A Tax Guide For Etsy Sellers: How To Report Etsy Income
The world is full of digital products but in the midst of it all, we have platforms like Etsy where the creators of unique handcrafted pieces and possessors of vintage treasures meet their true appreciators. If you are one such creator and have been earning through this online marketplace then your next step is to figure out how to report Etsy income on taxes?
In this article, we are going to learn about the taxes you owe to the tax authority and the deductions you can claim to lower your taxable income.
Do I Have To Report Etsy Income?
Yes, as a taxpayer you are bound to report income from all the sources. So if you run an Etsy shop you need to know how to report Etsy income on taxes. Whether you owe taxes or are eligible to claim refunds will depend on how much you have earned and how many expenses you are allowed to deduct.
Selling on Etsy will make you liable to pay the following taxes on your Etsy Income.
Paying Federal And State Income Tax
As an Etsy seller, you will likely be paying federal and state taxes on your Etsy Income
The federal has imposed progressive taxes. This means you will be charged higher taxes if you have a higher income.
Each state has its own tax rules and rates. Some states in the US do not impose income tax on individual income. This means when tax season arrives you will only have to submit a federal return. The majority of the states have progressive income tax systems.
Few states impose flat income tax rates where every taxpayer pays the same rate regardless of whether they are a high or low earner.
It is noteworthy that the United States has a pay-as-you-go system. This means instead of paying at the year-end you will pay as you earn. If you were employed then your employer would be responsible to withhold taxes from your paycheck and remit it to the IRS. But since you are a self-employed person you are solely responsible to compute, file, and pay your taxes.
Paying Annual Income Tax
This is a tax you will pay on any income you have made during a tax year. If you are operating a business on Etsy you will be considered to be operating a sole proprietorship unless you decide to incorporate your business as a corporation. In this case, your business is considered a separate entity and is taxed independently.
As a sole proprietor, you will be taxed on your business profits. Your business profits are the amount that is left after you subtract your total business expenses from your gross sales.
As an Etsy seller, you are considered an independent business owner. You might receive a 1099-K form from Etsy if the total value of the transactions is greater than $600. According to the IRS:
“Form 1099-K, Payment Card, and Third Party Network Transactions is an IRS information return used to report certain payment transactions to improve voluntary tax compliance.”
Even if you didn’t receive this form you are still responsible to report your income. The amount shown on your 1099-k form is the gross sales you have made via the Etsy platform. It reports your total revenue including transactions using credit, debit cards, or Etsy gift cards.
You will file form 1040 individual tax return to report your revenue. Additionally, you need to submit schedule C.
Paying Quarterly Estimated Taxes
If you have a business on Etsy and you expect to owe more than $1000 in taxes to the IRS then you are required to estimate and pay taxes on a quarterly basis. Remember this has to be only an estimate, not the actual amount you owe.
You might be wondering how do we know what our yearly profit is going to be? Well, that is a legitimate question. Keep in mind that these are called estimated taxes. One way you can resolve this is by looking at the amount you paid in taxes last year. So check your previous tax returns. Pay the current year's estimated taxes based on the previous year's numbers and you will not be penalized.
Make sure to pay these taxes on time to avoid any penalties. The due dates for these Quarterly estimated taxes are April 15, June 15, September 15, and January 15.
Paying Self-Employment Taxes
Self-employed people are liable to calculate and pay their self-employment tax which is a combination of social security and medicare taxes. This is not the case with employed people where employers are responsible to withhold these taxes from their paycheck.
If your total net income from self-employed activities including Etsy sales is less than $400 you don’t owe any SE tax on your Etsy income. But if it exceeds then you will have to pay it.
For the year 2022, the social security tax rate is 12.4% on the first 147,200 of your income. And the medical tax rate is 2.9%. If your income exceeds this limit you will have to pay an additional Medicare tax of 0.9% but no additional social security tax.
Remember if you classify your activity on Etsy as Hobby you don't have to pay SE taxes but that also means you will not be able to claim any deduction to reduce your taxable income. We will dive into this later in the article.
Collecting and Remitting Sales Tax
Sales taxes are collected by some states and local governments to run the state. This is done by adding a percentage to each sale. Sellers are responsible to charge, collect and remit this to the respective tax authority. These taxes are due either monthly, quarterly, or annually. The sales tax rules and rates vary from state to state so you got to look it up or talk to a tax specialist.
What Are The Tax Deductions You Can Claim On Etsy Income?
Before we look into the deductions we need to determine whether your activity is classified as a hobby or a business.
Imagine you are an artist who loves to make things with your hands. One day you decide to display them on Etsy out of curiosity to look at what it’s worth. It was very well-received and you start to get orders.
If you started off without the intention of making a profit you are pursuing a hobby but if it is generating considerable income then it is going to have tax consequences. But if you keep it as a hobby you will not be allowed to claim any deduction.
It is sometimes difficult to know when your hobby has turned into a business. So the IRS uses nine factors to determine whether your activity is classified as a hobby or has turned into a business.
When your activity is considered a business then you can claim the following ordinary and necessary business expenses as a deduction.
Home Office
If you have a dedicated space in your home for working then you are allowed to deduct the expense to the extent of the usage of your home. For instance, if you have used 15% of your home space for business purposes you are qualified to deduct 15% of the expense. You can claim expenses such as rent, utilities, etc.
You can compute your home office deduction by using either the regular method or the simplified option.
Professional Development
You can write off any amount you spend on upgrading your skills whether in a formal or informal setting. Any course material you purchase is also tax-deductible.
Tools
Whatever you spend on equipment that facilitates the production of your craft is tax-deductible.
Etsy Fees
There is cost associated with using online marketplaces and Etsy is no exception therefore any service charges you pay them are tax-deductible.
There are lots of other deductions which you can claim. Seek tax advice from a professional on how to report Etsy income taxes? They will make sure that you claim all the tax deductions you are entitled to and your tax returns are filed timely and accurately.