This is the final installment in my analysis of the rapidly growing shared economy. So far, we have outlined the popular transportation and home rental segments, which can be viewed here:
Today, we will analyze the taxation for those who sell their talent online.
How is Etsy.com Taxed?
Etsy tax? No, this is not a new tax the government has decided to implement. This has to deal with the taxation of those who sell on the popular website Etsy.com. Etsy is an online marketplace for the general public to buy and sell handcrafted items. Sellers on Etsy range from the casual crafter that wants to make some money off of their hobby, to the businesses that use Etsy as a supplement marketplace to their own website or storefront.
The main cogs of Etsy include jewelry, clothing, and accessories, most of which are handcrafted by the sellers. The sellers will receive a 1099 for their total amount of sales for the year. We help people in Milwaukee and Waukesha counties that sell on Etsy with tax preparation and tax planning.
What kind of expenses can you deduct?
The main expenses involved with selling on Etsy are the Cost of Goods Sold. The Cost of Goods Sold are going to be the materials purchased which are needed to produce the product. Also, equipment needed to produce your product can be deducted as well. Sewing machines, computer software, and other large machinery would be considered equipment.
Another expense to take into account is the Home Office Deduction. If you have a designated room in your home that is used exclusively for running your Etsy business, then you can deduct this as an expense. There are two ways you can do this. The first option is the Simplified Method, which gives you a $5 deduction per square foot of the room. The other option is the traditional method. With the traditional method, you compute the percentage of square feet the office is in comparison to the entire home. This percentage is used to deduct a portion of you real estate taxes, mortgage interest and utility bills.
Mileage: Any miles driven to gather supplies and materials can be deducted using the standard IRS mileage rate.
What about Fiverr? … What is Fiverr?
Fiverr.com is a website that can help consumers pretty much with anything. It is a gold mine for business owners, and we have personally used services on Fiverr a few times. Services include: graphic design, writing, video editing, music & audio, programming. and advertising. The sellers on Fiverr utilize their talent in these categories to produce a product based on the buyer’s order. It is a pretty cool concept, and I suggest you check it out if you ever need help with anything you don’t want to waste your own time on.
The taxation of Fiver sellers is similar to those on Etsy. However, they may not incur as many direct expenses. Their main expenses are going to comprise of equipment and the home office. In most cases, there are not many supplies or materials needed because they are using their expertise to produce a final product.
Both Etsy and Fiverr members may incur processing fees from the website. These fees are also deductible as expenses.
What have we learned about the Shared Economy?
The shared economy is a highly successful business model that is being carried over into many different sectors and industries. The main concept is that the Business lets us, the general population, do their work for them. They benefit off of the processing fees and advertising space, but rely on the citizens of the world to produce for their business.
The important thing to remember for all of those that are “working” for these companies is that you are not their employee, you are your own business! It may be your full time gig, or just something you do to supplement your income, but you are a business owner. You are no longer treated by the IRS as an employee and you will be taxed differently. It is important for you to know how to keep records of your business and stay compliant with the IRS tax code.
If you are currently involved in the shared economy, or if you want to make some extra money and join the shared economy, please contact your tax consultant to learn more of what you need to do.
Have a great weekend!
Nicholas Hammernik, EA