Given the success of the online, handmade marketplace Etsy, sites like HandMade at Amazon are giving more people the opportunity to sell their handmade creations online than ever before. In addition to making money from these sales, it is important to understand the tax requirements when selling your goods online.
You are an independent contractor
Being an independent contractor means you are self-employed. You determine what to make, how to make it, where to make it and how to sell it. Independent contractors are fully responsible for taking care of their own taxes.
Although you may receive payments from the site you sign up with, that site is not your employer and will not withhold taxes out of your earnings.
Business income and expenses
Your net income is the money you make selling your handmade items, minus eligible business expenses. When you file your tax return, fill out Schedule C. You only pay tax on the net profit—the total amount after you deduct eligible business expenses, such as:
- Fees paid to the online site/marketplace
- Cost of materials and equipment
- Shipping costs
- Bank fees
- Use of dedicated space in your home/studio for a workshop
Generally, you must pay self-employment taxes if your net profits are $400 or more. Self-employment taxes are Social Security and Medicare taxes. Use Form 1040SE to help you determine how much tax to pay.
Income tax and estimated taxes
Income taxes are due on income as you earn it. If you estimate you will owe taxes of $1,000 or more by the end of the year, the IRS wants you to make estimated quarterly tax payments.
If you don’t make these payments, you could be charged a penalty and interest for not paying the taxes in a timely manner. To help you estimate your quarterly payments:
- Look to last year’s taxes for guidance
- Use an estimator like TaxCaster
In addition to federal taxes, you may also need to pay state taxes. Because this varies from state to state, check with your state’s taxing authority.
Determining sales tax
Each state determines and collects sales tax from sellers doing business in their state. E-commerce has created a grey area as to what it means to do business in a particular state. The rule is that the business must have a significant presence, or "nexus," in the state, such as a:
- Distribution center
The exact definition of nexus, however, varies from state to state, and sometimes even amongst cities or counties within a state.
As a seller, it is up to you to determine the sales tax rules that apply to your business by checking with state Departments of Revenue. Sites like Etsy and HandMade at Amazon will collect sales tax for you, but only according to your instructions.