Etsy makes it easy to start selling, but taxes can be confusing, especially if your shop grows faster than you expected. You may wonder whether your income counts as a hobby or a business, how to use the tax form Etsy sends, and which costs you can subtract.
This guide explains the key tax points for Etsy sellers. It is educational, not tax advice. Verify details on IRS.gov or with a tax professional.
Is Your Etsy Shop a Business or a Hobby?
This question matters because it changes how your income and expenses are treated.
- If you sell with the intent to make a profit and operate in a businesslike way, you’re generally treated as a business and report income and expenses on Schedule C.
- If the IRS considers your shop a hobby, you must still report the income, but you may not be able to deduct your expenses against it.
Factors that suggest a business include keeping records, having a separate bank account, advertising your shop, putting in regular time, and changing your methods to improve profits. See the IRS guidance on hobby vs. business for details.
How Etsy Sellers Are Taxed
If your shop is a business:
- You pay income tax on your net profit (sales minus allowable costs).
- You pay self-employment tax for Social Security and Medicare. See Self-Employment Tax Explained.
- You generally make quarterly estimated payments when you expect to owe enough. See our Freelance Tax Deadlines: 2026–2027 Calendar.
You pay tax on profit, not on total sales. That’s why tracking your costs matters.
Your state may also tax your income. See our guides for California, Texas, New York, Florida, Illinois, and Washington.
Form 1099-K and Etsy
Etsy (through its payment system) may send you a Form 1099-K that reports the gross payments processed for your sales.
Important points:
- Thresholds have been changing. Congress and the IRS have adjusted the reporting threshold several times in recent years. Don’t assume you won’t get a form, and don’t assume you will.
- You must report all income either way. Receiving no form doesn’t make income tax-free.
- The 1099-K shows gross amounts. That may include shipping charges, and possibly amounts that aren’t all your income, such as sales tax collected or refunds. It doesn’t subtract Etsy fees, materials, or other costs.
- Compare the form with your own records and with your Etsy sales reports and payment account. If the numbers differ, find out why before filing.
Your deductions then bring the taxable amount down to your actual profit.
What Counts as Income
For most Etsy sellers, taxable income includes:
- Product sales
- Shipping charges you collect from buyers
- Digital product sales
- Custom order fees
- Income from sales outside Etsy, such as craft fairs or your own website
If you use the cash method, income generally counts when the money is available to you. Ask a tax professional how to handle timing issues for Etsy payouts and reserves, especially around year-end.
Deductions for Etsy Sellers
Expenses must be ordinary and necessary for your shop. Common ones include:
Cost of goods sold (COGS)
This is the cost of the products you sell.
- Materials and supplies used to make products
- Inventory you purchase to resell
- Freight-in and certain direct production costs
How COGS works depends on whether you make or buy products, and on your inventory method. The IRS explains the rules in Publication 334. Keep records of what you buy and what remains in stock at year-end. You generally can’t deduct the value of your own labor.
Etsy and platform fees
- Listing fees and transaction fees
- Payment processing fees
- Advertising fees, including promoted listings and offsite ads
- Subscription fees for Etsy tools, if you use them
Etsy shows these in your payment account and fee statements, which you can download for your records.
Shipping and packaging
- Postage and shipping labels you pay for
- Boxes, mailers, tape, and tissue paper
- Branded packaging and thank-you cards
- Shipping insurance
Equipment and tools
- Sewing machines, cutters, printers, kilns, and similar equipment
- Hand tools and workspace furniture
- Photography gear
Larger purchases can be deducted in different ways. See Last-Minute Tax Deductions Freelancers Can Still Claim Before Dec 31 and IRS Publication 946. If you also use something personally, deduct only the business-use portion.
Workspace
- If you use part of your home regularly and exclusively for your shop, you may qualify for the home office deduction. See IRS Publication 587.
- Rent for studio or storage space
- Utilities for the business-use portion
Marketing and business costs
- Website, domain, and hosting
- Product photography, props, and design software
- Business cards and promotional items
- Craft fair booth fees and related supplies
Travel and vehicle
- Mileage for supply runs, post office trips, and craft fairs. See How to Track Mileage for Freelance Tax Deductions.
Professional services and insurance
- Accountant, bookkeeper, and legal fees
- Trademark or business registration costs
- Product liability and business insurance
- Business license and permit fees. See Do Freelancers Need a Business License?
Insurance and retirement
- Self-employed health insurance premiums, with conditions
- Contributions to a SEP IRA or Solo 401(k). See SEP IRA vs. Solo 401(k).
General rules appear in IRS Publication 535.
Sales Tax for Etsy Sellers
Sales tax is a separate issue from income tax.
- In many states, Etsy collects and remits sales tax on certain sales made through its marketplace. That’s often called marketplace facilitator sales tax. You generally still report your sales correctly, but you may not need to collect tax yourself on those orders.
- If you sell outside Etsy, such as at craft fairs, on your own website, or through other channels, you may need to register for a sales tax permit in your state and collect tax.
- Rules for digital products vary by state.
- Sales tax collected by Etsy isn’t your income, but you should be able to tell it apart in your records.
Check your state’s tax agency for current rules, and see our state guides above for examples.
Business Setup for Etsy Sellers
- Business name: if you use a name other than your own, you may need to register it. See How to Register a Freelance Business in Your State.
- EIN: many sellers get one to keep their Social Security number off forms and bank accounts. See How to Get an EIN as a Freelancer.
- LLC: some sellers form one for liability protection. See Sole Proprietor vs. LLC.
- Licenses: cities and states may require a business license or home occupation permit.
International Sales
If you sell to buyers in other countries:
- Report the income in US dollars.
- Keep records of shipping, customs, and exchange rates.
- Etsy handles some international tax collection, such as VAT, on certain sales, but rules differ by country and product.
- Ask a tax professional if you’re regularly shipping abroad.
Record-Keeping Tips for Etsy Sellers
- Use a separate business bank account and card.
- Download Etsy’s monthly sales, fees, and payment reports.
- Track inventory purchases and what’s left at year-end.
- Keep receipts for supplies and equipment. A receipt scanning app and an expense tracking app help.
- Use a simple bookkeeping system.
- Keep a mileage log.
How Much to Set Aside for Taxes
Your tax rate depends on profit, filing status, and state. Estimate your net profit for the year, calculate expected taxes, and set aside a percentage of every payout in a savings account. This matters most for sellers whose shops grow quickly or who have a big holiday season. Review everything before year-end with our Year-End Tax Planning Checklist for Freelancers.
Common Mistakes Etsy Sellers Make
- Paying tax on gross sales instead of profit.
- Ignoring the 1099-K or not comparing it with their records.
- Not tracking inventory and materials.
- Forgetting Etsy fees and advertising costs.
- Mixing personal and business money.
- Missing sales tax rules for off-Etsy sales.
- Skipping estimated payments after a big season.
Frequently Asked Questions
Do I have to pay taxes on Etsy sales?
Yes. Income from Etsy sales is generally taxable, whether or not you receive a tax form.
Do I need to report income if I don’t get a 1099-K?
Yes. All taxable income must be reported.
Can I deduct Etsy fees?
Generally yes, as business expenses.
Is my Etsy shop a hobby or a business?
It depends on your intent and how you operate. Businesslike habits and a profit motive point toward a business.
Do I need to collect sales tax on Etsy?
In many cases Etsy handles it for marketplace sales, but sales outside Etsy may be your responsibility.
Do I need an LLC to sell on Etsy?
Not necessarily. Many sellers start as sole proprietors.
Final Thoughts
Etsy income is real business income, and it’s taxed like other self-employment income. Track your sales and costs, compare Etsy’s forms with your records, understand sales tax for sales outside the platform, and save money for taxes as your shop grows.
Disclaimer: This article is for informational and educational purposes only and does not constitute tax, legal, or financial advice. Tax laws, reporting thresholds, and rules change and depend on your situation. Verify current information at IRS.gov or consult a licensed tax professional.
Last Update: October 14, 2026