As a shop owner on Etsy, you’re a master of nailing the details, whether you’re designing the newest fashion, calculating ingredients for handmade bath soaps or meticulously measuring every last inch of leather for that bound journal. When it comes to your taxes, if you’re not as diligent as you are with your business, you could be losing out on thousands of dollars from legitimate deductions. Taxpayers often overpay on their taxes every year just by overlooking one potential tax break they’re entitled to, the IRS states.
From advertising your shop, to purchasing supplies, to mailing your products, every business-related expense is a possible deduction. Tax experts advise taking a common-sense approach when navigating the often-confusing world of taxes, reports Bloomberg. If you’re spending money on something for your Etsy shop, it is probably deductible. Business expenses must meet IRS rules of being “ordinary and necessary” to be considered deductions.
As a self-employed individual, you should be paying quarterly estimated taxes. While the IRS does not allow you to submit deduction paperwork with these quarterly taxes, it is vital to track all deductions throughout the year in case of an audit. You can factor in deductions with each quarterly tax payment, and use what you paid last year as a guide. The Estimated Tax Worksheet provided by the IRS includes instructions for determining how your estimated deductions will impact your quarterly taxes. Here are 10 deductions common for Etsy sellers to include:
If you’re using your car to pick up or drop off packages, you can deduct your vehicle expenses. There are two different ways to take a deduction, so choose the way you’ll get the most money back. The first method — the standard deduction — is a flat 54 cents per mile driven for business purposes. The second — the actual expense method — means you’ll need to keep track of all your vehicle expenses from gas and maintenance to tolls and repairs and then multiply the total by the percentage of time you use the car for business. Either way you decide, you’ll need to track your mileage.
Cell Phone and Internet Usage
What you deduct in terms of cell phone and Internet usage will depend on the percentage of time you’re using those devices and services solely for your business. Keep accurate records. Setting and adhering to self-imposed work hours is beneficial. Basic local telephone service on the first telephone line in a home is not deductible.
Any type of equipment you use is deductible — from the supplies you use to make your products to the packaging you put them in. If you’re a jewelry-maker, you can deduct everything from stones and wires, to a new pair of pliers. Anything you’ve spent money on may be deducted from your profit. Other deductible work-related equipment may include a new laptop or manufacturing item.
Shipping and postage costs you incur that relate directly to the products you’re selling are deductible. You can estimate your deductions based on what you paid last year, or file for shipping deductions at the end of the year. Operating as an online business means your shipping costs can really add up, so tracking these expenses and then deducting them saves a lot.
If you’re advertising your Etsy business online, in print or via another avenue, those costs are deductible. Also, the fees you pay to list your items on Etsy can be deducted as advertising costs.
Home Office Expenses
If there’s a room in your home you use exclusively and regularly for business, you can take the home office deduction. If you don’t have a specific room for your business, it may be wise to designate one, if only for the sake of taxes.
The parts of the home office that contribute to the deductible amount include repairs, depreciation, utilities and homeowners insurance. Even cleaning costs may be deducted, especially if you often have meetings with partners or potential new clients in your home office.
Legal or Professional Services
Fees you pay to attorneys and accountants for services you need to run your business qualify as business expenses. These fees may also cover personal tax advice you receive, including tax preparation fees.
Other professional service fees like bank fees and Etsy and PayPal fees are deductible.
Education, Networking and Travel
Like all deductions, anything you spend on education, networking and travel must be necessary, ordinary and related to your business. This means you need the education, networking or travel to improve or maintain the skills that are required in your business or that you are required by law to obtain or retain your licensure.
If you decide to expand your Etsy offering with a new product based on new learning, that education is not deductible, and any education that merely benefits your business but is not required is not deductible. While all travel and accommodation fees may be deducted, any meals or entertainment (up next) is deductible at a lesser rate.
Meals and Entertainment
Any entertainment expenses, including meals, must be directly associated with your business to be deducted at the 50 percent rate limit. If you’re treating someone, you need to be talking business during — or immediately before or after — for the expense to be deductible.
If you are audited and have deducted items such as these, be prepared to prove their case.
Donations to Charity
If you make a cash payment or gift contribution to a charitable or nonprofit organization, you may deduct that amount if your business did not directly benefit from it.
If you are making a donation that doesn’t directly impact your business, that counts as a charitable donation. Say you make bath and spa products and create a gift basket featuring your goods for a charity auction, that is deductible.
If, however, you’re paying a nonprofit to place an advertisement of your business in an upcoming brochure, you are not making a donation; you are paying for an advertisement.
Driving your car for charitable purposes can also result in a deduction of 14 cents per mile, plus tolls and parking fees. Driving related to charity may include dropping off any goods you are donating or driving to a non-profit event where you’re volunteering.
In addition to these deductions you can make on physical items and services, as a self-employed Etsy seller, you can also deduct some retirement contributions. If you have a traditional IRA, you may make a full deduction if you aren’t covered by another retirement plan. If you’re married, your spouse must also not be covered by a retirement plan at work. If you and/or your spouse do have a separate work retirement plan, deductions may be limited.
You may opt to have an individual 401(k) plan, which works just like a corporate 401(k) but is for solopreneurs like Etsy sellers. Like the traditional plan, anything you contribute to your 401(k) savings may be deducted from your net income when you report for taxes.
To maximize your deductions and make sure they’re accurate, use a professional service to help you keep track of it all. QuickBooks Self-Employed is a powerful cloud-based accounting software that has a free trial for Etsy shop owners. Precisely managing your expenses and income helps you to get the return you deserve, which could be just what you need to expand your Etsy product line or start a new shop.