Tax Considerations for Self-Employed Arts and Crafts Vendors
Maire Loughran
One of the most baffling non-creative aspects of running an arts and crafts business is figuring out what to do about taxes. Owners who can face down extreme bargain-hunting customers at a craft show or vendors shorting an order that was needed yesterday can adopt that deer-in-headlights look when trying to get their tax situation under control.
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!
Federal Taxes
- 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.
State Taxes
- 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.
Maire Loughran, the Arts and Crafts Business Guide for About.com, is a certified public accountant with fifteen years of experience assisting new business owners and is a craft business owner herself.
Maire has lectured extensively on the topic of how to start a new business covering such topics as a selection of business entities, business licenses and sales tax collection, bookkeeping, and how to write a business plan. She is also a university professor teaching accounting, auditing, and taxation classes.
A second-generation designer, she built her craft business from the ground floor up and writes and lectures on the topic to help others do the same. She has also written three books on related topics: a user guide to a Microsoft software accounting product, How to Start a Home-Based Jewelry Making Business, and Auditing for Dummies. Her fourth book, Financial Accounting for Dummies, will be available in 2011.
