When you have a job, you have to file your income tax return, and your employer also has to file a return with the government (Revenue Canada or the IRS) telling them that they paid you. The government can then match up what your employer reported as your income compared to what you reported as your income. The difference when you are self -employed is that you are reporting your own income and the government doesn’t have anything to match it up with. With self-employment there are a lot of opportunities to “fudge” your income, declaring less than you actually made, thereby paying less income tax. After all, if you sell your crafty work for cash who’s going to tell the government? For many small crafters the online world is just like this. You sell 10 items in a year on etsy, for a total of $250, why bother declaring it?
While this attitude is common it is a thought process than can land you in a lot of trouble. Getting into trouble with your tax department (Rev Can or the IRS) is not a good place to be.
There are approximately 400,000 registered sellers on Etsy.com. Let’s say that each one sells $10 in a year. That’s $4,000,000 (yes, 4 MILLION dollars) in sales. Ebay.com has sales 10 times greater than Etsy.com. Someone in the government has clued into the fact that there is a lot of money being made online and they would like their share of it. While many online sellers dutifully report their online income there are many who do not, either because they don’t understand that they have to, or because they figure that no one will know. Well. As of January 1, 2011 Paypal will be reporting income of any user (from any online source) who has sales of over $20,000 or 200 transactions to the IRS. So far they are not reporting to Revenue Canada. While they do not report sellers with income less than $20,000 they do have all your sales records. Revenue Canada and the IRS can request your sales income from Paypal if they suspect that you are not declaring your income.
If you make the decision to start a business of any size - making or doing or reselling anything in exchange for money - the responsibility to have a full working knowledge of the laws in your town, your county, your state, and your country falls, in their eyes, completely on YOU. You do not have to be registered as a business to still count as a business, simply selling anything puts you into the business category. If you earn income, you owe income tax on that money. If you owe them money, they will not forgive that debt in exchange for an explanation, unless they can be proved wrong. They do not care if you are a stay at home mom, a student, or a really nice person who didn't know that they were doing anything wrong.
If you haven't already started reporting your income from Etsy or Ebay on your taxes this would be a good time to start. It will also be more important than ever to keep track of your expenses and costs of goods sold, because you will need to be able to show what an item cost you to make and what costs went to operating your business so that your actual net (ie, taxable income) can be calculated.
As always there’s a disclaimer to this piece of advice. The words you read here are just that – advice. I cannot tell you exactly how to run your business. If you want someone to tell you what to do every step of the way then stay with a regular job and listen to your boss. When you make the decision to sell your work, you are making yourself the boss. As the boss it is your role to read as much advice as you can, ask questions, learn your responsibilities and then make your own decisions. This is your company, only you live with your decisions. Make them wisely.
Next week I’ll begin a series on the joys of record keeping! Yippeeee!!!