Taxes and Forms – CARAMEL COMICS

This is post number three in a series about starting an art business that focuses on convention based selling.

It’s time. If you ask any small business owner what part they hate most about running their business, most will say taxes. They are complicated, take many hours, and usually one ends up owing money. However, taxes that the government earns through businesses like ours are the funding for our community and help run our society. They are important to pay and to do correctly.

But how does one know what taxes they need to pay? What’s a LLC? Do I need to pay sales tax? What’s a Schedule C form? There are so many questions about taxes that it is easy to become overwhelmed. I am here to guide you on the basics that one needs to know to keep their business in good standing with the government. Let’s begin!

FORMING A BUSINESS LEGALLY

If you followed our previous blog post, the Brainstorming and the Business Plan, you should now be at the steps to register your business with the government. If you have already begun selling and have not filed any paperwork yet, now is the time to start. The longer the official forms are delayed, the more that may be owed in the end. The sooner that documentation and processes are setup, the easier they will be.

Now, I have stated many times that I am not an expert in the business fields, but I will be explicit here. I am not a licensed tax professional, and none of this writing should be considered legal, professional, or personal tax advice. If you have specific questions, you must contact a licensed tax authority in your local area for exact help and advice.

What can I help you with then? I am here for the basic level of knowledge you want to have when you go meet a bookkeeper or certified public accountant (CPA) for the first time. I will give you the base for your specific situation to be built upon. Let’s start with the first question the Department of Revenue wants to know, what is your business structure?

The most common business structures are: sole-proprietorship, partnership, limited liability company (LLC), and corporation. They each have pros and cons and often are determined by the amount of people involved with the business. A full explanation and official overview can be found on this web page by the US Small Business Administration (SBA). I will give my short overview here:

A sole-proprietorship is just as it states, a proprietorship of one individual. With this business structure, one is not separate from the business entity. The assets and liabilities of the business are also tied to your personal assets and liabilities. If you have not filed any paperwork yet, but are running your business already, this is the structure that you have. A sole-proprietorship is not required to file for many of the forms that other structures are required to do, so this can be an appealing more simple option for many.

A partnership is a way for more than one person to be involved in owning a business without forming a more complex business structure. The two most common types of partnership have either limited liability on everyone, or limited liability for everyone except for one person with unlimited liability. The unlimited person generally has more control and stake in the business. This structure can be a good choice if you want less complexities in your organization and have multiple people involved.

A limited liability company, or LLC, is a structure that gives one the benefits of a proprietorship and a corporation at the same time. An LLC is a separate entity with its own assets away from one’s own personal assets. This means if things go badly with the business, your personal things like your home will not be at risk. LLCs require much more documentation and work to form than a partnership, but not nearly as much as a corporation. LLC regulation is also very different depending on the state the business resides in.

Corporations come in several different forms, but in general are completely legally separate entities from the owners. Corporations take on the liabilities and assets instead of any individual persons. Corporations can sell stock and be invested in by outside members. Corporations also must do the most record keeping and follow the most regulations of any business structure.

So, which one should you pick? Unfortunately there is no straightforward answer. Most convention sellers are either running a sole-proprietorship or an LLC, with the former the most common. There are exceptions, but the draw of these two options for our purposes is clear.

A sole-proprietorship gives one the easiest, and often, cheapest business structure to handle. There is very minimal official documentation needed and very little regulation to comply with (comparatively). The biggest downside is the combined liability on the person. Have a bad year of selling and owe a lot of money? Personal assets like vehicles, equipment, and even housing could all be on the line to make up the debt. This business structure can involve employees, but it is a much more difficult process than in other structures.

LLCs are an obvious choice if multiple people need to be involved in the business operation. The separation of assets means that one can be assured to not lose their personal things to troubles in the business. They can also be run solo and still have all of these benefits of the structure. The negatives to this structure are mostly based around the increased level of paperwork filing and regulation to follow. In some states it is much more expensive and complicated to form an LLC than in others.

Which is the correct choice for you? I cannot say. For reference, I currently have a sole-proprietorship, but plan on changing to a limited liability company in the future. This is based on the current and projected future needs and revenue of my business. It also is based heavily on where I live, in the Midwest USA, where it is relatively easy to form an LLC.

For the best advice for your situation, contact a local CPA, attorney, or other business professional that will know your local and state laws and what specifics you will need to comply with. It is their job to know these things, and everyone wants to help you be successful and avoid any future potential issues.

So, we have decided on our business structure. What next? Depending on what you chose, there will be forms to file and documentation to make. To register your business, look up your state’s Department of Revenue. You can usually make an account and apply online, or they will list the other ways you can file. Follow their instructions depending on the structure you have chosen, and you’ve done it!

Is that it? Just file those forms? Not quite. Here are some more forms that you may want or need to file to make your business legal and official:

DBA (Doing Business As): A DBA will give your business an identity that is separate from your personal one. It is not required for a sole-proprietorship but is for many other structures. They are not the same as a trademark, but must follow trademark laws. Requirements for DBAs vary greatly by location.
EIN (Employer Identification Number): An EIN is the federal tax identification number for your business. If you have a sole-proprietorship and do not get one, you will need to apply for business forms with your social security number instead, which is not the most secure option. All other structures must file for an EIN.
Articles of organization: These documents state the specifics of how your business functions, the names of the people involved, and the location it happens in. Not required for a sole-proprietorship, but these are required for most LLCs.

Having a DBA and an EIN registered will let you apply for a business bank account. Business bank accounts have many perks that are only available to them, and it will be much easier to do the bookkeeping with your business finances completely separate from your personal ones.

Applying for a DBA will depend on your location. Check your state’s website for information on where to file and look into if you need to file at the local level as well.

Applying for an EIN is free through the IRS. Any service that charges you for an EIN is a scam. They may still give you the number, but now they have your personal information and your money. Apply for an EIN online at this link: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

Surely, we must be done with the paperwork now, right? Not yet! At this point you may be seeing why large businesses have employees they pay just to do this process. Luckily there is not much more to do. If have followed the steps, your business is officially registered to operate; however, there are other forms you must file to be legally able to collect taxes.

What taxes can you collect? What taxes do you owe? What money goes to where? State or federal? Local? What does quarterly filing mean? Let’s dive into all of this and even more in the next section.

DIFFERENT TAX TYPES

As a consumer, you interact with many types of taxes on a daily basis, but in general, you only need to pay the amount and then you are done with your part of the process. You might not even notice it is happening! As a business, you will be the one collecting the taxes and then sending the funds to the appropriate locations. It can feel overwhelming to start, so let’s go through the various type of taxes that our type of small business should know.

In general, the types of taxes that a convention selling business should know about are:

– Income tax
– Self-employment tax
– Estimated tax
– Employer tax
– Excise tax
– Sales tax
– Use tax

If you have ever been employed or filed your own tax return, you are probably familiar with income taxes. Depending on where you live, sales tax will be common to you, or something you hear about from other places. As the internet becomes a larger part of our lives, use tax becomes more important as well. Let’s breakdown each tax type and what they mean to our type of business.

INCOME TAX

Income taxes are straightforward to understand in concept, they are a tax on your income. When you “file your taxes” in a colloquial sense, you are filing your annual income tax return. Any income, from a job, a business you own, side-hustles, online sales, or anything else, is subject to income tax.

With a traditional type of employment, you would receive a W-2 form which lists the amount of taxes that your employer withheld from your wages. The income from small businesses must be reported similarly. Depending on which business structure your business takes will change which forms you need to file. To figure out which forms exactly, this page from the IRS website will explain which is needed by structure type. In general, most convention selling businesses will need to file a Schedule C form. We will explain that form in detail in the last section of this writing.

If you work a job that is not related to your small business, you will still need to report that income when you file. All income sources must be filed. Look out for an additional forms that will be sent to you before you file like a W-2, 1099, or others.

SELF-EMPLOYMENT TAX

Self-employment tax is a tax that persons that are not employed by other businesses pay. The money from this tax is not a special fee that only self-employed people pay. The tax is used to fund individual contributions to things like Social Security, Medicare, disability benefits, and other societal funds. In typical employment, these taxes are withheld from your wages and paid for you by your employer. As a person without an employer, one has to pay these taxes themselves.

In general, one must pay self-employment tax if their net earnings were $400 or more. This means you still may owe this tax even if you earn other income through traditional employment. There are other specifics to this tax, so check with a licensed tax professional for questions on a specific situation.

ESTIMATED TAX

Estimated taxes are the amount of taxes that is estimated an individual will owe. For a convention selling small business, if it is expected to owe more than $1000 of federal taxes, the business needs to be paying the estimated amounts as they are earned. If your business does not pay this much in taxes, you do not need to file the estimates. However, it is a good practice to start estimating before it is required, so that one can learn the process and be prepared when they hit the threshold.

Have you heard business people talking about quarterly filing? Estimated taxes are most likely what they were discussing. Estimated taxes are meant to be paid as earned, but in practice, filing every single transaction would be a mess of paperwork for everyone. As such, the IRS has a simplified system of when estimated taxes are due:

January 1 to March 31 – April 15
April 1 to May 31 – June 15
June 1 to August 31 – September 15
September 1 to December 31 – January 15 of the following year

For example, if you sold at eight conventions between June and August, the estimated federal income tax you would owe from those convention sales is due on September 15^th of that year.

Many states also allow or require estimated tax payments to them on the same quarterly schedule. Depending on how much one earns, they may be able to file semi-annually or annually instead. Check with the individual Department of Revenue for each state for specifics.

EMPLOYER TAX

Remember all those things I said that employers pay for you in a regular job? If your small business has employees, you are now that employer, and you will be paying those things for your employees. These taxes include social security and medicare taxes, federal income tax withholding, and federal unemployment tax.

Most small convention businesses are sole-proprietorships and do not have employees, and thus will not need to worry about any of these taxes. If one has structured their business as a LLC with employees, these taxes may apply. Speak to a local CPA or other tax professional for any specific answers about what employer taxes might apply to you.

EXCISE TAX

Excise taxes are taxes on specific goods and services. They are assessed at the federal state and usually state level as well. These taxes are usually on industries with high levels of regulation and higher societal costs. The most common are things like alcohol, tobacco, gasoline, and large commercial vehicles like semi-trucks.

Most states require special licenses to sell things that have excise taxes, so it is unlikely that a small convention selling business would need to pay these taxes. Artwork, apparel, and toys are generally not assessed an excise tax. Large asset purchases like large machinery and transport vehicles to help run your business, however, could owe these taxes. If you are concerned you need to pay these, ask a local accountant for more information.

SALES TAX

Sales tax is tax charged at the time of the sale of a good or service. Sales tax is not charged at the federal level and is instead determined entirely by state and local governments. Some states do not have sales tax at all.

Sales tax is collected from businesses to help fund the state and local governments. The cost can be passed directly onto the consumer in most places. Usually it is listed separately on a receipt, but it is not always required to be. Many small businesses include the sales tax into their pricing models.

Most states require a permit or license to collect sales tax. A sales tax license in the state you live in, if one exists, will be required for you have to legally run your business. If you travel out-of-state for an event, you may need to sign up for a permanent or temporary sales tax authorization, depending on the state and how they operate.

Sales tax rates are entirely dependent on location. Many states have a starting sales tax rate and then local areas may charge additional sales tax on top. The sales taxes that you need to collect at an event is based on the location of the event, not the location you are from. For example, if Big Anime Con is located in an area that charges 10% sales tax, but your home area only charges 5%, you will still owe 10% of sales made at Big Anime Con to the state and local governments.

USE TAX

Use taxes are a conditional tax that are only charged in certain situations. Many people are confused by use taxes as not just businesses but individuals are required to pay them as well. The simplest way to think of use tax is that it is a different kind of sales tax.

Use taxes are charged on goods or services that are purchased in another location that did not charge tax, but sales tax would have been charged had the product been bought locally. For example, let’s say you bought a jacket online from a business in Oregon, but you live in Indiana. Oregon does not have sales tax, so it did not charge any on the jacket purchase. If you had bought that same jacket from a local store in Indiana, you would have been charged sales tax, so you now owe the use tax to Indiana and potentially the local area as well.

Many sales tax licenses or permits also include use taxes. If you do not live in a state, but frequently sell items to that state, you may owe that state use taxes, and you will need proper authorization to collect them. If your business does online sales, this can be particularly confusing how to implement into your business organization.

Some tax software or online store fronts will collect and remit tax for you. If you do not use these, you will need to manually check the location that your sales originate from, and determine the process for paying the proper taxes. Luckily, most states have thresholds in place that require a certain amount of sales or income before tax is required to be sent to them. When just starting out your business, determine a strategy that you want to use to calculate use taxes, and implement it gradually so it will be ready when you hit the requirements.

Wow, that sure was a lot of information about taxes, and that was only a general overview of seven of them. It is easy to be overwhelmed by this topic just from how much information exists. I must keep repeating myself though, any specific questions can be answered by a local tax professional. It is their job to know these things. I also know that the advice of those people is generally not free. If finances have you in a difficult situation, look up local small business resources in your area. Many cities have groups for small businesses that will provide support and sometimes lower cost services.

On your own, you can always reference any information for free from the Internal Revenue Service (IRS), US Small Business Administration (SBA), and your state’s Department of Revenue.

The bottom link in the above list is to a database of all officially registered libraries. Libraries often have free tax forms, workshops, maker equipment, and, of course, books! Anyone can support their local library network and look the answers they need at the same time.

Now that you know what the different kinds of taxes are, how do you know what to pay? The exact numbers will depend on the amount of income and expenses that your business accrued during the fiscal year. A fiscal year for a business is usually from January 1^st to December 31^st, but businesses can have different start and end dates if they file it with the IRS. In our next writing, we are going to go in-depth into bookkeeping and what records you should be holding onto. For now, here are the basics to getting taxes paid correctly.

You will need to know the amount of income that your business earned. Calculate the sales tax amount that the income generated, if applicable. File a sales tax return to each applicable state. Depending on the state, you may need to do this once or multiple times a year. Keep track of the amount of taxes you pay as you will need the information for your income tax returns. Once you have your state sales and use taxes filed, you are ready to start your income returns.

Every adult earning an income is required to file a tax return. What forms one needs to file will depend on what income they receive. Anyone receiving wages will need the W-2 form from their employer. If you are running a business, you will need to file specific forms dependent on your business structure. Most people running a small convention business will need to file Schedule C (Form 1040).

I really cannot stress enough how important proper filing is. Small businesses are in general more likely to be audited by the IRS because it is less difficult than auditing a major corporation. To have the easiest and most correct tax filing, go to a local tax service. They will know the specific local issues that may arise.

If you cannot go in-person and prefer to file online, I personally request that you do not use services like TurboTax. They are definitely convenient, but they are providing a “solution” to the problem they have created. If you think taxes should be simple like they are in other countries around the world, using services like TurboTax that use their profits to lobby against changes to making taxes easier is only exacerbating the problem.

If you are like many and your total annual income is under $73,000, you can file your taxes online for free. You can manually download the forms yourself, fill them out, and send them back to the IRS, or you can use any one of the IRS partner websites that will guide you through the process. Here is a link to the IRS free file page with all of the information on qualification and more: https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free

I can hear you asking, “if these websites will help me file, what is left for you to explain?” While it is true that these programs will help you figure out what numbers to fill in, they may not tell you where the numbers come from. Maybe they ask you questions that do not seem relevant to taxes at all, but they seem to impact the numbers. What does COGS mean? Can my lunch count as a business expense? I will be explaining things to provide clarity on what numbers you need to know and where they come from.

To be specific, I will be going into detail about the Schedule C (1040 Form) as it is the most common form that will be filed by people doing convention selling. If your business needs to file a different income form, I am sorry to say I cannot go over each one. If you have a more complex business structure like a partnership or LLC, I highly recommend hiring a CPA that can make sure the filing process is much easier and more accurate.

Let’s get to it!

SCHEDULE C OVERVIEW

What exactly is a Schedule C form? Directly from the IRS, the Schedule C form is “to report income or loss from a business you operated or a profession you practiced as a sole proprietor.” In other words, this is the main way most small businesses like ours report to the government our earnings and expenses for the year.

But how is one supposed to know what those exact numbers are? The form states what category of income or expense each number is supposed to come from, but it does not explain what those categories mean. There are also some sections that are very confusing to people that have never filed the form before. Let’s go through each piece step-by-step.

First, here is a direct link to the exact form that you will need to file: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf Remember that this form is always free to access and look at directly from the IRS website. I recommend downloading it and having it for reference when it is tax time.

The IRS has its own very thorough walk-through of filing out the form. The link to that page is here: https://www.irs.gov/instructions/i1040sc The formatting and specific legal phrasing can be a bit overwhelming though, so I will try to do more simplified instructions in this section.

Next, let’s look at the big sections. There are five parts to the form. They are Income, Expenses, Cost of Goods Sold (COGS), Vehicle Information, and Other Expenses. Before the Income section (Part I), there are some general questions asking about the business operations for the year. Let’s breakdown each of the sections further.

BUSINESS INFORMATION

This section is all about the basic information about yourself and your business. Some lines in this section of the form will be easy to answer on your own and others will take a little research. For example, the first line is for the “Name of Proprietor.” Here you want to put your full legal name. Easy!

Line A says, “Principal business or profession, including product or service.” They are looking for a specific description on what your business does and how it operates. The easiest way to fill out this line is to use the exact description of the code you choose for Line B. The code you enter here is the North American Industry Classification System (NAICS) code that best matches your business.

There is not a set code that fits all convention sellers, because we all make different products and operate our businesses in different ways. Someone selling handmade soaps is operating differently than someone that draws digitally and sells V-tuber assets. All codes can be found at https://www.census.gov/naics/ and clicking on the most recent year. The most common sections convention selling businesses use are in Sector 31-33 (Manufacturing), Sector 44-45 (Retail Trade), and Sector 71 (Arts, Entertainment, and Recreation). For my business, I personally use code 711510 (Independent Artists, Writers, and Performers), but again, this may not be a good choice for your business. If you are really unsure, contact a tax professional for advice.

Line C should be much more simple as it just is asking for your “Business Name.” If you have a DBA or otherwise operate under a name that is not your legal name, put that name here. Otherwise, leave this blank, and the IRS will connect your business to your legal name.

Line D is asking for your EIN. If you have one, put it here, otherwise leave it blank.

Line E is for your business address. If you have a studio or office space not in your home, put that address here. If you operate out of your home where you live, you do not need to write that address here as it will already be on a different part of your tax return.

Line F asks if your accounting method is Cash or Accrual. If you are not an accountant, you may not know what these terms mean. Cash accounting is when income and expenses are counted when the money is exchanged. Accrual accounting is when income and expenses are counted for when the obligation is made. For example, let’s say you plan to do a painting commission for a client in December, but they do not pay for the commission until January. In Cash accounting, you would record that income in January when the payment was received, but in Accrual accounting, you would record that income in December when the invoice and contract were arranged. Most small businesses do cash accounting, so that will most likely be the option you choose here. Once you decide an accounting method, you will need to pick that same option each time you file. If you change methods, you will need to fill out an additional form when you submit your returns.

Line G asks “Did you ‘materially participate’ in the operation of this business during (year)?” This is a legal phrasing to ask if the income you made from this business was from actively working rather than passively generated like from investing or renting. The general threshold to answer yes to this question is if you worked over 500 hours or 20 days or more for your business. More specifics can be found on the IRS help form linked at the start of this section.

Line H is self-explanatory asking if you started or acquired this business in the year this form is being filed for. Check the box if yes, leave it blank for no.

Line I asks “Did you make any payments in (year) that would require you to file Form(s) 1099?” The payments being asked about here are things like employee wages, contractor costs, rent income, interest, royalties, and pensions. There are lots of hings that require you to fill out a 1099 form, but for a convention selling business, they are unlikely to occur. In general, you need to have paid out over $20,000 to a single vendor to need to fill out one of these forms. If you paid over $20,000 to several different manufacturers over one year, this form is not required. If over $20,000 was sent to a single company however, you would be required to file a 1099 form. If your business has hit this threshold, please pay for a CPA to help you do these forms correctly. If you did make any payments that require a 1099, check yes on Line I and Line J; otherwise, check no on those lines.

And just like that, we are done with the first section! Not so bad for a tax form. Now, onto the next section, income.

PART I – INCOME

This section starts the bulk of the numbers accounting segments of the Schedule C form. Income is where we calculate the exact amount of money that the business earned over the course of the year. If you are just starting your business out, these numbers may not be very high yet, and that is perfectly normal! No one becomes a multi-millionaire small business creator overnight. The goal here is report accurately so you can keep your business in good legal standing and to be able to track your growth accurately.

Line 1 is where you enter your gross receipts or sales for the year. Calculate all of the money you earned from various platforms and events, and enter that total amount here. Income from places like Etsy, BigCartel, PayPal, SquareUp, Stripe, and any other platform needs to be included here. If you received a 1099 form, be sure that income is included as well. Since we are talking about our own small businesses here, the W-2 check box should not apply. Once you have the total amount, write it in Box 1.

I will remind that cash income is still income that needs to be reported. Not reporting cash income is tax fraud and a great way to get an audit from the IRS. We at Caramel Comics highly recommend not breaking the law.

Line 2 is for Returns and Allowances. If you paid money back to a customer for any reason, that amount should be totaled and entered here. Subtract the number in Box 2 from Box 1 to get the number for Box 3. This is just a working number for the form to make sure your income is accurately reported.

Line 4 is where you enter your Cost of Goods Sold or COGS number. COGS is Part III of the Schedule C form, so we will calculate this number when we get to that section. For reference, Line 4 is the same number that is in Line 42. Once you have Box 42 filled in, come back up to Box 4 and put the same number.

Line 5 is your Gross Profit for the year. It is calculated by subtracting Box 4 from Box 3. Until we do Part III of the form, we won’t know this number yet. Make sure to come back and calculate this number.

Line 6 is for Other Income. This is extremely vague in the form, but what they are looking for is income that is related to your business, but not earned through the actual function of your business. This includes things like interest earned from a business bank account, advertising revenue from advertisements on your website, prizes won, bad debts recovered, and anything else similar. Add any of this income together and write the total in Box 6.

Line 7 is your Gross Income for the year. Until you do Part III and know your COGS number, you will not be able to calculate this number and will need to come back. After finishing Line 42, calculate Box 5 and then add it with Box 6 to get the number for Box 7.

And with Line 7 done, we have finished Part I of the Schedule C. Box 7 is your income of your business for the year. This is a great number to help keep track of your growth from year to year as your business operates. We will use this number again at the end of Part II, so let’s get to it!

PART II – EXPENSES

Welcome to Expenses! Running a business is not free, and this section is where we will see exactly how much we spent to keep our business running this year. This section may equal more than you earned in Part I, especially if you are just starting. That is very common and nothing to worry about if you are financially stable yourself. Having all of these numbers will be a great way to assess the business and strategize for future improvements!

Something to remember about the expenses categories is that an expense could potentially count in multiple categories. This flexibility is nice, just make sure you do not put the same expense in multiple places. Make sure you have receipts and documentation of all of your expenses to back you up.

Line 8 is for Advertising. If you paid for ads on a website, billboard, magazine, livestream, anything – those should be added up for this part. You can also include the costs of products given to influencers in this section. Social media payment for post boosts should be included here as well. This section is where I put convention branding expenses like booth banners and business cards.

Line 9 is Car and Truck Expenses. If you put a number in this section, you will also need to fill out Part IV of the Schedule C form. The numbers here are for if a vehicle is necessary for regular operation of your business. Travel expenses do not belong here, but instead in the travel expenses section (Line 24a).

There are two ways to determine the number that goes in Box 9 – the standard mileage deduction and actual expenses. If you have less than 5 vehicles and did not use actual reporting the previous year, you can use the standard mileage rate. To use mileage, total up the amount of miles drove for the business in the year and multiply them by the mileage rates (these change twice a year so look them up for accuracy!), and then add that amount to any parking fees or tolls collected. This is your number for Box 9. Remember to only use local traveling and fees in this calculation; this is not distant travel inclusive.

To deduct actual expenses for vehicles, total up registration fees, license plates, gas, insurance, repairs, oil, tires, tolls, parking fees, and anything similar for the Box 9 total. Vehicle depreciation should be included in Line 13 and rent or lease payments included on Line 20a, and not with Line 9. Remember that personal use of vehicles cannot be claimed in this section, so keep it separate from these numbers. There are many stipulations to vehicle expenses and what can be claimed, so talk to an expert for specifics.

Line 10 is for Commissions and Fees. If you commissioned another artist to make a logo for you, someone to edit product photos for you, or anything similar, that amount goes here. Remember this is an expense category, so income from commissions you have received does not go here.

Fees is broad and can cover a lot of things. Make sure to put payment processor and storefront fees from places like SquareUp, Stripe, Etsy, Itch.io, PayPal, and any others in this category. This section is a great place to put table and booth fees for conventions and other events. Total up all of these amounts for Box 10.

Line 11 is Contract Labor. If you paid a person to work for you, and do not consider them an employee, then the amount spent would go here. Remember that you will need to fill out a 1099-NEC form if this amount is $600 or more. Ask a tax expert for more information.

Line 12 is Depletion. This line is specifically for businesses that deal with fossil fuels and other depletable resources. If your convention selling business needs this expense category, something has gone weird, and you need to talk to an accountant now. We should be able to ignore this one.

Line 13 is Depreciation. A business asset that is useful for more than a year must be depreciated. If you are doing actual reporting for vehicle expenses, vehicle depreciation is included here. There is no strict guideline on what assets should be depreciated instead of expensed, but in general they should cost more than $100. Common assets to depreciate are computers, monitors, printers, storage furniture, large and small machinery, and vehicles. To calculate the annual depreciation value of an object, divide the total cost of the item by the projected amount of years it should be in service. For example, a sewing machine that is projected to last 12 years and costs $600, would depreciate $50 each year. Add all of the depreciation values for all assets together for Box 13. Note that depreciated assets must reported on a separate form (Form 4562) as well.

Line 14 is for Employee Benefit Programs. Any program that was paid into for employees counts here. It is unlikely you have employees if you are reading this post for help, so I will not be going into details here. Any questions about this section can be explained by a tax professional.

Line 15 is Insurance expenses, but not health insurance. Those expenses are calculated elsewhere. The insurance that counts here would be things like rental insurance if you rent a studio or warehouse, event insurance, and other things insuring your business. Vehicle insurance does not go here, but is included in Line 9.

Line 16 is for Interest. There are two lines in this area, Mortgage and Other. If you paid interest on a mortgage for a property that conduct business in, you can claim part or all of the interest here. If you received a Form 1098 from a financial institution, put the mortgage interest amount in Box 16a; if not put the amount in Box 16b. Any non-mortgage interest can also be added to Box 16b if you qualify as a small business taxpayer. Ask a tax professional for exact information about the details.

Line 17 is Legal and Professional Services. I keep saying to talk to an accountant or tax professional, and this is where you would log that expense. Any other legal service like attorneys, notaries, and others would also go here.

Line 18 is for Office Expenses. The materials needed for the bookkeeping side of the job should go in this category; for example, this includes things like staplers, printer ink, and tape. Postage expenses also go in this category. Total them all up for Box 18.

Line 19 is for Pension and profit-sharing plans. Importantly it is for those things for your employees, not yourself. Pensions paid for yourself as someone self-employed go on a different form (Schedule 1). Assuming you have no employees, you can skip this section as well.

Line 20 is for Rent or Lease and split into two sections. Line 20a is for vehicles, machinery, and equipment rentals. Did you rent a truck to deliver something? Rent a sewing machine? Laser cutter? Any rental expenses like that go on this line. Line 20b states “Other Business Property.” This line is referring to renting a place like an office space in a business building or studio area in a makers space. Put your total rent costs in Box 20b.

Line 21 is for Repairs and Maintenance. Did you have a sewing machine serviced? Cricut machine repaired? Order a replacement arm for a desk chair? Any costs considered basic upkeep that do not increase the value of the object can be counted here. Business vehicle repairs do not go in this section but back on Line 9.

Line 22 is for Supplies. Depending on what you make and sell at conventions, you may think a lot of items will go in this category, but actually most of those items will be calculated into your COGS section. This expense line is for all supplies that will not be logged in Part III. In general, the supplies for this section are things that were used for the selling of your products, but not the materials they are created of. This includes packaging, shipping labels, mailers, bubble wrap, receipt paper, books and tutorials, tools, and equipment. You can also include some materials that are difficult to measure the amount used, like thread or glue. As a guideline, items included here should be used up within a year and are not considered assets (which need to be depreciated instead). Total all supply costs for Box 22.

Line 23 is for Taxes and Licenses. Any taxes that your business paid to the state or local level should be put in this section. This can include property taxes for your business location as well. Any licensing and official verification costs are also a part of in this section. This includes your business licenses, sales tax permits, trademark and copyright fees, DBA fees, and any other government registration costs. You can also include software licensing fees into this section.

Line 24 is for Travel and Meals and is split into two sections. Line 24a is for travel costs. This includes airfare, gas, car rentals, tolls, parking, and lodging. For a trip to count as travel, the main purpose of the trip needs to be business related and not in your local area. Line 25b is for meal costs. For any meal while traveling, one can claim 50% of the cost of the meal. To qualify, the meal has to be a necessary expense and not “lavish or extravagant under the circumstances.” Some meals can be claimed up to 100% of the cost; talk to a tax professional for more specifics.

Line 25 is for Utilities. These are for utilities paid only for your business, so if you have a home office, your home utilities do not count in this section. You can include things like an additional phone line or data hotspot, if you use these things only for business purposes.

Line 26 is for Wages. The total amount of salaries and wages paid minus any amount of applicable employment credits goes into Box 26. If you have expenses in this category, you most likely must file W-2 forms for your employees. Work with a licensed tax expert to file those correctly.

Line 27a is for Other Expenses. Any expense you did not put in another category can go here, but make sure to not claim an expense twice. Common things to go in this section are software licenses, business subscriptions, market research costs, sample costs, and product testing fees. Have documentation of every item included in here to be extra prepared for any audits or form filing.

And like that, the bulk of the expenses section is complete! Line 28 is for the Total Expenses. Add Box 8 through Box 27 to get the total for Box 28. Then subtract this amount from Box 7 to get Box 29, Tentative Profit/Loss.

Line 30 accounts for the business use of a home. To determine this number, there are two methods. One involves using the numbers from Line 36 of Form 8829, and the other is the simplified method. Most use the simplified method as defined on the Schedule C form. If you use the simplified method, make sure to include the total square footage of your home (30a) and the square footage of the home used for business (30b). To find this amount, follow the instructions on the IRS website using the worksheets they provide here: https://www.irs.gov/instructions/i1040sc#en_US_2022_publink1000308050 A tax preparer or tax software can also help you determine this amount.

Subtract Box 30 from Box 29 to get Line 31, Net Profit or Loss. If this number is positive, the total is Profit; if negative, the total is Loss. If you had a profit, then you are done with the expenses section. If you had a loss, you need to follow the instructions on line 32 and potentially file additional forms. Talk to a tax professional on how to file a loss appropriately.

Expenses section done! Take time to reflect on all of the numbers from this section. Were your expenses as expected? Were some way too high? Did you make a profit this year? The Schedule C form helps keep our business in good standing, but is also an opportunity to learn where we can improve financially. Knowing the real data is the best way to be able to effectively plan for improvements to the business.

And speaking of real data, let’s move onto the next numbers section, COGS.

PART III – COST OF GOODS SOLD

COGS is a section that many struggle with when filing their Schedule C form. It is not a phrasing that is easily understood upon first reading. In short, Cost of Goods Sold (COGS) is how much it costs to produce the products a business sells. This includes the material, labor, and operation costs. A really thorough breakdown of COGS can be read at this article by Shopify.

Now, for our purposes, it is important to know that qualified small business taxpayers do not need to keep inventory and therefore do not need to calculate their COGS total. However, the IRS states that one still needs to use a method of accounting that will accurately reflect the business income. I recommend keeping inventory and calculating COGS anyway, so that one can more accurately understand their business cash flow and potentially lower the amount of income needing to be taxed.

With that said, let us get into this section of the Schedule C form. Line 33 asks which method(s) are used to value the closing inventory – cost, lower of cost or market, or other. Most small businesses will be using the Cost method, but you may be using a different one if your accounting is handled by a CPA or other accountant. Make sure to talk to them when filing this form.

Line 34 is asking if there was a change to the method that was used to determine inventory for the year. If you choose yes, you will need to include an explanation.

Line 35 asks for the value of your inventory at the beginning of the year. If you filed COGS the previous year, this number will be Line 41 on your previous year’s tax return. If this number will be different for any reason, you will need to attach an explanation. If you have never filed a Schedule C before, the number for Box 35 will be zero.

Line 36 is for the purchase costs from the year. This amount includes items that are ready to sell and the raw materials that are used to create your products. If you have stickers manufactured for you, that cost goes here. If you are a ceramic artist, the cost of clay would go here. Paper, paint, clay, wax, fragrance oils, acrylic sheets, clasps, beads, stickers, books, wood standees, enamel pins, screen-printed t-shirts, etc. – any thing that was purchased to make the end product goes in this section. Remember this section is only for new purchases; previous inventory items were already accounted for in Line 35. When totaling for Box 36, remember to subtract any purchases that were for personal use.

Line 37 is for the Cost of Labor. This does not include your own labor, or contract labor. The amount here is the cost of labor that employees of the business performed. This labor is specifically referring to labor involved in making the products sold. An employee sewing a dress that will be sold would be counted here; an employee doing payroll accounting would not. If you have no employees, this section will be left blank.

Line 38 is for Materials and Supplies. Here you would want to count other items that are needed to finish your products for sale, but are not the products themselves. A bottle of paint varnish that goes over a finished painting to seal it, jewelry tools used to attach clasps and key-chains to jump rings, placement boards for melting fuse beads on, parchment paper to protect things baking in the oven – any supply that is necessary for the finished product goes in this category. If you are unsure if a material goes in this section or in Line 36, it does not matter too much which you choose, as long as you do not record it twice. Materials and supplies should get used up and need to be replaced. Any equipment that lasts longer than a year should be accounted in the Expenses section and potentially depreciated as well.

Line 39 is Other Costs. If there are other expenses involved in your production that did not fit the other categories, total them here. These could include shipping container costs, freight on supplies, indirect labor, and any other overhead costs directly related to production. If you are uncertain if something qualifies for this section, an accountant can help.

For Line 40, add the totals in Boxes 35, 36, 37, 38, and 39 together. This is just a working number to total your starting inventory for the year plus the purchase values accumulated during the year.

Line 41 is for your Inventory value at the end of the year. There is no math on the rest of the form to find this number; this number comes from your own records. If you do not have a working inventory value in your bookkeeping, you will need to count the value of every item your business has in stock and is ready to be sold. There are several methods to determine this. Remember that the value here is the item production cost and not the retail sale value.

The most common methods for inventory valuation are First In First Out (FIFO), Last In First Out (LIFO), and weighted average cost. There are a million business writings about the pros and cons of each method, but for our purposes here, it is important to choose one and stick with it. The IRS assumes you will use the same method year to year, unless otherwise indicated in Line 34.

For a quick explanation of all three, let’s say you sell travel mugs with your design on them. You buy 200 mugs in March for $2 each, 100 mugs in May for $3 each, and 300 mugs in September for $4 each. This leaves you with 600 total mugs. Now let’s say you sold 300 of those mugs.

If you use the FIFO method, you would sell the oldest items first, so the remaining ones are from your September order at $4 each. This would leave your inventory value at $1200. If you use LIFO, you sell the newest items first, so your remaining stock would be the mugs from March and May. Your inventory value would be $700. If you use the weighted average cost, you would add the total original inventory together and divide it by the total inventory amount, and then you would multiply this number by the remaining inventory number. This would value the leftover inventory at $950.

There are positives and negatives to each method, so pick the one that fits your process best. Most common methods by convention sellers are FIFO and weighted average. Once you have decided on a method, apply it to the remaining stock for every single item type that you sell. Then, add all of those totals together for your inventory value. This process is one of the main reasons many businesses have different work procedures around the new year, so they will be able to accurately count their actual inventory.

Once you know your end of year inventory value, write that number in Box 41. Then you will want to subtract that number from Box 40 value, and that will give you the total for Line 42, your Cost of Goods Sold. You have successfully calculated your COGS!

Now that you have this number, use it to find the missing values from Part I (Income) and Part II (Expenses). You should now have your actual Gross Profit, Gross Income, and Net Profit/Loss amounts. We are almost done with this form as well. How do you feel looking at the numbers? If you are still feeling overwhelmed, do not worry. It is a normal reaction and the reason so many people hire other people to do this process for them. Let us move onto an easier section.

PART IV – VEHICLE INFORMATION

This section only needs to be filled out if you claimed vehicle expenses on Line 9 of Part II. If you did not, you can completely skip it. If you are doing actual vehicle expenses and included depreciation Line 13, be sure to also file Form 4562 for this vehicle.

Line 43 asks when you placed the vehicle in service for business purposes. Put that date in the space provided. Do not put the date that it was acquired, unless that is the same day as the starting date.

Line 44 has three sections to enter the total number of miles driven during the year. You will want to add the amounts and write down the separate miles totals for business, commuting, and other. If this vehicle is also used for personal purposes, those miles would go in the Other section. If you work from home, the commuting miles will be zero.

The next few lines are Yes or No check boxes asking if the vehicle was available for personal use. Answer accordingly. For Line 47a and 47b, written documentation can be things like gas station receipts, a miles tracking sheet, GPS data, and anything else that proves this vehicle was actually driven for working purposes.

And just like that, another section complete! We are almost done with the entire Schedule C form. Let’s finish it out now.

PART V – OTHER EXPENSES

Contrary to the other sections, there are not any questions to fill out in this part. Instead one just needs to list expenses that were not covered in the other sections. Not to be a broken record, but as there are very specific circumstances that these expenses must fit in, I do not recommend adding anything to this section that was not recommended to you by a CPA or other tax specialist. Most things in this section will require other forms or explanations, so it is best to leave them to the experts.

And just like that, we have finally finished the Schedule C form! There are so many steps and calculations needed to finish, you should feel proud of yourself for finishing it. If you were preparing this form by yourself, do your best to have a tax professional review it before you submit it. Once everything is good to go, you can find where to send the forms on the IRS website at this link.

After you send your returns, all you have to do is wait. If they are accepted, you did it! If they are sent back to you, fix the problem areas and then send them back. Do not forget to pay if you end up owing money, or hopefully wait for a nice refund to come to you. Once your returns are accepted, save copies for your records. You will need them when you file the next year, and might need them to certify income.

I also recommend celebrating that they are over. It feels good to accomplish a big task for your business, and you do not have to worry about this big hassle again until next year. Rejoice!

MAKING TAXES AND FORMS EASIER

Hopefully this writing has eased the stress of taxes for you at least a little bit. I know I feel less anxious if I at least understand what I am supposed to be doing. Living in the United States, most business laws are written about and cater to large corporations, and that can leave those of us just starting out in a difficult place, especially if one is not formally educated on entrepreneurship. I personally was formally educated, and I still feel overwhelmed at times.

There are several ways we can make this process easier. By reading this writing, you are already doing one – sharing community resources. I want to make as much information as freely available as possible to the art community. A rising tide lifts all boats; we all work best together.

For more specific resources to your own situation, look for local small business associations and groups. Many have free or low cost meetings, workshops, and services aimed at helping their local community. Local taxes often fund these groups, so you are potentially already paying for this service. Try to utilize it! Also remember that local libraries are a great free resource for endless amounts of information and help.

Did you find the amount of information and numbers needed for this topic extremely overwhelming? Bookkeepers are one of the most utilized contract services in the small business world for this reason. If your business is successful enough, you could hire someone to work on your record keeping part-time, or even hire a full-time employee to always have the numbers running smoothly.

If you are not quite that successful yet, or you like to keep all of your records yourself, do not stress out. The next writing in this series, Bookkeeping and Receipts, will have many recommendations and strategies for keeping your information organized and secure. I will also recommend some different record keeping software that many in our industry use. Until that writing, here is a link to a Google Sheets template that I made for Income and Expense calculating: https://docs.google.com/spreadsheets/d/1Zk5kAyjsmwo5tIvbahIJuld7QEgizoYoEn5YEPMhhfs/edit?usp=sharing

Just open the link, make a copy to your own Google Drive, and you have your own modifiable spreadsheet to keep track of your own numbers with. I pulled the income and expense categories directly from the Schedule C form; this way you can easily keep track of which numbers you need to know when income tax time rolls around again.

Thank you so much if you have made it this far in this writing. Knowing that a single person might be helped by this information keeps me working on sharing it freely. Thank you to the Artist Alley Network for being a wonderful community and great resource. As always, thank you to my editor June, without whom I would be totally lost.

See y’all next time!

– Rain

P.S.

Apologies this one took so long to get finished. They take a long time, and I earn nothing from making or posting them. If you would like the next posts made faster, considering leaving me a tip on our Ko-fi page so I can dedicate more time to our blog posts. If you can’t donate, I understand completely, but share this post with someone you think will be interested in the subject. Thanks! ♥