When the COVID-19 pandemic hit, Etsy became more than just a marketplace for handmade crafts and vintage finds. It transformed countless hobbyists into full-fledged entrepreneurs, with many people turning their passions into thriving online businesses. Whether you’re selling hand-knitted scarves for some extra cash or running a full-time jewelry shop, one thing is certain: taxes come with the territory. Knowing what taxes you’ll need to file – both at the federal and state level – is essential to avoiding trouble with the IRS.
Key Takeaways
Etsy income is always taxable. Whether you’re a business owner or hobbyist, all income earned on Etsy must be reported to the IRS.
Business vs. hobby classification matters. Businesses can deduct expenses and must pay self-employment, sales, and estimated taxes, while hobbyists cannot deduct expenses and only report income as “other income.”
Using the right forms prevents penalties. Filing with the correct IRS forms helps you stay compliant and avoid costly fines or interest.
Taxes You’ll Owe as an Etsy Business
If you’re running your Etsy shop as a business with the intent to make a profit, you’ll need to plan for several types of Etsy business taxes.
Self-Employment Taxes
Since Etsy doesn’t withhold taxes from your sales, you’ll need to cover both Social Security and Medicare through self-employment tax.
Income Taxes (Federal and State)
Profits from your Etsy shop count as taxable income. You’ll report this on both federal and, if applicable, state tax returns.
Sales Taxes
Many states require Etsy sellers to collect and remit sales tax on items sold within the state. Etsy now handles much of this for sellers, but you’re still responsible for ensuring compliance with your state’s rules.
Payroll Taxes (If You Have Employees)
If your Etsy business has grown to the point of hiring employees, you’ll also need to withhold and pay payroll taxes.
Quarterly Estimated Taxes
Because you’re self-employed, you’ll generally need to pay estimated taxes four times a year to avoid penalties.
Common Tax Forms For Etsy Business Owners
- Form 1099-K (provided by Etsy if your sales meet the reporting threshold)
- Form 1040 (individual tax return)
- Schedule C or C-EZ (to report business income and expenses)
- Schedule SE (to calculate self-employment tax)
Tax Tip
Deducting expenses like materials, shipping, and Etsy fees can significantly lower your taxable income if you’re considered a business.
Taxes You’ll Owe as an Etsy Hobbyist
If you’re selling on Etsy occasionally without treating it as a formal business, your tax obligations look a bit different.
Income Tax Only
All money earned is considered “other income” and is taxed at your regular income tax rate. The big difference from business owners? Hobbyists cannot deduct expenses like supplies, shipping, or marketing.
Form 1099-K
Even hobbyists may receive a 1099-K from Etsy if they cross the IRS reporting threshold. But regardless of whether you receive one, you must report all Etsy income.
Common Tax Forms For Hobbyists
- Form 1040 (individual tax return)
- Schedule 1, Line 8 (to report “other income”)
Business or Hobby? Why It Matters
Correctly identifying whether your Etsy activity is a business or a hobby is critical. Misclassifying can lead to penalties, interest fees, and unwanted IRS attention.
- If you’re actively trying to make a profit, your Etsy shop is a business.
- If you’re just selling occasionally without a profit motive, it’s a hobby.
Deducting business expenses when the IRS considers your sales a hobby could trigger costly audits. To protect yourself, keep accurate records and file the correct forms every year.
Bottom Line
Whether you’re a hobbyist selling for fun or an entrepreneur running a full-time Etsy business, you can’t escape Etsy taxes. From self-employment taxes and estimated payments to reporting other income on your tax return, staying compliant helps you avoid IRS headaches and keeps your shop thriving.