Running an Etsy Shop: Knowing How to Handle Your Taxes

Each year, millions of people choose Etsy as an avenue to sell – and buy – unique goods. If you have considered opening an online shop or already have one started, congratulations! Your entrepreneurial spirit is an inspiration. While running your virtual store, your focus should be providing the best possible product for your customers. However, there are new responsibilities that come with operating a small business, including taking care of your taxes without an employer doing the heavy lifting for you.

There are important things you need to know regarding taxes associated with your new venture, even if it’s simply a hobby that’s bringing in a small amount of profit. While we invite you to get in touch with our professional team who can help make you’re preparing your taxes a breeze, we’ve compiled a list of tips to get you on good terms with the IRS.

As a self-employed individual, the government expects you to pay income taxes, pay self-employment taxes on your profits and collect sales taxes depending on what state you live in. While you don’t have to file a 1099 form through Etsy if you make less than $20,000 a year and there are less than 200 transactions, don’t make the mistake of thinking you’re not responsible for reporting your earned income to the IRS.

Looking ahead to know what you owe

To stay within government standards, complete a Schedule C (Form 1040) form to report profit or loss from your business as well as a Form 1040-ES to calculate your estimated taxes. Since you are not having taxes withheld from your paycheck by an employer, estimated taxes substitute for withholding, cover Social Security and Medicaid and must be paid throughout the year to avoid penalties down the line.

Determine deductions

It’s valuable to invest time in deciding what you can and cannot include as business expenses in your records. As an Etsy shop owner, home office and travel deductions are available. Keep careful track of expenses including cost of materials, advertising, shipping and even cleaning fees for your workspace. While you cannot directly include childcare expenses, you can take advantage of a child care tax credit on your personal return.

Additional tips for the trade

You’ll definitely want to open a separate bank account to easily distinguish between business and personal expenses. With estimated tax payments in the mix, it’s also smart to find a helpful bookkeeping system like ours and save money over time to lessen the burden of tax payments. If you are married, one way around these estimated payments includes withholding extra on your spouse’s paycheck. Decisions like this, though, should be done with much caution.