It's Official! I'm On the Grid
Ok, like I wrote before, I decided to go "on the grid" with my business, meaning that I decided to declare to Uncle Sam my income from my knitting/crocheting business.
I was already partially on the grid because I have a partner who had always declared all the income in the past. But in the past we had one business account and every time I made a sale I had to go through her to get my money. I got tired of doing it that way so I set things up so that my sales went into my own account. Most of you are probably on your own so this info wouldn't apply to you.
The thing to think about, and why I decided to get "on the grid" for 2013, was the fact that I was already "on the grid" and just didn't realize it. For example, I had been using Intuit Gopayment and Squareup mobile credit card devices to process my sales. The fact that the government knew about this was brought home when I received a document with my total sales stating that the government would receive a copy of the report. In addition, I was on Etsy and several other online stores. Etsy in particular just takes one look to know when the person opened the store and how many sales they made. The others don't have this info front and center, but I don't doubt that the sites wouldn't happily give the info to the government if asked. I think that many, many crafters and sellers do things "under the table", and once upon a time you probably could. But in today's electronic world...
Also, there's the "they-ain't-thinking-about-me-'cause-I-don't-make-enough" thing. I learned about that the hard way when my parents business got audited. Now mind you, my parent's store made WAY, WAY more than what I make. But I had it in my mind that the government only took the time to investigate big stores like Macy's. My accountant friends set that thinking straight by letting me know that 85% of all business is small business, so it's worthwhile to go after the little guy. There's so many more of us and we actually comprise most of the nation's income. In addition, it's often harder to go after the big boys because they have all kinds of fancy lawyers and accountants in place to find them the right loopholes and represent them should they get audited.
So, I was really happy when Camara got her accountant, Linda Tiller, to speak to the Handmade Collective. I knew I didn't want to do any more than necessary (e.g. filing for my LLC), and she confirmed that it was best to wait until bigger and more steady money comes in because you would then have to do things and pay all kinds of fees even if you made nothing that year. My own personal accountant confirmed this. That just left me functioning as a sole proprietorship. Linda Tiller had suggested that if you had made $600 - $700 or more, you needed to report your income. So that's what i set out to do.
When I got to my accountant, she repeated what Linda Tiller had said, namely that the government goes kind of easy on a business that can show a loss for the first 5 years. So I had to now produce records for my business, records that I did not really have organized since I had not planned on declaring my income until it was already 2014.
Lucky for me, most of my expenses were online or on a credit card, so I got my bank statements for all my credit cards for the last year. Also lucky for me, most of my supplies come from the craft store, so it was easy to identify from my banking statements what my supply expenses were. By doing it this way, I realize that I wasn't catching all my expenses, since there were times when I went to the craft store with cash. But I'd rather die than dig in that big ol'bag of receipts I had. Not to mention I had gone on a cleaning jag once and shredded a lot of the receipts, especially the cash ones. But oh well, I spent so doggoned much it didn't matter. For this year, I am creating folders for supplies, vending expenses, etc., and I have a separate credit card that I got from Paypal to use for the supplies.
Next, I went online and downloaded CSV reports from Paypal and Etsy. The right thing to do would have been to have separate Paypal and Etsy accounts for personal and business, and because I have a partner, those things were set up. But I'd gotten sloppy since then, so I had to go through with a highlighter to differentiate between personal expenditures and business ones. As of this year, I'm doing a much better job of keeping things separate.
Long story short, I ended up getting only a few dollars back from the government, and owing the state hundreds of dollars. However my accountant worked with me, and I just went back and found more expenses (e.g. i had used my personal paypal to buy supplies and had forgotten about it). So when I finished, the federal was giving me back hundreds of dollars and I only owed the state $50.
The accountant did not ask for the receipts for these things. She just asked for the figures. But I made sure that I could account for every penny that I declared should I get audited. Also, I made sure everything with a "paper trail" was accounted for (e.g. credit card sales, online store store activity). What you do with your cash sales is up to you.
At no time did I have to fill a separate form or do anything declaring myself a sole proprietorship, or at least not to my knowledge I didn't. I simply had my accountant declare my income.
Now a couple of things. I used my savings from my IRA to live on. There are penalties that go with that, which is why I ended up owing. If you don't have a situation like that, you probably won't have to pay anything. Another thing is that I live in New York, the land of high expenses and bullshit. Therefore, your fees and things for everything from declaring a LLC to the taxes you have to pay will probably be less in most places. In other words, it really wasn't too painful. My fee to the accountant was $300, about $100 or so more than it would have been had I not mixed business in with the personal. My brother's fee for his LLC is about $800 so doing the sole proprietorship is cheaper by far than the LLC is, and since I probably won't be using savings with a penalty for next year, I expect to make out even better.
The last thing is that my accountant is getting me a sales tax ID. In New York, getting a permanent vendors license is damned near impossible if you are not a vet. You have to get a temporary one and pay about $10 per month plus fees for the months you might possibly be vending. Many of the biggest festivals require them, and you need to have your tax ID# to get one. Plus, both Linda Tiller and my own accountant said that it's best to have this number because without it, you'll be using your social security number all over the place which is not good. I'm using my social security number in one of my online stores right now.
I wrote this stuff out so that each one of us will consider if we need to go "on the grid" or not, and would know what to expect should we decide to go the sole proprietorship route. At some point, I plan to get my LLC, but probably not for a long while. I'll definitely report the process when I do.