How To File Make Your Etsy 1099 Taxes A Breeze
More people are looking for ways to sell online as the pandemic continues and Etsy is one of the great online marketplaces for a new startup artist. Although getting started as a sole proprietor in online sales is simple and straightforward, it’s not easy to be a real business owner and to be compliant with all IRS filing rules. In this article, I will go through some of the basic tax information needed as an Etsy seller for IRS reporting purposes.
How do I determine my sales on Etsy?
Can’t you track your sales on Etsy? And have no idea where to start? Don’t worry – Etsy sends out a certain form called Form 1099-K to you and the IRS if you have $20,000 or more in credit card sales through Etsy Payments and you receive 200 and more payments through Payments (PayPal) during the year. You will need to provide Etsy with your tax information when you reach 100 transactions totaling over $10,000.
What is a 1099-K?
A 1099-K form reports the total gross sales income you received through Etsy Payments during the previous calendar year. Now, what is “Gross sales income?” – Gross sales include all of your sales including shipping, refunds, card processing fees, and sales tax applied to the specific items. As mentioned above, you may qualify to receive a 1099-K form if you meet certain profit and sales thresholds. If you aren’t paid in USD and aren’t a US seller, you won’t receive a 1099-K from Etsy, though.
If you have multiple shops on Etsy, the sales across all your shops will be combined to determine whether you have met the reporting thresholds. You’re required to have the same tax information on each of your shops. As of 2019, if your combined shop totals qualify, you will receive a single 1099-K with the combined gross totals from your shops.
When will I get a 1099-K Form?
If you believe you’ve met the 1099-K requirements through Etsy Payments, Etsy will mail out Tax form 1099-K or have forms available to download for qualifying sellers by the end of January in the following year. You can also sign up for electronic delivery of your 1099-K form. You must make sure that you have the correct taxpayer information, including the most up-to-date mailing address.
How to sign up for electronic delivery of your 1099-K Form
- On Etsy.com, click the Your Account icon, then click Shop Manager.
- Click Finances.
- Click Legal and tax information.
- Click Sign up for an electronic 1099-K.
- To download your e-form, click Download 1099-K. Your e-form will download as a PDF file. Don’t leave the page until the download is complete.
If you select electronic delivery, you won’t receive a paper 1099k-K Form in the mail. If you would like to receive a paper 1099-K Form, you can opt-out of electronic delivery on the Legal and tax information page.
Can I deduct business-related expenses?
The great news is, you only pay taxes on your net profit (gross sales minus expenses including Etsy fees and other business deductions) from your tax bill. This means that even if your 1099-K Form shows $100,000 of the gross sales if you have $40,000 of expenses to claim, you will only be taxed on the remaining $60,000 net business income. Typical 1099 business expenses you can deduct are as follows:
- Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
- Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees' retirement.
- Rent Expense - Rent is any total amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
- Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
- Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
- Cell Phone Bills - You can deduct phone bills that are used for business purposes.
- Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession
Hobby VS Business
Beginning in 2019, the IRS doesn’t allow you to deduct hobby expenses from hobby income. You must claim all hobby income and are not permitted to reduce that income by any expense.
If you take it seriously as a small business and show that it’s not a hobby, you can take advantage of using any loss from your business to offset other income you have, such as wages. To prove you have a business and it’s not a hobby, you will have to show the time and effort you spend, have a business plan, and how a profit at least three out of five years, keep a separate bank account for business purposes, and demonstrate your expertise.
If your total gross income as a freelancer is $400 and more, you must pay self-employment tax in addition to income tax. Make sure you set aside a portion of your sales for these self-employed tax purposes. Generally, it’s about 15% of your net income. To calculate how much you'll owe, use our self-employment tax calculator for free.
You will also owe some state and local sales taxes on your Etsy sales. Although Etsy calculates, collects, and remits state sales tax on orders shipped to some states, it is ultimately your responsibility. You should research the laws in the states you often sell in and make sure to collect and remit tax as required.
Estimated Quarterly Taxes
The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. In other words, taxpayers are required to pay taxes on their estimated annual incomes in four payments spread out over each year. These are called estimated taxes. These payments are for both self-employment taxes and income taxes.
You can make payments either through withholding or by making estimated tax payments. If you didn't pay enough throughout the tax year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. To see how much to send, use our free estimated tax payments calculator.
You normally pay estimated taxes in four installments – typically due on April 15, June 15, and September 15of the current year and then January 15 of the following year.
If you’re located in the US and paid in USD and meet certain gross sales and transaction threshold, Etsy is required to report your total gross sales income from Etsy Payments on the 1099-K Form without subtracting expenses. You can sign up for electronic delivery of your 1099-K Form to receive one in the following year. Remember that total 1099-K income doesn’t need to be reported as a full amount and you can always claim business-related expenses as a tax deduction to reduce taxable income in your tax returns. If you have questions during the tax season, speak with a CPA or an accountant for tax advice.