Co-owned Etsy shop... how to prepare taxes?

[Anonymous]

Let's say there are two people, John and Joe, that want to run an Etsy shop together. They plan to be perfectly equal co-owners in that each of them will pay 50% of the expenses, earn 50% of the revenue, etc. The question is, when do they have to start filing taxes and how do they file it?

When do they have to file taxes? Etsy issues a 1099-K form to shops that reach $600 in sales, so does that mean John and Joe don't need to file taxes unless they receive a 1099-K form? 

How do they file taxes? Several questions around this:

• Do they need to set up an LLC for their partnership? The main concern here is that an LLC requires an annual $800 fee, which most likely exceeds the net earnings from running the shop. So it wouldn't make sense financially.
• If no LLC, how should they report taxes? Is there a way to split up the 1099-K form such that both John and Joe pay half the taxes? Or should all shop earnings be reported under one person, only to have the tax payment split on their own? Any advice on dealing with taxes in a partnership would be much appreciated!

[Mike9241]

you need to file a partnership return for the year business begins (usually when you open for business) and each year thereafter. form 1065.  an LLC is not required. it's set up for the purpose of hopefully limiting the liability of its members.  You would need Turbotax for Business to file the return. it's only available for Windows computers and currently costs $150. state would be extra.

form 1065 is due by the 15th day of the third month of the year.  penalties for failure to file are steep.  about $200 per month per partner or member with an annual maximum of about $2400 per partner/member.

[Anonymous]

Thank you for your response! So if I understand correctly, John and Joe together need to file one 1065 form for their partnership. Then does it matter whom Etsy assigns a 1099-K to? For instance, if John receives the 1099-K, does he need to do anything about it besides filing the 1065 with Joe?

[Critter-3]

The K-1 needs to be issued in the name and EIN number of the partnership ... if you have one in the name of one of the partners  please seek local professional assistance to get this issue handled correctly to avoid IRS letters later.  

[Anonymous]

Ah thank you for the clarification! The 1099-K should also be issued in the name and EIN of the partnership, right?

[Critter-3]

Always.   Please get some education on your situation.  Ignorance of the rules are costly with the IRS. 

[Opus 17]

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@Anonymous wrote:

Ah thank you for the clarification! The 1099-K should also be issued in the name and EIN of the partnership, right?

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The IRS does not have special rules for LLCs since they are creations of state law.  You might or might not want to make an LLC for other reasons, the IRS doesn't care.

Unless you elect to be taxed as an S-corporation**, you are a partnership.  The partnership needs an EIN (this will be linked to the SSN of the person who applies for it as the responsible person, but it will belong to the partnership) and all partnership business should be carried out with the EIN.  

**This is a complex decision and requires substantial legal and financial advice before taking that step.

When the partnership files it's form 1065 tax return, it will generate a K-1 statement for each partner that the partner will include as part of their regular personal tax return.  The K-1 passes income and expenses to the partners.  The amount of cash you "draw" is not necessarily your income.  If the partnership nets $5000 profit after expenses, each partner may be taxed on $2500, even if you draw differently.  For this and other reasons, you should have some kind of partnership agreement in writing—what is the ownership percentage, the responsibilities of the partners, and so on.  You may want professional help to set up the partnership finances in the first year, even if you carry on with your own taxes and accounting from there.