A penny for my tax man's thoughts (which, be warned, are frightening).

I have to assume, based on the size of the bill that my accountant has just sent me, that he intends the good advice he has given me to be shared with about a hundred thousand people. So here goes.

Somebody over at the IRS has finally been introduced to the world wide interweb and noticed that Etsy (and Ebay, of course) is making an awful lot of money off of lots and lots of small, under the radar sellers. Starting January 1st, 2011, Paypal will be calculating income and, by years end, reporting it to the IRS. If you haven't already started reporting your income from Etsy or Ebay on your taxes (I put it in the "other income" category, and print out the years transactions for my own records) Now's the time. It will also be more important than ever to keep track of your expenses and costs of goods sold, because you will need to be able to show what an item cost you to make and what costs went to operating your business so that your actual net (ie, taxable income) can be calculated. Lets say for example that you sell something on Etsy for ten dollars that took five dollars to make. The IRS will see the whole ten dollars, it will be up to you to show them what your actual profit was, and that's the number that gets taxed.

As it stands now, sellers bringing in less than $20,000 don't have much to worry about. But just because Paypal won't be sending your records in to the IRS doesn't mean that they won't be aware of your business presence. Clearly, they are paying attention!

Here's the thing about the IRS, and I'm sorry to get a little scary here. If you make the decision to start a business of any size - making or doing or reselling anything in exchange for money - the responsibility to have a full working knowledge of the laws in your town, your county, your state, and your country falls, in their eyes, completely and unsympathetically on YOU. If you owe them money, they will not forgive that debt in exchange for an explanation, unless they can be proved wrong. They do not care if you are a stay at home mom, a student, or a really nice person who didn't know that they were doing anything wrong. They have the power to take away your house, your car, your credit, and your business.

You can read more about this new law here and here. Paypal has it's own explanation on their blog, but honestly it feels like the article downplays the issue a tad bit. I know, it seems a little overwhelming. You'll be able to figure it, and a system for tracking what you owe, out for yourself without hiring an accountant, I promise. Also, Etsy has a great thread about taxes over here. As much as I wish they would do more to warn their sellers about the pitfalls of unintentional tax evasion (and labor laws that pertain to working at home, and the health risks of knitting fifty scarves a week without workers comp insurance, while they are at it), the truth is that it's not their responsibility as a marketplace to do so. Its up to you to protect yourself, which could be the motto of small business in general, no?