So, etsy

[feuervogel]

I'm thinking of starting an etsy shop to sell crocheted things and quilted things and whatnot, but I have no idea about the tax implications of it. If I sell to people *in* NC, I have to collect sales tax (or take it out of the sale price); if I sell to people *outside* NC, I don't.

Do I have to register as a business so I can send the state what meager sales taxes I collect? (I'm assuming I won't sell more than $100/mo.) What's the cutoff for hobby vs business, anyway? The IRS says it has to do with the intent to make a profit. Well, sonny, I wouldn't be selling shit if I didn't want to make money off it. Here is a more plain-English discussion of that.

I don't know, y'all. I just want to make some stuff and sell it to people at more than it cost me to make it.

Does anyone have experience with this sort of thing?

Comments

[firecat]

For the IRS I think you have to pay tax if you make over $400 a year in profits. Also if you want to deduct business expenses.

For NC it's free to get a tax ID and you can get the ID and fill out the tax form online.

[feuervogel]

I found the NC-BR form, and I've even learned that I don't have to register as a business with my town (which one of my SO's college friends said I did because it was a business; she also said I need to pay taxes on all my income to the IRS, but I've also heard the $400/year thing, so IDK. If they really want to bother with the $30 of tax revenue, whatever.)

[firecat]

Actually she is right about the IRS -- you are supposed to report your business income regardless, but if it's less than $400 you just write it in a spot on form 1040. If it's more than $400, you are supposed to fill out a business income tax form (schedule C).
(I wish my brain wasn't using up so much space storing tax trivia...)

[feuervogel]

That makes sense. She never said anything about the various forms, and I knew there was some difference somewhere.

[corpsefairy.livejournal.com]

I'm reasonably sure that if you don't think you're going to make more than $100/month, the IRS basically considers it a hobby and doesn't care. You do have to pay in-state sales tax, though.

[feuervogel]

I can't figure out if I need to register as a business to pay sales taxes. I do know some people who sell things in the state, but they're more than hobbyist-level. Wouldn't hurt to ask, anyway...

(I do know that NC doesn't make you pay monthly sales tax, just quarterly, if you consistently make under 100/mo. That I could find online.)

[corpsefairy.livejournal.com]

If you're just concerned about sales tax, you just need a seller's permit, which is free and easy to get. Look up your state's Board of Equalization for the forms.

[feuervogel]

There appears to only be county level boards of equalization (http://www.co.orange.nc.us/assessor/BoardsPurpose.asp), and the state Department of Revenue doesn't have anything called a seller's permit. http://www.dornc.com/downloads/fillin/NCBR_webfill.pdf is the form I'd need to fill out to register as a seller (according to someone on Yahoo Answers), and I don't intend to incorporate or anything like that.

[beth_leonard]

Federally, you report your income minus your expenses on a schedule-C. The math on that will charge you 15% of your net profit as Social Security and Medicare taxes. There's basically no way around those two taxes if you make any profit at all. Net profit = gross total income minus expenses like "cost of materials" and "pay an accountant to figure this out for me".

If you do something like buy equipment just for the business (like a better sewing machine), you can deduct the cost of the equipment on an amortized scale, depending on the type of equipment, likely over the course of 5 years. You have a couple of different choices for how to amortize it, and the law has been changing on this every year. If you're lucky, you can deduct the whole cost in the first year.

If, during the starting-up phases of your business you spend more on equipment than you make in income, you can take a loss on your 1040 that offsets your spouse's income or any other income you may have. You can only do this in 3 years out of every 5, otherwise they call it a "hobby business" and you can't deduct the loss any more, even if you haven't finished depreciating your stuff yet.

If you also use your equipment for personal use, you can deduct only part of the cost -- for example, my video camera for my video business is declared as 50% personal and 50% business use, so I'm deducting half the cost over the course of 5 years.

Circling back to the schedule-C, if you make a profit, 15% goes straight to the Feds. All of it (including the 15% I believe, but my accountant handles that part) also gets added into your "AGI" number on your tax forms, to be taxed at your marginal rate.

Every state is very different in how state taxes and sales taxes are required and collected, thus making some states more "business friendly" than others. Likewise every city is different. Where my mom lives, she doesn't have to register with the city until she makes 10K profit annually. Where I live, I have to pay $130 every 2 years with even $1 in gross income -- not net, gross. [I closed my business at the end of 2012 when they started requiring me to file quarterly "paper bag use reports" or face a $500 fine. Seriously?? I have 1 customer annually... Sunnyvale is not micro-business friendly and has been getting worse over the last few years.]

In CA, to pay sales taxes, you register to get a wholesale number with the Board of Equalization (which sends notice to your city that you're doing business, btw) and if you're small enough, you just fill out a form annually stating gross income + purchases you didn't pay sales tax on (if you bought materials wholesale) - cost of purchases that went into making your stuff - sales out of state - cost of shipping and then you allocate your customer purchases to any of 128 different tax districts in the state depending on the location of your customers, and then you send the state a check for the taxes you owe (which presumably you collected from your customers when they bought stuff.)

Some states require you to charge sales tax on shipping and handling charges, others don't. CA requires it on handling, but not shipping if the cost of shipping was directly passed on to the customer and not grossed up (that's why it gets subtracted).

Whew!

Don't ask about hiring someone in CA -- I hired a housekeeper, and I spent more time figuring out how to legally pay her and do taxes on her than she did cleaning in the first month, and it was another nightmare this April.

There may be a local Chamber of Commerce to help you with all the details. Also search for "small business administration" I took several classes from them when I started. Starting a business legally is very hard.

--Beth

[beth_leonard]

I realized that I may not have made it clear that federally you don't need to do anything to register as a business, you are a "sole proprietor" and you just report the income on your regular 1040 schedule-C and it gets taxed like regular personal income. That's why people are always screaming about how increasing the marginal personal income tax rates hurts small businesses.

--Beth

[beth_leonard]

P.P.S. This is totally not relevant, but an interesting discussion of tax policy -- if your business starts making a ton of money, it may become worth it to incorporate. There's two styles but from this perspective they're basically the same. Once incorporated, you pay an annual incorporation fee/tax to your state of incorporation (in CA it's like $800, I think it's near $0 in Delaware) and your business now pays the business marginal tax rate of 35% to the feds instead of the personal marginal tax rate of 39.6% to the feds. However, if you pay yourself any salary, that is taxed at your personal rate and it gets deducted as an expense from the business.

This is why large businesses incorporate and small ones don't. This is also why there's an interesting graph somewhere about "personal income" over time. Back when the marginal tax rate was 90% instead of much closer to the business tax rate, it made sense to incorporate at a much smaller business size. Change the tax rates, and people change their business structures, but it also changes the pie graphs as to what percentage of federal tax revenue comes from "business" vs. "personal" sources.

[feuervogel]

So, NC only has county-level boards of equalization. Here is mine: http://www.co.orange.nc.us/assessor/BoardsPurpose.asp Note that everything in their list regards property taxes.

http://www.dornc.com/practitioner/sales/bulletins/section1.pdf is the relevant section of the NCGS regarding sellers. (Scroll past all the definitions.) The form NC-BR is here: http://www.dor.state.nc.us/downloads/fillin/NCBR_webfill.pdf Only wholesalers have to get wholesaler numbers. Otherwise you just tick the "retail" box.

I do not plan to do this any more than hobby-level time. I don't expect that I'll make more than a few hundred dollars of sales (gross) in a year. (And since only sales in-state require me to pay sales tax, only some small fraction of that would go to the state, probably.) If I were filing singly, my income wouldn't meet the threshold for reporting at all.

If they (the IRS) really want 15% of $200, they can have my $30. It's not going to make a difference, really.

The town's business license form requires an EIN, which I will not have, because I don't have employees, and I'm not paying myself a salary. This is a hobby. I do not plan to open a shop or whatever, and I'm not going to pay a fee for a HOBBY. It will likely be more than my expected income. http://www.ci.hillsborough.nc.us/content/business-license (The link to the town code is broken for me.)

Also, technically, my HOA forbids running a business out of my home. They don't say anything about hobbies.

[beth_leonard]

An EIN is really easy to get, doesn't cost anything, and you don't have to use it. We have one for our sole proprietorships so we could open an individual 401K on the tutoring income. There's a form on the federal IRS website to get it.

I can tell you're upset about all the paperwork you have to fill out for a hobby. It drives me nuts too, but if you want to be legal about it, that's what you have to do. I really hate government regulations and how they make things harder for small businesses in order to "protect" people from shoddy goods and services. It kills innovation because big business can start out as hobbies and small businesses.

--Beth

[feuervogel]

Yes, I know, you hate the government.

I am saying that the business license forms most likely do not apply to me, therefore I will not be filling them out.

[beth_leonard]

I don't hate government. I hate it when government over-regulates things in ways that are not good for growth and economic development. I'm perfectly happy that we have laws like "don't kill people" and appropriate punishments and court systems for enforcing them.

--Beth

[feuervogel]

Hillsborough Town Code, chapter 8, article 1.

Sec. 8-1. - Definitions.

The following words, terms and phrases, when used in this chapter, shall have the meanings ascribed to them in this section, except where the context clearly indicates a different meaning:

Business includes any trade, occupation, profession or other activity engaged in by any person or caused to be engaged in by any person or caused to be engaged in by him with the object of gain, profit, benefit, or advantage either direct or indirect, except that the term business does not include occasional and isolated sales or transactions by a person who does not hold himself out as engaged in business.

Conducts a business. A person conducts a business when he engages in one act of any business. If a person is listed in the yellow pages of the telephone directory issued by the telephone system serving that town that shall be prima facie evidence that the person is conducting a business.

Within the town. A person conducts a business "within the town" when he maintains a business location within the town or when, either personally or through agents, solicits business within the town, or picks up or delivers goods or services within the town.

-----
See the italicized section under "business".

[beth_leonard]

So it sounds like in your local town you don't need to register as a business. That's a relief at least. It will also help you with the HOA. In some towns people aren't so lucky.

--Beth