Pay Caesar His Due

Sorting out the taxing dilemma of paying taxes on crowdfunding campaigns at Kickstarter and beyond.

The Magazine
The Magazine on Medium
18 min readFeb 17, 2014

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By Glenn Fleishman, editor and publisher, The Magazine

Disclaimer: I am not an accountant, and my advice about what to look out for should not constitute legal or tax advice. Consult a professional after learning the kinds of questions you should ask before and after a crowdfunding project.

I almost had a cash flow and tax disaster slam together after a 2014 Kickstarter campaign ended. I thought I had crossed all the t’s in tax and dotted the i’s in income before I started — and I missed a few crucial planning steps. I’m here to share what I learned from a successful campaign and how I’ve avoided running into the same averted car crash in the years since.

Note: This article was updated in early 2022 to reflect changes since I originally published it in 2014.

Budgetary bungles

Rewards-based crowdfunding has collected several billion dollars on behalf of creators since Kickstarter’s launch in 2009. Much attention is paid to blockbuster campaigns that rake in $100,000 or more, but about half the revenue comes from the projects that collect $100s to the low $10,000s. Kickstarter tracks that over 200,000 campaigns raise under $100,000 (as of 14 Februry 2022); only 9,252 have raised $100,000 or more and only 620 over $1 million.

Many people who launch a crowdfunding campaign have brought in business revenue before—or at least not on the scale of what the project raises. This means they may not have previously consulted an accountant and may have little or no idea about the issues involved.

I’ve run two businesses that grossed millions dollars across the short period I owned them, and have raised nearly $200,000 across several Kickstarter campaigns dating back a decade. I’ve also been involved on the tax and revenue periphery of some much larger firms, so I thought I was prepared.

When I put together the budget in 2014 for the Kickstarter campaign to produce a book from the first year of The Magazine’s articles, I thought I had accounted for everything. I negotiated fees with the designers, received estimates from printers, set reprint fees with contributors, calculated domestic and international shipping costs, and contracted a cover artist. My production budget turned out very accurately in the end.

And I had, of course, considered tax — I just hadn’t considered it well enough. The project was designed to break even. Any profit flowed into funding software and site development for The Magazine, so it would be a wash, too. We’d have some extra hardcover books and the ebook left to sell afterwards, which would help to continue to support operations. (I paid myself a wage running the publication, but didn’t separately try to pull a wage from the Kickstarter campaign.)

Technical tax aside: The Magazine was owned by my single-member LLC, Aperiodical LLC, and all profit above expenses, even if I leave all the cash in the business accounts, flows through to my personal return as taxable income.

But I hadn’t really put a precise number on the tax owed below the federal level as I should have. Worse, city, regional, and state revenue and taxation departments still remain unaligned on how to account for crowdfunding revenue. Kickstarter suggests that most funds are taxable income and provides links to a number of governments’ tax agencies on the topic. Some government entities have made up their minds: Canada said in October 2013 that all project-based crowdfunding revenue counts as business income.

Technical tax aside: In the United States, federally recognized nonprofits with a 501(c)(3) or similar designation may be exempt from tax; some groups also work with non-profit fiscal sponsors that provide some management and compliance while also handling tax filings.

In fact, there’s some wiggle room over whether someone without an established business who uses crowdfunding and promises the equivalent of gifts and thank-you notes to fund a project — like postcards and downloads as the rewards for funding making a freely distributed film — needs to count the revenue as taxable for business! Crowdfund Capital Advisors, a group that consults on investment and other forms of crowdfunding, suggests from expert advice that if no tangible reward is given, then there’s no sale, and thus potentially no tax; the same is true if the reward is tiny compared to the item’s production or market cost.

Technical tax aside: GoFundMe, a non-project crowdfunding site for personal needs, operates in the U.S. on the principle that it’s perfectly legal for thousands of people to send you gifts in the form of cash without you paying any tax. U.S. tax code makes the sender responsible for any tax paid on outright gifts. There’s an annual threshold of tax-free gifts to individuals to avoid generational wealth tax avoidance, but not a limit on receiving gifts.

But it depends entirely on how local, state, and federal taxing authorities want to treat that revenue and on whether they pay enough attention or receive enough information from other parties — such as a required form from payment processors discussed below — to track you down if you fail to meet the rules that they intend to enforce.

Let’s start with some business basics before I go into the specifics related to crowdfunding.

The following sections lean almost entirely on my knowledge of U.S. tax and business requirements. Many of the principles and obligations are similar in other countries, but you’ll need to consult local experts and authorities to know precisely how to handle your responsibilities.

Business basics

In the United States, if you accept money for goods or services above a certain threshold, or at all for certain kinds of work, you probably require all of the following:

  • A state business license, which is connected with state sales or other taxation. The license may have specific extras you need, such as an assumed business name (the dba, “doing business as”) or registration for certain kinds of business. If your crowdfunding campaign includes going on site to perform a task, you may need additional licensing and to obtain insurance coverage and register that insurance with the state.
  • A state business taxpayer account registered with the tax or revenue agency. You may apply for the business license and set up this account at the same time, or your state may operate them as different parts of one agency.

Bureaucracy aside: I discovered in early 2021 that one part of the Washington State Department of Revenue marked my main business closed in the licensing section, but it remained open for taxes. Thus I paid all my taxes and even renewed my master business license—which can contain multiple businesses—and only discovered the problem when applying for a PPP loan and the bank asked me why my business was closed. The revenue workers were incredibly apologetic and solved the problem for me (and the loan went through).

  • A business license in every city in which you work in person. For freelancers, this might be the city in which you have a home and work out of a home office; if you rent an office, you may be able to make the case all your business is done there. If you make products and deliver them in person, it’s possible you technically need a license in the destination city; by mail or delivery service, generally not.
  • A reseller certificate or exemption permit if you buy services or goods at wholesale intended for resale. In my case, as a book publisher, I gave a copy of this permit to the printer that made my hardcover books. It needed it for its files so that it, in turn, can show its taxing authority that it properly did not need to charge me sales tax on its sale of finished items. You can use this reseller certificate for purchases that you should meticulously document for anything that’s part of an item for resale, like boxes for shipping. In most states, if you can’t get the supplier to omit sales tax, you can file for a refund with the state as part of your regular business quarterly or annual sales-tax reporting forms.
Sample reseller permit from the State of Washington
Sample reseller permit from the State of Washington
  • A federal Employer Identification Number (EIN) if you want to set up your business as a legally distinct tax entity. Apply to the IRS here. I set up a single-person LLC (limited liability company) in my state, which gives me the protections of a corporation, the ability to distinguish earnings and expenses for the company from other inflows and outflows, the simplicity of direct flowthrough of profit and loss to my personal taxes, and the ability to obtain an EIN. It also makes it easier to sell a business as a separate entity. (I set up my LLC to buy someone else’s LLC’s assets, in fact.) However, you may choose the simplicity of a sole proprietorship, which is still separately accounted for in your federal taxes, but requires less overhead. Consult an accountant for sure on which makes more sense.

And you may owe all of the following kinds of tax:

  • City or county business. Most municipalities tax all income earned in their jurisdiction. Annual income below a threshold may be exempt, but you typically have to report income, even if you don’t have to pay anything. In one recent year, I paid hundreds of dollars in tax quarterly and then received a refund at the end of the year when my total annual income was below the city threshold.
  • In-state sales. Most states have sales tax, and if you’re engaged in any business that sells goods or services to the public, you’ll owe this for all in-state sales and be required to deal with a lot of accounting and regulation around it. (If you sell goods to retailers in state, they can give you a copy of their retailer certificate that lets you not charge them sales tax, just as you can to suppliers.) States tend to enforce sales-tax collection stringently. Different cities and regions in a state may have separate sales tax rates or surcharges, too. I often have to use an address lookup for people who purchase my stuff within Washington and outside Seattle to find the sales tax code; the state’s filing system shows the appropriate tax rate and divvies it out as part of my filing.
  • Out-of-state sales. Due to a 2018 Supreme Court ruling, every state that collects sales tax (four do not) now require you remit sales tax if you sell above a certain quantity or value of goods in a calendar year to residents of their state. If you have to pay it out, it means you should probably collect it—otherwise, you’re paying out of your gross receipts. However, most states require that you sell at least 200 unique items or gross over $100,000 on sales in the state to have this requirement. The $100,000 value is high, but it’s very easy to sell 200 low-priced items. Fortunately, the three biggest states, California, New York, and Texas, have just a dollar threshold and it’s $500,000. The Sales Tax Institute has an exhaustive chart detailing each state’s rules, and a consortium comprising a number of states has a unified filing site appropriate for small businesses. Because you can’t predict sales and the rules vary by state, make sure you consider whether you could hit the item threshold in any state. You should comply with these laws, even in states you don’t live or work in, but note that enforcement is typically limited to large companies, giant projects, or people flaunting the rules, like putting on their site, “We don’t collect sales tax for any state but ours, dagnabit!
  • Out-of-country sales. The purchaser of your goods may have to pay their country’s customs department or an international shipper tax or tariffs based on the item imported before they can receive it. But recently some countries and regions have shifted that burden to sellers of any size, where previously there was a value threshold beneath which no VAT was due on imports. ¶ The United Kingdom as of early 2021 requires every non-UK seller has a value-added tax (VAT) number issued by a government agency and that you calculate and collect VAT before shipping and then remit it on a regular basis. ¶ The EU also set the minimum to €0 for which VAT must be collected, but still allows shippers to manage the process on your behalf.

Bureaucracy aisde: Despite months of trying and answering multiple requests for more information about literally a couple thousand dollars in previous sales to UK buyers, I do not have a UK VAT and can no longer get anyone in the office to respond. As a result, I can’t sell items to people in the UK.

  • Use. Did you know that many states have a use tax? This is tax owed on items purchased from outside your state that are put into use within the state. Small businesses typically ignore this, and individuals bother only on large purchases, like vehicles, which must be registered in a state and have tax paid at that point. But if you purchase, say, a $25,000 3D printer to make your project go, even if the firm selling you the item doesn’t do business in your state with a nexus (a physical presence there), the state expects you to pay, and some states routinely audit firms of all sizes to make sure they’re complying. It’s more likely these days that most online retailers of any size will collect sales tax for your state during checkout, however, due to the situation described above.
  • Federal. This is a whole big ball of wax, but what often fells Kickstarter folks is the cash flow (having the money on hand at the right time to pay taxes) rather than the tax burden itself. I’ll discuss later the time span between earning money and spending it. Most sole proprietors and small companies have to pay quarterly estimated taxes, generally based on what taxable income they estimate owing each quarter. (Big companies owe estimated taxes too, but it’s vastly more complicated the bigger you get.)

Are you crying yet? There’s more.

It’s the most taxable time of the year

The very worst possible time to launch a crowdfunding campaign is late in the year. This is because taxes in America and most countries are typically owed on income received in a given calendar year, while expenses may be deducted only in the calendar year in which they occur. If they’re not the same year, it can have a huge impact on one’s cash on hand. (Just to be different, the UK tax year runs from April 6th one year to April 5th the next.)

Of course, I launched my 2013 Kickstarter campaign in November to finish in mid-December. I had a reason, which I’ll get to later.

Technical tax aside: You can have a business with a “year” that doesn’t run January to December, but once you pick it, it’s very hard to change. And you can choose to calculate taxes on an accrual basis, in which revenue and expenses can be reported when they align (useful for selling things and maintaining inventories) instead of necessarily when they occur. But this is subject to a host of rules that make it useful only for specific businesses, and it isn’t specifically useful for crowdfunding unless your business is already organized on that basis.

Because crowdfunding campaigns can take months or even years to fulfill, if you launch a campaign late in a year, all the revenue comes in late in the year and is taxable in that year, whereas expenses come in the next year or even a subsequent one for big projects. Sorry for all the bold, but it’s an important point to make.

You see the problem. In our case, we raised over $56,000 in 2013 (before subtracting Kickstarter and credit-card fees), and nearly all of that money was for services that would be rendered in 2014, such as printing. Because we would eventually incur those expenses, they would offset our taxable income in 2014 — but we still needed to pay the tax for 2013! That kind of tax-year offset can cause a cash crunch if you haven’t planned for it, and we hadn’t.

Kickstarter aside: Kickstarter works with Stripe, a payment processor, to charge backer cards. Technically, you set up an account with Stripe and Stripe collect money as a proxy for you. You also agree in the Kickstarter setup process to send 5% of the gross to Kickstarter as its fee. (Stripe takes 2.9% plus 30¢ per transaction.) Stripe pays out 14 days after the campaign ends. Their collection is a taxable event for you because they collect money on your behalf. If you have more than 200 payments (separate charges) and more than $20,000 collected for you in a calendar year, Stripe files a form (the 1099-K) with the government to report it and sends you a copy. (In some states, you may receive one at a lower threshold.)

I paid all outstanding invoices before December 31, even if they were fresh (we typically pay invoices in 14 to 28 days) and I wrote checks for reprint fees to all the contributors. I paid the invoices of my designers in full for the entire project, as well as other folks collaborating on the project—there’s a lot of trust involved in that. It’s rare to be in a position in which all the cash is on hand and you know you’ll need to pay it all out in a short period of time. Because we wound up shifting printers, I didn’t pay a deposit to the printers until January, sadly. (I asked several contractors if they minded being paid at the butt end of the year, because I would be increasing their 2013 tax burden. None objected.)

Here’s the problem you could face, even though your net taxes might be identical, spread across two years. Let’s suppose all the following and see it through to the conclusion:

  • Your Kickstarter raises $50,000 in 2022. That’s $50,000 in taxable income.
  • You have $40,000 in expenses you plan to incur, but you can only pay $10,000 of them in 2022. The rest will be paid out in 2023. That’s a net of $40,000. (I’m assuming everything is entirely deductible against income from your federal business filing, a Schedule C, which is true for shipping, printing, professional services, and so forth—all your hard expenses.)
  • In 2022, you’ll thus wind up paying tax as if you netted $40,000 from the project.
  • In 2023, you pay out the rest of your expenses: $30,000. That $30,000 reduces your 2023 income by $30,000.
  • When you pay tax for 2023, you will not pay—in effect, get back—the tax you paid in advance of expenses in 2022.

The crunch comes in when you’ve paid out $1,000s to the feds in 2022 and need that money in 2023 to pay your expenses. For a small project, you can probably float it. But what if you typically do $10,000s in business a year, have a $50,000 project, and have had to pay the government $10,000 in tax you expected to have on hand—not at refund time in 2024?

Most freelancers I know put money aside on a monthly or quarterly basis to ensure they have the tax dollars to hand when they need to pay. Many businesses of all sizes are also compelled to pre-pay estimated taxes on a quarterly basis to the IRS to avoid penalties and interest. These payment are made April 15, June 15, September 15, and January 15 for the 1st, 2nd, 3rd, and 4th tax quarters—yes, the dates don’t align three months apart. To avoid being dinged, nearly all people must have paid at least the lesser of either 90% of the tax owed for the current tax year or at least 100% of the tax shown on the return for the prior year. This includes any withholding on wage-based jobs where an employer handles that for you, if you do a mix of work for yourself and also get a W-2.

Math aside: That is, if you owed $10,000 in tax on your 1040 in 2022 and you wind up owing $15,000 in tax for 2023, you avoid problems by prepaying $10,000. If you were to owe $7,500 in 2023, you could prepay as little as $6,750 (90% of $7,500) and still be ok.

This can work in your favor if you cross a year division, the crowdfunding income is a big blip above your normal income, and your expenses remain to be paid in the second year. I managed to hit the target exactly here (see illustration). If expenses had crept past April 15, this could have put me on the spot with not enough cash on hand in my business account, and having to use credit cards or loan my business money from personal savings.

The rules changed since 2014, when 110% of the year-before taxes had to be prepaid; now it’s 100%.

For a person or business for which the Kickstarter is larger than, say, their annual income, this cash-flow issue could be devastating. The creator of Printrbot raised $830,827 toward a $25,000 goal. But the project funded in December 2011. You see the problem. He told Wired in 2012 that he was hit with an IRS “bill” (more likely, he talked to an accountant who told him what to pay for 2011 taxes) of $330,000. However, the company was able to deliver its hardware.

(So why did I launch my Kickstarter at the end of the year? Timing! Due to delays, it was the last possible moment it would work.)

Sales and retail: local, interstate, and foreign

My biggest goof in timing and preparation, however, was not fully sorting out my state business and sales tax burden. Fortunately, as I spoiled for you earlier, it all worked out. But I’ve heard horror stories from other folks, especially in larger states like California and New York, which are aggressively ensuring that every penny of sales tax is paid.

Washington State, like many, has different categories of business tax, depending on whether a sale is wholesale, retail, service, or in a variety of highly specific, lobbyist-backed special categories. (Split-pea subsidies, for instance.)

I had assumed based on previous conversations with the state revenue department that only some of the Kickstarter would be taxed at the retail rate, that some would be classified as advertising (podcast sponsorships), and that some would count as services. Far too late in the process, I made a more detailed study of the rules and asked my accountant. He suggested that I get a ruling from the state. In Washington, as in other states, the revenue department can issue official rulings that may be appealed, but if you accept the ruling, it becomes the rule under which you pay tax related to the question. You can’t be charged additional tax for complying with the rule, even if they later change the guidelines.

The state declared that 100% of my Kickstarter gross revenue — before fees, as our business tax has no exemptions or deductions for expenses — should be counted as retail sales. However, because it was a retail sale, I would be obliged to pay business tax and sales tax only on purchases delivered to residents within Washington State. The state ruling notes, in part:

All of the items that you listed (digital subscription, electronic books, and T-shirts) are retail sales when sold to consumers in Washington. Retail sales tax applies based on the selling price, and the gross income is taxable for B&O tax under the Retailing classification. When reporting your sales, you should include your gross sales amount and then claim an Interstate & Foreign Sale deduction, under both the Retailing B&O tax and the retail sales tax, for those sales with delivery to consumers outside the state.

Except, of course, I hadn’t asked the folks who pledged for only electronic rewards where they lived — only their email addresses. And a good subset of backers hadn’t filled out their surveys. I had set up an address-update system on my Web site, and I emailed backers asking them to provide a state within the United States, or a country, which would meet the requirements for state reporting. Only a small percentage did. (About 10% of the revenue came from Washington residents. The state got about $750; Seattle, about $150.)

If you’re in a state in which knowing the out-of-state and international component of gross or net income matters, or that collects sales tax for in-state purchasers and deliveries, consider setting up a survey on the early side, making sure to ask all questions that need to be asked. You can also punt this very effectively to BackerKit, a sort of independent backend for Kickstarter, which has far better post-campaign tools for managing pledges.

Technical tax aside: My accountant says that Washington State requires that I inform customers that sales tax will either be included or added to purchases. Kickstarter 13 years into its existence doesn’t let you automatically surcharge sales tax, which varies by address, in any case. I chose to include it. Other states may also have this requirement.

I’m the eggman

Taxation for most people is probably the most boring subject they have to deal with. And I admit that I don’t love accounting and tax regulations. However, in the world we live in, you can avoid neither taxes nor death (perhaps there’s a Kickstarter for the latter?), and preparing better than yours truly could save you time, fuss, audits, and penalties.

Americans: contact the tax office in your state for more information: AlabamaAlaskaArizonaArkansasCaliforniaCaliforniaColoradoConnecticutDelawareFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahVermontVirginiaWashingtonWashington D.C. • West VirginiaWisconsinWyoming

Glenn Fleishman is a freelancer journalist and regularly turns to crowdfunding to advance his creative endeavors. In 2019, he created the Tiny Type Museum & Time Capsule project and published the book Six Centuries of Type & Printing.

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