Congrats! If you’re making a profit in your Etsy shop, you’re running a business. Along with the sense of accomplishment you get from being your own boss comes something a little less fun: taxes. From securing a taxpayer ID to paying quarterly estimated taxes, here's what you need to know about filing taxes as a small-business owner.
Is my shop a hobby or a business for tax purposes?
If you're making a regular profit off your hobby, it's really a business, according to the United States Internal Revenue Service (IRS). Determining whether your Etsy shop is a business or a hobby is a key first step, since it will affect how much you pay in taxes.
Some guidelines to keep in mind include:
- If you're selling on Etsy without expecting a profit, your shop may qualify as a hobby.
- If your Etsy shop is something you dedicate time to on a regular basis (and the time you spent is not inconsequential), and your primary purpose for the shop is for income or profit, your shop qualifies as a business.
Many businesses can experience a loss during their first few years, but are still considered businesses because of the regular work toward and expectation of future profit.
If your shop is classified as a hobby, and your income is less than your expenses, then you experience a “hobby loss.” This is when the distinction between hobby or business becomes important. Say, for example, you’re paying a lot for precious stones and quality metals but not passing on this expense to your customers. These deductions might exceed what you earn as a business, but you can’t deduct them from your income under the hobby loss rule.
If you started your shop as a hobby but begin to make an income or profit, make a plan and keep organized records so you’re ready to file as a business.
What kind of taxpayer ID do I need?
If you’re a sole proprietor—meaning you are not a business entity that is a corporation, partnership or limited liability company—you may use your Social Security number for tax filing and reporting. Otherwise, you need a federal employer identification number (EIN) to pay taxes as a business.
Even if you’re a sole proprietor Etsy shop owner, you can still opt to get an EIN. This gives you a few privileges: You can hire employees, incorporate, form a limited liability company or partnership, and have a solo 401(k) retirement plan. Using an EIN instead of a Social Security number can also help to protect against identity theft and establish you as an independent contractor, lending more credibility to your business.
Do I need to pay taxes on my shop income?
Etsy shops that meet the requirements for businesses are required to pay taxes on that income and may be subject some additional tax, including the following:
- Profit or loss from business: You’ll file a Schedule C annually to report profits or losses, regardless of whether you have registered your Etsy shop as a business. If you meet certain qualifications, such as having business expenses of $5,000 or less and not having a net loss from your business, you may be able to use a Schedule C-EZ form, which is a simpler version of the Schedule C.
- Self-employment tax: Self-employment tax (a combination of Medicare and Social Security tax) is due for any individual who makes $400 or more from self-employed income. You should file a Schedule SE form once a year. Learn more on the IRS website.
- State income tax: Some states also require you to pay state income tax on business profits.
- State sales tax: Etsy automatically collects and remits sales taxes on physical goods shipped to most states. More specifically, it’s handled in the states where it’s legally required to do so, thanks to what’s called “market facilitator laws.” Etsy also handles sales tax on downloadable orders in many states. This applies to both “instant” digital downloads, which your customer can download right away, and “made-to-order” downloadables, which you’ll have to customize before sending to them.
- Value Added Tax: If you're a VAT registered seller, you may be required to charge VAT on the items that you sell on Etsy. In some cases, Etsy collects and remits this tax on your behalf. You may also pay VAT on some eligible seller fees. Learn more about VAT on Etsy.
How often should I pay my taxes?
Individuals and businesses pay taxes each quarter based on an estimate of what they’ll owe for the year. When you work a typical nine-to-five job, your employer calculates these estimates for you, but when you’re working for yourself, it’s up to you. If you think you might owe more than $1,000 in taxes this year, you must make quarterly estimated payments.
First, determine your taxable income. As outlined here, to calculate taxable income, deduct expenses and other deductions you're eligible for from your annual gross income, then divide the number by four to determine your quarterly taxes.
If this is your first year in business, you can base your estimate on your expected adjusted gross income, your taxable income, and your expected deductions and credits. If your shop’s been up and running for a year, you should pay as at least what you paid in the previous year to avoid underpayment penalties. If you know you'll be making substantially more this year than you did last year, you should save money just in case you owe more at the end of the tax year.
You can pay quarterly estimated taxes online through the IRS website. You’re subject to a penalty if you don’t pay quarterly taxes by the following dates:
- For January 1-March 31, the due date is April 15
- For April 1-May 31, the due date is June 15
- For June 1-August 31, the due date is September 15
- For September 1-December 31, the due date is January 15 of the following year
You’ll also need to file your Schedule C or Schedule C-EZ form for the previous year by April 15 of each year.
How can I avoid overpaying?
Avoid overpaying taxes on your Etsy shop by keeping organized records of all business expenses throughout the year. Using a tool like QuickBooks Self-Employed allows you to track sales, tax deductions, and expenses in an app that directly integrates with your transaction data. Learn more about tracking your business expenses and common deductions for Etsy shop owners.
QuickBooks products can help you keep track of your business income by importing up to 18 months of your Etsy shop data and estimating your Quarterly Estimated Taxes for you. Get started today.
Please note that tax laws change frequently, and this information is not tax advice or legal advice. You're responsible for any use of this information. Please consult an attorney or tax expert if you have any questions.
Continue reading > Chapter 2: Making Sense of Your Tax Forms
Words by Intuit Tax Prep
