks your Schedule C deductions and mileage and it has tools to keep your personal income separate from your business income for easy reporting. It’s a good starter option for only $9.99 a month.

GoDaddy Online Bookkeeping is the perfect option if you also sell on Etsy or Ebay because the software automatically imports and categorizes your sales and expenses from those venues in addition to Amazon and Paypal. That’s a huge time saver.

On the Fly

If you have a smartphone, there are dozens of mileage and expense tracking options you can download for free.

Expensify is good if you travel to a lot of events. It has a scanner that reads and logs your paper receipts and the ability to track your mileage via GPS.

MileIQ is a new app that works even when you forget to turn it on. As long as you have your phone on you when you drive, the app logs the miles via GPS.  Then you use a simple swipe to classify each trip as work or personal and it goes on to the proper report. I’m trying this one now, so we’ll see how it goes.

Controlling the Clutter

When you make things for sale, the materials you use are all deductable. If you’re buying online, all of those receipts will show up in your accounting software. All you have to do is categorize them and the software will do the rest. Set a reminder on your calendar to do this once a month. More often if you shop a lot. After a month or so, the software will begin to recognize your purchases and do most of the work for you but it’s still good to double check before you’re overwhelmed with line-items.

If you do a lot of local or cash shopping, sign up with Shoeboxed. This company turns your paper clutter into digital reports. Your receipts turn into neat reports the IRS will love and they’ll even scan all those business cards you picked up at that convention making future networking a breeze.

Paying Your Dues

If this is your first year as a business owner or if you’re making a lot more than the year before, you need to think seriously about quarterly tax payments. When you’re employed, your employer takes taxes out of your income on a weekly basis. When you’re self-employed, you need to give the IRS what you owe every couple of months. Figuring out what you owe is tricky but there are penalties if you’ve underpaid by the end of the year.

If you or your spouse has a full-time job, you can adjust your W-2 so you pay more out of that check to cover any extra tax liability from your craft business. The IRS doesn’t care which pocket the money comes out of as long as they get the money before the deadline.   

Learn more about that here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

 

There’s no question that running your own business leads to all new hurdles come tax time but if you keep your records straight starting with the first transaction of the new year (or April 1, 2015 if you haven’t started), you’ll sail through next tax season and hopefully see an uptick in your income.

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Comments

Steve

TrackMyDrive is another mileage tracker similar to MileIQ only at a fraction of the cost ($8.99 compared to $59.99 a year)

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