Etsy is a website that allows you to buy and sell handmade items and crafting supplies. The site is free to join, and sellers can create a free shop to showcase their products. Whether selling on Etsy is a hobby or a full-time business, the income is taxable if net earnings reach $400 or more for the year. Sellers are also required to collect sales tax on transactions. Understanding your tax obligation is necessary to avoid hefty fines and penalties from the Internal Revenue Service or your state's Department of Revenue.
Annual Income Taxes
Etsy sellers are required to pay annual income taxes on their sales. Since an employer is not withholding taxes from your earnings, you are responsible for paying federal and state taxes. You are considered self-employed and must report earnings on Schedule SE. In addition to the tax on your income, you also must pay a self-employment tax to cover the necessary Social Security and Medicare taxes. You can calculate your self-employment tax by reporting income and expenses on Schedule C.
If you expect to owe more than $1,000 in taxes for the year, the IRS wants you to pay 25 percent of your estimated taxes each quarter. Quarterly estimated taxes are due April 15, June 15, September 15, and January 15, and must be reported with Form 1040-ES, Estimated Tax for Individuals. You can estimate your tax liability based on what you owed last year. Under the "safe harbor rule," the IRS will not charge penalties and interest for underpayment as long as you pay the same amount as the prior year. You can adjust the amount if your sales for the year increase or decrease significantly. The Small Business Administration recommends new business owners speak to a tax adviser to discuss the best calculation method.
You are taxed on your net profit, which is the total amount of income you made, minus expenses. When selling handmade crafts, subtract the cost of materials and supplies from the sale price. Everything used to manufacture the product, such as the needle and thread used to make a dress, are qualifying expenses. You may also deduct Etsy listing fees, shipping costs, envelopes and materials used for packaging products. If you receive payments through PayPal, the transaction fees are deductible. Other possible deductions include home office, vehicle expenses, advertising fees and accounting and tax preparation fees.
As of 2013, online sellers are only required to collect sales tax in the states where they live. For instance, if you live in Florida, you will need to assess a sales tax when a buyer in Florida purchases an item. Before you can legally begin collecting sales tax from your customers, you will need to contact your state Department of Revenue to register for a sales tax permit. After receiving the permit, you can log into your Etsy seller account to automatically tack on the sales tax for buyers in specific states. Since tax rates vary among states, Etsy sellers are responsible for researching their local laws and collecting the proper sales tax. The sales tax you collect is paid to the state Department of Revenue. Depending on the volume of sales, payments may be required quarterly or annually.