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Anyone who owns and operates a business will be forced to deal with taxes. If you operate a business on Etsy, your tax situation may be even more complicated than the average business. From income taxes to sales tax, you will have a variety of responsibilities to consider and requirements to meet. Fortunately, you can simplify all matters related to Etsy taxes by learning about each type of taxation and following some easy tips. This guide is designed to give you the information you need to understand your tax liabilities as an Etsy seller, as well as to help you keep your business in compliance at all times.
Not every seller on Etsy will need to pay state or federal income tax. However, if you earn a profit from your activities on Etsy, this type of tax will likely be required.
Hobby Vs Business
The first step in determining whether you will owe this type of tax is to consider the purpose of your Etsy shop. If you are running the shop as a hobby and are not earning a profit, you may not need to report your activities on your income tax returns. However, if you are running your shop as a business and/or if you have earned a significant profit, you need to report your revenue and expenses.
Keep in mind that many businesses experience a loss during the first few years of operation, but they are still considered “businesses” for tax purposes because they are intended to earn a profit in the future.
Types of Taxes Assessed on Income
If your Etsy shop qualifies as a business, you may pay several different types of taxes on the income you earn. Taxes assessed on business income include:
• Income taxes on profits – As a business owner, you are required to report your profits and losses every year to the IRS. If your business owns a profit, you will pay tax according to your filing status and tax bracket.
• Self-employment tax – As a business owner, you are responsible for paying self-employment tax if you earn more than $400 in self-employment income. Self-employment tax is a combination of Social Security and Medicare tax.
• State income tax – Many states assess tax on business profits. The amount of tax you will pay varies by state, as well as your filing status.
Paying Income Taxes
Every Etsy shop owner’s tax situation is different. However, in general, you will follow the same basic procedure when paying your income taxes.
Steps for paying your federal taxes as an Etsy shop owner are as follows.
1. Know your tax ID.
In order to report income and pay federal taxes, you will need a tax ID. If you are a sole proprietor, you can use your Social Security number as your tax ID. However, if you are not a sole proprietor, or if you would rather not use your Social Security number, you can apply for a federal employer identification number, or EIN, instead.
2. Report your income and expenses.
Most Etsy shop owners will report their income and expenses on Schedule C. Be sure to keep careful records of all revenue and business expenses so you can report these figures accurately. If you have a profit, both income tax and self-employment tax will be calculated on this amount.
3. Pay any tax you owe.
After completing your tax forms, you may find that you owe a balance. If so, be sure to pay this amount before the due date to avoid penalties and interest.
The way state taxes are calculated varies considerably from one state to another. However, in general, you will complete a return each year to report your business income and expenses. Allowable expenses and deductions may be different at the state and federal levels, so be careful when completing this paperwork.
As with federal taxes, it is important to make sure that you file your returns and pay any taxes you owe by the appropriate due date. Otherwise, you may owe penalties and interest.
Quarterly Estimated Taxes
If your business earns a profit during the year, you will typically be expected to pay estimated quarterly taxes to the IRS.
Depending on your state’s laws, you may need to pay estimated quarterly taxes to the state as well. The purpose of estimated quarterly tax payments is to ensure that you are paying the tax you owe during the year, as opposed to paying it in a lump sum at the end of the year. These payments are similar to the tax withholding employers use to collect income taxes on behalf of their employees each pay period.
However, as a self-employed taxpayer, you will be expected to make these payments on your own.
For federal tax purposes, you are required to make these quarterly estimated tax payments if:
• You will owe at least $1,000 in federal income tax.
• Your withholding and refundable credits for the year will cover less than 100 percent of your tax liability during the previous year or 90 percent of your tax liability for this year, whichever is smaller.
Estimating Quarterly Tax Payments
There are several different ways you can estimate your quarterly tax payments. One way is simply to estimate the total amount you will owe for the year and divide by four. You will send four equal payments to the IRS each quarter using this method. You can also estimate your quarterly tax payments using the income you earn each quarter. This method may be preferable if your income varies throughout the year.
If you find that you have overestimated or underestimated your tax payments, you can adjust the amount you pay in the following quarter to compensate. It is also possible to get a refund at the end of the year if you end up paying too much, or you can simply have the excess amount applied to your taxes for the following year.
Regardless of the method you use to calculate your estimated quarterly tax payments, you will need to complete IRS Form 1040-ES. You may also need to attach additional forms, depending on your situation and the way you calculate your tax payments. You can make the required tax payments by mail or online.
Penalties for Failing to Pay
If you meet the IRS requirements for making estimated quarterly tax payments, you will owe a penalty if you don’t pay on time. The due dates for each quarter are as follows:
• 1st quarter – April 15
• 2nd quarter – June 15
• 3rd quarter – September 15
• 4th quarter – January 15 (of the following year)
Expenses and Deductions
As an Etsy shop owner, you don’t want to pay more than you owe in income tax. The best way to make sure you aren’t paying any more than the required amount is to carefully track your business expenses and claim all deductions for which you qualify. These deductions reduce your taxable and, thus, reduce the total amount of tax you owe to the IRS at the end of the year.
Keeping Track of Expenses
As an Etsy shop owner, your expenses will vary based on the nature of your business. However, all Etsy shop owners should keep detailed records of all the expenses they incur while running their businesses. Examples of common business expenses include:
• The cost of materials
• Equipment expenses
• Cell phone usage
• Internet usage
• Advertising fees
• Home office expenses
• Shipping costs not paid by buyers
• Meals related directly to your Etsy business
• Education expenses
• Vehicle expenses incurred for business purposes
• Legal and professional fees, such as fees paid to an accountant
• Wages paid to employees or independent contractors
• Travel expenses
As you progress through the tax year, it is important to keep a running total of your expenses, as well as a detailed list of individual expenses. Be sure to keep all original receipts so you can provide evidence of each one in the event of a tax audit.
Extra Deductions for Etsy Sellers
Most of your business expenses will be listed on Schedule C, where they will be subtracted from your taxable business income. However, as a self-employed Etsy shop owner, you may qualify for additional tax deductions not listed on this form. For example, if you pay your own health insurance premiums and you are not eligible for employer-sponsored insurance through your own employer or a spouse’s employer, you can typically deduct the cost of your premiums. This deduction is claimed on Form 1040.
Etsy sellers can also deduct the employer portion of their self-employment taxes from their adjusted gross income, which reduces the amount of total tax owed. Additional deductions may be available as well.
State Tax Deductions
Many states follow rules similar to the IRS when it comes to business expenses and deductions. However, some rules may differ. For example, your state may not allow some of the deductions permitted by the federal government, and/or it may have deductions not allowed on your federal returns. It is important to learn about your state’s tax laws and regulations so you can complete your tax forms properly and minimize the amount you owe.
Etsy Tax Reporting Rules
If your sales or profits on Etsy exceed certain thresholds, Etsy is required to report the income you earned to the IRS. This means that you will receive form 1099-K, which lists information about the payments you received on Etsy during the year. Etsy will issue this form if you are a United States seller who received 200 or more payments during the year, with sales totaling at least $20,000. If you own more than one Etsy shop, Etsy will combine your sales from all shops to determine whether reporting is necessary.
Certain states also require Etsy to report income. For example, if you are located in Virginia, Vermont, Massachusetts, Maryland or DC, you will receive Form 1099-K if your sales total at least $600. New Jersey sellers will receive Form 1099-K if they have at least $1,000 in sales.
State Sales Tax on Etsy
Sellers on Etsy are often responsible for collecting a paying sales tax on behalf of their customers. Because you likely do business with customers in several states, however, determining when sales tax should be collected can be a challenge. To take care of your sales tax responsibilities and ensure that you are always in compliance with state law, follow these steps.
1. Find your sales tax nexus.
The majority of states impose a sales tax, but the specific laws and regulations vary by state. In most cases, your sales tax responsibilities will depend on where you have a sales tax nexus. A nexus is simply a physical connection to the state. This connection may be in the form of property, such as an office or warehouse. You may also have a connection to a state if one of your employees is working from within its borders.
If you have a sales tax nexus within a given state, you will typically be required to collect tax on any orders that are placed within that same state or delivered to an address within that state. You will not be required to collect or pay sales tax on orders placed and delivered within other states.
To determine whether you have a sales tax nexus within a given state, contact the state’s department of revenue or research the matter online. As an online seller, it is common to have a sales tax nexus in multiple states. Be sure to consider all states with which you have a connection to make sure all of your bases are covered.
2. Understand tax laws and rates.
For each state in which you have a sales tax nexus, you will need to know what rate you should charge your customers. You will also need to be aware of any local sales taxes collected by counties or cities, as well as any categories of items that could be exempt from sales tax. In addition, you should make note of the sales tax filing and payment due dates for each state.
3. Register your business with each state.
Most states will require you to register for a permit before you can begin collecting sales tax. To find out more about registration requirements, contact your state’s department of revenue. In many states, you will be able to complete this process online. If you are given a specific permit number, be sure to record it for later reference.
4. Configure your Etsy shop appropriately.
After you have determined which states require you to collect sales tax, as well as the rate charged in each state, it is time to configure your Etsy account to begin collecting taxes.
To set up tax collection on your Etsy account, navigate to Shop Manager. Next, go to Finances, followed by Payment Settings. Navigate to Sales Tax.
Once you are in this part of the settings, you can set tax rates for entire states or individual zip codes. Be sure to configure the settings to collect sales tax for every state in which you have a sales tax nexus.
5. File and pay state sales tax.
All states that require you to collect sales tax will also expect you to report the sales tax you have collected and turn it over to the state’s taxing authority. To ensure that you complete this part of the process accurately, you will need to keep accurate records of all the sales tax you collect. You can also view your past sales tax collections on Etsy by downloading the CSV file of your sales. Follow each state’s instructions for submitting your sales tax return and remitting payment.
Keep in mind that if you use more than one platform to make sales, you will need to collect and pay sales tax from all platforms. For example, if you also make sales on eBay and Shopify, you will need to collect sales tax on these platforms as well, and you will need to total the tax collected from all your sales when filing and paying tax to the state.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.