Do I Need a Tax ID Number to Sell Crafts?

Selling crafts, whether as a hobby or a business, comes with tax responsibilities that can be confusing. A common question is whether a Tax ID Number is required. The answer depends on factors such as business structure and location.

Understanding when a Tax ID is necessary helps prevent penalties and ensures compliance with federal and state regulations.

Federal vs. State ID Requirements

At the federal level, the IRS requires a Taxpayer Identification Number (TIN) for businesses with employees or those structured as corporations or partnerships. If you sell crafts as an individual without employees, you can typically use your Social Security Number (SSN) for tax reporting. However, if your business grows or you hire employees, obtaining an Employer Identification Number (EIN) may be necessary.

State requirements vary, often based on sales tax laws. Many states require a Sales Tax Permit or Seller’s Permit, which may necessitate a state-issued Tax ID Number. For example, California requires anyone selling tangible goods, including handmade crafts, to obtain a Seller’s Permit. Texas mandates a Sales and Use Tax Permit for retail sales. Some states, such as Alaska, Montana, New Hampshire, Delaware, and Oregon, do not have statewide sales tax, but local jurisdictions may impose their own rules.

Sole Proprietors and EIN

Sole proprietors do not need an EIN unless they have employees or meet other IRS criteria. Without employees, they can use their SSN for tax purposes. However, obtaining an EIN can offer benefits.

Using an EIN instead of an SSN helps protect personal information when dealing with vendors, payment processors, or suppliers. Platforms like Etsy, PayPal, and Square may request a tax identification number, especially if sales exceed $20,000 and 200 transactions in a calendar year, as required under IRS Form 1099-K regulations. An EIN also simplifies opening a business bank account, keeping personal and business finances separate.

Some states require an EIN for a Sales Tax Permit, even if the IRS does not. Florida and Illinois, for example, require an EIN for sales tax registration, even for businesses without employees.

Business Entities Requiring a Tax ID

If a craft business is structured as a partnership, multi-member LLC, or corporation, an EIN is required. These entities file separate tax returns from their owners.

For LLCs, tax treatment varies. A single-member LLC is considered a disregarded entity for federal tax purposes and does not need an EIN unless it hires employees or elects to be taxed as an S corporation. If an LLC files Form 2553 to be taxed as an S corporation, an EIN is required.

Corporations, whether C corporations or S corporations, must obtain an EIN. A C corporation files Form 1120 and pays corporate income tax, while an S corporation passes income and losses to shareholders, who report them on their personal tax returns.

Partnerships, including multi-member LLCs taxed as partnerships, also need an EIN. Partnerships file Form 1065 and distribute income and expenses to partners via Schedule K-1. The EIN facilitates tax reporting and ensures proper allocation of earnings among partners.

Thresholds That Trigger Tax IDs

A Tax Identification Number may be required when a craft business reaches certain financial or regulatory thresholds. If net earnings exceed $400 in a tax year, the IRS requires self-employed individuals to file a Schedule C (Profit or Loss from Business) and pay self-employment tax. While this does not automatically require an EIN, it signals that the IRS recognizes the activity as a business rather than a hobby.

Another threshold involves third-party payment processors, which must issue a Form 1099-K to sellers who receive over $20,000 in payments and conduct more than 200 transactions annually. The IRS planned to lower this threshold to $600 under the American Rescue Plan Act of 2021, but implementation has been postponed, keeping the higher limit in effect for 2024. Receiving a 1099-K does not change tax liability but increases IRS scrutiny, making accurate income reporting and expense tracking essential.

Sales Tax Registration

Selling crafts often requires compliance with state and local sales tax laws. Whether a seller must collect and remit sales tax depends on where they operate and how they conduct transactions. Most states impose sales tax on tangible goods, including handmade items, and require sellers to register before collecting tax from customers.

State Sales Tax Permits

Most states require craft sellers to obtain a Sales Tax Permit or Seller’s Permit if they make taxable sales. This permit allows businesses to collect sales tax from customers and remit it to the state. Some states, such as New York and Florida, require registration regardless of sales volume, while others set revenue thresholds before requiring compliance. In Colorado, businesses must register if they exceed $100,000 in annual sales. Some states also issue resale certificates, allowing sellers to purchase materials tax-free if they are incorporated into finished products for resale.

Online and Out-of-State Sales

Selling crafts online introduces additional tax considerations, particularly after the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. This ruling allowed states to enforce sales tax collection on remote sellers, even if they lack a physical presence in the state. Many states have since implemented economic nexus laws, requiring businesses to register and collect sales tax if they exceed a certain revenue or transaction threshold.

For example, California requires out-of-state sellers to collect sales tax if they generate more than $500,000 in annual sales to California residents. Platforms like Etsy and Shopify often handle tax collection on behalf of sellers, but compliance responsibilities vary based on state laws and platform policies.