This blog was posted in March 2017.
Tax season causes a wide range of emotions. For some it may mean a hefty return and much rejoicing. If that’s you, we’ll all pretend to be very happy for you. For others, just thinking about taxes causes distress. If that’s you, don’t fret! You’re not alone. Taxes are confusing and scary, right? But maybe they don’t have to be. Let’s take a few minutes to break down some of the basics.
At TpT, we want to make sure you’re equipped with the resources and knowledge you need to understand your tax reporting needs as a TpT Teacher-Author, or at least be able to ask the right questions. Below we explore the top 5 questions you may be thinking about.
As always, the information provided here should not be interpreted as legal or tax advice. TpT isn’t able to provide specific tax or legal guidance and everyone’s tax situation is different. We strongly encourage you to work with a tax professional near you for advice on how to report your TpT sales and other income.
1. Do I have to pay taxes on what I make on TpT?
If you’re like many Teacher-Authors, you most likely opened your TpT store to share resources you’d been making for your own students for years and wanted to see if you could turn that into some extra income. Some of you see your TpT store as your true calling and have made it your career, others of you are just getting started or may see your TpT store as a fun side-gig, and still others may be somewhere in between. No matter where you land on this spectrum, and whether or not you consider your TpT store a business, to the IRS your TpT sales are income and should be reported on your tax return.
The IRS does make a distinction between “businesses” and “hobbies,” but income from both activities is taxable, and it’s not necessarily advantageous to be classified as a “hobby.” If you’re not sure where you fall (or which classification is most advantageous for you), this is something you should discuss with a tax professional. Here’s some guidance from the IRS.
Bottom line? Regardless of how much or how little you sell, and whether you consider your TpT store a business or a hobby, your TpT income should be reported on your tax return.
2. Will I get a tax form from TpT?
You might. TpT does issue a tax form called a 1099-K to TpT Teacher-Authors who meet very specific criteria outlined by the IRS. TpT doesn’t issue any other tax forms. You’re your own boss and business on TpT so you won’t get a W2 form like the one you get from your employer. You also won’t get a 1099-MISC or other official income statements.
Ok, so what’s a 1099-K and when will you get one? A 1099-K form is an informational tax form that online marketplaces like TpT (who facilitate sales between Buyers and Sellers) have to issue for each Seller who has had gross sales of more than $20,000 and more than 200 transactions in a particular year. Both of these thresholds need to be met. This means,
- Teacher-Authors who sold 201 or more resources in 2016 but had gross sales of $20,000.00 or less will not get a 1099-K this year.
- Teacher-Authors who had $20,000.01 or more in gross sales in 2016 but only sold 200 or fewer resources will not get a 1099-K.
- Teacher-Authors who have had all-time sales of $20,000.01 or more and 201 resources or more, may not get a 1099-K. The IRS threshold is based on the activity of a single year.
If you do get a 1099-K form, you’ll notice that it reports the total number of sales you had and the total dollar amount of those sales. This means that a 1099-K reports on gross sales rather than your net earnings. No, this does not mean that you’re going to have to pay taxes on this total. That wouldn’t be fair, and thankfully the IRS knows that.
Remember, a 1099-K is just informational. Unlike a W2 or 1099-MISC which have to be filed with your taxes, the IRS uses 1099-K forms just to get a sense of how much business you did and that your tax return accounts for your business income. While your gross sales are a good place to start, you can take deductions in order to winnow that down to your “net” or taxable income. You’ll want to work with your tax professional to determine what expenses (like TpT’s commission) and other deductions you can claim to find your taxable income.
3. What does it mean to be self employed or a sole proprietor? Am I one?
A sole proprietorship is what a business is called when it’s owned by one person and isn’t registered as a formal entity like a limited liability company (LLC) or corporation. It’s the simplest form for a business and doesn’t require formal registration to set up. In most cases, TpT Teacher-Authors are sole proprietors — whether they know it or not!
As a sole proprietor, the income you make (by selling on TpT for example) is called self-employment income and gets reported using two different schedules on your personal tax return — Schedule C and Schedule SE. Schedule C (or C-EZ) is used to report your income (sales) and expenses such as advertising, fees and commissions, and supplies. Fill out Schedule C or C-EZ to find your net “business” income. You’ll enter that amount on Schedule SE to find out what you need to report for self-employment tax. Self-employment tax also takes care of your required contributions to Social Security and Medicare (the same way your employer makes these withholdings from your paychecks).
4. I’ve heard businesses can deduct expenses. Does that apply to me?
They sure can, and so can you! Whether you’re a grand operation with hundreds of employees, a mom n’ pop store, or a sole proprietorship, businesses of all sizes and shapes are able to deduct ordinary and necessary expenses from their business income. Deducting expenses lowers the business’ taxable income which reduces the amount of tax your business owes. Great, right? What’s the catch? Ordinary and necessary means your deductible expenses have be related to your business efforts and have to be reasonably necessary or helpful to running your business — so no, your gym membership doesn’t count, and neither does your dog groomer, or that new living room set you just bought (unless it’s in your home office, then maybe).
Deductible business expenses are the costs that you incur to run your business and include things like supplies and equipment (like your computer or software programs), fees and commissions that you pay for services (like TpT commissions and PayPal transaction fees), advertising expenses (like TpT promos, Facebook ads or a business page, Pinterest, and GoogleAds), rent (if you lease an office space), professional fees (like lawyers and accountants) and so on. Expenses are reported when you fill out Schedule C or C-EZ and reduce your gross income. You can find more information and resources from the IRS here.
Knowing what costs you can deduct as expenses and how to report them accurately is super important. This stuff can get tricky and the rules aren’t always intuitive or easy to follow. This is another area where you may want to work with a tax professional.
5. Quarterly tax payments — what are they and do I need to pay them?
Quarterly tax payments are estimated payments that some folks have to make throughout the year when the income they are receiving isn’t subject to tax withholding. Woah, that was a bit of a jargony mouthful, so let’s break that down a little bit.
Quarterly estimated tax payments, like paycheck withholdings, are a way for the IRS to make sure that you don’t get strapped with an unwieldy tax bill that you aren’t able to pay. Folks receiving self-employment income (like many TpT’ers) have to make estimated tax payments if they expect to owe more than $1000 in taxes on that income when they file their return. This isn’t optional, but is something you have to do if you meet the criteria. The IRS does apply penalties if you don’t make these payments, so it’s super important to be aware of this rule and work with your tax professional to determine if it applies to you.
Estimated tax payments are due four times during the year — in April, June, September, and January. You can find more information and resources from the IRS here.
Phew, there’s a lot of meaty information here!
Feeling any better? I hope so. You may never be a tax expert (as if you’re not already busy enough, right?), but being aware of these things is important. Sometimes just knowing the right questions to ask goes a long way. If it makes sense for you financially, consider engaging the services of an accountant or other tax professional to help you work through this stuff — and hey, you can probably deduct their fees as a business expense!
We take a deeper dive into what it means to be a small business owner over on TpT U and are always updating and adding important information. Take a look and let us know what else you’d be interested in learning by filling out the survey at the bottom of the page.