Etsy taxes 101: A comprehensive guide for small business and solopreneurs

As a shop owner on Etsy, you’re a master of nailing the details, whether you’re designing your latest collection, identifying ingredients for handmade bath soaps or meticulously measuring every last inch of leather for that bound journal. 

When it comes to your taxes, if you’re not as diligent as you are with your business, you may have to pay penalty fees or lose out on thousands of dollars from deductions. 

But navigating the often-confusing world of taxes doesn’t need to be difficult. In this guide, learn how to prepare and file your Etsy taxes, including tax deductions that may help you save money.

What taxes do you need to pay on your Etsy business?

Whether having an Etsy shop is a hobby or your first solopreneur venture, you have to pay taxes once you start making sales on the platform. Paying sales tax and filing taxes on your Etsy business depend on your business structure, location, and state.

Some of the Etsy taxes you may have to pay include:

• Income taxes: Etsy income is usually considered self-employed income, so you’ll need to report your earnings on your income tax return. You can do this with Schedule C or Schedule C-EZ of Form 1040. 
• Self-employment tax: If you’re filing as self-employed and make over $400, you’ll pay self-employment tax, which covers Social Security and Medicare taxes in addition to your income tax. 
• Quarterly estimated taxes: If you expect to owe at least $1,000 in tax for the year, you may have to pay quarterly estimated tax payments, which is common for self-employed individuals to avoid penalties for underpaid taxes. 
• State and local taxes: Aside from federal taxes, you may also have to pay state and local taxes, including income taxes, business taxes, and other fees. 
• Sale tax: Depending on your location and your customer’s location, you may need to collect sales tax on orders. Generally, Etsy automatically includes sales tax on purchases, aside from certain sales and states. 
• International taxes: If you sell to customers internationally, you may need to comply with international tax regulations, such as VAT (Value Added Tax) or GST (Goods and Services Tax), depending on the country. 

There are a lot of tax forms and documents you need to prepare to file your taxes on Etsy, so it’s important to keep thorough records of your income and expenses. Since tax regulations vary widely by location and type of business, a tax advisor can inform you about specific requirements and guide you through the tax filing process.

How to pay taxes on Etsy sales 

While making sales is exciting, dealing with taxes isn’t likely your favorite part of owning an Etsy shop. If you’re wondering how to stay compliant with laws and file taxes on the income you earn on Etsy, the following steps will help you stay prepared.

1. Determine if you have a hobby or a business 

The first step to paying taxes on Etsy sales is understanding whether selling on Etsy is a hobby or a business for tax purposes, as it can affect how you report income and expenses to the Internal Revenue Service (IRS). While the differences aren’t cut and dry, the IRS provides guidelines to help you make this determination.

You may consider your Etsy shop a hobby if:  

• Making a profit is not your main motivation to sell on Etsy.
• You only sell items on Etsy occasionally and don’t try to sell consistently. 
• You incur losses from Etsy sales and don’t make an effort to try to become profitable. 
• Your primary purpose is personal pleasure or recreation rather than making a profit.  

If your Etsy shop is considered a hobby, you shouldn’t need to pay self-employment taxes. Nevertheless, you need to report it as part of income, generally under the “Other Income” line of your tax return, and can’t deduct hobby expenses that exceed your hobby income. 

Now, you may consider your Etsy shop a business if: 

• Making a profit is your main motivation on Etsy. 
• You maintain regular activities and make efforts to improve and expand.
• You try to change your business practices to make it more profitable. 
• You maintain detailed records of income and expenses, have a separate business bank account, and treat your Etsy shop as a business. 

If the IRS considers your Etsy shop a business, it will count as self-employed activity unless you already have a different business structure. This means you’ll need an Employer Identification Number (EIN) or use your Social Security Number (SSN) if you’re a sole proprietor. 

2. Organize and complete necessary tax forms

If you determine your Etsy shop is a business for tax purposes, you have to organize and complete the necessary tax forms. The forms you may need to complete and submit include: 

• Schedule C or Schedule C-EZ: This form reports your income and expenses to the IRS and is part of your individual tax return (Form 1040). In the Schedule C form, you’ll need to provide information about your sales, expenses, and net profit or loss. 
• 1099-K: This form reports the total payments you earned from Etsy sales during the tax year. For 2023 sales, Etsy will provide a 1099-K form if you earn $20,000 or more in gross sales during a calendar year. 
• Schedule SE: This form reports the self-employment taxes, which cover the Social Security and Medicare tax. You’ll file this form if you made at least $400 in self-employed income during the tax year. 

Fill out each form and ensure the information is correct, including your tax identification number, income, and expenses. 

3. File your quarterly estimated taxes

Unlike W-2 employees, sole proprietors’ businesses pay estimated taxes each quarter. If you believe you owe more than $1,000 in taxes in a year, you’ll have to pay taxes quarterly. 

To calculate how much you have to pay each quarter, you can base it on the previous year’s taxes if your income is consistent throughout the year or use form 1040-ES to calculate your estimated quarterly taxes. 

You must submit your quarterly taxes to the IRS by these deadlines:

Once you’re ready to make your quarterly payments, you can file electronically with the IRS or send a check or money order with a payment voucher from Form 1040-ES. 

Keeping your records organized is crucial to making the correct payments on time. Consider using software that integrates with Etsy, like QuickBooks, to keep track of your sales, expenses, and deductions.

4. Don’t forget about sales tax

Wondering if you need to charge sales tax on Etsy orders? The answer varies by location. Luckily, Etsy handles charging, collecting, and remitting sales tax on most orders. 

Some states don't require Etsy to collect and remit sales tax. You can opt out of Etsy automatically collecting sales tax and calculating the tax owed on each sale. 

5. Deduct business expenses

From advertising your shop to purchasing supplies to mailing your products, every business-related expense is a possible deduction.

While the IRS doesn’t allow you to submit self-employed deduction paperwork with quarterly taxes, it is vital to track all deductions throughout the year in case of an audit. You can factor in deductions with each quarterly tax payment and use what you paid the year prior as a guide. 

Here are 10 common Etsy tax deductions:

1. Vehicle expenses: If you’re using your car to pick up or drop off packages, you can deduct your vehicle expenses by tracking your mileage and other vehicle-related expenses. 
2. Cellphone and Internet usage: You deduct cellphone and Internet usage when you’re using those devices and services solely for your business. 
3. Equipment expenses: Any equipment you use is deductible—from the supplies you use to make your products to the packaging you put them in. 
4. Shipping expenses: Shipping and postage costs you incur that relate directly to the products you’re selling are deductible. 
5. Advertising fees: If you’re advertising your Etsy business online, in print, or elsewhere, those costs are deductible. You can also deduct fees to list your items on Etsy. 
6. Home office expenses: If there’s a room in your home you use exclusively and regularly for business, you can take the home office deduction. 
7. Legal or professional services: Fees you pay to attorneys and accountants for services you need to run your business qualify as business expenses. These fees may also cover personal tax advice you receive, including tax preparation fees.
8. Education, networking, and travel: You can also deduct what you spend on necessary education, networking, and travel. 
9. Meals and entertainment: You can deduct any entertainment expenses, including meals, directly associated with your business. 
10. Charity donations: If you make a cash payment or gift contribution to a charitable or nonprofit organization, you may deduct that amount if your business did not directly benefit from it.

In addition to deductions you can make on physical items and services, as a self-employed Etsy seller, you can also deduct some retirement contributions. If you have a traditional IRA, you may make a full deduction if you aren’t covered by another retirement plan. If you’re married, your spouse must not have a retirement plan at work to qualify.   

You may opt for an individual 401(k) plan, which works just like a corporate 401(k) but is for solopreneurs like Etsy sellers. Like the traditional plan, anything you contribute to your 401(k) savings may be deducted from your net income when you report for taxes.

Find peace of mind come tax time

Making sure your Etsy taxes are accurate helps you avoid penalties and maximize your deductions. Use a professional service that integrates with Etsy, like QuickBooks Solopreneur, to help you keep track of it all. Precisely managing your expenses and income helps you to get the return you deserve, which could be just what you need to expand your Etsy product line or start a new shop.