Tax time is right around the corner, and if you’re a handmade business owner there are “things” you need to keep track of and record in your bookkeeping system for tax purposes. This post has some bookkeeping and tax time tips to make your life easier.
TAX TIME is in April! But, unfortunately as a handmade, creative, or craft business owner you need to think about bookkeeping and taxes all year long.
That’s where a good bookkeeping system comes into play because it can make tax time so much easier.
Sure, you need to think about sales tax all year long.
As a handmade business owner, you also need to report your business income and expenses to the IRS by April 15th.
In the U.S. it’s reported on a Schedule C (for sole proprietors and single-member LLC’s), that’s included with your personal 1040 return.
While keeping track of all the “things” may seem like an overwhelming task, it really doesn’t have to be. With the right tips and a good bookkeeping system; you can ease the work that comes with tax time.
DISCLAIMER: I AM NOT A CPA, SO I WON’T OFFER ANY TAX ADVICE. BUT AS A CAREER BOOKKEEPER, I KNOW HOW TO CATEGORIZE ALL THE DAY-TO-DAY TRANSACTIONS SO YOU CAN GIVE YOUR BOOKKEEPING INFORMATION TO A CPA, WHO CAN THEN FILE YOUR TAXES.
Tax Time Help – Deductions
The IRS lets handmade, creative, and craft business owners take “deductions” for business related expenses. These “deductions” reduce your business income and lower any potential taxes that you might owe. So it’s really important that you keep track of them on a regular basis throughout the year!
Business related deductions or expenses can include things like:
- software subscriptions
- educational courses
- small tools and supplies
- the cost of the materials used to make the items you sold
- office expenses
- commissions and affiliate payments you pay to others
- Etsy, Ravelry, PayPal, Square, etc. fees you pay
- and, so much more
It’s important to keep track of all these expenses during the year, on a regular basis (at least once a month) in your bookkeeping system so you can claim them as deductions at tax time.
A big tax help for me is to enter all my income and expenses on a weekly basis into QuickBooks Desktop Premier, but you can use Wave Accounting (which is free) or even a spreadsheet.
Once a week, I take maybe 30 minutes, and sit down and enter my sales and expenses into each category – while everything is still fresh in my mind and I don’t have to search for things.
Then once a month I spend maybe another 30 minutes to:
- record the money (or payment) I receive from PayPal
- transfer the money into my business checking
- reconcile my checking and credit card statements
- and make sure everything balances out
I also keep track of what I’m spending on inventory and keep track of a “cost of goods sold” amount for each item I make. That way, when I sell the item, I add the cost of goods sold amount to my “expenses”.
Choose a bookkeeping system
Whatever you choose for a bookkeeping system (software or spreadsheets), make sure that that you use it consistently and make time to enter your transactions as you go.
You don’t want to be sitting in front of your computer – CRYING – on April 1st because you have to go back through an entire year’s worth of transactions in order to get ready for tax time.
Tax Time & Bookkeeping Help – Organizing your “stuff”
Keeping all that paperwork organized will be a huge help. You need to keep a copy of all those original receipts for both your sales (income) and your deductions.
You should be keeping the receipts for what you spend money on but did you know that you should be keeping your business documents for 7 years?
THAT’S RIGHT, I SAID 7 YEARS!
You should keep copies of your business income tax returns (your Schedule C, here in the U.S. and your Canadian T-2125 forms) and ALL the receipts for at least seven years.
Maybe you heard you only need to keep things for 3 years. The IRS can go back 7 years, if you’re audited.
There are two ways to organize your “stuff”
- a paper or hard copy filing system
- or, a digital filing system
Bookkeeping Help – Cost of Goods Sold
Cost of Goods Sold (COGS) includes how much you paid for the materials you used to make each finished item.
You can ONLY deduct the COST to make an item, when that item is SOLD.
For example, you make a shawl in the summer of 2021 and:
- pay $5.99 for a skein of yarn
- you use 2 buttons that cost $0.50 each
- total cost of the shawl is $6.99
- the shawl is sold at a craft fair in the February of 2022, for $70.00
In your February 2022 bookkeeping records you record the $70.00 as income and the $6.99 as the Cost of Goods Sold.
Using software like QuickBooks will make the the process of tracking the cost of your finished items easier. But a simple spreadsheet like my Project Costs & Pricing Calculator will work too.
Bookkeeping & Tax Help – Reporting Income
Handmade business owners also need to accurately track their income too. This includes keeping detailed records of sales made through different platforms like Etsy, Ravelry, your own shop, etc.
It’s also important to keep track of cash payments, received from craft fairs, so that they can be included on your tax return.
Bookkeeping and accounting software, like QuickBooks or Wave Accounting, will make this process easier. The software does most of the math calculations automatically for you.
Marketplaces like Etsy and payment processors like PayPal, are required to report your income to the IRS, if you make over a certain amount of money. And the amount varies by state. If you make more than your state threshold, you’ll receive a form 1099-K by January 31st. You’ll need to include it with all the rest of your tax paperwork.
A 1099-K, is a tax form that is created by a third-party payment processor or marketplace such as Etsy, PayPal, or Square.
Third-party payment networks have to submit 1099-K forms to the IRS, state governments, and to you. The objective is to make sure that people are reporting their business income on their tax returns.
Bookkeeping and tax time can feel totally overwhelming, but it honestly doesn’t have to be! Keep accurate bookkeeping records throughout the year, and tax time will be a whole lot easier and less stressful.
Where to get bookkeeping help if you’re a handmade, creative, and craft business owner
Join the FREE Handmade Business Bookkeeping Community and connect with other handmade, creative, and craft business owners, who are serious about getting their bookkeeping under control.
Totally overwhelmed with all this bookkeeping stuff? Don’t know where to start? Find out more about the Handmade Business Bookkeeping Academy.
I actually have been in business for 15+ years and am well aware of bookkeeping and accounting. I also take a deduction for electrical usage and space in my home for office usage, work area and storage space for my craft work. Your post is very informative though for those starting off in the business world though. And it should help them tremendously. Thank you for all the information you furnish through these posts to help home business owners starting out as well as for those not familiar with bookkeeping methods and those whom are less informed.
I’ve actually been in business for 15+ years and have been handling my bookkeeping on my own as well as doing my taxes on my own. I have never had any problems thus far. I also take a deduction for electrical use as well as space used in my home for office usage and storage of my craft work. This post is very informative though for those whom are starting off in the business world and should help them out substantially.