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First off, I'm located in Massachuesettes.

Back in July, I launched a clothing company where I was selling shirts with my designs on them, through a big cartel shop. The brand took off faster than I expected and am looking at a positive income after each item release, my original plan was to just do this for fun and then file as an LLC come next tax season.

I've done 3 releases since July netting me over $600 in profit alone (after reimbursing my personal fund, paying shipping, etc). How would I prepare to file for this, would it need to be reported at all?

I've heard in Mass that as long as you don't go past $2k additionally in a year, they won't even look into it. I don't want to disregard this money then end up getting audited down the line. I kept a list of my expenses, shipping charges, and profits. As well as probably being able to pull even more info from Big Cartel, Shippo and Stripe.

Am I going to incur extra fees and/or fines, since I waited to file for an LLC? Last year I did my taxes through TurboTax and filed with $2k gained in freelance design, but I was also able to provide a 1099 form.

Any thoughts or ideas on what I need to do to prepare for tax season is greatly appreciated!

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As a new (very!) small business, the IRS has lots of advice and information for you. Start at https://www.irs.gov/businesses/small-businesses-self-employed and be sure you have several pots of coffee or other appropriate aid against somnolence.

By default a single-member LLC is 'disregarded' for tax purposes (at least for Federal, and generally states follow Federal although I don't know Mass. specifically), although it does have other effects. If you go this route you simply include the business income and expenses on Schedule C as part of your individual return on 1040, and the net SE income is included along with your other income (if any) in computing your tax. TurboTax or similar software should handle this for you, although you may need a premium version that costs a little more.

You can 'elect' to have the LLC taxed as a corporation by filing form 8832, see https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc . In principle you are supposed to do this when the entity is 'formed', but in practice AIUI if you do it by the end of the year they won't care at all, and if you do it after the end of the year but before or with your first affected return you qualify for automatic 'relief'. However, deciding how to divide the business income/profits into 'reasonable pay' to yourself versus 'dividends' is more complicated, and filling out corporation tax returns in addition to your individual return (which is still required) is more work, in addition to the work and cost of filing and reporting the LLC itself to your state of choice. Unless/until you make something like $50k-100k a year this probably isn't worth it.

1099 Reporting. Stripe qualifies as a 'payment network' and under a recent law payment networks must annually report to IRS (and copy to you) on form 1099-K if your account exceeds certain thresholds; see https://support.stripe.com/questions/will-i-receive-a-1099-k-and-what-do-i-do-with-it . Note you are still legally required to report and pay tax on your SE income even if you aren't covered by 1099-K (or other) reporting.

Self-employment tax. As a self-employed person (if the LLC is disregarded) you have to pay 'SE' tax that is effectively equivalent to the 'FICA' taxes that would be paid by your employer and you as an employee combined. This is 12.4% for Social Security unless/until your total earned income exceeds a cap (for 2017 $127,200, adjusted yearly for inflation), and 2.9% for Medicare with no limit (plus 'Additional Medicare' tax if you exceed a higher threshold and it isn't 'repealed and replaced'). If the LLC elects corporation status it has to pay you reasonable wages for your services, and withhold+pay FICA on those wages like any other employer.

Estimated payments. You are required to pay most of your individual income tax, and SE tax if applicable, during the year (generally 90% of your tax or your tax minus $1,000 whichever is less). Most wage-earners don't notice this because it happens automatically through payroll withholding, but as self-employed you are responsible for making sufficient and timely estimated payments, and will owe a penalty if you don't. However, since this is your first year you may have a 'safe harbor'; if you also have income from an employer (reported on W-2, with withholding) and that withholding is sufficent to pay last year's tax, then you are exempt from the 'underpayment' penalty for this year.

If you elect corporation status then the corporation (which is really just you) must always make timely payments of withheld amounts, according to one of several different schedules that may apply depending on the amounts; I believe it also must make estimated payments for its own liability, if any, but I'm not familiar with that part.

  • Wow, that was really thorough! I appreciate all of the resources. I guess I'll follow the stuff so that my stripe/big cartel stuff is taken care of, then just worry about income in general. I don't think the profits from this will be bumping me into a new tax bracket either. – knocked loose Sep 17 '17 at 2:06

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