An Etsy 101 Series wouldn’t be complete without covering Etsy taxes and accounting. It’s an important business task to get right, but it’s not everyone’s favorite topic for sure. Relax, though; we’re not going too deep on these. After all, this is a crash course, and it’s just not feasible to cover the laws and idiosyncrasies of every state. Ready to crunch some numbers? Let’s dive in!
Before we begin
This article is a part of our Complete Guide for Everything You Need to Know to Succeed on Etsy! If you just stumbled across this article, we recommend you start back at the beginning: Everything You Need to Know Before You Start an Etsy Shop.
Or, if you’d like to check out each article in the series, click through the links below:
8 Steps to Starting an Etsy Shop
We created the Complete Guide for Everything You Need to Know to Succeed on Etsy to teach you how to start an Etsy shop the right way. You can position your Etsy shop for longterm success by following these core principals.
- How to Do Etsy Market Research for Your Products
- Know Your Etsy Shop Branding Before You Open
- How to Create & Maintain an Etsy Shop Aesthetic
- How to Master Your Etsy Product Photography
- How to Research Etsy Keywords
- Etsy Shipping Costs and How to Calculate Them
- A Crash Course to Etsy Taxes & Accounting
- The New & Improved Quick and Dirty Guide to SEO for Etsy
At Marmalead, we strive to offer real, practical advice for Etsy sellers right here on our blog and on our YouTube channel. The world of Etsy is constantly evolving, so if you have a question you can’t find an answer to, reach out to us at success@marmalead.com.
Some Legal Stuff
Before we dive into the details, it’s crucial to understand, this is not tax or legal advice. The purpose of this article is to help paint a picture of what’s involved from the taxes and accounting side so you can navigate it better.
Ultimately, you should take any specific questions to a trustworthy and knowledgeable professional. In general, professionals can be more effective at helping when you go to them with a base level of understanding. A benefit of this understanding is that you’ll be able to ask better questions! Millions of creative business owners just like you navigate these topics, so we’re confident you can too!
IRS Delays New Reporting Threshold Until 2024
In November 2023, the IRS announced a delay to their lower $600 reporting threshold requirement for forms 1099-K.
The 2023 threshold remains at $20,000, but from 2024, a lower threshold of $5,000 will be introduced, leading to a $600 threshold in 2025.
Suppose you’re unfamiliar with this announcement as part of the American Rescue Plan of 2021. In that case, the new reporting threshold will require businesses that collect more than $600 on apps like Venmo, PayPal, and Etsy to report their earnings to the IRS.
“A burdensome reporting requirement for small businesses.”
Etsy isn’t really a fan of the new lower reporting threshold, nor are other TPSOs (third-party settlement organizations).
The National Federation of Independent Business (NFIB) calls this new reporting threshold a burdensome reporting requirement for small businesses. While other critics claim the lower threshold is “government overreach” and will only hurt small businesses.
So Etsy is leading efforts in Washington to raise the threshold, so micro and small sellers aren’t unnecessarily burdened with complicated reporting requirements. They’re also advocating for Congress to raise the $600 reporting threshold permanently.
You can join Etsy in advocating to raise the reporting threshold by sending a letter to your member of Congress through the 1099-K Fairness Coalition.
Understanding Etsy Taxes & Accounting
While you’re cruising through all this information, realize a lot of the work is in the initial setup. Things like filing for incorporation and Employer Identification Number (EIN) are one-time tasks.
Since you’re learning about Etsy taxes, we assume you want to make an income.
The first thing to discuss is your intent. We’ll assume your intent is to make an income, making you a business for tax purposes. Although, there’s another designation where the IRS considers your endeavor to be a hobby.
The “hobby loss” rule applies if you don’t make a profit for 3 out of 5 consecutive years. And if that happens, you can’t deduct your business losses anymore. Basically, the IRS wants to ensure you’re not pretending your hobby is a business just so you can deduct the losses from your other income.
Do you need an EIN as an Etsy Seller?
While an EIN isn’t required for Etsy sellers, it can help keep your identity secure while operating your business.
Whether you need an EIN depends on several factors, such as your business structure and tax filing requirements. You may use your Social Security Number (SSN) for tax purposes if you operate as a sole proprietor. However, if you have employees, operate as a corporation or partnership, or meet certain other IRS criteria, you may be required to obtain an EIN.
Should you use your SSN as a sole proprietor?
You can, in most cases, if you want to. However, an EIN is basically a social security number for a business. By using an EIN, you keep a curtain between your personal identity and your business.
For example, if a business needs to send you a Form 1099, they’ll need either your SSN or EIN. Your EIN is unlikely to be useful if the number somehow gets out. While your SSN is that all-important number tied to your personal credit.
Ready to create a degree of separation between your personal and business identities? Here’s how to apply for an EIN.
Which business entity does your Etsy shop fall under?
The type of business entity for your shop is important and somewhat nuanced. The basic choices are sole proprietor, which is just you, the individual, without a separate corporation, or a Limited Liability Corporation (LLC).
An LLC is a popular choice because it creates a separation of liability between you and your business. It’s also simple to manage from a tax, accounting, and ongoing compliance perspective. They’re a pass-through entity, meaning your profit/loss from the business is taxed at your personal tax rate.
Beyond this, you have C-Corporations and S-Corporations. If you’re looking at those, you’re getting more advanced 😬
Bookkeeping for Etsy sellers
While setting up your accounting, you may also see a question about being cash or accrual-based. This is about your bookkeeping. Cash basis is most common for small businesses. While accrual is something you’ll see big corporations use. You need to know that cash-based transactions record income and expenses when they’re received and spent, just like paper cash. Accrual is recorded as it’s earned or owed, like when invoicing.
Paying Taxes to the IRS
There are multiple levels to be aware of in the tax aspect. Regarding tax efficiency and overall planning, it helps to understand “what’s what” upfront.
Federal, State (Income and Sales), and City. All of these may not apply to you since it depends on your state. Nevada, for instance, doesn’t have State and City income tax, so if you live there, you would only consider Federal Income and State Sales tax.
Federal Income Tax & Etsy Taxes
Federal Income Tax from your business will likely go on a Schedule C form with your personal taxes (Form 1040). That comes back to being a pass-through entity that you read about earlier. Tax rate-wise, your business income gets added to any other income, such as wage income (W2). Then, due taxes follow the tax brackets to determine the amount owed.
Misunderstandings in Etsy Taxes
Since this article is a simple introduction to these terms, let’s look at a commonly misunderstood component for tax calculation and the brackets.
For example, being in the 22% bracket doesn’t mean you’re taxed at 22% from $1 all the way up to $85,525 (which is the 2020 upper level for single filers). The first $1 to $9,875 is actually taxed at 10%, then it moves to the next bracket of 12% for $9,876 to $40,125. Then the next dollar is taxed at 22%.
In other words, earning that extra dollar to be in the following bracket doesn’t mean your entire income is taxed at the higher bracket.
Self-Employment Tax & Etsy Taxes
Another type of Federal Tax is the self-employment tax. When you work a W2 job, your employer pays half of this tax, and you pay the other half through a payroll deduction.
When you’re self-employed, you pay both the employee and business side (although you’re not considered an employee). This comes to 15.3%. Its purpose is to fund Social Security and Medicare.
It will go on your 1040 Schedule SE.
I have to remember all this?
It’s worth noting that TurboTax covers everything we’ve discussed regarding tax filing. So if you’ve used TurboTax for personal filing, it’s the same experience. You’ll just need to answer additional questions when you file since they didn’t apply to you previously.
Okay, when should I pay my Etsy taxes?
When you’re self-employed and not on a payroll, you’re not having earnings withheld from your paycheck for taxes either. The IRS, however, still wants to be paid more than once a year.
You’ll likely need to make quarterly estimated tax payments due on 4/15, 6/15, 9/15, and 1/15. Basically, this is your expected tax bill for the year divided by four.
What if my business is steadily growing, and I don’t know how much I’ll owe? This is more common than not. To avoid a penalty for underpaying, there’s a solution. Pay at least 90% of the tax for the current year. This doesn’t really help if the business is growing and you don’t know what 90% will be. Or 100% of the tax shown on the return for the prior year, whichever is smaller.
In other words, if your total tax bill for last year was $5,000, paying $5,000 in estimated payments will avoid a penalty even if your bill this year is much higher. You’ll still have to pay the difference, of course. And anything you overpay gets refunded.
Paying State Taxes
If you live in one of the 42 states with an income tax, you’re already filing a return with them. Just like the Federal Return, your business income/loss will be added to the return. This is where the pass-through entity helps simplify things. If you chose a different type, you’d have to do a separate Federal and State return just for the business, and then the papers really pile up.
Do Etsy Sellers Pay Sales Tax?
The laws around Sales Tax are always changing. And in recent years, the popularity of eCommerce has made states more ambitious about collecting it. It used to be you just had to collect Sales Tax in the State/County where you had something called nexus (for our definition, that means you have business operations there, employees or a warehouse, for example).
For most of us, though, that will be just our home state.
You’ll also want to check the laws in your state to see whether or not what you’re selling requires you to collect Sales Tax. If so, you’ll need to register to collect and remit Sales Tax. It’s a monthly thing. However, lower volumes are often able to pay quarterly.
Some states also have thresholds where you don’t have to register and collect Sales Tax until you reach a certain sales dollar figure.
But wait, there’s more!
In most states, Etsy as a marketplace is now collecting Sales Tax based on where the buyer is located without you doing anything at all. For these sales that take place in your home state, you don’t have to report these sales; you can only say they were made through Etsy.
Combining those two pieces of information, it’s worth looking at your specific State’s laws to see if selling exclusively on Etsy, where they’re collecting Sales Tax, requires you to do anything at all.
Do Etsy Sellers Pay City Taxes?
By now, you’re catching the theme that every level of government wants a piece of your income. Your county is different because they’re likely getting their revenue from your property taxes, not income taxes. So that brings us to City taxes.
City taxes can be straightforward; the form just asks for numbers straight off your 1040. However, if you live in one city and your business is based in another, both cities want a return, and you’ll need to calculate what’s owed to each.
Often the city you live in will give you some level of credit for the taxes you’re paying to the other city.
So now we know how to pay our Etsy taxes, let’s look at accounting.
Accounting for your business means keeping a record of what happened financially over the course of the year. This is called bookkeeping. A popular solution is Quickbooks, and Etsy even has a partnership with them.
You enter an expense (supplies that you purchased, for example), and it stores that information in the proper accounting format. It will also generate financial reports like balance sheets and income statements. And both of these are important for understanding the health of your business.
Create a System & Routine
The biggest favor you can do for yourself with accounting is to have a system and a routine. It’s so much easier to do your bookkeeping when you can still remember the details. That’s the ideal time to record the details, so you no longer need to remember them! The beginning of the following month is a good time to knock out a month of bookkeeping.
We recommend putting it on your calendar or making it a recurring To-Do List item.
Bookkeeping doesn’t need to be tedious. It’s just putting transactions into general categories like expenses for supplies, marketing, or equipment (e.g., camera).
An easy way to start is to take all your receipts from the prior month and start entering them. Then match all those transactions to your bank and credit card statements. Mark them off as you go because when you have extra transactions on your statements, you’ll want to add those too.
Do You Need to Keep Receipts as an Etsy Seller?
Ideally, you hold onto receipts if you ever need to look back and show proof of the transaction. Don’t stress about keeping receipts for small transactions. Even during an audit, the IRS receipt requirements are $75 or more.
For the receipts you do keep, they say to hold onto them for three years. If you buy many of your supplies online, just put the email receipt in a folder where you can search it out if you ever need it. For paper receipts, grab a shoebox and load it up. Mark it by year so you know when you can throw them out.
Business Expenses to Claim on Your Etsy Taxes
Just like keeping your house going, there are a lot of expenses to running a business. You should account for every expense to have the most accurate picture of how your business is doing.
- Buying stamps? Postage expense.
- Use a phone? Phone expense.
- Did you buy a course to learn something business-related? Education expense.
- Use Marmalead? Software expense.
Quickbooks will have standard account names, and you’ll just need to choose the most fitting one for your transactions.
Common Tax Deductions for Etsy Sellers
Etsy sellers might not be aware of several common tax deductions that can benefit their business and help them save money come tax time. These common deductions include:
- Home Office Expenses: If you use a part of your home exclusively for business, you can deduct expenses like mortgage interest, insurance, utilities, repairs, and depreciation.
- Supplies and Materials: Costs for materials used to make your products are deductible.
- Shipping Costs: Postage, shipping materials, and delivery fees can be deducted.
- Fees and Commissions: Fees paid to Etsy or other platforms for selling your products are deductible.
- Marketing and Advertising Costs: Money spent on promoting your Etsy shop, including online advertising, is deductible.
- Education and Training: Expenses for courses or workshops to improve your business skills are deductible.
Remember, tax laws vary from state to state, so it’s important to consult with a tax professional for specific advice related to your circumstances.
Tax Implications for International Transactions
Another tax implication of selling on Etsy arises when you ship goods internationally. If you sell products to residents in another country, you should be aware of the following tax implications:
- Understanding VAT/GST: Many countries levy a Value-Added Tax (VAT) or Goods and Services Tax (GST) on products sold to their residents. Etsy sellers need to understand and comply with these tax requirements, which may include registering for VAT or GST in certain countries and collecting the tax on sales.
- Customs Duties and Import Taxes: Customers in other countries may be subject to customs duties and import taxes on the products they purchase. These charges are typically due once the package arrives in the destination country. It’s important for Etsy sellers to make their international customers aware of these potential additional costs.
- Income Reporting: Revenue from international sales must be reported as income in your home country. Keep accurate records of all sales, including international transactions.
- Seeking Professional Advice: Tax laws and regulations can be complex and vary by country. It’s advisable to consult with a tax professional who has expertise in international commerce to ensure compliance.
By being aware of these factors, Etsy sellers can navigate the complexities of international transactions more effectively.
Generating an Income Statement for Etsy Sellers
The Income Statement is the most important report you can generate for your business. It tells you what money is coming in, where it’s going out, and how much you’re keeping as profit. Sometimes little expenses like frequent supply purchases add up to more than you’d expect. The Income Statement is a useful place to see that.
The Income Statement looks something like this:
REVENUE
Sales Revenue $100,000
Cost of Goods Sold (COGS) $40,000
Gross Profit $60,000
EXPENSES
Equipment Expense $2,000
Postage $2,000
Marketing $4,000
Total Expenses $8,000
NET INCOME $52,000
Wrapping up Etsy taxes
See, that wasn’t so bad, was it? Wrapping your head around Etsy taxes and accounting isn’t as hard as you think, but it does take a little research. The good news is there are many free or relatively inexpensive programs out there that you can use to help you keep track of everything throughout the year.
And again, don’t be afraid to consult with a professional on this subject. It could very well save you time and headaches in the future.
Interested in more things you should know before you start an Etsy shop? Do you know what similar product listings sell for on Etsy, or are you flying blind? Not only is it important to know the price of your competition, but here’s how to price your products to beat them.
If you’re ready for the next article in our Complete Guide for Everything You Need to Know to Succeed on Etsy, then here it is:
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The New & Improved Quick and Dirty Guide to SEO for Etsy
