A side hustle is now a trend with the 9-5 job. There are multiple reasons behind it: inflation and many other factors people want to earn from side hustle to maintain their lifestyle. If you are a craftsman, designer or artist Etsy is the best platform to earn your passive income. Etsy adds an income stream to your existing income.
But with diversifying your income source there comes legal publications. Etsy merchants and sellers are supposed to report their income to authorities at the time of filing a tax return.
Selling on the Etsy platform may be a full-time business to someone but for some, it is just a hobby and gaining some extra income out of their passion.
As an Etsy merchant/seller, you are the sole proprietor and owner of the business, and you are earning money out of it. All the money you are earning through selling through Etsy falls under the income of a self-employed person.
Running a business and earning income from it carry their own obligations. If you haven’t made many sales yet, or if most of your income comes from an employer, your Etsy income is unlikely to have any impact on your tax liability. However, you must report Etsy's income to the tax authorities (IRS).
There are two types of taxes that you might be subjected to and take care of in order to avoid any tax penalty or tax audit:
Etsy seller Income tax compliance and obligation
So, as a self-employed person you have an obligation to report the sales from the Etsy platform in your tax return. If you’re deriving income solely from employment the employer will deduct your taxes at the source which is referred to as withholding tax.
The employer withheld 7.64% of your salary to pay into social security and Medicare benefit. And the other half of 7.65% is the employer contribution that he pays to you.
But as a self-employed person, you have to take due diligence with tax authorities to make sure you are not missing any deadlines and making compliance with tax laws and regulations. As a self-employed person as in the Etsy seller/merchant case, you have to pay full of your amount in 15.3% on your own.
1099-K form to report Etsy income:
The platform processing your sales is required to give you the record of your overall income from the entire sale. It will be less than sell as Etsy takes their fee. Etsy will provide you with a 1099-K form. This form is the indicator that you’re bound to file a tax return.
What is the 1099-K form?
The IRS form 1099-K is simply a report of the total gross money that was paid to you on a platform. You might not have seen that same number released to you, depending on what the platform takes.
Etsy and similar platforms are required to create a 1099-K if you made more than a certain number of sales or received more than a set amount of money in purchases. When Etsy provides you with a 1099-K, they submit it simultaneously to you, the seller, and to the government. So, the IRS and you both are informed about the income you should be reporting in your tax return.
Do Etsy sellers/merchants Deduct Expenses When They Report Etsy Income and file a Tax Return?
Every Etsy seller/merchant is required to report income derived from Etsy on their income tax return. However, they can claim deductions for business expenses. Because of the rule businesses are allowed to deduct their expenses from the revenue and to pay tax on net income/profit. As Etsy shop is a small business, you can deduct from your taxable income the operating expenses of your business.
Here are a few business expenses that are deductible and you may be able to claim as an Etsy seller/merchant:
Marketing and advertisement
Materials used for making products or running your business
An allowable portion of rent/mortgage/utility costs if you qualify for a home office deduction
subscription costs, including continuing education and skill development
Healthcare premiums if you are not eligible for healthcare through an employer or a spouse
Retirement savings contributions
Self-employment taxes for Social Security and Medicare
Quarterly estimated taxes:
Income in the United States is not paid on a yearly basis, but on the basis of the estimation when it is earned. If a person is deriving income solely from employment the employer will be doing a bit for his employee. But if you are a small business owner you have to comply with tax authorities on your own.
Etsy sellers are treated as small businesses that can estimate their income and can pay their pay taxes quarterly. Etsy sellers will estimate the overall tax that they owe, and then submit it to tax authorities' quarter of it at the specified dates mentioned by IRS.