Etsy taxes for sellers

If you sell on Etsy to make a profit, your shop is a business and its profit goes on Schedule C. You're taxed on profit, not sales, so your fees and materials matter a lot.

Your 1099-K

Etsy reports your sales on Form 1099-K. Payments that reach you through a card processor, payment app or marketplace are reported on Form 1099-K instead, generally once they pass $20,000 and 200 transactions in a year under federal rules (some states use lower thresholds).

A 1099-K shows gross sales before Etsy's fees, refunds and your costs. Report the gross, then deduct what it cost to make those sales.

Either way, every dollar is taxable whether or not you get a form. Your own records are what count.

What you can deduct

Etsy fees: listing, transaction, payment processing, offsite ads and Etsy Ads.
Cost of goods sold: materials and supplies that go into what you sell, figured on Part III of Schedule C.
Shipping labels and packaging.
Tools and equipment, plus photography gear and props for listing photos.
Home office, if you have a space used regularly and only for work. The IRS simplified method is $5 per square foot, up to 300 square feet.
Health insurance premiums you pay yourself (self-employed health insurance deduction), if you aren't eligible for an employer plan.
Retirement contributions to a SEP IRA or solo 401(k), which lower income tax (not self-employment tax).

Sales tax isn't your income

In most states Etsy collects and pays sales tax on your orders as a marketplace facilitator. That money was never yours, so it isn't income and isn't a deduction. If you also sell elsewhere, those sales may have their own sales tax rules.

Hobby or business?

If you're not trying to make a profit, the IRS may treat your shop as a hobby. Hobby income is still taxable, but you can't deduct the costs. Run the shop like a business, with separate records, a pricing plan and a profit goal, and you keep the deductions.

How much to set aside

Work out your profit margin first. If materials, fees and shipping take 40% of each sale, you're only taxed on the other 60%. Then save about 25–30% of that profit for taxes (more in high-tax states, less in states with no income tax). Applied to each sale, that's more like 15–18% of the sale price in this example.

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Frequently asked questions

Do I have to pay taxes on Etsy sales if I didn't get a 1099-K?

Yes. Business income is taxable whether or not you get a form. The 1099-K threshold only decides when Etsy has to report it.

Are Etsy fees tax deductible?

Yes. Listing, transaction, payment processing and advertising fees are business expenses. Your Etsy payment account statements total them up.

Do I pay self-employment tax on Etsy income?

Yes, if your Etsy shop is a business and your net earnings are $400 or more for the year.

Sources

Estimates and general information, not tax advice. Check with a tax professional for your situation.