The Curious Case of the $21,000 Potato Salad Tax Bill

Everyone from makers to filmmakers to startups love crowdfunding.  And why not?  It's a way to publicize your project or business and get money.  But don't forget that that money can be considered income. And where there's income, you need to pay taxes.

The folks at Tax Foundation breakdown Zack Danger Brown's Kickstarter campaign to make a better potato salad as an illustration for how the funds you receive in a crowdfunding campaign can be subject to taxation.  A very good short read:

Nearly 5,000 backers from across the world have chosen Brown’s potato salad project, and tens of thousands of dollars will be dished to Brown on August 2. But once these funds are given to Brown, they will constitute income that might mean a sizeable tax bill for Brown. Kickstarter explains how pledges are taxed: 

“In the U.S., funds raised on Kickstarter are considered income… A creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes.” 

Kickstarter also notes creators “may be able to classify certain funds” as nontaxable gifts instead of income, so long as the funds were pledged with “detached and disinterested generosity,” but one look at Brown’s Kickstarter page shows that these funds probably won’t qualify 

Brown offers donor specific handouts, such as a recipe book with potato salad recipes from every donor country for pledges of $50 (so far 83 backers), potato salad themed hats for pledges of $25 (234 backers), and even a potato salad themed haiku for pledges of $20 (4 backers). 

So, given that Brown’s funds will likely be considered income instead of non-taxable gifts, how much will he have to pay in federal, state, and local income taxes?

Income and Taxes Paid by Zach Danger Brown
The Potato Salad Maker From Kickstarter
Source: Tax Foundation Estimates
As of 2:28pm, Wednesday, July 9, 2014
Income
Total Income	$70,912
Income Minus Expenses and 5% Finders Fee	$65,912
Taxable Income	$51,105.47
Taxes
Federal Income	$8,632.22
State Income	$1,712.00
City Income	$1,510.20
Payroll Tax Burden	$9,313.07
Total Tax Burden	$21,167.49
Effective Tax Rate	32.11%
After Tax Income Less Expenses	$44,744.51

Read the whole post, it's a quick read and well worth the time.  But overall, the lesson here is play it safe and set aside a portion of what you make through crowdfunding to pay your taxes.