You work for yourself. You love the flexible schedule and freedom to do your own thing, and Etsy provides a great platform for your creative business. What you don’t love—because who does?—are taxes. But with a little organization, paying your taxes is easy as pie.
Quarterly taxes are an estimate of what you will owe Uncle Sam throughout the year. Individuals and corporations are required to make estimated tax payments throughout the year. Employers make estimated tax payments by withholding funds from employees’ paychecks. However when you’re self-employed, like all Etsy sellers are, you’re responsible for calculating these withholdings yourself.
Quarterly estimated tax payments can alleviate the potential strain to cash flow when it comes time to file an annual return and helps avoid any IRS penalties.
Do All Etsy Sellers Have to Pay Quarterly Taxes?
If you’re expecting to owe more than $1,000 in taxes in a year, you must pay quarterly estimated tax payments. Since these payments are based on “estimates,” a general rule of thumb is to look at the amount of taxes you paid the previous year. In most cases, paying the same amount quarterly will suffice and doing so will avoid any underpayment penalties. Learn how to calculate your taxable income so you know what to expect when it comes time to pay quarterly.
How Should Etsy Sellers Calculate Quarterly Taxes?
Quarterly estimated tax is based on your taxable income and self-employment tax, which consists of Social Security and Medicare. Additionally, depending on your state, you may be required to pay state income tax from your business’s profits (otherwise known as taxable income).
To calculate your taxable income as a business owner, take your annual gross income—the total revenue you received—and deduct expenses, and any deductions you’re eligible for. For example, if your annual revenue was $100,000 and you have business deductions that total $30,000, your taxable income is $70,000.
As for self-employment tax, in the 2016 tax year, for example, the self-employment tax rate on net income up to $118,500 is 15.3% (that breaks down to 12.4% Social Security tax and 2.9% Medicare tax).
The Internal Revenue Service provides a full listing and reference guide for small business owners. IRS Form 1040-ES is a worksheet that takes you through that calculation and helps you determine your taxable income and payments.
Once you have an estimate for the taxes you’ll owe for the year, divide that number by four and submit your quarterly payments by their due dates. As the name suggests, quarterly tax payments are expected to be made four times throughout the year, due: April 15, June 15, September 15 and January 15, pending any holidays or weekends.
To avoid underpayment penalties, aim to pay at least what you paid in taxes the previous year. If you made more than $150,000 (or $75,000 for those who are married filing separately), pay 110 percent of the previous year’s taxes. Even if you end up owing money come annual tax time, you’ll still be exempt from underpayment penalties.
Depending on the growth of your business—specifically, if business is booming—you may want to take this added income into account and set extra funds aside so that you’re prepared in the event that you owe more money.
Underpaying or failure to make quarterly estimated tax payments on time could result in a penalty of 5 percent for each month the tax return is late. Failure to file within 60 days of the due date will result in a minimum penalty of $100. Penalties may vary depending on your income level.
How to Manage Your Taxes
QuickBooks Self-Employed calculates your quarterly estimated tax so there are no surprises at tax time. Not only will it help keep your Etsy business organized by tracking revenue and expenses as you go, it helps you set aside money so that you’re prepared when you need to make payments. Etsy shop owners can export their transactions and expenses directly into QuickBooks Self-Employed so that everything is in one place. It also exports your Schedule C, the IRS form that is used to determine business net income and helps you manage your deductions.
Pop-up markets, craft fairs and festivals are great opportunities to take your online Etsy business into real life, but can cause headaches when it comes to organizing your off-site transactions and expenses. The free mobile app, which comes with your QuickBooks Self-Employed subscription allows you to capture receipts with a photo, swipe to categorize your expenses and more, so you can spend less time worrying and more time celebrating your business’ success.