Etsy is a peer-to-peer e-commerce website for people around the world to make, sell and purchase unique, handcrafted goods. Etsy sellers, or Etsy-preneurs, value their business independence. However, this freedom comes with responsibility, like keeping up with your own taxes.

Annual Income Taxes

Etsy sellers pay income taxes on their sales. This is considered self-employment income, which means you must fill out a Schedule C “Profit of Loss from Business.” As an Etsy-preneur, you will owe taxes on the net profit from your business. Translation: the total amount of income you made, minus your business expenses and deductions.

Etsy will send you a 1099-K, which reports the total gross sales income you received through direct checkout during the last calendar year. To receive a 1099-K, you must meet both of these requirements: 

  • You processed $20,000 in sales through direct checkout
  • You received 200 or more transactions through direct checkout

If you earn less than $20,000 and do not receive a 1099-K, you still need to report those earnings on your income tax return.

Quarterly Estimated Taxes

Because you are self-employed, you must follow the “pay-as-you-go” rule: You pay your income taxes as you earn money, not just at the end of the year. If you expect to owe more than $1,000 in taxes for the year, then the IRS expects you to pay a fourth of the tax each quarter.

At the start of the year, it can be difficult to determine what your annual net profit will be, as well as which tax deductions you will be able to take. Hence the word estimated. The IRS acknowledges this uncertainty, so you will not be penalized as long as you pay what you owed last year, which can be found on last year’s Form 1040. To pay your estimated quarterly taxes, fill out a Form 1040-ES voucher and send it to the IRS or make payments online, by phone or by direct transfer.

Self-Employment Deductions

Because you pay taxes on your profit (gross sales minus expenses and deductions), you will want to minimize your tax bill by maximizing your deductions. Here’s a list of items you can deduct, but be sure to keep records and follow the IRS guidelines.

  • Cost of goods sold, i.e. beads, fabric, threads
  • Listing and advertising fees, i.e. Etsy’s fees for selling, promoted listings, business cards
  • PayPal and other bank fees
  • Home office deduction
  • Driving expenses, i.e. mileage deduction for dropping off packages and picking up supplies
  • Postage and shipping, i.e. packaging materials

Find out all you need to know about the digital economy and your taxes. Stay tuned for next week's topic: eBay and Craigslist income. You can also check out last week's blog on Airbnb and rental income.

Disclaimer: Tax Lounge is an informational source for industry news and related topics. We take every effort to provide honest and accurate tax information, but this information should not be a substitute for professional tax advice. Use our office locator to find your local tax office or subscribe to our free newsletter.