Valorie, our resident tax specialist here on the blog, has offered some more great answers to very common questions sellers may have about filing with the IRS........just breathe and read further.
Q. I just started selling in June and didn't make $400. Do I need to file?
- Ok, this one I researched because I really wanted to see the answer. I have seen other websites and advice, forums etc mentioning a $600 filing requirement. There is no minimum requirement if you own a business. I think they confuse the magic number there with the 1099 issuing requirements (that’s a whole other ball of wax. Just because you don’t receive a 1099, it does not mean you don’t have to declare the money.)
According to IRS Publication 334, Chapter 5, “You must report on your tax return all income you receive from your business unless it is excluded by law. In most cases, your business income will be in the form of cash, checks, and credit card charges. But business income can be in other forms, such as property or services.”
I researched the databases I had access to and found no answer so I am assuming that you must indeed report all of it, even if it is just a little bit. However, by claiming the income, you also get to claim any expenses you had. If your expenses were more, then your business loss would be deductible from your income so it isn’t a bad thing! Just remember that your business needs to make a profit at least three out of the last five years or the IRS can rule it a hobby (this limits your expense deductions dramatically.)
Q. What else do I need to run my shop legally? I don't need and EIN- no employees, yes?
A. If you don’t have employees, you don’t need an EIN. You can get one easily online if you choose to. Some prefer to put an EIN on documents versus your social security number. Realistically, unless you have an LLC, Corporation or Partnership, your business return is filed with your personal one so it doesn’t matter if your SSN is used.
Q. If/when I file? Do I file under self-employed? Or is there another way I should be doing this? What next?!
A. Your sole proprietorship tax return (Schedule C or C-EZ) is due the same time your personal tax return is due: April 15. Your business return is part of your personal return and it all goes together to the IRS. Most Etsy jewelry makers will have to file the C because the C-EZ is not for use by those who have inventories, business losses, expenses over $5000, or business use of home deductions.
Q. Do I need to register? Get a license or is that only state?
A. You do not need to register with the government as a business for federal tax purposes unless you are an entity other than a simple sole proprietorship (corporations, etc.). You can register with your state Department of Revenue to file and pay sales taxes (all of which can be done online). You can also obtain an occupational license if your city requires one. Seriously, they are usually under $20 and worth it to just go get one for peace of mind.
*Please keep in mind that this blog is just to advise you that you should think about it before you act. Your best course of action is always to consult your tax advisor or accountant. I really hope this helps!