It may come as a surprise that taxes are marginally easier than death when you’re a creative individual. While the latter requires explicit and detailed instructions on what to do upon your passing, the former is something you can control and often doesn’t involve more than a few extra forms when you’re filling out taxes for the year. Still, if you are selling anything that you created, the government will want a cut of that income. The one thing to be careful of here is that often this endeavor is considered a “hobby” instead of a business. If you want this extra income to be a business, it needs to be making a profit on an annual basis for many years. Consider how much you spend on stocking your inventory of products, advertising, and the variety of other costs that contribute to your creativity before determining if you’re even in the black when it comes to your business (which will require a Schedule C and adds extra scrutiny to your taxes).
If you exclusively stick to online selling through retailers like Amazon, Smashwords, or Lulu, there’s nothing more you need to do than to include the 1099-MISC forms from these platforms in the annual filing of your federal taxes. These royalties are considered income as long as you made more than $10 in the last year. Be sure to check in the Taxes sections of the websites you use to distribute your work to ensure you have collected all the 1099-MISC forms you need. Additionally, if you have an agreement to sell your creative works in a brick-and-mortar location, they should send you a 1099 as well.
Selling physical copies directly is…complicated
So far, taxes for selling your creative works exclusively online is simple. Things get a bit more complicated once you start to sell physical products. If you’re regularly selling in the town where you live (like at a farmer’s market, for example), you’ll likely want to get a local sales license to do so. This license lets the town know that you’re selling something that needs taxes remitted to them on a regular basis. Similarly, if you are selling at events (like conventions), you’ll need to be sure to have special event tax licenses as well. None of these licenses are particularly expensive, but you should consider including them in your costs if you’re trying to make a business out of selling your work.
Here’s an example from my own experience. I have a sales license for the town where I live, and I also obtained a special event license from my state to collect taxes for a Comic-Con that happened during the summer. Do these things before the event. After the event, I add up all the sales I made and apply the local and state tax rates to these sales. Using the online portals for the local and state revenue departments, I declare how much I sold at the event, then I pay the taxes for the event (which is often calculated for you—but you should keep track of these numbers yourself to make sure they match). If I happened to have several events in the state, I can also wait and submit my taxes for these events on a quarterly or annual basis instead (be sure to check your specific town’s and state’s requirements). The important thing here is to keep track of what you’ve sold and when so you know what to submit to your local and state tax authorities. This total will also come in handy when you file this extra income for your annual federal taxes as well.
Cut into profits, or charge the customer?
The best way to consider taxes when you’re selling your creative wares is that it’s a fee you should account for with every sale. Just like how Square or PayPal charges a fee on each credit card transaction you make with them, taxes may cut into your profits. Depending on the markup of what you’re selling, you can probably absorb these small percentages in the overall price of the item to keep it consistent with any online marketplaces where you might be selling the same thing. Alternatively, you can add these taxes and fees onto the price of the product and have the customer pay this sales tax directly.
When I’m selling at conventions, I generally use a flat, even number price for people paying with cash. I still have to pay taxes on that sale, even if I didn’t charge the customer for that tax. Generally, I find it easier not to have to deal with coin-based change and stick with only whole dollar amounts when people pay with cash. However, if customers want to pay with a credit card, I add the taxes on top of the base price so that the taxes are covered in the sale. This is easy to set up in Square and PayPal and is done automatically when these services calculate the total cost of the sale (just make sure that the state and local taxes are included in the overall tax rate for the location where you’re selling). I could add the credit card processing fee to the base price as well, but I’ve decided just to let that small amount come out of the profits of each sale.
Taxes don’t cost that much
While you might make hundreds of dollars selling your creative products in a year, taxes might only account for a few dozen dollars that you’ll have to pay to the government. I know that monetizing a hobby is often an endeavor with razor-thin profit margins—if you even manage to pull yourself out of the red—but you really shouldn’t ignore paying taxes on it. In this digital age, it’s actually quite simple to calculate and pay taxes. It doesn’t take more than a few minutes to do, and it doesn’t cost as much as you think it might. After all, taxes are inevitable when you sell anything you’ve created.
How much do you charge for your work?
Should you adjust the price of your product to account for taxes?
Do you know what the state and local tax rates are for your location?