$21,000 Tax Bill Just for Some Potato Salad

July 09, 2014

As of 2:30pm on July 9, 2014, Zack Danger Brown has amassed over $70,000 in pledges from donors using Kickstarter—a website that matches donors to projects—to make potato salad.

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?

We will cap the amount of funding he receives at $70,912 (his total as of 2:28pm on July 9, 2014). Kickstarter takes 5 percent (as a finder’s fee) of the total and Brown is able to deduct expenses associated with that income because the income from Kickstarter qualifies as business income.

Let’s say between the finder’s fee of about $3,500 and business expenses of about $1,500 (in order to make recipe books, and potato salad themed hats, pencils and paper to write his haikus, and a bowl for potato salad mixing), Brown’s pre-tax income drops to $65,912.

Now, let’s assume Brown is a single filer that is able to take a standard deduction of $6,200 and a personal exemption of $3,950 in 2014. Also, since this income is self-employed income, we must calculate Brown’s payroll tax burden, which is $9,313.07. We then take half of this amount ($4,656.53) and, along with the standard deduction ($6,200) and personal exemption ($3,950), deduct it from his taxable income. This gives Brown $51,105.47 in taxable income.

Next, Brown will have to face the U.S.’s progressive tax system. Brown’s first $9,075 dollars will be taxed at a rate of 10 percent. His next $27,824 in income will be taxed at 15 percent. His remaining income will be taxed at a rate of 25 percent. This puts his federal income tax burden at $8,632.22, and his effective federal income tax rate on his Kickstarter funds of $65,912 will be 13.1 percent.

But wait, there’s more. As a resident of Columbus, Ohio, Brown also faces city and state taxes. On his taxable income of $51,105.47, he must pay $1,510.20 in city taxes and $1,712 in state taxes.

And let’s not forget his payroll taxes. As we mentioned earlier, Brown owes $9,313.07 in payroll taxes on his self-employment income. This is calculated from the first dollar of after expenses income of $65,912.

In total, Brown’s federal, state, and local tax burden on his income of $65,912 is $21,167.49 for an effective tax rate of 32.11 percent, leaving him with take home pay of $44,744.51 less taxes and expenses.

So while the pledges continue to stream in, it’s important to remember there will be a tax bill on any profit Brown retains. Given that Brown’s “Big Stretch Goal,” is to “rent out a party hall and invite the whole internet” to a potato salad party, this fundraising effort is a good start.

Update (7/11/2014): Kickstarter has updated the funding totals (currently around $48,000 at 2:25pm). According to The Business Journals, the boost in total funds resulted from some fake pledges which have now been removed. Stay tuned, and we will update the final numbers once the remaining 21 days have expired.

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 

 

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