If you're an Etsy seller, you probably didn't imagine spending hours crunching numbers when you first opened your shop. However, bookkeeping is essential to keep your business running smoothly. Don't worry if you're not a math expert, as this guide on bookkeeping for Etsy sellers will provide you with the fundamental principles and tools to simplify the process. By following these tips, you can effectively manage your finances and focus on growing your business.
What is bookkeeping?
Bookkeeping refers to the systematic method of recording and monitoring all financial transactions related to a business. This can be accomplished through the use of accounting software or physical records such as books. By keeping accurate records, you can generate trustworthy financial statements, such as income and expense reports, that provide insight into your business's profitability over a specific period.
When you analyze your income statement alongside other financial documents like balance sheets and cash flow statements, you can obtain a comprehensive overview of your company's current financial state. This will provide you with the necessary information to make more informed and effective business decisions.
Bookkeeping for Etsy
As Etsy operates as an eCommerce platform, your bookkeeping practices will require some adjustments compared to general business bookkeeping. While the fundamental principles remain the same, there are several aspects specific to e-commerce that you need to consider. These include managing
- sales tax
- tax deductions
- transaction volume
- merchant fees
Doing all these transactions manually can be time-consuming and overwhelming. Thankfully, there are several DIY accounting software applications available that can automate many of these processes, including those with Etsy integrations. Some popular options are QuickBooks Online, QuickBooks Self-Employed, Xero, and Wave. However, some Etsy sellers have raised concerns about the limitations of QuickBooks for Etsy.
If you are not interested in DIY solutions, you can opt for Bookkeeping Pro Services, which can manage your Etsy bookkeeping for you and even file your taxes.
How can bookkeeping help your Etsy business?
The accuracy and timeliness of your business's bookkeeping have a direct impact on its overall health. For instance, by keeping your books up to date, you can gain better control over your cash flow, which is a significant factor in the failure of 82% of small businesses. Maintaining accurate books also empowers you to:
- Base your business decisions on data instead of intuition.
- Identify tax deductions.
- Manage cash flow effectively during difficult times.
- Avoid tax penalties, fines, and notices.
- Easily detect fraudulent activities and other banking errors.
- Provide a detailed financial history that can help you qualify for loans.
- Identify trends and establish growth benchmarks.
- Create inventory projections.
- Generate financial statements and make informed financial choices.
There are numerous other ways in which financial data can assist Etsy entrepreneurs like you, such as determining:
- The cost of each finished product.
- The most popular product in your Etsy shop.
- The live selling event that generated the most revenue.
- The profits earned by your Etsy business in the last month.
- Whether you're overspending on supplies.
- The number of months before you can afford to buy that new pottery wheel, assuming consistent profits.
Difference Between Etsy Bookkeeping and Etsy Accounting
Although people often use the terms "bookkeeping" and "accounting" interchangeably, they actually refer to two distinct functions. Bookkeeping involves recording a company's financial transactions, while accounting involves analyzing and interpreting those transactions.
Bookkeeping includes tasks such as:
- Categorizing transactions
- Tracking inventory
- Preparing balance sheets and profit and loss statements
- Reconciling bank accounts
- Managing payables and receivables, and overseeing
- Cash flow management
In contrast, accounting takes a broader view and looks at the overall financial health of the business. For Etsy business owners who seek insight to inform business growth, it's important to understand that the accuracy of their accounting analysis depends directly on the accuracy of their bookkeeping records. If bookkeeping records are not up-to-date, any accounting findings will be unreliable.
Tasks that accountants typically perform include:
- Reviewing financial statements prepared by a bookkeeper
- Preparing reports, statements, and models
- Auditing books
- Filing taxes
- Creating financial forecasts
- Completing risk analysis
Specific bookkeeping considerations for Etsy sellers
Managing finances can present a distinctive set of challenges for Etsy sellers. However, there are steps you can take to ensure that your business flourishes.
Make a determination on whether to adopt the cash-basis or accrual method of accounting
As an e-commerce business owner, it is crucial to understand the two primary types of accounting methods: cash and accrual. If you are new to the world of accounting, your first task is to choose the method that best suits your business needs. Let's take a closer look at each method.
Cash accounting is a method that records transactions only when money is exchanged. This approach is similar to how we manage our personal finances. For instance, when a customer pays for their ordered wedding decorations, the transaction is recorded in the ledger. However, if the invoice is sent out later, and the customer has not yet paid, the income is not recorded until the transaction clears.
Due to its simplicity and ease of management, many small businesses prefer the cash basis method. With this method, it is always easy to determine the exact amount of cash available at any given time.
Accrual accounting is a type of accounting that records transactions when they take place, regardless of whether the business owner has received the funds or not. This method is commonly used by larger, well-established businesses.
Determine your sales tax nexus
Sales tax obligations can vary depending on your income, product, and sales platform. You may need to pay sales tax on a quarterly or monthly basis. The sales tax nexus is a complex issue that arises when you live in one state but earn a certain revenue threshold in another state. In such cases, you may have to register for a sales tax permit in that state and collect sales tax from buyers who live there.
If you sell only through Etsy, you'll be glad to know that in most states, Etsy collects sales tax based on where buyers are located, so you don't need to do anything extra. However, if you use other sales channels like Amazon, eBay, or Shopify, it's crucial to research how each platform handles sales tax. Failure to comply with sales tax regulations or filing a late or erroneous return could result in late fees, interest, and bank charges.
Since the majority of Etsy businesses generate less than $10,000 in annual revenue, most sellers only need to pay sales tax for their state of residence. State thresholds for nexus typically require at least $100,000 in gross revenue. You must check your state's laws to determine whether you need to collect sales tax. In some states, sales tax is only required for goods and not services.
To determine whether you're obligated to collect and pay sales tax in a particular state, refer to a current Remote Seller Nexus Chart.
Be sure to consider the Etsy seller fees when calculating your costs
Although you don't have to pay monthly rent for a physical storefront, the fees charged by Etsy can significantly impact your earnings. It's important to consider the costs associated with running an online business, including Etsy fees and other expenses, when determining product prices, preparing taxes, and calculating return on investment. Failing to do so may result in underpriced products, overestimated success, or missed tax deductions, leading to overpayment of taxes.
- If you decide to sell an item on Etsy, a commission of 6.5% of the item's cost will be charged by the platform.
- By opting for Etsy Plus, a monthly fee of $10 will be charged to your account.
- When your customer uses Etsy payments as their payment method, you will be charged a processing fee equivalent to 3% of the listing price plus an additional $0.25.
- Payment processors such as PayPal and Square levy a fee of 2.9% of the listing price plus an additional $0.30 for transactions.
As an owner of an Etsy shop, any costs you incur for advertising, whether it be online, print, or other mediums, can be deducted from your taxes. In addition, the fees you pay for listing items on Etsy can also be considered tax-deductible as a form of advertising expense.
Etsy imposes a fee of $0.20 for each listed item, which is charged every four months or until the item is sold, whichever occurs first.
As you get ready to file your yearly tax return, keep in mind that you may be able to deduct your subscription costs for third-party business tools, such as accounting or inventory management software, from your taxable income.
Invest in inventory management
Efficiently managing your inventory is crucial for a successful online selling business. While you might be able to get by without an inventory management system in the short term, as your product offerings expand and you attract repeat buyers and referrals, it becomes increasingly important to have a robust inventory system that can offer you valuable insights and accommodate a wide range of products and variations. Here are some inventory management solutions to consider for your Etsy store.
Etsy’s Shop Management
The inventory tool within the platform provides a short video tutorial on effective methods, but its practical advice is somewhat limited. While the dashboard is suitable for novice sellers, it falls short for those seeking to expand their business, which is the objective of 82% of Etsy sellers.
Excel spreadsheets can be a viable option for small Etsy shops to manage their inventory effectively. If you fall into this category, simply search for "bookkeeping" on Etsy's search bar to access a range of affordable and visually appealing inventory management templates. However, it's worth noting that as your business expands, relying solely on Excel for inventory management may no longer be feasible or practical.
Craftybase is a specialized inventory management solution that caters to the needs of handmade Etsy stores. It provides a comprehensive package that includes tracking both material and product stock levels, calculating the cost of goods sold (COGS) for tax purposes, logging expenses, managing prices, and generating reports on monthly and annual product revenue.
StitchLab, yet another exceptional tool, enables you to gather your complete online inventory, encompassing Etsy, in a singular platform and export it to accounting software.
How Bookkeeping Pro Services can help
Bookkeeping can be a time and energy-consuming task, especially for new business owners who may have limited resources. Even if you decide to tackle it on your own, struggling with Excel spreadsheets can feel like an added risk.
With Bookkeeping Pro Services, you don't have to go it alone. As America's largest professional bookkeeping service for small businesses, we specialize in handling all of your bookkeeping needs and tax filing so that you can concentrate on growing your business.
Our expertise in e-commerce bookkeeping and accounting has been honed through years of working with hundreds of eCommerce sellers. We provide comprehensive support, including visual reports, a tax-ready Year-End Financial Package, and access to our team of experts. By partnering with us, you can maximize your tax deductions and minimize the stress of keeping up with your financials.
The bottom line
Effective bookkeeping is crucial to the success of your Etsy business, regardless of whether your passion lies in creating best-selling crocheted blankets or macrame wall hangings. Neglecting to pay proper attention to your finances can result in ill-informed decision-making and heightened risks to your business. If you find bookkeeping overwhelming, consider starting out slowly by focusing on one bookkeeping task at a time. Bookkeeping Pro Services offers guides and templates that can help you get started. For example, you can begin with their Excel Income Statement Template