Making a profit in your Etsy shop qualifies you as a business owner. And owning your own business comes with a less-than-fun side effect: taxes. Find out how to file taxes as a small business owner, from registering for a taxpayer ID to paying quarterly estimated taxes, and more.
Do you need to pay taxes on your Etsy shop income?
Yes - you must pay income tax on your Etsy income — usually, how much you earned from selling your products less your business expenses.
The Etsy website reports your gross earnings to the IRS on Form 1099-K, but you are required to report Etsy sales income on your tax return regardless of whether or not you receive a 1099-K. In states that have income taxes, you will also have to pay state income taxes on all Etsy sales.
Businesses operating on Etsy are required to pay taxes on their income, including the following taxes:
- Profit or loss from business: Whether you registered your Etsy shop as a business or not, you must file a Schedule C annually. You may be able to file a Schedule C-EZ form, a simplified version of Schedule C, if you meet certain criteria, such as not having a net loss from your business.
- Self-employment tax: Self-employment tax is due for anyone who earns $400 or more from self-employment. Schedule SE forms are due once a year. Learn more on the IRS website.
- State income tax: Some states also require you to pay state income taxes on business profits.
- State sales tax: You may also need to collect and report state sales tax.
Is your Etsy shop a hobby or a business for tax purposes?
A hobby that makes a regular profit is considered a business by the Internal Revenue Service (IRS). In order to determine how much tax you will owe on your Etsy shop, you must determine if it is a business or a hobby.
Consider the following guidelines:
- Etsy shops that do not expect a profit may qualify as hobbies.
- If your Etsy shop is something you devote considerable time to, and the primary objective of the shop is to earn income or profit, then your shop qualifies as a business.
While many businesses lose money during their first few years, they are still considered businesses because of the regular work toward and expectation of future profits.
If your shop is regarded as a hobby and your income is less than your expenses, you are said to be experiencing a hobby loss. It is at this point that determining whether your shop is a hobby or a business becomes most crucial.
You might, for example, be paying a lot for your raw crafting materials, but not passing this expense along to your customers. Under the hobby loss rule, you cannot deduct these deductions from your income even if they exceed the amount you earn as a business.
If your shop started as a hobby but now makes a profit or income, make a plan and keep organized records so you can file as a business.
What kind of taxpayer ID should you have for an Etsy shop?
Sole proprietors - that is, those who are not incorporated, partnered, or limited liability companies - can technically use their Social Security number when filing and reporting taxes. Otherwise, your business must have an employer identification number (EIN) to pay taxes.
There are some important differences between using an EIN and social security number for your tax filing as an Etsy seller.
An EIN can be obtained even if you own a sole proprietorship Etsy shop. As a result, you can hire employees, incorporate, form a partnership or limited liability company, and have a solo 401(k) retirement plan. You can also use an EIN instead of a Social Security number to protect yourself against identity theft and establish yourself as an independent contractor, giving your business more credibility.
Helpful Resource: The Difference Between Federal and State Tax IDs
Charging, Collecting, and Paying Sales Tax as an Etsy Seller
Local and state governments may impose sales taxes, usually on a percentage of sales. This tax is usually collected by the online seller and sent to the appropriate authorities by the seller.
The rules governing sales tax vary from jurisdiction to jurisdiction, so do your research in your area.
Helpful Resource: The Ultimate Guide to Sales Tax
Does Etsy Add Sales Tax Automatically?
To comply with the law and assist its users, Etsy has been recently adjusting its sales tax process. Etsy automatically collects and remits state sales taxes for most orders, but not all.
Etsy has so far started collecting sales tax for 42 states and the District of Columbia. Based on the buyer's shipping address, the platform determines the sales tax required. In these states, Etsy adds sales tax to purchases according to the state's rate and remits the tax to the state authority.
In some of these states, especially in those where your business has a physical presence, you may have to file a sales tax return. However, if the state is covered by Etsy's policy, you will not have to pay any additional sales tax.
What Tax Forms You Should File for Your Etsy Shop
Throughout the year, if you make a profit from your shop, you might need to file the following forms:
The US Individual Income Tax Return (Form 1040) is the standard form for reporting an individual's gross income on the federal income tax return.
With this form, taxpayers can potentially lower their annual payments by claiming expenses and deductions. The 1040 forms are due on April 15 of each year and must be completed by all individuals who meet the income requirements based on their filing status and age.
Schedule C and Schedule C-EZ
When you run your Etsy shop as a business, you must fill out Schedule C and Schedule C-EZ forms. Schedule C and Schedule C-EZ are the same, but Schedule C is longer and Schedule C-EZ is simplified.
Business owners who have a profit, expenses exceeding $5,000, are sole proprietorships with no employees, do not deduct their homes, and do not use depreciation may include Schedule C-EZ forms instead of Schedule C.
Schedule SE, Self-Employment Tax
You must file a Schedule SE for self-employment tax if your total net income from Etsy is $400 or more. This includes coverage for Medicare and Social Security taxes.
In order to figure self-employment taxes, you must subtract deductions and credits from your anticipated taxable income.
You must pay estimated taxes quarterly using Form 1040-ES, Estimated Tax for Individuals, if you expect to pay more than $1,000 in annual taxes.
Your estimated taxes may qualify you for a refund when you pay your annual taxes, or you may owe more if your actual taxable earnings were higher than you estimated. Your estimated tax payments will be guided by what you owed the previous year.
Helpful Resource: What are Estimated Taxes?
Receiving 1099-K Forms From Etsy
As an independent business owner, you may receive a 1099-K form from Etsy, PayPal, or other payment processors.
When the form is ready, you can directly download it from your Shop Manager if you meet the requirements. It can also be mailed to you. It will be postmarked by January 31 of the tax-filing year.
What is a 1099-K Form?
The 1099-K form reports credit card payments you received from a third party. Since Etsy Payments processes credit card payments for sellers, a 1099-K form must be provided to sellers earning over $600 per year. A corresponding form must also be filed with the IRS.
Accordingly, your 1099-K form will reflect your gross sales revenue from Etsy Payments. Sales made through Etsy Payments include credit card, debit card, or Etsy Gift Card transactions, as well as local bank transfer payments in certain European countries.
Will You Receive a 1099-K Tax Form From Etsy?
Depending on the amount of sales and transactions on your Etsy shop, you can receive a 1099-K form. Usually, a 1099-K form must be provided to sellers earning over $600 per year. Your requirements may vary based on where you live.
If you receive a 1099-K form, Etsy must send a copy of that form to the IRS and/or the state tax authority. You won't receive a 1099-K from Etsy if you aren't a US seller and aren't paid in USD.
If you want to ensure your 1099-K is accurate, make sure your Etsy account has the correct legal and tax information, and that you entered a valid SSN, EIN, and mailing address.
Tax Deductions for Etsy Sellers
Whether you are advertising your shop, buying supplies, or mailing your products, every business-related expense can be deducted. In most cases, any money you spend on your Etsy shop is deductible. In order to qualify as a deduction, business expenses must meet IRS standards of being "ordinary and necessary."
Helpful Resource: The Detailed List of Small Business Tax Deductions
Top Tax Deductions for Etsy Sellers
Self-employed individuals are required to pay estimated taxes quarterly. Even though the IRS does not allow you to submit deduction paperwork with these quarterly taxes, you should keep track of your deductions throughout the year in case of an audit. With each quarterly tax payment, you can include deductions, and the amount you paid last year can be used as a guide.
The following are common deductions for Etsy sellers:
You can deduct shipping and postage costs you incur that are directly related to the products you're selling. If you aren't sure how much you paid for shipping last year, you can estimate it or file for a deduction after the year ends. Shipping costs can add up quickly when running an online business, so tracking costs and deducting them helps you save come tax time.
You can deduct any type of equipment you use - from the supplies used to make your product to the packaging used to package your product. If you are a jewelry-maker, you can take a deduction for everything from stones and wires to pliers - anything you’ve spent money on may be deducted from your profit. Other deductible work-related equipment includes a new computer or manufacturing item.
Home Office Expenses
A home office deduction is available if you use a room in your home exclusively and regularly for business. If you don't have a specific room for your business, it may be wise to set one up for tax purposes.
Repairs, depreciation, utilities, and homeowners insurance are some of the parts of the home office that contribute to the deductible amount
Get Help With Your Etsy Shop Taxes
Running your own business can be complex enough without needing to worry about the many confusing tax implications.
It is important to consult with an experienced accountant who can give you the valuable advice you'll need to file your taxes.
Do you need help with your taxes?
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