Question: I want to start my own small business selling crafts. What (US) tax forms do I need to file?
Congratulations on living the American dream of being your own boss! Since you mentioned you are the only owner, your business will be a sole proprietorship. In the US, the owner of a sole proprietorship is considered self-employed and you will pay two types of taxes: income tax and self-employment tax. Self-employment tax is the same as Social Security and Medicare tax for self-employed people.
You will report all your income and expenses on an IRS form called Schedule C Profit or Loss from Business, which is part of the Form 1040. You should file your own tax return, separate from your parents. They can still claim you as a dependent on their tax return even though you file a separate return.
You will also fill out Schedule SE to calculate the self-employment taxes owned. The self-employment tax is 15.3% of your net income (profit). Many teens that own small businesses find that they may not owe federal income tax, but do owe self-employment tax. The threshold to start paying self- employment tax is $400 of net income (profit). So if you made over $400 in profit from a micro business, you need to fill out a Schedule SE and pay self-employment tax.
Keep good records of everything you earn and everything you spend in your business. This can help reduce your taxes. It is a good idea to talk to an accountant when you start your business. He or she will also be able to help you with issues like sales tax. My book Money and Taxes in a Micro Business covers taxes for business owners.
Visit my website MicroBusinessForTeens.com to learn more about starting and running a micro business.
Carol Topp, CPA. is the author of the Micro Business for Teens series and operate an accounting practice (a micro business!) that specializes in tax preparation, small/micro business start-ups, and nonprofit accounting.