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How to Report Income to the IRS as an Etsy Seller

Selling on Etsy may be one of the easiest and fastest ways to get into business for yourself. Make no mistake, however. Just because getting started in online sales is fast and easy doesn’t mean you’re not a “real” business – especially in the eyes of the Internal Revenue Service (IRS).

Fortunately, complying with IRS rules for your new business isn’t hard. Here’s what you need to know as an Etsy seller.

Etsy tracks your “Etsy Payments” sales for you

After the end of the year, Etsy sends out Form 1099-K, Payment Card and Third Party Network Transactions, to both you and the IRS. Form 1099-K reports your total sales using Etsy Payments, plus other information. Etsy must issue a 1099-K form if you have $20,000 or more in sales through Etsy Payments and you receive 200 or more payments through Etsy Payments during the year.

Certain payments are not considered to be “Etsy-processed payments”, for purposes of Form 1099-K. That includes payments through your PayPay account, checks, money orders, and so on.

Etsy requires you to provide your full taxpayer information by the time you reach 100 transactions totaling over $10,000. Your Etsy shop may be disabled if you continue to receive payments and do not provide this information.

The IRS matches your business sales to the total on all 1099 forms you receive for your business. It’s important that you report at least as much in sales as on these forms to avoid getting a notice from the IRS.

You must also report other sales from outside Etsy

As a craftsperson, you may also sell your work at local fairs and markets or on your own website. You must include revenue from all sales in your total business income, regardless of whether you receive a form reporting it.

Owning a small business may qualify you for more tax deductions

As a self-employed person or sole proprietor, you can deduct direct business expenses. That includes supplies, the costs of materials used in inventory you sell, advertising, and shipping.

That’s not all, however. You may be able to deduct vehicle expenses for travel to purchase supplies and promote your business. If you have a second phone line for business, you can deduct its cost. You may even be able to take a home office deduction as an Etsy seller.

Operating your business in a “business-like” manner is important

If you operate your business; in other words, if you take it seriously and show that it’s not just a hobby, you can generally use any loss from your business to offset other income you have, such as wages.

There are a number of ways to prove you have a business as an Etsy seller and not a hobby. You can demonstrate your expertise, show the time and effort you expend, have a business plan, show a profit at least occasionally, keep separate bank accounts for business purposes, and maintain good records.

If you report a profit to the IRS at least three out of five years, the IRS assumes you are a business. However, even if you have never shown a profit, you may still be considered a business if you operate in a business-like manner.

Save money to pay taxes including for income tax and self-employment tax as an Etsy seller

If your total income from self-employment is $400 or more, you must pay self-employment tax in addition to income tax come tax time. You only pay self-employment tax on your income after expenses.

Make sure to set aside a portion of your sales on a regular basis for federal and state taxes. Or, if you also have wages as an employee, consider increasing your tax withholding from your pay using Form W-4. By planning for your taxes now, you can avoid a surprise tax bill when you file your return.

Your state and local governments may have other requirements

You may owe state and local sales tax on your Etsy sales, depending on the laws and tax rates where you live. Research the laws in the states you often sell in. Make sure to collect and remit tax as required.

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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