Concerned About Back Taxes from My Etsy Side Hustle – Need Guidance!
I’m reaching out for some advice from anyone who’s navigated a similar situation. Here’s what’s going on:
A few years back, I started creating small, handcrafted felt replicas of people’s pets – think adorable, woolen 3D figures. Initially, it was just a fun hobby for friends and family, but I decided to list a few items on Etsy, and surprisingly, the orders really took off! Now, I have a steady flow of commissions, especially around the holidays, and I even enlisted my cousin to help with packaging and shipping part-time.
However, I’ve run into a significant issue: I completely neglected taxes. Since my full-time job withholds taxes from my paycheck, I treated my Etsy earnings as just extra money, thinking they wouldn’t require any further tax obligations. Now, I’ve received a 1099 from Etsy for the first time, and it’s dawned on me that I might owe a substantial amount. To make matters worse, I never kept track of my expenses – I don’t have receipts for wool, tools, packaging materials, shipping supplies, or anything else I’ve purchased along the way.
Additionally, I never reported any income from the first two years of selling. How serious is this? Am I in trouble with the IRS, and is there a way to resolve this without making the situation worse? I’m feeling really overwhelmed and don’t know where to begin.
TL;DR: My Etsy side hustle has grown unexpectedly, and I’ve neglected tax responsibilities. How can I address this without getting into serious trouble?
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First off, it’s great to hear that your Etsy shop is thriving! It sounds like you’ve turned your passion into a successful venture. Now, let’s tackle your tax concerns step by step.
Don’t Panic: While the situation may seem daunting, many small business owners find themselves in similar predicaments. The IRS often provides options for people who need to catch up on their taxes.
Gather Information: Start gathering any records you do have related to your sales and expenses. Even if you don’t have receipts, try to estimate the levels of expenses you incurred for materials, shipping, packaging, etc. You can often reconstruct your costs based on bank statements or Etsy records.
Calculate Your Income: Use the 1099 from Etsy to determine how much you earned last year. If you sold more than $600 through Etsy, they are required to issue you a 1099 form, which indicates the income reported to the IRS.
Look into Deductions: If you have any business-related expenses (like supplies, shipping, and even a portion of your home if you’re running the business from there), you may be able to deduct these to lower your taxable income. This will help offset the amount you owe.
Reach Out for Help: Consider talking to a tax professional, especially someone experienced with small businesses or Etsy sellers. They can help you navigate the IRS’s expectations and help you set things right without incurring penalties.
File Amended Returns: If you need to report previous years’ income, you may have to file amended tax returns. A tax professional can guide you through this process and help you understand any potential penalties or interest that may apply.
Set Up a Better System Moving Forward: To avoid this situation in the future, consider implementing a tracking system for income and expenses. There are many apps and software designed for small business owners to help with bookkeeping.
Plan for Future Taxes: Going forward, set aside a percentage of your income from your Etsy shop to cover your tax liabilities. This way, you won’t be caught off-guard next time.
Remember, the most important thing is to be proactive about your situation. The IRS offers programs for people who are trying to get back on track, and the sooner you address this, the better off you’ll be. Good luck!
First off, it’s great to see your Etsy side hustle blossoming into something more substantial! While it can be daunting to confront tax responsibilities, it’s important to remember that you’re not alone in this – many small business owners find themselves in similar situations.
To tackle your concerns about back taxes, here are a few steps you can consider:
1. **Gather Documentation**: Start by gathering whatever records you can find. Even if you don’t have receipts, make a list of your expenses (wool, tools, shipping materials, etc.) and estimate their costs as accurately as possible. This can help lower your taxable income when you file.
2. **Consult a Tax Professional**: Considering the nuances of your situation, it would be beneficial to consult with a CPA or tax advisor who has experience with small businesses or freelancers. They can guide you through the process of filing your taxes, addressing any potential penalties, and ensuring you’re compliant moving forward.
3. **File Correctly and On Time**: Even if you’ve missed deadlines in the past, it’s crucial to file your returns as soon as possible. Being proactive can demonstrate good faith to the IRS. If you owe taxes, they may provide options for payment plans.
4. **Learn for the Future**: To avoid this stress in the future, consider setting aside a portion of your earnings from each sale for taxes, and keep better track of your expenses moving forward. Apps designed for small business accounting can help you maintain records easily.
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