According to the U.S. Small Business Administration Office of Advocacy, in 2006 home-based businesses generated $102 billion in annual revenue. A small business which provides a service such as sewing can continue to be profitable despite economic ups and downs. When you run the business from your home your overhead is minimal, which helps to increase the profitability. As with any business endeavor, however, one thing you will inevitably have to deal with is taxes.

Reporting

The first thing you might ask yourself about your sewing business is if you have to report your income, and if so, how to do it. The law says that as a sole proprietor you must file Schedule C, which lists your income and expenses. You need to be careful to run your sewing business as a business, as the IRS expects you to make money at some point. If you don’t they can reclassify your business as a hobby and you will only be allowed to deduct expenses less than or equal to your sewing income, using Schedule A for your itemized deductions.

Amount

Another sewing-business tax question is how much tax you will have to pay. As with income from any source, you must pay federal, state, and local taxes based on your income level. In addition, you must pay a self-employment tax, which is currently (2010) 15.3% of your net income. This tax is a combination of social security and Medicare taxes. An employer normally contributes half of this amount, but when you are self-employed you have to pay the full amount yourself.

Incorporation

Many small-business owners wonder if incorporation is a good choice. Incorporating not only reduces personal liability, it reduces the amount of your tax liability on the self-employment tax. However, when you incorporate you must file a personal tax return and a second tax return for the corporation. Check with your accountant to see if incorporating is best for you.

Deductions

When you are setting up your sewing business you will no doubt have questions about what expenses you can legally deduct. You can deduct virtually anything that deals with your sewing business. Keep meticulous records of all of your expenses in getting set up and running your business. You can deduct supplies (fabric, thread, and notions), billing and record-keeping costs and equipment, such as sewing machine, serger, iron and ironing board, and a computer that is used for your business. If you work from your home you can deduct a portion of your rent or mortgage for home-office expense, along with a portion of your phone and power bills. You can also deduct mileage if you need to drive to get supplies, pick up or deliver projects, meet with clients, or for any other valid business reason. Even if your business shows a loss for the first couple of years all of these deductions are valid.