How to Do Etsy Taxes for Your Small Business

Selling handmade goods, vintage items, or craft supplies on Etsy offers a platform to reach a wide customer base. As a seller, understanding the tax implications of your online business is crucial for operating legally and efficiently. This guide aims to clarify the tax landscape for Etsy sellers, providing insights into various tax types and compliance procedures.

Identifying Applicable Taxes

Etsy sellers are typically considered self-employed, making earnings subject to federal and state taxes. Profits from Etsy sales are taxable income and must be reported on your annual tax return.

Beyond standard income tax, Etsy sellers are responsible for self-employment taxes. This tax covers Social Security and Medicare contributions, normally split between an employer and employee in traditional settings. As a self-employed individual, you bear full responsibility for both portions. The self-employment tax rate is 15.3% on net earnings from self-employment, with 12.4% for Social Security and 2.9% for Medicare.

State sales tax is another consideration for many Etsy sellers. This tax is imposed by state and local governments on the sale of goods and services. Unlike income and self-employment taxes, which are federal obligations based on your profit, sales tax is collected from the buyer at the point of sale and then remitted to the appropriate state tax authority. The applicability and collection of sales tax depend on your business location and customer residency.

Essential Record Keeping

Meticulous record-keeping is essential for tax compliance and business management. Track all income sources, including Etsy sales, shipping fees, and other revenue like custom orders or workshops.

Record business expenses, as these reduce taxable income. Common deductible expenses for Etsy sellers include the cost of goods sold (materials, labor, and production costs), Etsy fees (listing, transaction, and payment processing fees), and shipping costs (postage, labels, and packaging supplies).

If you use a portion of your home exclusively and regularly for your Etsy business, you may qualify for the home office deduction. This allows you to deduct a portion of your rent or mortgage, utilities, and insurance costs. Other deductible expenses include marketing and advertising costs, supplies and tools used in production, professional development like craft classes, bank fees, and subscriptions to relevant software.

Effective record-keeping simplifies tax preparation and provides a clear financial picture. Utilize spreadsheets, accounting software, or specialized apps to organize financial data. Retain all receipts, invoices, and bank statements as documentation for your income and expenses. Organized documentation streamlines tax filing and provides substantiation for reported figures if ever requested by tax authorities.

Understanding Key Tax Documents

Etsy sellers use several tax documents to summarize financial activity and report taxes.

Form 1099-K, “Payment Card and Third Party Network Transactions,” is issued by Etsy or its payment processor when a seller meets specific transaction thresholds. This form reports the gross amount of payments received through the platform. It is important to remember that the amount on Form 1099-K represents gross sales and does not account for refunds, processing fees, or business expenses, meaning it is not your net profit or taxable income.

Schedule C (Form 1040), “Profit or Loss from Business (Sole Proprietorship),” is used to report your Etsy business income and expenses, calculating net profit or loss for the tax year. Schedule C serves as the primary means of reporting your business’s financial performance to the IRS, detailing revenue and itemized deductions. Its purpose is to determine the taxable income from your self-employment activities.

Schedule SE (Form 1040), “Self-Employment Tax,” is used to calculate the self-employment tax owed. This form determines your Social Security and Medicare contributions based on net earnings from self-employment reported on Schedule C.

Form 1040-ES, “Estimated Tax for Individuals,” is relevant for many Etsy sellers. This form is used to calculate and pay estimated taxes throughout the year. If you expect to owe at least $1,000 in taxes for the year, you may be required to make quarterly estimated tax payments.

Calculating and Reporting Federal Income and Self-Employment Taxes

Calculating federal income and self-employment taxes begins with determining your net profit. Start with your total gross income from all Etsy sales and other business revenue, using Form 1099-K as a starting point for all income. Subtract all allowable business expenses that you meticulously recorded throughout the year, such as the cost of goods sold, Etsy fees, shipping costs, and home office deductions. The resulting figure is your net profit or loss, which forms the basis for your taxable income.

Transfer this net profit information onto Schedule C (Form 1040). Report your gross receipts or sales. Deductible expenses like advertising, commissions, legal and professional services, office expenses, supplies, and utilities are then itemized. The net profit or loss from your Etsy business is calculated on Schedule C, and this figure flows to your main Form 1040, impacting your overall adjusted gross income.

After completing Schedule C, use your net earnings from self-employment to calculate your self-employment tax on Schedule SE (Form 1040). The net profit from Schedule C is transferred to Schedule SE. Self-employment tax is computed on 92.35% of these net earnings and added to your total tax liability on Form 1040.

The self-employment tax calculated on Schedule SE also includes a deduction for one-half of the self-employment tax paid. This is entered on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income,” and reduces your adjusted gross income on Form 1040. This deduction helps offset the burden of Social Security and Medicare taxes. Both your net profit from Schedule C and the self-employment tax from Schedule SE are integrated into your personal income tax return, Form 1040, determining your total federal tax liability.

For many self-employed Etsy sellers, making estimated tax payments throughout the year is a requirement to avoid penalties. If you expect to owe federal tax, you generally need to pay estimated taxes quarterly using Form 1040-ES. These payments cover your income tax and self-employment tax obligations. The IRS sets payment deadlines typically in April, June, September, and January of the following year.

Managing State Sales Tax Obligations

State sales tax obligations for Etsy sellers are distinct from federal income and self-employment taxes and are primarily governed by “sales tax nexus.” Nexus refers to a sufficient physical or economic presence in a state that requires a business to collect and remit sales tax. Physical nexus can be established by having a physical location, employees, or inventory in a state. Economic nexus is triggered when a seller meets certain sales volume or transaction thresholds in a state, often ranging from $100,000 in sales or 200 separate transactions annually, regardless of physical presence.

Once nexus is established, the seller must register for a sales tax permit with that state’s tax authority before collecting any sales tax. Registration is mandatory and grants authority to collect sales tax and provides a sales tax identification number. Each state has its own registration portal, typically found on the state’s Department of Revenue or Tax Commission website. It is important to complete this registration process accurately and promptly in every state where you have nexus.

Etsy’s role as a “marketplace facilitator” significantly simplifies sales tax collection for many sellers. Under marketplace facilitator laws, adopted by most states, platforms like Etsy are responsible for calculating, collecting, and remitting sales tax for transactions on their platform. For sales through Etsy in states with these laws, Etsy handles the sales tax, relieving the individual seller of this burden. However, sellers should verify which states Etsy collects for, as the list can change, and some states may have specific nuances.

Despite Etsy’s role, sellers may still be responsible for collecting and remitting sales tax in certain scenarios. If you make direct sales outside of the Etsy platform, such as through your own website or at local craft fairs, you are typically responsible for collecting sales tax in states where you have nexus. In such cases, you must manually calculate sales tax based on the applicable rate for the buyer’s location and ensure it is added to the purchase price.

Collected sales tax must be remitted to the appropriate state tax authorities according to their specified filing frequencies (monthly, quarterly, or annually), depending on your sales volume. States generally provide online portals for filing sales tax returns and making payments. Maintain accurate records of all sales, collected sales tax, and remitted amounts for compliance.