You’re dreaming up a new product, which means purchasing supplies (and shipping boxes for when orders start coming in). Running an Etsy shop means spending money on supplies, Etsy fees, and maybe even marketing and other overhead costs . Keeping a close eye on all of your expenses can help you make smarter decisions about your business and allow you to claim money-saving deductions.
Why you should track your business expenses
Having an accurate view of your business expenses helps you make deductions that can lower your taxes, leaving you with more money to reinvest in your shop and yourself. As an Etsy seller, you’re required to pay taxes on income. Subtracting business expenses from sales gives you the lowest taxable income and lowers the amount of taxes you'll have to pay. The United States Internal Revenue Service (IRS) considers business expenses to be deductible if they are both “ordinary and necessary.” This basically means they’re common and appropriate. They might include expenses related to:
- Business interest
- Car usage (excluding personal use)
- Home office or studio space
- Education
- Employee pay
- Entertainment, gifts, meals, and travel (entirely related to your business)
- Insurance
- Retirement plans
- PayPal and other bank fees
- Listing and advertising fees
- Postage and shipping supply costs
As you can see, many of your expenses may give you a tax advantage when you file. Not keeping track of these expenses might mean you’ll owe more.
Just like tracking your personal expenses is essential to strong personal financial growth, tracking business expenses gives you a better understanding of the state of your business. As you track your business expenses, you may notice that you’re overspending in categories that aren't really benefiting your business. That information will help you home in on essential expenses that will help your business be profitable and grow.
How to track your business expenses
To prove to the IRS you did, indeed, make those purchases for your business, you’ll need a paper trail to back up your claims. This means keeping your receipts and purchases organized.
When it comes to finances, mixing business with pleasure can get complicated. Opening a separate bank account for your business allows you to make purchases with a business-designated credit card and keep your business purchases separate from your personal ones. You’ll also be able to build up business credit that can help with future financing, as well as earn points and rewards for business expenditures.
The IRS recommends keeping the following types of expense documents for your business:
- Account statements and invoices
- Canceled checks
- Cash register tapes
- Credit card receipts and statements
- Cash slips for cash payments
- Receipts for all entertainment, gift, transportation, and travel expenses
The amount of time you should keep these documents varies between three years to indefinitely depending on the type of tax return you file, but the longer you keep them, the better protected you’ll be if you’re audited. This is where an electronic record-keeping service like QuickBooks can help, since you always have a digital copy of your records available, and the calculations are always quick and accurate.*
Otherwise, you could use a paper ledger to write down expenses and use devices like a calculator and an accordion organizer to store paper receipts, organized by month and year. The risk is that you could lose paper records or they could get damaged or stolen. At the very least, if you're using a paper method of tracking expenses and storing receipts, scan or photograph the documents so you have a backup digital file.
How organized expense tracking helps at tax time
When you’re filing your taxes as an Etsy business owner, you'll be required to fill out either a Schedule C or a Schedule C-EZ. These forms will ask for your business expenses.
Expense tracking on the Schedule C form can be quite complicated, with at least 20 lines of detailed expenses to fill out. It’s easier to deal with the C-EZ but you’re only eligible to do so if you meet each of the following requirements:
- Your expenses are $5,000 or less
- You don’t have employees
- You deduct your inventory expenses as they occur
- You’re not using depreciation or deducting home cost
Keeping accurate records of all business expenses makes filling out either form simpler and easier. It also helps you accurately pay estimated payments throughout the year, since you'll have a clearer view of total taxable income depending on what expenses are deducted from business profit.
Don’t make expense tracking harder than it needs to be. QuickBooks can automatically categorize expenses, so everything is organized when it’s time to file.* Get started.
Please note that tax laws change frequently, and this information is not tax advice or legal advice. You’re responsible for any use of this information. Please consult an attorney or tax expert if you have any questions.
Continue reading > Chapter 4: Collecting State Sales Tax as an Etsy Shop Owner
Go back > The Ultimate Guide to Taxes for Etsy Shop Owners
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