If you’ve been building a side hustle as an Etsy seller, and you’re wondering, “do I have to report Etsy income on my taxes?” you’ve come to the right place. Etsy is home to many artists and craftspeople selling their goods online – but you need to remember to report Etsy income when it’s time to file your returns. Some people work full-time as online sellers, making and distributing their products through online marketplace facilitators like Etsy, while others may only do it as a hobby in their spare time.
Whichever of those categories you fall into, you should be proud of yourself for the work you’ve put into becoming a small business owner. It’s not easy to find an audience and carve out a niche in the crowded world of internet commerce.
Whether you’re aware of it or not, you’re running a small business! That’s not a simple feat. And all of the money you make through selling your goods is income you’re earning as a self-employed business owner of your sole proprietorship.
Of course, running a business and earning income carry their own obligations, unfortunately. If you haven’t made very many Etsy sales yet, or if most of your income overall comes through an employer, your Etsy income is unlikely to have any effect on your situation for the tax year. However, you are required to report Etsy income to the IRS.
Do your due diligence to make sure you’re following the rules and avoiding any potential pitfalls! Here’s the process for reporting this income.
Lookout for Etsy Form 1099-K to Report Business Income
As the platform is processing your sales, Etsy is required to report those sales and give you a record of your overall income if you meet certain minimum sales amounts. Etsy will create and provide this report to you on form 1099-K. Receiving this tax form is the first important indicator that you will need to file all of your Etsy income on your tax return.
What is a 1099-K Form?
The IRS form 1099-K is simply a report of the total gross sales that were paid to you on a platform. You might not have seen that same number released to you, depending on what the platform takes.
Etsy and similar platforms are required to create a 1099-K if you made more than a certain amount of online sales or received more than a set amount of money in business income. When they submit a 1099-K, they submit it simultaneously to you, the marketplace seller, and to the government. That means both you and the IRS are informed about the income you should be reporting on your taxes.
Can you Deduct Business Expenses When You Report Etsy Income?
You're required to report Etsy income on your income tax return. However, the good news is that you can claim deductions for business expenses as well. Because your Etsy shop is effectively a small business, you can deduct from your taxable income costs associated with operating your business.
Here are a few self-employment deductions you may be able to claim as an Etsy merchant:
What Taxes Do Etsy Sellers Pay?
Everything explained so far above has to do with income tax, which is the largest tax you’re responsible for as an individual taxpayer in the United States. However, there are a couple of separate but related taxes and tax issues that you should be aware of.
Self-Employment Tax
If you earn wages through an employer, you’re probably used to having a part of your salary withheld to pay for income taxes and something called FICA. Employers withhold 7.65% of your income to pay into Social Security and Medicare on your behalf, and then they pay another 7.65% of your income out of their money but in your name.
The self-employment tax refers to this second 7.65% which is usually paid by the employer. If you are in business for yourself, then you are responsible for paying both halves for a total of 15.3%.
Quarterly Estimated Taxes
Quarterly estimated taxes are actually a part of your taxable income obligations, but they’re also something you might not be used to if you’re accustomed to working for an employer.
Income taxes in the United States must be paid as you earn throughout the year and not at the end of the year. Employers usually handle this on their employees’ behalf. However, if you make most or all of your money as an independent small business, you will need to do this yourself.
You can pay your taxes as you go by making quarterly estimated tax payments. You estimate the total taxes you will owe, and then you pay a quarter of it at a time. The IRS sets four annual deadlines for these four tax installments. The four quarterly estimated tax deadlines are:
State Sales Tax
On top of the income and income-related taxes, Etsy sellers also have to be concerned about state sales tax. This is a tax on the customer transactions themselves, and the laws on these are set entirely at the state level.
Etsy store sales tax rules are complicated because it depends on where each customer is located and the relationship your business has with that state. You must pay sales tax on purchases made in states where your business has a significant presence or “nexus” of business activity.
This means that if a single customer from a state buys a product of yours, and you aren’t located there, you probably won’t owe sales tax there. However, if you start selling to more customers there, you will likely have to remit some sales tax money to that state. Exact minimum requirements and sales tax percentages vary depending on the state.
Etsy and other similar online platforms have the infrastructure to collect and remit sales tax, but they don’t always do it automatically if you don’t instruct them to. Make sure you’re getting the right taxes taken out of your sales.
1-800Accountant Makes Reporting Etsy Income a Breeze
There are numerous requirements and challenges that come with doing small business taxes and reporting Etsy income, but you don’t have to figure it out on your own. Work with a professional from 1-800Accountant and ensure that you’ll be prepared when tax season comes around.
An expert ecommerce tax accountant can make filing your tax return a simple and efficient process, and you’ll be able to rest easy knowing that you’re saving as much money as possible. Get help from an Etsy accounting professional and focus on the creative work you do that earned you this income in the first place!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.
