Selling your kid's old bicycle is not likely to cause any tax consequences, but when you sell crafts, vintage or specialty items on websites like Etsy, you must report and pay taxes on your net income. You will also likely need to pay self-employment tax on your profits, and in some locations, you may also be responsible for charging and collecting sales tax.
Paying federal and state income tax on Etsy income
If you sell items on Etsy, you must pay income tax on your income—usually, the total amount you earned by selling your products, less your business expenses. Etsy reports your gross income to the IRS on Form 1099-K, but even if you don't receive a 1099-K, you must report Etsy sales income on your tax return. If your state has income tax, you must pay state income taxes on the net income from your Etsy sales as well.
Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.
Deducting business losses from Etsy sales
If you sell on Etsy for profit as a business, you can deduct business expenses like:
- Cost of materials
These can be deducted even if they exceed the money your business earned. If your business expenses are greater than your Etsy income, you'll have a business loss from your sales, which you can then deduct from any other income you have—even from another job or business. This deduction can reduce your taxable income.
Business expenses if your business is a hobby
If your Etsy selling is considered a hobby by the IRS then you cannot take business loss deductions to directly reduce your selling income. For tax years prior to 2018, you take them as an itemized deduction on Schedule A. For tax years beginning with 2018, you will not be able to reduce your hobby income by any expenses. Therefore, most taxpayers will try to avoid having their Etsy selling being classified as a hobby.
You are more likely to avoid hobby classification if you run the operation in a businesslike manner, depend on the income from the business, keep precise business records and show a profit in three out of five years.
Paying self-employment tax
If your total net income from self employment including Etsy sales is $400 or more, you must also pay self-employment tax on the income. Self-employment tax is comprised of Social Security and Medicare taxes — the percentage that would normally be withheld from your paychecks as an employee, plus the percentage your employer would have contributed.
When you're a self-employed individual you're responsible for paying both types of taxes yourself. As of 2021, this means a total of:
- 12.4% of the first $142,800 you earn for Social Security tax
- 2.9% of your total income for Medicare
If your income is greater than this amount, then you will likely be subject to an additional Medicare tax of 0.9%.
If your income is considered a hobby, then it will be subject to income taxes but not to self-employment taxes.
Charging, Collecting and Paying Sales Tax
Some state and local governments charge sales taxes—usually a percentage of the value of each sale. In many cases, it’s the responsibility of the online seller to collect this tax from the buyer and send it on to the taxing authorities.
Sales tax laws are not the same in each jurisdiction, so make sure to research the rules in your area.
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