I’m writing this post today for two reasons:

I met with an accountant for the first time ever today (I’ve done all my taxes on TurboTax up to this point, but now I have a board game company, so I got a real accountant). I learned a lot of stuff that I want to share with you. The first three entries in this series have been about things to do WAY before your Kickstarter project launches. Accounting and finances definitely need to be on that list too.

Let’s start with the main reason you need to track your project expenses and revenue:

Kickstarter Creators Must Pay Income Tax

Yes, Kickstarter is not a store. But for almost all pledges, you are providing a good or service, and they are giving you money for it. Thus you need to pay taxes on your profits (or get money back from the government if you lose money).

The good news is that you don’t actually have to pay income taxes until you fulfill your pledge promises. On the flip side, the expenses that went towards creating those pledges aren’t deductible until you fulfill your pledge promises. You still need to hand over all of that data to your accountant in the current year (including this form from Amazon if you raised over $20,000 or had more than 200 backer transactions), but you shouldn’t have to pay for any taxes in this fiscal year. Except for one thing…

Kickstarter Creators Must Pay Sales Tax for In-State Backers

Sales tax is different than income tax, because sales tax triggers at the point of sale. Which, in this case, is when a backer’s credit card is charged. The good news is that you only have to pay sales tax for in-state backers. This applies for Kickstarter pledges and any pre-orders you accept after the campaign ends. Make sure you calculate this additional expense when you create your reward levels. From then on, you’ll fill out a quarterly form on your state’s department of revenue website that indicates the amount of sales tax you owe them.

Here’s How to Save Money on Accounting

Okay, so now that you know that you have to deal with taxes, here’s how to deal with it effectively. Because having an accountant is not cheap! (You still need an accountant, though. I would highly recommend Justin Marty at Anders CPA in St. Louis. You want an accountant who has worked with Kickstarter companies before, and Justin has done that for us and several other creators of various sizes: jmarty@anderscpa.com.)

Right about now you might be asking why you should worry about all of this now. After all, you’re still creating your project–you haven’t even launched your Kickstarter campaign yet. Here’s why:

You’re already spending money on your project.

In fact, odds are, you’ve already been spending money on your project for quite some time. And you’ve probably been using your personal credit card or checking account or PayPal account. Which is fine. Don’t panic. But you need to make a change right away. Three changes, actually:

Open a checking account solely for the project. I use Capital One 360 (formerly ING) because it’s free, easy, secure, and it pays healthy interest rates, even on checking accounts. Plus, you get a debit card with the account, so that’s two birds with one stone: You can now make almost all purchases through this account, and you can link your Amazon account to the checking account to receive pledge payments when your campaign ends. If you use I use Capital One 360 (formerly ING) because it’s free, easy, secure, and it pays healthy interest rates, even on checking accounts. Plus, you get a debit card with the account, so that’s two birds with one stone: You can now make almost all purchases through this account, and you can link your Amazon account to the checking account to receive pledge payments when your campaign ends. If you use my referral link , I get $10 and you get $25 from Capital One 360. Note that you can’t use that account to make international wire transfers, though (I use TransferWise for that). Open a PayPal account solely for the project. You’re going to use PayPal. Trust me. If you hire any freelancers, you’ll pay them with PayPal. If you want to accept pre-orders after your campaign, you’ll receive them with PayPal. And if any backers forget to add international shipping to their pledges, you can ask them to pay you via PayPal. But you don’t want all of that money mixed in with your personal PayPal account, because that will add that much more time for your accountant to sift through everything.

Also, taxes aside, by separating personal and business expenses, you’re making it easier for you to make a case of corporate liability instead of personal liability if you ever get sued. Hopefully that’ll never happen, but cover your ass(ets) by separating your accounts.

So go open those accounts. Seriously. Right now. I’m not even kidding. I waited until I “had time” to do it, but it will literally take you 30 minutes at most to get both of those accounts set up, and you will thank yourself in the long run for not mixing all of those expenses together.

I keep track of all expenses on a spreadsheet, which has proven useful. But my accountant told me that it would have been better if I used Quickbooks, so you might want to consider that (it syncs with TurboTax, so if you can figure out TurboTax Business, you’ll save some money that way too).

Incorporating Your Company

You don’t need to set up a company to run a Kickstarter campaign. If you do decide to set up a company, the timing of when you set it up doesn’t matter (i.e., it doesn’t need to be a priority before a campaign). In fact, it’s something you may want to wait to do until after the campaign, as it costs money, and your campaign may not successfully fund.

Each state has different laws for incorporation, and I would recommend LegalZoom to help you with that. There are several different ways to set up your company depending on how many people are involved, the potential for growth, number of investors, etc. As an example, Alan and I set up Stonemaier Games as a limited liability partnership, which basically means that I pay taxes each year based on the percentage of the company I own, and Alan does the same based on his percentage. We have an operating agreement that we can change at any time without having to go through any outside party.

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If I’m missing anything or if I have any of this information wrong (and you can support your claim with evidence from an accountant, not just something you heard in passing), please let me know. I want this post to be as accurate as possible to future and current Kickstarter creators.

Also read this extensive post written by another project creator about tax implications (thanks to Tyler for sharing this on Facebook).

And this post by fellow creator James Mathe.

Up Next: Kickstarter Lesson #5: Connecting with Bloggers