It’s easy to set up an Etsy shop and start selling your handmade, digital, or vintage items, but what happens when it’s time to pay your taxes? Do you need to report your Etsy income on your taxes And what about sales tax?
Table of Contents
- Do you need to pay taxes if you sell on Etsy?
- Do you need to collect sales tax if you sell on Etsy?
- Do you need to pay self-employment taxes if you sell on Etsy?
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Before I start, I need to say that while I’ve had my own home-based business for the last 25 years, I’m not an accountant or a tax professional. Before you pay taxes for your business for the first time, you should consult a licensed accountant or tax professional if you have questions. The information in this article is based on my personal experience selling online, but your location and business structure might be different, so make sure to check that you’re doing the right thing for your situation by talking to a tax professional.
Do you need to pay taxes if you sell on Etsy?
The short answer is yes, if you sell on Etsy and your intention is to make a profit, you’re considered a business, and you need to pay taxes on your income. In the US there’s no “minimum income” required before you have to declare your income, so if you’re earning anything you’ll have to add that to your income that you report on your taxes.
This could vary depending on what country you’re in, so you’ll need to check your local laws. For the most part, though, most governments want you to tell them when you make money, so if you’re making anything you’ll need to report it.
People sometimes make the argument that you can be running an Etsy shop as a hobby, because Etsy doesn’t require you to have a business license to sell on the platform. But if you make a profit the IRS considers what you’re doing to be a business, so don’t use that excuse to not pay taxes.
(The question of a business license comes up a lot, too, since Etsy doesn’t require one. But depending on where you live, you might need to be licensed before you sell anything at all, so check on that. I live in Virginia in the US, and the state requires that you have a business license or a DBA filed before you sell anything. The laws where you are are going to be more important than Etsy’s rules!)
For an article about business licenses and whether you need one to sell on Etsy, click here.
So as far as reporting your Etsy income on your annual tax return, yes, you need to do that if you’re trying to make a profit. This includes both federal and state income taxes.
But what about other types of taxes? Income tax isn’t the only thing to think about. There are also sales tax and self-employment taxes if you’re located in the US.
Do you need to collect sales tax if you sell on Etsy?
Sales tax is tricky, because Etsy might collect and send it in for your transactions, but you might still have to file a sales tax return even if you don’t send anything in. Etsy has to follow laws for online marketplaces as far as collecting and remitting sales tax, but that doesn’t mean that you don’t have to register or submit a return.
This is another issue that you’ll have to check with your local tax authority, because laws vary by location. In the US, some states will require you to register for sales tax and send in a return on the schedule they give you (I pay quarterly) even if Etsy sends the taxes in for you.
Other states won’t require that, so you need to check to see what the laws are where you’re located.
The basic way that sales tax works is that Etsy has to collect it and send it in because they’re a marketplace, and they’re responsible for doing that under marketplace laws that have been passed recently so that states don’t miss out on online sales tax collection.
If Etsy has to collect sales tax for your location, the tax will have been paid, so you don’t have to pay it yourself. But some states still want a record of your sales, so you have to file a sales tax return that says how much you made that was taxable, then you’ll subtract out the amount that was “excluded” or “disqualified” (or whatever terminology your state uses.)
The only amount you’ll have to send in would be for the sales that Etsy didn’t pay tax for on your behalf. For me, that would be things that I sold on my website to customers who are also in Virginia, which is where my business is located.
So let’s say that I made $1000 on Etsy and $1000 of sales to people in Virginia on my website. I would file a sales tax return that said I made $2000, but then exclude the Etsy income because they already paid the sales tax on it. The amount that I had to send in to the state would only be what I charged Virginia residents from my website sales, not from my Etsy sales.
Again, if this is something that you’re not familiar with, it would be a good idea to sit down with someone in your local tax office to see exactly how they want you to fill out the forms. Since this is an official government document you need to do it the right way!
This help article on Etsy goes over which states Etsy collects sales tax for: Sales Tax on Etsy
TaxJar also has good information about sales tax and how it works: Sales Tax Basics
You’ll also see a setting in your shop settings for sales tax, but that’s only for states where Etsy doesn’t collect the tax. You can check to see if Etsy collects the tax for your state here: States Etsy collects sales tax for
If you live somewhere other than the US, you’ll need to check on whether Etsy collects the taxes for your country and how they’re remitted. This article about VAT on Etsy could help, but again, checking with a tax professional before you get started is your best bet: VAT on Etsy
Those are the basics of sales tax, but ONCE MORE, check to see what the legal requirements are for where you live, it’s going to be different everywhere.
After sales tax, the next thing to think about is going to be self-employment taxes.
Do you need to pay self-employment taxes if you sell on Etsy?
This section applies to US sellers. If you’re in a country other than the US, check to see if there’s an equivalent of self-employment taxes, because the laws are going to vary by country.
In the US, the Internal Revenue Service (IRS) defines self-employment income as “income that arises from the performance of personal services, but which cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee.”
Basically, if you’re a US citizen and you make money online, you could be responsible for paying self-employment taxes throughout the year, and you might have to pay a penalty if you don’t.
Self-employment tax is paid on a quarterly schedule throughout the year. It takes the place of the payroll taxes that you pay into Medicare and Social Security if you have a W-2 job.
There are income limits for whether you’ll need to pay self-employment taxes, but if you’re earning money any way other than being employed by someone else, you’ll need to look into this. It doesn’t matter whether it’s money that you’re earning through Etsy or a part-time job, you need to make sure this is covered.
If you don’t pay your self-employment taxes, you might end up owing a penalty at the end of the year! SE taxes are deducted from the income tax that you owe the same way that your W-2 withheld tax would be, so if you underpay it can end up biting you in the butt when you owe money to the IRS.
This goes for both federal and state income taxes, you’ll need to pay both throughout the year if you’re required to pay them based on your income.
The basic message I want to get across with this article is that you need to check that all of your financial details and tax responsibilities are taken care of!
You don’t want to be hit with a big tax bill at the end of the year, or to get a penalty for not paying something on time.
Check with a tax professional to make sure that all of your papers are filed and taxes are paid to protect yourself!
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