Key Takeaways
- Sales tax laws vary by jurisdiction, so it's important to research the laws in your area.
- If you sell items on platforms like Etsy, you need to report and pay taxes on your net income, which is your total earnings minus allowable business expenses.
- If your total net income from self-employment, including Etsy sales, is $400 or more, you must pay self-employment tax, which includes Social Security and Medicare taxes.
- Even if you don't receive a 1099-K form, you're still required to report all your income from sales.
Paying federal and state income tax on Etsy income
If you sell items on Etsy, you will likely need to pay income tax on your income—usually, the total amount you earned by selling your products, less your business expenses. Etsy typically reports your gross income to the IRS on Form 1099-K, but even if you don't receive a 1099-K, you still have to report your Etsy sales income on your tax return. If your state has income tax, you'll need to pay state income taxes on the net income from your Etsy sales as well.
The IRS is gradually phasing in new 1099-K reporting requirements for payments from third-party processors like Venmo and Paypal. In 2021, Congress changed the reporting threshold from over $20,000 in payments and more than 200 transactions to over $600 in payments regardless of the number of transactions. But instead of using the new $600 threshold right away, the IRS applied the previous reporting threshold for the 2022 and 2023 tax years. For the 2024 tax year, the IRS plans to use a $5,000 threshold, regardless of the number of transactions. The tax agency hasn’t announced its plans for after 2024 yet. On the other hand, some states have already started using the $600 threshold for their own reporting requirements.
Deducting business losses from Etsy sales
If you sell on Etsy for profit as a business, you can likely deduct business expenses like:
- cost of materials
- advertising
- shipping
Provided that you Etsy activity is considered a business rather than a hobby, 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. This can typically be deducted from other income you have—even from another job or business. This deduction can reduce your taxable income.
TurboTax Tip:
If your Etsy activity is considered a business, you can deduct business expenses, and if these expenses exceed your income, you can usually report a business loss to 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 can take them as an itemized deduction on Schedule A. For tax years beginning with 2018, you are not be able to reduce your hobby income by any hobby 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'll also need to pay self-employment tax on this income. Self-employment tax includes Social Security and Medicare taxes. The amount due is comprised of 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.
This means a total of:
- 12.4% of the first $168,600 in 2024 you earn for Social Security tax and is expected to increase to $174,900 in 2025
- 2.9% of your total income for Medicare
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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