So, how can a busy self-employed arts and crafts business owner stay on top of the tax situation? It’s easy if you break taxes into logical categories. In most circumstances, there are only three types of taxes for the self-employed: federal, state and county. Federal taxes are further broken down into two subcategories – income and self-employment; state taxes can be income or sales. See, it’s not all that scary!
- Income tax: I’m sure income tax is a familiar concept, as you have been paying this tax since you received your first W-2 back when you were a teenager saving up to buy a car.
Net income from your arts and crafts business is added together with all your other sources of income (interest, your spouse’s W-2, capital gains, etc.) and reported on your Form 1040. Reduce this income by all allowable deductions – for example - if you itemize, your Schedule A expenses and you’re taxed on what’s left over.
Most living or working in the United States have to pay federal income tax. Live in Canada? Canadian small business tax rules are different from the USA. The basic concept is the same: income = taxes.
- Self-employment tax: This is the self-employed arts and crafters version of the Federal Insurance Contributions Act (FICA). Back in the days when you worked for someone else, every paycheck had a deduction of 7.65% of gross income for FICA. Your employer was also required to match your contribution dollar for dollar for a grand total of 15.3%.
FICA funds two programs. Old age, survivor, and disability insurance benefits (OASDI) accounts for 12.4%. The remaining 2.9% is for Medicare. Your self-employment tax is divvied up the same way.
Since you’re self-employed, you don’t have an employer to match half of your contribution. That’s right; you’re responsible for the entire 15.3% on all net self-employed arts and crafts income. This tax is reported on the Schedule SE and added to income tax on your Form 1040 for your tax due total.
- Income tax: If you live in a state that also collects state income tax, you have to pay income tax at this level as well. If you’re lucky enough to live in Alaska, Florida, Nevada, South Dakota, Texas or Wyoming, you have one less tax return to fill out each year as these six states do not have a state income tax. Washington State doesn’t have a state income tax but they do have a business and occupation tax that is very similar in nature.
From living in various states over the years, I know that each state structures their income taxes slightly differently. Check out your state Department of Revenue for more information about your obligations.
- Sales tax must be collected on every sale to the ultimate consumer. Wondering about the exact definition of ultimate consumer? Here’s an example: you handcraft wooden clocks, you’re at a craft show and you sell a clock to an attendee. That transaction is subject to sales tax.
On the flip side, if you manufacture wooden clocks in volume and sell a few of them to a retail store, you don’t collect sales tax. The retail store is not the ultimate consumer – their customer is. The onus for collecting sales tax is on the store, not you.
Sales Tax on Internet Sales: What about Internet sales you make from your website? As it stands right now, as long as the item sold is being shipped to a state in which you don’t have a physical location, you aren’t responsible to collect sales tax on the transaction.
Sales Tax for Craft Show Vendors: Attending arts and crafts shows in different states is a little more complicated. Even though you may not live in the state, you’re physically present at the craft show so you have to collect sales tax and remit it to that particular state. Check out each state’s department of revenue website to see how they want you to this. A lot of the states will issue you a transient sales tax certificate.
- Many counties require all businesses to pay a tax on assets owned by the business. The good news is, the tax rate is usually pretty low. Common taxable business assets include inventory, office furniture and computers. When you apply for your business license, the licensing office will be very helpful in letting you know if you are liable for this tax.
Keep this fact in mind - just because there are many different types of taxes, your business may only be liable for some of them. Your starting point in the whole tax situation is to relax and take a step back. Think about the particulars of your business and consider where you operate your business. This will give you a good idea which taxes you’re going to have to deal with.