When I first started making jewelry for a 'living' I had no clue what I was doing. I was in my mid 20's and had just moved back in with mom. I never really researched the business aspects of running a business... i.e. taxes, licenses, sales tax, etc. So the first year I filed my taxes as a business owner I was completely unprepared for the reality of owing any money. I thought, I made less then $10,000 I have zero money to my name, how could I possibly owe taxes? After all, I was so used to filing that W2 and getting money back. Call me naive' and I was, I ended up owing thousands, I instantly broke down in tears.
When you are going from a hobbyist to a legit business owner, you have to pay a lot more in taxes. You are now in charge of paying both sides of your social security and medicade (or is is medicare.. I can never remember)- when before your employer paid half, and the other half was taken from your check before you could even miss it. You also now are hit with SELF EMPLOYMENT tax. Yea, you get a tax on top of your income tax just for being your own boss. Its a cruel world. But I'm not done..
Then there is sales tax. Yep, one more tax you have to pay on the goods sold.
Net vs Gross- you pay taxes on your NET income. This is your Gross (the big number) minus all your expenses, (supplies, postage, travel, web hosting, millage, etc). You want to get that Net number as low as you can. And now I understand why people have company cars, offer to pay for large business meetings meals, or buy a new computer every year- because its a write off. And believe me, you WANT them.
Its been over 6 years since I have been running my own business and with each tax season I feel a little more prepared, but only a little, I mean taxes just suck, but its a part of life and its the same time every year. So be prepared!
Every year you want your business to grow so you must adjust your tax strategy accordingly. Really look at your numbers each year. Now decide how much you think or want to grow, is it 20, 30, 40%?!
Take that number and pay your taxes QUARTERLY based upon that number.
Paying (1) Federal, (2) State and (3) Sales taxes all quarterly will ease the burden of having to pay in a huge lump sum at the end of the year. No one wants to take all the money they have saved and pay taxes- or worse, not have the money to pay them at all. Estimate quarterlies HIGH. If you make less then what you thought, you may just get a refund for over payment; and in which case the IRS became a savings account you couldn't touch for a year.
My favorite accounting software is Intuit Small Business quickbooks -it keeps everything organized and so I can see my spending charted, the estimated tax I owe, categorize my deductions and just have a really clear view of how my business is doing. You can link your checking accounts, Paypal and even your Etsy account. Its one touch updating. I swear by this app, get it on your phone and its liked to your desktop version as well. If you are an Etsy seller you even get a discounted rate of $5 a month. Not to bad right, plus guess what, its a TAX WRITE OFF!
Here is the Etsy Version of Intuit Small business quickbooks.
** Disclaimer-please talk to your accountant, I am NOT a tax person, this is my personal experience.