How retailers on Etsy can craft a tax plan
Maybe you opened an Etsy shop just hoping to make a few extra dollars from a hobby you already loved. Or maybe you’ve always dreamed of turning your talents into a full-time gig where you can be your own boss. In either scenario, there could be tax consequences.
When you open a shop on websites like Etsy, you’ll have to report and pay taxes on net income from the crafts, vintage or specialty items, and other products you sell. Depending upon your circumstances, you may also need to pay self-employment tax on your profits. In many cases, you’ll also be responsible for charging, collecting, and remitting sales tax. Sales tax can be complicated, particularly for online sellers whose customers may live in different states.
One of the best things online sellers can do is build a strategy for managing their taxes. Don’t delay. Deadlines can snowball. Before you know it, missing deadlines can become an avalanche of late fees, fines, and penalties. Instead, start with small steps, find a process that works for you, and be consistent.
In the simplest terms, if you’re selling items on Etsy, you’ll need to pay income tax on the money you make. Etsy usually reports the gross income of online sellers to the IRS using Form 1099-K. However, even if you don’t receive this form, you are still required to report your earnings to the IRS on your own. Beginning with the 2022 tax year, if more than $600 in payments were made during the year, the seller must report that income.
In addition to federal taxes, you may also be responsible for state income tax. You'll have to remit this based on the money you earn from your Etsy sales. Eight states don’t have income tax. They include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Be aware that how you’ve structured your business can also affect your tax obligation. You may be able to file income from your Etsy store with your personal return. This could be especially true if your business is a sole proprietorship. If your business has a different structure, you may have to differentiate the income. If you’re self-employed, you may also have to include Etsy sales in your calculations for your self-employment tax.
| Selling on Etsy is a great way to share your talents or unique vintage goods with the world. Make sure you have the right tax strategy to only share what you have to with the IRS.
Setting sales tax
Mastering the fundamentals is the foundation for any good strategy. However, without a solid plan for handling sales tax, all of that work can begin to topple. While some online platforms will charge sales tax on your behalf, it’s an advantage to learn the regulations that apply to your business.
If you know your obligations, you can be sure you haven’t overcharged or undercharged. Sales tax needs to be paid in the exact right amount. If you overcharge, you’ll have to remit the overage or refund your customers. If you undercharge, you could be liable for the difference.
Five states don’t charge a state-wide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, your business isn’t free from all sales tax obligations even if you’re based in one of these states. You’ll also need to pay attention to any state where you’ve established a nexus.
Expectations for expenses
Deductions are a great way to save some money on your business tax bill. Selling on Etsy is no exception. Keep track of expenses. Be ready to provide itemized records of your cash flow. If at all possible, store receipts and invoices for at least a few years.
As long as your sales on Etsy are part of a business, you can deduct expenses such as your cost of materials and shipping rates. Cost of goods sold is a type of expense that you may be able to claim as a seller for the expense of creating and then selling your item.
Other common business deductions for online sellers could also apply. If you pay to advertise on social media, you may be able to deduct those marketing expenses. Fees for business licenses, permits, and certifications are also typically acceptable deductions. Premiums for your business insurance may be deductible. Necessities you need to keep your business running, like internet and electricity, can also likely be written off. If you work out of a home office, your supplies, software, and even a portion of your rent could be eligible to be claimed on your taxes.
Get ready for what’s next
Opening your own shop on Etsy is a great way to start your own business. Over 81 million buyers have purchased items like one-of-a-kind custom wedding cake toppers and vintage hats. If you’re looking to join the more than 4 million sellers running a shop on Etsy, remember to make a solid tax strategy a part of your business plan.
ComplYant is a great place to start. In addition to an extensive resource hub, an excellent place to start is the webinar, 9 Tax Things New Small Business Owners Need to Know. Remember to sign up for a free account to use ComplYant’s innovative platform. You’ll be able to manage your tax obligation and never miss a deadline with custom reminders. Get started today.