When you use crowdfunding to raise money, you might not at first consider all the fees that are deducted. This is, for sure, going to be several pages, and maybe a chapter, in the Crowdfunding book.
Many sites, such as Kickstarter, take 5% of the gross as their cut in running the site and making all the magic happen on the back-end. Credit-card processing takes an average of 3–5% at the sites I’ve surveyed, varying because some cards (like American Express and certain Visa and MasterCard branded cards) charge higher fees for acceptance.
You have to figure you have 10% in processing total off the top when planning.
That 90% that remains gets reported in the United States as 1099-MISC income, which is non-employee compensation. The crowdfunding site reports this income to the IRS, and sends you a form about the end of January.
I am not an accountant (IANAA, as it were), but this is where people may get tripped up.
For the simplest case, in which you’re a sole proprietor, you might owe city tax, state tax, and federal tax, not to mention state and local sales tax.
In Washington state, where I live, both the city of Seattle and the state collect a “business and occupation” (B&O) tax, which is assayed against gross receipts. Whatever shows up on 1099-MISC, I have to pay tax on (0.45% to the city and 2.5% to the state). There are no deductions one can make, although rather small businesses are exempt from paying (but have to file nonetheless).
At a federal level, you get taxed at the marginal rate for your income with the crowdfunding gross adding to whatever income you made for the year. This can push some people from one tax bracket to another, like 15% to 25% or 25% to 28%. You pay the highest tax on the last dollar you earn, as it were, not on every dollar.
(The U.S. uses brackets, which mean you only pay a given rate for the range of income for that bracket. For instance, for a single person or married-filing-separately, after deductions and other adjustments on a 1040 in 2012, the 15% rate applies to $8,700 to $35,350, and 25% rate applies to an adjusted gross income from $35,350 to $85,650. If your adjusted gross income was $30,000 before the crowdfunding project, and that added $10,000 without offsetting business expense for $40,000 total, you’d pay 15% on $5,350 of that and 25% on $4,650.)
The upshot: you have to be sure you can pay the tax on that additional amount added on to your income, at whatever bracket(s) it falls into.
Of course, and here’s where you need to see an accountant or tax preparer, nearly any crowdfunding project will have large associated expenses that will be deductible for a sole proprietor. For my project, I’ll have travel, professional services (graphic design and illustration), book production (printing), and so on.
But I’m trying to raise money in 2012 for a project that won’t complete until 2013. I’ll wind up paying tax on what I receive in 2012 for which I don’t have offset expenses (since the book won’t be printed until next year), and have expenses in 2013 that will offset some of the tax paid this year. (It gets more confusing when, like me, you have to pay quarterly estimated federal taxes, and have to be sure you pay the right amounts on time, too, figuring out what those should be.)
If you plan it right, you’ll make sure you have both your funding and your expenses in the same tax year.
Again, a good reason to talk to a professional.
Finally, the issue of state sales tax. Whatever state(s) in which you’re doing business take a keen interest in collecting sales tax on any purchases made by an end-user (whether consumer or business) and handed over or shipped within a state.
Where crowdfunding fits into that is going to be a bit tricky, no? Because if you have, as I do, a $125 pledge level that gets you a hardcover book, an ebook, acknowledgements in the book, and blog and video access over the next several months as I document the project, what part of that is taxable when I deliver a product in Washington state?
I expect that there is a taxable portion: some sort of fair-market value of the tangible deliverables, like the book, but not the goodwill. The pledge isn’t a sale; it’s closer to a gift with a product attached. I’ll talk to folks who have run large projects to see the advice they got, and will be talking to (and paying) professionals to get answers for the book as well. I’ll likely contact the tax offices in larger states to see if they have a policy that applies.
Given that estimates put worldwide pledges for micropatronage at nearly $3 billion in 2012, I can imagine states will be looking closely at the hundreds of millions of dollars exchanging hands in the United States, some portion of which involves same-state product delivery, and licking their chops.
Bottom line? It’s possible that between fees, local taxes, and estimated payments, you could have only 55% to 65% of the gross amount of funds raised to work with initially, and recover some of that through lower taxes on other income in the following tax year.
I’ll be writing more about this as I investigate the ins and outs.