Help! I am afraid of money!

March 2, 2017 6:53 PM

I recently released a free game on itch.io under pay-what-you-want. Much to my delight and horror, several people have actually opted to pay me for it.

Part of why I made it free in the first place is that I'm highly intimidated by doing taxes for independent income -- I otherwise have a corporate job where that stuff is kind of automated.

I am confronted now with a mysterious wall of Paypal transactions -- payments come in with a Paypal fee pre-removed -- so a $5 payment might arrive as $4.55, and then an additional payment goes out to itch.io for the rev share, cutting it down to $4.05. Right now this is all sort of sitting in Paypal limbo -- none of it has hit my bank account.

What I'm fretting over is this: Will I owe taxes on what was originally given to "me" before these other companies took a cut? Or only on what actually enters my bank account? I would hope/expect I only owe tax on the money I receive, but I don't particularly trust the system to be... fair.

I understand that the tax on self-employment income can be substantial, so I'm worried about unleashing some terrifying scenario where I wind up owing so much in taxes that I would have been better off financially if no one had paid me at all.

Possibly relevant: I am a MD resident, and I don't think I'm dangerously close to changing income tax brackets from a small amount of extra income. My previous tax situation was the extremely simple "enter the contents of your W-2 and complete a Turbotax Wizard" variety.

I am aware of estimated quarterly taxes but am factoring the penalty fee in as something I may have to eat because I really have no way of predicting how much might come in and no reason to expect it to get very high.

I would prefer not to involve an accountant unless I actually make enough extra to pay one (see above worry about nightmare scenario where "making money" puts me into the red).

I am almost certainly overreacting, as the internet is full of Etsy stores and artists taking commissions and all manner of people happily using Paypal to process small amounts of bonus income. But perhaps they're all Playing with Fire and not submitting taxes at all?

I would appreciate if anyone could help inform and possibly reassure me!

posted by space snail to Work & Money (6 answers total)

I do small business taxes as a freelancer every year and it's not a big deal. You can use TurboTax and they hold your hand. You won't owe taxes on money you don't receive (i.e. that goes towards card processors etc.)) and you won't owe more taxes than money you make. The worst part is that the version of TurboTax you need will be more expensive f you want to take business expense deductions (this just allows you to deduct business expenses from your taxable income).
posted by mosschief at 7:00 PM on March 2, 2017 [6 favorites]

I make a nice but not substantial amount of money from Patreon (like 2% of my pretax income from a corporate W2 job) and it didn't affect my taxes to any appreciable degree.
posted by Automocar at 7:07 PM on March 2, 2017

You definitely are overreacting.

You will need to keep some records to be on the up and up. The records will have your gross income, plus expenses, including the fees you pay to Paypal and itch.io. Those business expenses will be deductible, and you will only owe tax on the next income. You are not in danger of mysteriously owing more in taxes than you earned. Estimate about 30% of your net income for taxes on self-employment income, and specifically set it aside in a savings account if it's a significant amount for you.

If this is a relatively small percentage of income compared to your full-time job, there probably won't even be any penalties if you don't pay quarterly taxes. (Check the details, but the federal rule is something like, "as long as you've paid 90% of last year's tax, there's no penalty".)

I do my own small business taxes on TaxAct, and it's super easy.
posted by ktkt at 8:33 PM on March 2, 2017

First off--Awesome! Great job!

I'm not an accountant. I've been self-employed numerous times in my life, as my primary source of income and as a side gig.

First, you should not be taxed on the paypal fees. If nothing else, those are business expenses and would be deducted.

Second, the first year at least, I don't think you should incur penalties. My understanding has always been, if you have covered your previous year's tax burden, you really won't incur penalties. I'm terrible at estimated taxes, and I've never incurred penalties.

Third, I generally just assume 40% of my independent taxes will go away in taxes. This is way high, but the overestimate makes me very happy in the end.

Finally, for tax brackets, you only enter that bracket for the the amount you are over the bracket, not your entire income. Here's a good explanation.

Also, without being totally ridiculous, you should be sure to itemize and deduct any business expenses. I have never created an app or game, but I do a lot of office work at home. I've deducted my cell phone, internet, square footage of my office, software costs, printing costs, etc. To sleep better at night, only deduct what you can provide receipts and justifications for.

I am a total rule follower. Taxes terrify me. I've managed it by overestimating in my head where I'll be at the end of the year and not stretching my deductions. I also use TurboTax. I've used professional CPAs too. You can get one for like $250 to help you. I just find that I go in with a spreadsheet and everything already figured out, so not necessary.
posted by fyrebelley at 8:34 PM on March 2, 2017 [1 favorite]

I'm worried about unleashing some terrifying scenario where I wind up owing so much in taxes that I would have been better off financially if no one had paid me at all.

This can never happen. You will owe ~16% self employment taxes plus whatever your federal tax bracket it plus whatever your state tax bracket is, but that will not be greater than 100%. If you're lucky to make more than ~$120K taxable income at your day job, your self employment tax will actually be quite low, as only that portion is subject to SSI.

If you will owe $1,000 or more in taxes from your software, you do need to make estimated tax payments or increase your tax payment from your day job.

Paypal will issue a 1099 and it's pretty painless to drop it into most tax software.
posted by Candleman at 8:40 PM on March 2, 2017 [3 favorites]

This is why I pay an accountant to do my taxes. His fee is also a deduction.
posted by Obscure Reference at 4:08 AM on March 3, 2017 [1 favorite]