Cottage Food Tax Guide: What Home Bakers Need to Know

Is Cottage Food Income Taxable?

Yes. Income from selling baked goods is self-employment income, even if it's a side hustle. The IRS considers you a sole proprietor unless you've formed an LLC or corporation.

What You Owe

• Federal income tax: Your cottage food profit is added to your other income and taxed at your marginal rate.
• Self-employment tax: 15.3% on net earnings (Social Security + Medicare). This is on top of income tax.
• State income tax: If your state has one.
• Sales tax: Depends on your state and what you sell. Many states exempt cottage food from sales tax. Check yours.

Deductions That Save You Money

The good news: you can deduct legitimate business expenses. Common deductions for home bakers:

Cost of Goods Sold (COGS)

• Flour, sugar, butter, eggs, and all other ingredients
• Packaging materials (boxes, bags, labels, ribbon)
• Baking supplies consumed (parchment paper, piping bags)

Business Expenses

• Equipment: Mixers, ovens, pans, tools (depreciated or Section 179)
• Marketing: Business cards, website costs, social media tools
• Farmers market fees: Booth rental, event fees
• Delivery costs: Gas mileage (67¢/mile in 2026), delivery bags
• Software: Order management, accounting, website hosting
• Insurance: If you have product liability insurance
• Education: Baking classes, food safety courses, business courses

Home Office (Limited)

Note: Since cottage food is made in your home kitchen (not a dedicated office), the home office deduction is tricky. You generally can't deduct a portion of your kitchen since it's not used "exclusively" for business. Consult a tax professional.

Quarterly Estimated Taxes

If you expect to owe more than $1,000 in taxes for the year, you should make quarterly estimated payments to avoid penalties. Deadlines: April 15, June 15, September 15, January 15.

Record Keeping

Keep receipts for everything. Track every dollar in and every dollar out. The IRS requires records for at least 3 years. Use a system. A shoebox of receipts won't cut it when you're doing 50+ orders a month.

KneadIt's finance tracking lets you categorize expenses using IRS Schedule C categories, so tax time is just pulling a report instead of digging through bank statements.