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As an Etsy seller, your inventory plays a role in determining your income and expenses for tax purposes. Here's a breakdown of how inventory affects your taxes: 1. Cost of Goods Sold (COGS): You should track the cost of purchasing or producing the items you sell on Etsy to calculate your COGS. This includes the cost of materials, labor (if applicable), and any additional costs directly associated with creating your products. The COGS is an expense that you can deduct against your revenue to help calculate your taxable income. 2. Unsold Inventory: At the end of the tax year, you should account for any remaining unsold inventory. In general, the inventory is valued at your cost and acts as an asset on your balance sheet. You cannot deduct the cost of unsold inventory until you sell the items. For your contractor in the Philippines, you generally don't have to withhold or pay payroll taxes since they are a foreign independent contractor. However, you should have them fill out Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting), which verifies their foreign status and serves as a record that they are not subject to U.S. tax withholding. When filing your tax return, you must report your total revenue from Etsy sales, including any fees or commissions paid to your contractor in the Philippines. You can also deduct certain business-related expenses such as fees paid to Etsy, shipping costs, and other essential business expenses. Remember to keep accurate records of your sales, COGS, and expenses to make filing your taxes easier. As with any tax situation, it's always a good idea to consult with a tax professional familiar with your specific circumstances to ensure you're filing taxes correctly and optimizing your deductions.