How to File (and Save Money on) Your Etsy 1099 Taxes

by
Soo Lee, CPA
Updated 
January 19, 2023
January 12, 2023
Icon check
Reviewed by
a tax professional
How to File (and Save Money on) Your Etsy 1099 Taxes
by
Soo Lee, CPA
Updated 
January 19, 2023
January 12, 2023
Icon check
Reviewed by
a tax professional

Digital marketplaces like Etsy make it easy for entrepreneurial types to start businesses selling anything from bacon-flavored toothpicks to film reel wall clocks.

Setting up shop on Etsy, though, means dealing with self-employment taxes for the first time. And that can feel overwhelming — especially if you’re mostly in it for the bacon-flavored toothpicks.

This article has the answers that will help you stay on the IRS’s good side, save money on your taxes, and free up your time for what matters most: connecting with your customers.

Contents

What taxes do you pay as an Etsy seller?

Etsy sellers have to pay self-employment taxes and income taxes on what they earn. Depending on where you — or, more likely, your customers — live, you might have to collect sales taxes from them and pay that out on their behalf.

Most Etsy shops are “sole proprietorships”. This means one person owns the business, and they can take care of their Etsy taxes when they file their personal tax return. (That’s true even if Etsy is your side hustle — something you do alongside a regular day job.)  

Let’s break down the types of taxes you‘ll pay on your Etsy income.

Self-employment tax

If you’ve worked as a regular employee, you’re used to seeing FICA taxes taken out of your paycheck to cover Medicare and Social Security taxes. Self-employment tax is essentially the same thing, but for business owners.

The key difference is that:

  • W-2 employees pay 7.65% of their income in FICA taxes. Their employer matches the other 7.65%, bringing the total contribution to 15.3%
  • Self-employed people pay the full 15.3% because they’re responsible for both the employee and employer amounts

Luckily, you can deduct the employer portion from your income taxes. Speaking of which….

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Income tax

In addition to self-employment tax, Etsy sellers also pay income taxes to the federal government.

Federal income taxes are progressive, which means that the amount you pay depends on your income level. Depending on where you live, you might also have to pay state income taxes. 

Get an idea of what you can expect to owe in self-employment and income taxes with our free income tax calculator. We’ll tell you how much goes to your state, too.

Sales tax

Sales tax works a little differently than the first two: it doesn’t come out of your income. (Hooray!) It’s your customer who pays it — assuming they live in the US.

You’ll facilitate this payment, though, usually by tacking a fixed-percentage sales tax onto the price of your products. Keep reading to learn more about sales tax, or skip ahead to the part on hobby sales.

(Note: Money from sales taxes usually goes to your customers’ state or local jurisdictions, for things like road work or funding for public schools. If you live in one of 12 “origin states” — meaning, the sales tax is collected from the merchant’s state instead of the recipient’s — it’ll go to your state or local government instead!)

Does Etsy take care of sales tax for you?

In most cases, yes. Etsy automatically collects and remits sales taxes on physical goods shipped to most states. Specifically, it handles this in the states where it’s legally required to do so, thanks to what’s called “market facilitator laws.” 

Etsy also handles sales tax on downloadable orders in many states, but not all of them. This applies to both “instant” digital downloads, which your customer can download right away, and “made-to-order” downloadables, which you’ll have to customize before sending to them.

Which states don’t require sales tax?

A few states are exempt from sales tax, period. They are:

  • Montana
  • New Hampshire
  • Alaska
  • Delaware
  • Oregon

In addition, not all states tax digital orders. And some states only collect sales tax for certain types of digital orders. For instance, in Vermont, the sale of a downloadable photo wouldn’t need to be taxed. But other digital orders — like custom ringtones or digital games — are taxed.

All in all, there’s a fairly good chance that Etsy has your situation covered. That said, it won’t always be the case.

What should you do if Etsy doesn’t handle all of your sales tax?

There are a few situations where state sales tax is required, but Etsy doesn’t take care of them for you. 

For example, Etsy doesn’t collect sales tax on made-to-order downloads if they’re purchased in Alabama. But Alabama does tax digital products. So if you sell a made-to-order downloadable wedding invitation to someone in Alabama, you’ll be expected to charge the appropriate sales tax.

In cases like these, you can use Etsy’s sales tax tool, which will let you set a sales tax for specific states. Just go to your “Shop Manager,” navigate to “Finances,” and find your “Payment settings.” 

What about out-of-state sales?

If your store is based in, say, California, but you sell to another state where Etsy doesn’t facilitate sales tax, you’re still likely off the hook.

Here’s why. Every state has two rules for determining who should pay sales tax: 

  • Economic nexus: You’ve made enough sales in their state for them to care
  • Physical presence: You have employees, an office, warehouse, or shop in their state 

Luckily, most states don’t consider you to have “economic nexus” in their state unless you sell more than $100,000 in goods.

Bottom line: If you make $5,000 in digital order sales in a state where Etsy doesn’t handle your sales tax, you still don’t need to worry about it. You don’t have economic nexus!

That said, if you have a remote employee — not a contractor —  in that state, you would need to collect sales tax. Because then you’d have a physical presence there. 

Now let’s move on to a common question among Etsy sellers: How do you handle taxes if you just run your store as a casual hobby?

Do you have to file taxes if Etsy is your “hobby”?

Yes. "Filing taxes" essentially means reporting your income to the IRS. And if you’re running your shop as a hobby, you’ll still have to report what you earned from Etsy sales. 

The tax form you'll use is Schedule 1. Your hobby income goes on line 8.

How does hobby income work?

Hobby income isn’t subject to self-employment taxes. But it is subject to income taxes. That means it can push you into a higher marginal tax bracket.

For example, say you’re a single filer who made $200 selling your crochet on Etsy as a hobby. It’s enough to push your total income from $41,700 to $41,900. That puts some of your income into the next tax bracket up (because the 12% tax bracket ends at $41,775, while the 22% tax bracket starts at $41,776).

That means $124 of your money would get taxed at the higher tax rate of 22% — thanks to your Etsy hobby. But what if your Etsy shop counted as a business instead?

Does your Etsy shop count as a business or a hobby?

The IRS doesn’t shy away from a gray area. And the distinction between hobby and business can be a little fuzzy. The key consideration, though, is your intention as a seller: Are you running an Etsy shop expected to make a profit? Or is it purely a recreational pastime?

A few other things the IRS wants you to think about when it comes to your store. If the answer to any of these questions is “yes,” it’s less likely to be a hobby:

  • Do you devote a significant amount of time to making your Etsy shop?
  • Do you depend on income from Etsy for your livelihood?
  • Do you have prior experience in making a profit with a similar business?

Find out more in our in-depth guide to business vs. hobby.

It’s important to figure out if your Etsy shop counts as a hobby. Why? Because hobbies aren’t eligible for tax write-offs — even though you still have to report any income to the IRS.

On that note, let’s talk about common write-offs that Etsy shop owners should track to save money on their taxes.

How to lower your Etsy taxes with write-offs

Most new business owners are shocked when they see their tax bill for the first time. The good news is that, if you track your business expenses, you can significantly lower that number.

That’s because you’re not taxed on your gross income but your net income. So if your Form 1099-K shows $30,000 in gross annual sales, but you spent $5,000 on business expenses, your taxable income would be $25,000.

The even better news: there are tools out there to do the job of logging write-offs for you. Such as Keeper, an app that connects to your bank account and automatically tracks each business expense — leaving you free to focus on Etsy matters. The Keeper app gives you a neat list of your expenses at the end of the year with digital receipts attached, so you don’t have to go through the hassle of storing paper receipts.

What kinds of expenses might an Etsy seller use Keeper to track?

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Common tax write-offs for Etsy sellers

For an expense to qualify as a write-off, the IRS says that it needs to be both “ordinary” and “necessary” — meaning:

  • Common for people in your field
  • Useful for doing your job

(According to the IRS, “necessary,” in this context doesn’t have to mean indispensable — just helpful and appropriate.)

For an Etsy seller, these types of expenses depend a lot on what you’re selling. An ordinary and necessary expense for a jewelry seller could be earring hooks or polymer clay. A cold press juicer, on the other hand, wouldn’t count.

That said, here are some expenses that many Etsy shop owners can write off.

Office-related expenses:

Marketing and promotion expenses:

  • 📻 Marketing fees
  • 🌐 Logo design
  • 🪧 Google and Facebook ads pointing to your Etsy shop
  • 🖌️ Freelance copywriters or marketers

Inventory expenses:

  • 📮 Shipping and handling costs
  • 🛍️ The cost of the goods you sell
  • 🔧 Inventory repair costs
  • 🪣 Storage bins or other organizational goods
  • 🗃️ Inventory management systems

Other expenses common for small business owners:

Check out our full list of common online seller expenses to ensure you don’t miss a potential write-off!

Before you can start writing off your expenses, you’ll need to determine your gross income. And that means you’ll need an Etsy 1099-K document.

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What is an Etsy 1099-K?

A 1099-K is a document that summarizes the gross sales income of anyone who:

  • Got paid through a third-party payment processor, like a credit card, gift card, PayPal, or online marketplace — such as Etsy
  • Earned at least $20,000 from business transactions
  • Had at least 200 business transactions on their account

The threshold to get a 1099-K was supposed to drop to $600 starting in 2022. However, the IRS has chosen to delay this change for a year. That means the bar for getting a 1099-K from Etsy will stay at $20,000.

Etsy will also send a duplicate 1099-K to the IRS, so it’ll know exactly how much you earned from the platform. 

Note: Your gross sales income is the total amount of money you earn from sales. It doesn’t include the write-offs you subtract to find your taxable income.

Do you get a different 1099-K for each shop you own?

No. If you own multiple shops, the gross sales you earned from each will be combined on a single 1099-K.

That’s because your 1099-K is pegged to your tax ID. And if you have multiple shops on Etsy, you’ll have registered each one with the same tax ID — regardless of how different they may be. Sell handmade clay family portraits and gourmet marshmellows? Both will need the same tax ID!

How to get your Etsy 1099-K

By default, Etsy will make your 1099-K available digitally. To find yours:

  1. Sign in to Etsy.com and select “Shop Manager”
  2. Go to “Finances”
  3. Click on “Legal and tax information”
  4. Select “Download 1099-K”

You can also choose to have your 1099-K sent to you via snail mail. To do so, follow steps 1-3 above. Then:

  1. Select “1099-K Settings”
  2. Toggle “Off” to opt out of only receiving a paperless 1099-K

When will you get your 1099-K?

You can access your 1099-K on Etsy starting on January 31. If you decided to have one mailed to you, it might arrive a little bit later. 

What to do if you don’t get an Etsy 1099-K

If you didn’t earn at least $600 through Etsy, you won’t receive a 1099-K. 

However, if you earned at least $400 through your store (after deducting business expenses — more on that below), you’ll still be expected to file self-employment taxes. And to do that, you’ll need to know what your gross sales income is.

So how do you determine how much you earned through Etsy without a 1099-K?

  1. Sign in to Etsy.com and go to “Shop Manager”
  2. Choose “Settings”
  3. Select “Options”
  4. Click “Download Data”
  5. Choose “Etsy Payments Sales CSV”
  6. Select “Download”
  7. Open the downloaded form and calculate the total of the “Gross” column for the relevant year

Now that you’ve determined your gross sales income for the last year, you’re ready to start filing.

How to file your Etsy self-employment taxes

If you’re filing your taxes by yourself, you’ll need to know the nuts and bolts of the process. Even with a tax filing app like Keeper — or an accountant — you’ll want to have an understanding of what’s involved.

Here are the basics of filing your self-employment taxes, including the Etsy tax documents you’ll need.

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Step #1: Determine your gross income

Congrats! By getting a hold of your 1099-K or figuring out your gross sales on your own, you’ve already ticked off the first step of filing your taxes.

Step #2: Make a list of your Etsy expenses

As you know, it’s important to track your business expenses throughout the year because it can save you money come tax time. For instance, if you sell posters on Etsy, you can remove your printing costs from your gross income. 

Step #3: Fill out your Schedule C

Your Schedule C is the form you’ll use to calculate your taxable income or net profit. That’s your gross income, minus your business expenses. You’ll also claim your write-offs on this form.

Step #4: Figure out whether your need to pay quarterly taxes

If you expect to owe the IRS at least $1,000, you’ll need to pay your taxes quarterly. To figure out if that applies to you, use our quarterly tax calculator.

The deadline for each quarterly payment typically falls on:

  • April 15th
  • June 15th
  • September 15th
  • January 15th

The deadline for filing your taxes, however, doesn’t change. That still falls on April 15th. (So long as that doesn’t fall on a weekend or holiday, in which case the deadline is moved to the next business day.)

Think you’ll need a bit of extra time to file your taxes? Learn how to file for a tax extension.

How do you know if you need to pay quarterly taxes?

If you’re not sure whether you’ll be responsible for quarterly payments, you can use our free quarterly tax calculator. This will tell you whether you’ll hit the “$1,000 or more” rule of thumb for filing quarterly. And if you do, it can help you figure out how much you should pay each quarter.

By now you should have an idea of what taxes you’re responsible for as an Etsy seller, how to file and pay your taxes, and the types of business expenses you should be tracking. Now, why not try the tax app that can make running your own business a little easier?

Soo Lee, CPA

Soo Lee, CPA

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Soo has over 10 years of experience at publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diverse industries, including manufacturing, wholesale and retail, construction, real estate development, banking, finance, and professional and legal consulting. At Pricewaterhouse Cooper, she worked with many foreign-owned companies and advised clients on a broad range of issues, including federal and state tax minimization, determining the optimal structure for new foreign investments, and restructuring and reorganization for existing operations.

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