Indiana Cottage Food Taxes: Sales Tax, Income Tax, and Deductions

Indiana cottage food sellers often focus so heavily on permits and labeling that they overlook the tax side of the business. But the state collects sales tax on prepared food, the IRS treats your cottage food income as self-employment earnings, and the deductions available to home-based food businesses can significantly reduce what you owe. Getting the tax structure right from day one saves money and prevents problems at filing time.

Sales Tax: 7% on Prepared Food

Indiana charges a flat 7% sales tax on prepared food sold at retail. As a home-based vendor, you're responsible for collecting this tax from your customers and remitting it to the state.

To collect sales tax legally, you need a Registered Retail Merchant Certificate (RRMC) from the Indiana Department of Revenue. Apply through the INTIME portal — the cost is $26 ($25 statutory fee plus $1 online convenience fee). The certificate is location-specific and renews automatically every two years at no charge.

Once registered, the DOR assigns your filing frequency based on estimated sales volume:

• Monthly filers: higher-volume businesses
• Quarterly filers: moderate volume
• Annual filers: lowest volume (common for seasonal cottage food businesses)

File your ST-103 return through INTIME on the assigned schedule. The critical rule most new vendors miss: you must file $0 "zero returns" during any period you don't sell. Failing to file — even when you have nothing to report — can trigger automatic permit revocation by the DOR.

Income Tax: Self-Employment Rules

All income from your cottage food business is classified as self-employment income, regardless of whether you've formed an LLC or operate as a sole proprietor. This triggers two federal obligations:

Schedule C (Profit or Loss from Business): Report all gross income and deductible expenses on your personal tax return. You don't need a separate business tax return unless you've elected corporate taxation for your LLC.

Self-employment tax (Schedule SE): You owe 15.3% on net self-employment earnings above $400 — this covers your Social Security and Medicare contributions that an employer would otherwise split with you. Half of this amount is deductible on your 1040.

Indiana also taxes self-employment income at the state level through its flat income tax rate, plus your county's local income tax rate. The applicable combined rate depends on the tax year and county, so verify the current rates with the Indiana Department of Revenue.

Deductions That Actually Apply

Home-based food businesses generate legitimate deductions that reduce your taxable profit. Track these from your first sale:

Ingredients and supplies: Flour, sugar, butter, packaging, labels, jars, bags, boxes — every material that goes into your product or its packaging is a cost of goods sold.

Equipment: Mixers, baking sheets, thermometers, scales, pH meters, dehydrators. Items with a useful life beyond one year may need to be depreciated, but Section 179 allows you to deduct the full cost of qualifying equipment in the year you purchase it, up to the annual limit.

ANSI food handler certification: The $15 online course or $40 Purdue Extension class is a deductible business expense, along with any renewal costs.

Home office/kitchen deduction: The IRS allows a deduction for the business use of your home. For cottage food, the most straightforward method is the simplified option: $5 per square foot of your kitchen used exclusively for business production, up to 300 square feet ($1,500 maximum). The regular method (calculating your kitchen's percentage of total home square footage and applying it to mortgage/rent, utilities, insurance) often yields a larger deduction but requires more documentation.

Farmers market fees: Booth rental, market vendor fees, membership dues for market organizations, and required liability insurance premiums are all deductible.

Vehicle expenses: Mileage driven to farmers markets, ingredient suppliers, the health department, and other business-related trips. Track mileage with a log or app — the IRS standard mileage rate applies.

State Egg Board permit, RRMC fee, and LLC filing fees: These may be deductible business or organizational costs, but their treatment and timing can vary; confirm with a tax professional.

The Local FAB Tax Complication

Some Indiana municipalities impose a Food and Beverage (FAB) tax on top of the state sales tax. If you sell at a farmers market or event in a municipality that charges FAB tax, you may be responsible for collecting and remitting that additional amount.

Tracking which municipalities charge FAB tax — and at what rate — across multiple market locations is genuinely complex. If you sell at markets in multiple counties or cities, a CPA familiar with Indiana food and beverage tax rules is worth the consultation fee.

Set Up Your Tax Structure Early

Most cottage food tax problems come from poor record-keeping in the first year, not from complex rules. The Indiana Cottage Food & Home Food Business Guide includes the full INTIME registration walkthrough, sales tax filing instructions, and the business expense categories specific to home-based food operations in Indiana.

See more Indiana guides →