Etsy is a digital marketplace that connects consumers around the world with independent sellers of unique, often handmade goods. There were over 95 million active buyers on Etsy in 2022, up a whopping 55% since 2019.
With that many buyers, selling on the platform can be pretty lucrative, but it also means dealing with self-employment taxes. If you’re interested in becoming a vendor, here’s what you need to know about Etsy taxes to keep up with your responsibilities.
If you sell goods on Etsy, you’re a self-employed individual rather than an employee. Not only does that make your tax situation more complicated, but it also means you have to navigate it without the help of an employer.
Generally, your first responsibility as an independent Etsy seller is to classify your activities as a hobby or a business. Their tax treatment will differ significantly depending on which category they belong to.
The Internal Revenue Service (IRS) lists nine factors you can use to inform your assessment, but they all generally boil down to whether or not you engage in your Etsy activities for profit.
If you do, you should probably treat your shop as a business. If you don’t, you should probably treat it as a hobby. Consider consulting a tax professional if you don’t fit easily into either category.
Here’s what the distinction means for your taxes.
If your Etsy shop is a business, your net business earnings will be subject to income taxes and the 15.3% self-employment tax. However, you can write off certain business expenses to reduce your taxable net earnings and lower both tax bills.
Because you’ll probably expect to generate a profit, you’ll also have to make quarterly estimated tax payments. These go toward your income and self-employment taxes since you don’t have an employer to withhold them from your earnings.
Meanwhile, if your Etsy shop is a hobby, your income will only be subject to income taxes, not the self-employment tax. However, you can’t take tax deductions for any expenses related to your activities.
Since hobbies aren’t run with the intention of generating a profit, you generally don’t have to make estimated tax payments during the year. However, if you do end up earning a small amount of income, you’ll have to pay taxes on it at the end of the year.
As an Etsy seller, you’ll have sales tax responsibilities whether your activities qualify as a hobby or a business. Namely, you must collect sales taxes from your customers and send the proceeds to the proper government agencies alongside a sales tax return.
Etsy automates the tax collection process for sellers in many states but not everywhere. You may still be responsible for filing sales tax returns even when they do. If you live somewhere sales taxes apply, ask a tax expert for help.
Whether your Etsy shop is a business or a hobby, you must keep track of its income and report it on your tax return. Fortunately, that's a pretty easy thing to do. In fact, the platform does virtually all of the work for you.
You can download a copy of your Etsy Payments CSV file from your account’s Shop Manager tab at any time. It can provide a detailed breakdown of your platform sales for the year or any other date range you select.
Etsy may also send you a Form 1099-K to officially confirm your annual gross earnings. For tax years 2022 and before, you’ll get one if you earned at least $20,000 and had at least 200 transactions. For tax years 2023 and beyond, you need only make $600.
If you meet the requirements necessary to trigger the issuance of the 1099 form, you should be able to access a digital copy by January 31. You can also request that they send you a paper copy, but it’ll take longer to arrive.
Remember that these documents can help you check your business income, but you shouldn’t trust them implicitly. Keep your own tax records and reconcile everything at year's end to avoid costly mistakes.
If your Etsy shop is a business, you should report its income and expenses on Schedule C. That’s the appropriate tax form for all sole proprietorships, the default legal entity structure for independent contractors.
You’ll also need to file a handful of supporting schedules to give tax agencies additional context and help them verify that your numbers are accurate. The following forms are typically required with Schedule C:
Schedule 1: This is a form where you report your net business earnings and any other income that isn’t wages.
Schedule 2: On this form, you must state the self-employment taxes you expect to owe on your net business earnings.
Schedule SE: This is where you show how you calculated the self-employment taxes you reported on your Schedule 2.
Generally, if your Etsy activities are a hobby, you won't have to worry about most of those. You’re not subject to self-employment taxes and your expenses aren’t deductible, so you only need to report your gross hobby income on Schedule 1.
Regardless of your Etsy shop’s status, you’ll need to file these schedules with your Form 1040, the official name of the individual income tax return. That’s where you provide high-level details like your Social Security Number and total taxable income.
As mentioned briefly above, tax deductions or “write-offs” are expenses that business owners can subtract from their gross earnings, lowering their taxable income and indirectly reducing the taxes they owe.
The IRS requires that expenses be “ordinary and necessary” to qualify as a tax write-off. That generally means they must be commonly incurred in your industry and reasonably beneficial to your business model.
Let’s look at some examples of potential Etsy tax deductions so you can better understand how they work and avoid missing any on your tax return.
Since you can generally only sell products on Etsy and not services, many sellers incur inventory-related business expenses in their day-to-day operations. Fortunately, these should all be tax-deductible.
For example, that would include the cost of:
Direct materials and direct labor
Storage materials like boxes and bins
Rent of storage space
Inventory management software
Shipping and handling products
In addition to product costs, here are some other expenses you may be able to write off as an Etsy seller:
Etsy platform fees
Home office expenses
Marketing costs for your shop
Business portion of vehicle expenses
Professional service fees
Health insurance premiums
To keep track of these expenses, open a separate checking account and credit card for purchases related to your Etsy shop. That'll save you from having to sift through your bank statements at tax time to identify anything that might be tax deductible.
Because Etsy treats its sellers as independent contractors, it won’t withhold taxes from your earnings. As a result, you must make quarterly estimated tax payments, assuming you expect to owe at least $1,000 in income and self-employment taxes for the year.
Aim to pay 25% of your annual tax bill on or before each of the following dates:
January 15 (of the next year)
Don’t worry too much if you’re unsure what your tax bill will be. You can avoid penalties by paying at least 90% of the taxes you owe for the current year or 100% of the taxes you owed in the previous year.
If you can keep track of your business income and expenses, make your estimated tax payments on time, and fill out the proper tax forms, you should have everything you need to file your Etsy taxes.
Make sure to file your return and pay any remaining amount you owe by April 15 to avoid penalties. If you request an extension, you’ll have until October 15 to file, but you won’t get additional time to pay.
While you could use tax software to file your return independently, it’s often better to let a professional tax preparer do it. They’ll be able to check that you’re complying with regulations and claiming all your deductions, including any fee you pay them.
In any case, try to file your Etsy taxes electronically. That way, you’ll receive instant confirmation that the tax agencies received your submission, and they’ll process any refund they owe you more quickly.
Another great way to streamline your Etsy taxes is to sign up for Found! It’s a business checking account designed to simplify the most tedious parts of being self-employed, including your tax responsibilities.
For example, Found can track your income and expenses and use them to project your annual tax bill in real-time. Then, whenever you collect a payment, it can use that information to set aside the perfect percentage for your estimated tax payments.
Sign up for Found today and try out its powerful features for free!
Fees you pay Etsy for the right to list and sell your goods on the platform should be tax deductible, assuming your activities qualify as a business. You should report them on Schedule C with your other tax-deductible business expenses.
Because Etsy takes some of these fees out of your earnings automatically, you won’t see all of them hit your bank account. However, you should be able to find a summary of all the fees you’ve paid in the Shop Manager section of your account.
Yes, you need to have a tax identification number to sell on Etsy. If you’re a sole proprietor, the default filing status for independent contractors, you can get away with using your Social Security Number.
If you use any other legal entity structure, such as a corporation or a limited liability company (LLC), you must use an Employer Identification Number (EIN) instead.
Fortunately, Etsy collects sales taxes for you and sends the funds to the proper agencies in many states, though not all of them. As a result, you may still have sales tax responsibilities in certain locations.
Even in areas where Etsy handles the collecting and remitting, you may need to file a separate sales tax return. Consider asking a Certified Public Accountant (CPA) for assistance with this aspect of your Etsy tax responsibilities.
When you sell your products on Etsy, you’re considered an independent contractor, not an employee. As a result, Etsy generally won’t withhold income or self-employment taxes from your earnings.
Instead, you must make quarterly estimated tax payments to cover whatever you owe. To avoid penalties, aim to pay at least 90% of your total taxes for the current year or 100% of the taxes that were due in the previous year.
Disclaimer: The information on this website is not intended to provide, and should not be relied on, for tax advice.
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