Sell on Etsy: The Complete Tax & Business Guide

If you’re planning to sell on Etsy, you’re probably thinking about products, pricing, and branding. That’s exciting but here’s what many new sellers overlook: taxes, IRS reporting, and proper business setup.

That’s where mistakes happen.

Many small business owners don’t realize that Etsy income is taxable, that Etsy may issue a 1099 form, or that sales tax rules can vary by state. As a result, they end up overpaying taxes, missing deductions, or receiving unexpected IRS notices.

In this guide, we’ll break everything down in plain English. You’ll learn:

• How Etsy income is taxed in the USA
• How to report Etsy income on taxes
• Whether Etsy reports to the IRS
• When you might need an LLC for your Etsy shop
• How to handle sales tax on Etsy
• Practical bookkeeping tips to stay compliant

Let’s start with the foundation.

What Does It Mean to Sell on Etsy?

To sell on Etsy means you operate an online storefront through Etsy’s marketplace, offering handmade goods, digital products, vintage items, or craft supplies.

From a tax perspective, this is considered self-employment income if you’re operating for profit, according to the IRS Self-Employed Individuals Tax Center

That means:

• You are running a business
• Your income is taxable
• You may owe income tax and self-employment tax
• You must keep business records

Even if it’s “just a side hustle,” the IRS still considers it income.

So let’s clarify how that works.

Does Etsy Report to the IRS?

This is one of the most common concerns.

Yes, Etsy may report your income to the IRS.

Etsy is required to issue a 1099-K form if you exceed the IRS reporting threshold for payment processors.

As of recent IRS guidance:

• The federal 1099-K threshold is scheduled to drop to $600 in gross payments
• Some states have already adopted lower reporting thresholds
• The 1099-K reports gross payments processed, not profit

This means:

• It does NOT subtract fees
• It does NOT subtract refunds
• It does NOT subtract shipping costs

That’s why bookkeeping is critical.

If Etsy issues a 1099-K and you fail to report that income, the IRS will receive a matching copy. That often triggers automated notices. If you also accept payments through platforms like Cash App or other digital processors, you should understand how third-party payment reporting works especially with new IRS rules. You can learn more in our guide on Cash App taxes and 1099 reporting requirements.

So yes, Etsy reports to the IRS and you should assume your income is visible to them.

How to Report Etsy Income on Taxes

Now let’s talk about how to report Etsy income on taxes properly.

If you operate as a sole proprietor (which most new sellers do), you’ll file:

• Schedule C (Form 1040) – Profit or Loss from Business
• Schedule SE – Self-employment tax

If you’re unsure how Schedule C works, we break it down step-by-step in our guide to mastering the Schedule C tax form for small business owners.

Here’s how it works step-by-step:

Step 1: Report Gross Income

Start with your total Etsy sales (including what appears on your 1099-K).

Step 2: Subtract Business Expenses

This is where many sellers miss opportunities.

Common deductible expenses include:

• Etsy listing fees
• Transaction fees
• Payment processing fees
• Shipping supplies
• Advertising
• Packaging materials
• Business software
• Home office expenses (if qualified)

Step 3: Calculate Net Profit

Gross Income – Expenses = Net Profit

You only pay income tax and self-employment tax on the net profit, not total sales.

For example:

Taxes apply to the $17,000 — not the $25,000.

That’s why accurate records matter.

Understanding the Etsy 1099 Form

Most sellers receive a 1099-K, not a 1099-NEC.

Here’s what you need to know about the Etsy 1099 form:

• It shows gross payment volume
• It may include sales tax collected
• It does not show profit
• It does not show expenses

Sometimes sellers panic when the 1099-K total doesn’t match their bank deposits. That’s normal.

The difference is usually:

• Refunds
• Processing fees
• Timing differences
• Sales tax collected on your behalf

That’s why we always advise clients at JC Castle Accounting to reconcile their Etsy statements monthly.

Sales Tax on Etsy: Who Handles It?

Sales tax on Etsy can be confusing, but here’s the good news.

In most states, Etsy is considered a Marketplace Facilitator.

That means:

• Etsy collects sales tax from customers
• Etsy remits sales tax to the state
• You typically don’t need to collect it separately for Etsy sales

However, there are exceptions. For example, if you’re selling to customers in California, marketplace facilitator rules still interact with evolving state tax requirements. You can review current updates in our breakdown of California sales tax rules for 2025.

You may still need to:

• Register for a sales tax permit in your state
• File informational sales tax returns
• Handle sales tax for off-Etsy sales (like your own website)

This varies by state, so it’s important to verify with your state’s Department of Revenue. For example, sales tax rules in states like Florida can be more nuanced than many sellers expect. We discuss real-world compliance issues in our article on navigating tax and sales tax challenges for small businesses.

The key takeaway: just because Etsy collects sales tax doesn’t mean you can ignore sales tax compliance entirely.

Do You Need an LLC for an Etsy Shop?

This is another big question.

An LLC for an Etsy shop is not required, but it may be smart.

Here’s the difference:

Sole Proprietor

• Simple to start
• No formation costs
• No liability protection

LLC

• Protects personal assets
• Adds professionalism
• May help with business banking
• Flexible tax treatment

If you’re selling occasionally and earning a few thousand dollars per year, a sole proprietorship may be fine.

But if you’re scaling, hiring help, or investing serious money into inventory, forming an LLC can reduce personal risk.

This isn’t just about taxes — it’s about asset protection.

Bookkeeping for Etsy Sellers: What Actually Works

If you want to avoid stress at tax time, bookkeeping for Etsy sellers should start on day one.

Here’s what we recommend:

1. Open a Separate Business Bank Account

Even if you’re a sole proprietor.

This keeps business and personal expenses separate.

2. Track Monthly Income & Fees

Download Etsy reports each month.

3. Record Expenses Consistently

Use accounting software like:

• QuickBooks
• Wave
• Xero

Or work with an accountant.

4. Reconcile Your 1099-K

Make sure your records match what Etsy reports.

5. Plan for Quarterly Taxes

If your net profit exceeds a few thousand dollars, you may need to make estimated tax payments to the IRS.

That’s where many side-hustle sellers get surprised.

How Much Tax Will You Pay?

When you sell on Etsy as a self-employed individual, you may owe:

• Federal income tax
• State income tax
• Self-employment tax (15.3%)

Self-employment tax covers:

• Social Security
• Medicare

For example:

If your net profit is $20,000:

• Self-employment tax ≈ $3,060
• Income tax depends on your total household income

This is why setting aside 20–30% of profit is often a smart planning move.

Common Mistakes Etsy Sellers Make

Let’s talk about real-world risks.

Here are the most common mistakes we see:

• Not reporting Etsy income because it’s “small”
• Ignoring a 1099-K
• Mixing personal and business expenses
• Forgetting to track shipping costs
• Not paying estimated taxes
• Assuming Etsy handles all tax obligations

These mistakes can lead to penalties, interest, or IRS letters.

In short, selling online doesn’t mean tax-free.

When Should You Work with an Accountant?

You should consider professional guidance if:

• Your Etsy profit exceeds $15,000–$20,000
• You’re unsure how to report Etsy income on taxes
• You received a 1099-K that doesn’t match your records
• You’re forming an LLC
• You’re operating in multiple states

At JC Castle Accounting, we regularly help online sellers clean up books, reconcile 1099 forms, and create tax strategies that legally reduce what they owe.

And that’s not about avoiding taxes — it’s about paying the correct amount.

Quick Summary: What Every Etsy Seller Should Know

If you sell on Etsy in the USA:

• Your income is taxable
• Etsy may issue a 1099-K
• You must report net profit, not just deposits
• Sales tax is usually handled by Etsy, but compliance still matters
• An LLC may provide liability protection
• Good bookkeeping prevents IRS issues

When you treat your Etsy shop like a real business, it becomes one.

FAQs

1. Does Etsy report to IRS even if I make under $600?

Etsy may still track your income internally, but a 1099-K is generally issued once you exceed the IRS reporting threshold. Regardless, you must report all income — even under $600.

2. How do I report Etsy income on taxes if I didn’t receive a 1099 form?

You still report it on Schedule C. The IRS requires you to report all business income, whether or not you receive an Etsy 1099 form.

3. Do I need an LLC to sell on Etsy?

No, an LLC for an Etsy shop is not required. However, it can provide liability protection and a more formal business structure.

4. Does Etsy handle sales tax on Etsy sales automatically?

In most states, Etsy collects and remits sales tax as a marketplace facilitator. However, you may still need a sales tax permit depending on your state.

5. What expenses can I deduct when I sell on Etsy?

You can deduct listing fees, transaction fees, advertising, shipping supplies, packaging, software, and other ordinary business expenses related to selling.

6. What happens if I don’t report Etsy income?

If Etsy reports your earnings to the IRS and you don’t include them on your tax return, you may receive a notice, penalties, and interest charges.

Conclusion

If you plan to sell on Etsy, treat it like a real business from day one. Track your income, understand how the Etsy 1099 form works, stay compliant with sales tax rules, and report your net profit correctly.

That’s how you avoid stress, penalties, and surprise tax bills.

At JC Castle Accounting, we help small business owners across the USA build clean books, reduce tax risk, and grow confidently. If you want clarity instead of guesswork, professional guidance can make all the difference.