Started selling on Etsy? Congrats on the side hustle! Now here’s the part nobody talks about: taxes.
I started my Etsy shop selling handmade jewelry three years ago. First year, I made $8,000 and thought, “Cool, extra money!” Then tax season came and I realized I owed the IRS $1,800. Hadn’t saved a penny for it.
Let me help you avoid that surprise. Here’s your complete Etsy seller tax guide for 2025.
Are Etsy Sales Taxable?
Yes. All of them. Even if:
- It’s “just a hobby”
- You made very little
- You didn’t get a 1099
- You reinvested the money into supplies
The IRS considers this self-employment income. Period.
When Do You Get a 1099 from Etsy?
Etsy sends you a 1099-K if you had:
- 2024: More than $5,000 in gross sales
- 2025: More than $2,500 in gross sales (threshold is dropping)
Important: Not getting a 1099 doesn’t mean you don’t owe taxes. You still need to report ALL income.
What Taxes Do Etsy Sellers Pay?
| Tax Type | Rate | Notes |
|---|---|---|
| Self-Employment Tax | 15.3% | Social Security + Medicare |
| Federal Income Tax | 10-37% | Based on your tax bracket |
| State Income Tax | 0-13% | Depends on your state |
Total tax burden is usually 25-35% of your net profit. Yep, that much.
Calculating Your Etsy Profit
Here’s the formula:
Gross Sales – Expenses = Net Profit (taxable income)
Your gross sales include:
- Item prices
- Shipping fees you charged
- Any other fees collected from buyers
Your expenses include:
- Cost of materials
- Etsy fees
- Shipping costs you paid
- Packaging materials
- And much more (see deductions below)
Every Etsy Seller Deduction
Direct Costs
- Materials and supplies (fabric, beads, wood, etc.)
- Etsy fees (listing fees, transaction fees, payment processing)
- Shipping costs (postage, boxes, tape, labels)
- Packaging (boxes, tissue paper, thank you cards)
Business Operations
- Home office (dedicated workspace in your home)
- Internet (business portion)
- Phone (business portion)
- Computer/tablet (if used for business)
- Software (design programs, accounting apps)
- Photography equipment (camera, lights, backdrops)
Marketing
- Etsy Ads
- Social media advertising
- Business cards and promotional materials
Professional Services
- Accountant or tax preparer fees
- Legal fees
- Business insurance
Education
- Craft classes related to your products
- Business courses
- Books and resources
Sales Tax: Etsy Handles Most of It
Good news: Etsy automatically collects and remits sales tax in most states. They handle the marketplace facilitator laws so you don’t have to.
You might still need to handle sales tax if you also sell through your own website or at craft fairs. Check your state’s requirements.
Quarterly Estimated Taxes
If you expect to owe $1,000+ in taxes, you should make quarterly payments:
- Q1: April 15
- Q2: June 15
- Q3: September 15
- Q4: January 15 (next year)
I recommend saving 30% of your profit and paying from that pool each quarter.
Record Keeping Tips
- Download your Etsy CSV reports monthly (sales, fees, etc.)
- Save all receipts for supplies and expenses
- Use a separate bank account for Etsy income
- Track mileage for post office trips and supply runs
- Keep records for 7 years
Hobby vs. Business
The IRS distinguishes between hobbies and businesses. If Etsy is a “hobby,” you can’t deduct losses against other income.
To be considered a business:
- Show profit motive (try to make money)
- Keep good records
- Operate in a business-like manner
- Profit in 3 of the last 5 years (guideline, not strict rule)
If you’re treating your shop seriously and trying to profit, you’re probably a business.
Frequently Asked Questions
Do I need an LLC to sell on Etsy?
No. You can operate as a sole proprietor. An LLC provides liability protection but doesn’t change your taxes much for a small operation.
What if I gave products as gifts—is that taxable?
Making gifts isn’t taxable income. But the materials you used aren’t deductible either since they weren’t sold.
Can I deduct supplies I bought but haven’t used?
Generally, you deduct supplies when used, not when purchased. But for small amounts, most people deduct when bought—the IRS isn’t picky about it.
What if I made a loss this year?
You can deduct business losses against other income (like a W-2 job), reducing your overall tax bill. This is one advantage of being classified as a business vs. hobby.
Get Organized Now
Start tracking everything from day one. Download Etsy reports monthly, save receipts digitally, and set aside 30% of profits for taxes.
A little organization throughout the year makes tax time painless—and maximizes your deductions.