How Much Can You Make Selling Crafts Before Paying Taxes?

Many individuals discover a passion for creating and selling crafts, often starting as a personal hobby. Any income generated from selling crafts is considered taxable by the Internal Revenue Service (IRS). This applies whether you view your activity as a full-fledged business or simply a way to cover material costs. All income from craft sales, regardless of amount or frequency, may be subject to tax reporting requirements. Both hobby and business income can lead to a tax liability, making it important to understand how to report your earnings.

Income Reporting Thresholds

The amount of income you earn from selling crafts directly influences your tax reporting obligations. The $400 net earnings threshold for self-employment tax is a primary consideration. If your net earnings from your craft activity reach or exceed this amount, you are required to pay self-employment taxes, which cover Social Security and Medicare contributions. Net earnings are determined by subtracting your allowable business expenses from your gross income.

Even if your net earnings fall below the $400 threshold for self-employment tax, you may still need to file a federal income tax return. Filing thresholds for individuals vary based on factors like filing status and age. If your total gross income from all sources, including craft sales, exceeds the standard deduction for your filing status, you must file.

Another reporting consideration is the $600 threshold for receiving a Form 1099-NEC, Nonemployee Compensation. If a single payer, such as an online marketplace or a craft fair organizer, pays you $600 or more for your craft sales or services during the year, they are required to issue you this form. Receiving a 1099-NEC does not change your tax obligation; all income is reportable. You are responsible for accurately reporting all income you earn, regardless of whether you receive a 1099-NEC, provided it meets the relevant filing thresholds.

Calculating Your Taxable Income

Determining your taxable income from craft sales begins with identifying all your gross receipts. Gross income includes all revenue from your craft activities, such as direct sales, online marketplace sales, custom orders, and shipping fees collected from customers. Any money received for your products or services, before deducting costs, contributes to your gross income.

The Cost of Goods Sold (COGS) is a key deduction for craft sellers, representing the direct costs of producing items. COGS includes raw materials directly incorporated into your crafts, like yarn or clay. It can also include direct labor costs if you pay someone to assist in creating items. To calculate COGS, start with your beginning inventory, add purchases made during the year, and subtract your ending inventory.

Many other ordinary and necessary business expenses can reduce your taxable income. These are costs incurred to operate your craft business. Examples include:
Marketing and advertising fees, such as website hosting or social media ads.
Booth fees for craft fairs.
Shipping costs for packaging materials and postage.
Bank fees related to your business accounts.

If you use a dedicated space in your home solely and regularly for your craft business, you might qualify for the home office deduction. This allows you to claim a portion of home expenses, like utilities, insurance, and depreciation, based on the percentage of your home used for business. Costs for professional development, such as online courses that enhance your craft techniques or business management skills, are deductible.

Meticulous record-keeping is paramount for all these calculations. Retaining receipts, sales logs, and expense trackers provides the necessary documentation to support your income and expense figures, which is essential for accurate tax reporting and in case of an IRS inquiry.

Reporting Your Craft Business Income

After calculating your gross income, Cost of Goods Sold, and other allowable business expenses, you report these figures to the IRS. Most craft sellers operate as sole proprietors, which means they report their business income and expenses on Schedule C, Profit or Loss From Business (Sole Proprietorship), a component of their personal tax return. This form is specifically designed for reporting income and deductions from a business you own and operate.

On Schedule C, you enter your gross receipts from sales and report your Cost of Goods Sold separately. Your business expenses, such as advertising, office expenses, and supplies, are itemized. The form then calculates your net profit or loss by subtracting total deductions, including COGS, from your gross income.

The net profit or loss from Schedule C is carried over to your personal income tax return, Form 1040, U.S. Individual Income Tax Return. This net figure combines with any other income sources, like wages or dividends, to determine your total adjusted gross income.

As a self-employed individual, you are responsible for paying estimated taxes throughout the year, rather than having taxes withheld from a paycheck. This is because there is no employer to withhold taxes on your behalf. These estimated tax payments, typically made quarterly, cover your income tax and self-employment tax obligations. The payments are usually due on April 15, June 15, September 15, and January 15 of the following year, though these dates can shift if they fall on a weekend or holiday.

Understanding Self-Employment Tax

Beyond regular income tax, individuals earning income from craft sales are subject to self-employment tax. This tax represents your contribution to Social Security and Medicare, serving as the self-employed equivalent of the FICA taxes withheld from an employee’s paycheck. It ensures that self-employed individuals contribute to these federal programs, providing benefits in retirement, disability, and healthcare.

Individuals with net earnings from self-employment of $400 or more must pay self-employment tax. Self-employment tax is calculated on 92.35% of your net earnings from self-employment, as determined on Schedule C. This percentage accounts for a deduction of one-half of your self-employment tax that you will later claim.

To calculate and report your self-employment tax, you will use Schedule SE (Form 1040), Self-Employment Tax. The net profit figure from your Schedule C is transferred to Schedule SE, where the tax is computed.

An important benefit for self-employed individuals is the deduction for one-half of your self-employment tax. This deduction is taken on your Form 1040 and helps to reduce your adjusted gross income. This means that while you pay both the employer and employee portions of Social Security and Medicare taxes, you can deduct a portion of what you pay, slightly mitigating the overall tax burden.