Selling your kid's old bicycle is not likely to cause any tax consequences, but when you sell crafts, vintage or specialty items on websites like Etsy, you have to report and pay taxes on your net income. You will also likely need to pay self-employment tax on your profits, and in some locations, you may also be responsible for charging and collecting sales tax.
Paying federal and state income tax on Etsy income
If you sell items on Etsy, you will likely need to pay income tax on your income—usually, the total amount you earned by selling your products, less your business expenses. Etsy typically reports your gross income to the IRS on Form 1099-K, but even if you don't receive a 1099-K, you still have to report your Etsy sales income on your tax return. If your state has income tax, you'll need to pay state income taxes on the net income from your Etsy sales as well.
The IRS planned to implement changes to the 1099-K reporting requirement for the 2023 tax year. However, the IRSrecently delayed the implementationof the new $600 reporting threshold for transactions from third party processors like Venmo and Paypal, reverting tax year 2023 back to the previously higher 1099-K reporting threshold (over $20,000 in payments and more than 200 transactions).
However, some individual states have already begun to use the lower reporting threshold. Maryland, Massachusetts, Vermont, Virginia and the District of Columbia have a $600 threshold for requiring 1099-K in effect for 2023. North Carolina and Montana also have a $600 threshold, although state tax officials have said these states may offer relief. If you don’t receive a 1099-K, the IRS still expects you will report all your income, regardless of the amount.
Deducting business losses from Etsy sales
If you sell on Etsy for profit as a business, you can likely deduct business expenses like:
- Cost of materials
- Advertising
- Shipping
Provided that you Etsy activity is considered a business rather than a hobby, these can be deducted even if they exceed the money your business earned. If your business expenses are greater than your Etsy income, you'll have a business loss from your sales. This can typically be deducted from other income you have—even from another job or business. This deduction can reduce your taxable income.
Business expenses if your business is a hobby
If your Etsy selling is considered a hobby by the IRS then you cannot take business loss deductions to directly reduce your selling income. For tax years prior to 2018, you can take them as an itemized deduction on Schedule A. For tax years beginning with 2018, you are not be able to reduce your hobby income by any hobby expenses. Therefore, most taxpayers will try to avoid having their Etsy selling being classified as a hobby.
You are more likely to avoid hobby classification if you run the operation in a businesslike manner, depend on the income from the business, keep precise business records and show a profit in three out of five years.
Paying self-employment tax
If your total net income from self employment including Etsy sales is $400 or more, you'll also need to pay self-employment tax on this income. Self-employment tax includes Social Security and Medicare taxes. The amount due is comprised of the percentage that would normally be withheld from your paychecks as an employee, plus the percentage your employer would have contributed. When you're a self-employed individual you're responsible for paying both types of taxes yourself.
This means a total of:
- 12.4% of the first $160,200 in 2023 you earn for Social Security tax increasing to $168,600 in 2024
- 2.9% of your total income for Medicare
If your income is considered a hobby, then it will be subject to income taxes but not to self-employment taxes.
Charging, Collecting and Paying Sales Tax
Some state and local governments charge sales taxes—usually a percentage of the value of each sale. In many cases, it’s the responsibility of the online seller to collect this tax from the buyer and send it on to the taxing authorities.
Sales tax laws are not the same in each jurisdiction, so make sure to research the rules in your area.
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FAQs
If your Etsy shop is a business, your net business earnings will be subject to income taxes and the 15.3% self-employment tax. However, you can write off certain business expenses to reduce your taxable net earnings and lower both tax bills.
Do I have to worry about sales tax on Etsy? ›
For the most part, Etsy is required to collect and remit sales tax on behalf of its retailers. But this requirement only applies to sales made on the platform. Any additional sales, whether made in person or through other online sites, must be managed by the seller.
Does Etsy report your income to the IRS? ›
Etsy tracks and reports your sales through Form 1099-K. You'll receive this form if you had over $600 in Etsy Payments in 2023. You may be able to deduct business expenses such as supplies and shipping costs. If you're selling on Etsy, be sure to set aside earnings to cover income tax and self-employment tax.
How much do you have to make on Etsy to get a 1099? ›
Etsy is required to issue a 1099-K form to you and the IRS if your shop reaches $20,000 USD in sales and more than 200 transactions during the calendar year. If you expect to qualify, make sure your taxpayer details are up to date by December 31, 2023. Learn how to update your taxpayer information.
How much should I set aside for taxes at Etsy? ›
Taxes You Will Need To File As A Seller On Etsy
Self-employment tax equals about 15.3% of your net earnings. To quickly figure out how much you'll owe, use our 1099 tax calculator. It is your dirty to figure out your total gross income earned, to report taxable income on your income tax return.
How much can you make selling crafts before paying taxes? ›
Self-employment tax
Generally, you must pay self-employment taxes if your net profits are $400 or more. Self-employment taxes are Social Security and Medicare taxes. Use Schedule SE with your tax return to help you determine how much tax to pay.
Does Etsy keep track of sales tax? ›
Based on applicable US State enacted marketplace facilitator tax laws, Etsy automatically calculates, collects, and remits US sales tax on behalf of sellers located anywhere in the world when: An order ships to a recipient in the US; or. A digital order is purchased by a US buyer; and. The order meets certain criteria.
How to do tax-exempt on Etsy? ›
If you're making a purchase that qualifies as tax-exempt, such as a purchase for a certified non-profit organization, select Contact support at the bottom of this page. When you contact Etsy Support: Include the order number(s) for the order(s) that should be tax exempt. Attach your tax exemption form.
How to remove sales tax in Etsy? ›
If you don't want to charge tax on an item, when creating or editing a listing, uncheck the box next to the item's price.
Does selling on Etsy count as a business? ›
An Etsy seller needs a business license if their Etsy activity is a business. If it is a hobby, no license is necessary. However, it is hard to follow the IRS guidelines to determine whether you have a business or a hobby. Therefore, you may want to consult a small business attorney to guide you in the right direction.
Contact Etsy Support: Reach out to Etsy customer support to inquire about the status of your 1099-K. Report Your Income Regardless: Whether you receive the form or not, you're still responsible for reporting all your income. Maintain thorough records of all sales and related expenses.
Do I need an LLC to sell on Etsy? ›
If you're based in the US, you can either operate your Etsy shop as an unincorporated entity — a sole proprietorship or a general partnership — or you can incorporate and form a corporation or a limited liability company (LLC). Sole proprietorships and general partnerships are the two simplest options.
Am I self-employed if I sell on Etsy? ›
As a seller on Etsy, you're considered to be a self-employed person by the IRS, so you'll have to pay self-employment taxes as well as income tax. Depending on where you live or where you're selling goods, you might also have to collect sales tax on each sale you make.
In what states does Etsy not collect sales tax? ›
Determine Where to Charge Etsy Sales Tax. As a seller, you must charge sales tax in states that impose a sales tax, where you also have a sales tax nexus. Forty-five states and the District of Columbia levy a sales tax—only Alaska, Delaware, Montana, New Hampshire, and Oregon don't.
Can you sell on Etsy as a hobby? ›
If you're selling on Etsy without expecting a profit, your shop may qualify as a hobby. If your Etsy shop is something you dedicate time to on a regular basis (and the time you spent is not inconsequential), and your primary purpose for the shop is for income or profit, your shop qualifies as a business.
Do I need a tax ID to sell on Etsy? ›
An EIN is required if your business is registered as an LLC or partnership for reporting taxes to the IRS. If you're operating as a sole proprietorship, which the majority of Etsy owners are, you don't need an EIN.
Is my Etsy shop a hobby or business? ›
If you're selling on Etsy without expecting a profit, your shop may qualify as a hobby. If your Etsy shop is something you dedicate time to on a regular basis (and the time you spent is not inconsequential), and your primary purpose for the shop is for income or profit, your shop qualifies as a business.
How to use tax exempt on Etsy? ›
If you're making a purchase that qualifies as tax-exempt, such as a purchase for a certified non-profit organization, select Contact support at the bottom of this page. When you contact Etsy Support: Include the order number(s) for the order(s) that should be tax exempt. Attach your tax exemption form.
