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Sunday, February 8, 2015

Sunaina's Guide: Etsy Shop Accounting and Taxes

I've been doing my own personal income taxes for years now, and I've never hired a tax person to help me. When your only source of income is from an employer who provides you a W-2 form, it is pretty simple and straightforward to use TurboTax or HR Block.

However, since starting my Etsy shop and watching it grow this year, things have started to become a bit more complicated. If you own an Etsy shop like me and generate any earnings, you have to pay taxes on these earnings. When my husband and I started doing a lot of sales, the accounting portion of our business suddenly became overwhelming. We did some research and found that one of the best solution out there for Etsy sellers right now is GoDaddy's Outright Bookkeeping product.

Outright can sync up to your Etsy shop and Paypal account, as well as eBay shop if you have one. That way, anytime you make a sale, the transaction is reported in the bookkeeping. It keeps track of your earnings from PayPal, your costs for shipping (if you use eBay or Etsy to ship), the fees that you paid to Etsy or eBay or Paypal - and the best part is everything is automatic. You don't have to enter this information yourself because it automatically pulls the data from your accounts.

However, now that it is tax-season, I am going back and updating my expenses that Outright can't automatically track. For example, we have costs associated with buying materials for our jewelry. This is the bulk of our expenses. We also have costs for things like shipping envelopes, product cards, business cards, camera rentals for photoshoots, and some meal expenses from our photoshoots and business events (like a Coachella promotion event we did last year). These have to be manually entered or you won't get an accurate tax estimate.

Rickard and I try to keep our receipts from all our business expenses, but I"ll be honest, we haven't been the best at it - and I am realizing how important it is to keep track of these! The more accurate and more expenses you report, the lower your overall profit is and the taxes that you pay are much less. Keep track of everything! You can potentially expense a portion of even your rent and utilities if you operate out of the home and store your inventory at home.

As a business owner, it's important to keep track of not just the expenses, but also sales because you do have to pay taxes on them. So oftentimes, when you get money, try to portion out a percentage that needs to be paid to the tax-man. We weren't doing this in the beginning because we were "newbies", so this is going to cut into our refund this year because we should have been paying these taxes.

Realizing that I have to pay all this tax on my sales throughout the year, I have now decided to select an option in Etsy to charge my customers sales tax for California customers. If you own an Etsy shop, this can be done by going to "Your Shop" -> "Finances" -> "Accept Payments". Click on the "Sales Tax" tab and you can update the tax rate depending on the state of the buyer. You can also change this depending on the country. There are different rules/regulations around tax rate depending on the state and the one that you are based in. I have estimated my California tax so I can begin portioning off the tax portion at point-of-sale, rather than doing it all at the end of the year and realizing I owe so much to Uncle Sam!

I'm going to do some more blog posts on running your own business and would love to hear from other Etsy sellers as well on how you run a profitable shop and pay your dues as well!

Feel free to leave comments/feedbacks or even tax suggestions for me below.

Disclaimer: I am not a qualified tax consultant or professional tax advisor. 

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