Do You Have to Claim Etsy Sales on Your Taxes?

Income earned from selling products on Etsy is considered taxable income by the Internal Revenue Service (IRS) and must be reported. If you sell goods on the platform, you are responsible for determining if you need to file, calculating your taxable income, reporting it to the IRS, and paying any tax that is due.

Determining Your Filing Requirement

The IRS requires that all income from any source is reported on a tax return unless excluded by law. For an Etsy seller, the first step is to determine whether your shop is a business or a hobby. The IRS views an activity as a business if you operate it to make a profit. An activity is presumed to be a business if it has been profitable in at least three of the last five years.

If your Etsy shop is classified as a business, you can deduct expenses from your income. If it’s a hobby, you must report the income but cannot deduct expenses. This distinction affects how you calculate your final taxable amount. The requirement to report all income exists regardless of whether you receive any tax forms.

Payment settlement entities like Etsy must send Form 1099-K to sellers and the IRS if sales exceed certain thresholds. For the 2025 tax year, you will receive a Form 1099-K if your gross sales through Etsy Payments are more than $2,500. This threshold is part of a phased implementation by the IRS. Even if your sales are below this amount and you do not receive a Form 1099-K, you are legally obligated to report all business income.

Calculating Your Taxable Etsy Income

To determine the portion of your Etsy sales subject to tax, you must calculate your net profit. This begins with your total gross income, which is the total money received from sales before any expenses are taken out. You can find this information in your Etsy shop’s payment account reports, and it includes the sales price of your items plus any shipping fees you charged.

From your gross income, you subtract the costs of running your business. These deductible expenses are the ordinary and necessary costs incurred in your trade. A category of deductions for many sellers is the Cost of Goods Sold (COGS), which includes the cost of raw materials and supplies used to create your products. For example, a jewelry maker could deduct the cost of metal and stones.

Other deductible expenses can be subtracted from your gross income to find your net profit. These include:

• Platform and transaction fees: This includes listing fees, transaction fees, and payment processing fees charged by Etsy.
• Operational costs: Expenses for shipping, postage, and packaging materials like boxes and bubble wrap.
• Marketing and advertising: Money spent on Etsy Ads or other online advertising for your shop.
• Home office: A portion of your home expenses if you use part of your home exclusively and regularly for your business. This can be calculated using a simplified or actual expense method.
• Overhead: A portion of your internet and phone bills based on business use, as well as the cost of business-related software, subscriptions, and professional development.

Reporting to the IRS

After calculating your net profit, you must report this information to the IRS. If you operate your Etsy shop as a sole proprietor, you will report your business income and expenses on Schedule C, Profit or Loss from Business. This form is filed with your personal Form 1040, U.S. Individual Income Tax Return.

On Schedule C, you will enter your gross income from all sales, not just the amount reported on a Form 1099-K. The business expenses you calculated, such as COGS, advertising, and office expenses, are entered in the appropriate lines. The resulting net profit or loss from this form carries over to other parts of your tax return.

If your net profit from your Etsy business is $400 or more, you must also pay self-employment taxes. These taxes cover Social Security and Medicare contributions and are calculated on Schedule SE, Self-Employment Tax, using the net profit from your Schedule C. The self-employment tax rate is 15.3%, which is 12.4% for Social Security up to an annual limit and 2.9% for Medicare.

The net profit from Schedule C is added to your other sources of income on Form 1040. The self-employment tax from Schedule SE is added to your total tax liability. This integrates your business’s financial results into your personal tax return.

Paying Your Taxes

Since income from an Etsy shop is not subject to automatic tax withholding, you are responsible for paying taxes on it throughout the year. This is done by making quarterly estimated tax payments for both your income tax and self-employment taxes. You must pay estimated taxes if you expect to owe at least $1,000 in tax for the year after subtracting any withholding and credits.

To determine your estimated tax payments, you will need to estimate your total expected income and deductions for the year. You can use the worksheet on Form 1040-ES, Estimated Tax for Individuals, to help with this calculation. The year is divided into four payment periods, with due dates in April, June, September, and January of the following year.

The IRS provides several payment methods, including online through IRS Direct Pay, the IRS2Go mobile app, or the Electronic Federal Tax Payment System (EFTPS). You can also mail a check with a Form 1040-ES payment voucher. Making these payments helps you avoid a large tax bill and potential penalties for underpayment.