I would like to know more about taxation on Shapeways profits for designers. My impression is that this may count as royalty payments reported on Schedule E, but I'm not sure. Shapeways facilitates the manufacturing and sales of the products and we are paid by sales per unit. Or we sell the design to Shapeways in totality where we no longer collect a payment for units sold in which case I think it is counted as capital gains on Schedule D.
But in some cases where the works of artists and writers are paid royalties, it could be filed under Schedule C, in which case you will have to pay self-employment tax of 13.3% on top of your standard income tax. The benefit of filing under Schedule E is I think it would not be taxed as self-employment income, and you would save having to pay the 13.3%. But then I'm not sure how you would deduct your expenses for designing and prototyping your models. If you declared your income on Schedule E, and your expenses on Schedule C, you would have a business loss, which I think complicates things and might trigger an audit.
Also, since Shapeways is based in both the Netherlands and New York, royalties can be divided into US sourced income and Foreign sourced income. The products which are manufactured in the Netherlands may be non-taxable royalties, but if Shapeways sends the products made in the Netherlands to customers in the US, then it may become taxable. If Shapeways manufactures the products in New York and sells it to foreign customers, it may be considered Foreign sourced income. IF Shapeways sells these products to US customers then it becomes US sourced income.
But you would have to take a closer look at the tax treaty between the US and the Netherlands. It's very confusing. There are also issues of whether since Shapeways has both a US and Netherlands based establishment, if all worldwide royalties paid to you from Shapeways becomes US sourced income if you are a US tax-resident, or if all worldwide royalties become foreign sourced income if you are non-resident alien of the US.
I'm also now a tax-resident of Germany, but I'm a US citizen, so it makes things much more complicated. I would have to read the tax treaty between the US and Netherlands, US and Germany, and Netherlands and Germany. Most of the customers buying my models from Shapeways are located in Europe, so their models are being made and shipped from the Netherlands, but there have been some US customers, and I would assume that they are receiving their models from New York. But since Shapeways doesn't disclose to us which of their factory is manufacturing for which customer, we may in the end be liable for taxes on all of our worldwide royalties, since the taxpayer has the responsibility of the burden of proof.
Also, how Shapeways is reporting their payments to designers will affect how we declare and categorize the payments. It would be nice for Shapeways to tell us how they are reporting our payments to the IRS, whether it is 1099 and which type. And how they will report income to someone like me who is a tax-resident of Germany but a citizen of the US, where I must declare all income on both tax returns, and how the tax treaties would determine which country gets what tax.
I could be COMPLETELY WRONG though. Maybe everything just goes under schedule C. But I wonder whether the tax could be lower under Schedule E.
This is the first year I'm getting shapeways payments, and the end of the year is very near.