Taxes for Etsy Sellers

I recently teamed up with Janet from paperandspark.com to bring you a crash course on taxes for Etsy sellers. I know that this information will be valuable to you all especially since it’s now tax season! Check out her guest post below to learn the basics about taxes as an Etsy seller.

Taxes! Just hearing the word might make your blood pressure rise and your pulse increase. Whether you’re just setting up shop or you’ve been selling for a while, you probably have some anxiety about taxes. Today, I’m hoping to provide a little bit of clarity by reviewing the two most important types of taxes that apply to you as an Etsy seller.

Figuring out your financial responsibilities as a creative business owner can be one of the biggest challenges we face.  There are a lot of questions, and we just plain don’t know what we don’t know. How do you figure out which rules apply to you and which do not?  Let’s dive in.

There are two main types of taxes that you need to deal with – income tax and sales tax.

I’ve got a handy little cheat sheet right here that summarizes the two side-by-side. This downloadable summary is great to refer to throughout the year as tax questions pop up.

 

Income Tax

WHO do you pay it to?

Income tax is regulated by and paid to the federal government. This is the tax that the IRS gets excited about. Many states also have their own income tax as well.

WHAT money does it apply to?

We pay income tax on both our personal and business income. You’ve (probably) been paying income tax on your personal income via what’s called the Form 1040 each year. Your business also owes income tax on its net income (your total sales minus your business expenses). If you’re a sole proprietor (which many of us are), you report this info on a form called the Schedule C, which is filed along with your personal 1040.

WHO has to pay this tax?

Rumor has it that you aren’t subject to income tax until you make X amount of money, but this generally is incorrect. You should always plan to file a Schedule C for your business (again, assuming you’re a sole prop). If you’re running your business with the intent to make a profit, then you are subject to income tax and should be claiming your biz income on your tax return. This applies even if you never filed any business paperwork to “declare” yourself as a business, or even if you didn’t make much money during the year.  Bottom line – the federal government wants its money!  Keep in mind you’ll only actually owe tax if your business had a profit for the year.

WHEN is it due and how often?

Federal income tax is due once a year. For most of us, that due date is April 15th. You may have also heard of estimated quarterly income tax payments. If you believe you are going to owe a lot of money at tax time and want to avoid paying a big bill (plus potentially interest or penalties), you might need to pay estimated income tax amounts on a quarterly basis. Estimated quarterly payments are like pre-paying your big tax bill in advance throughout the year.

Other Stuff to Know:

It’s in your best interests to practice good bookkeeping or financial recording skills throughout the year. That’s because you won’t deduct expenses on your tax return that you forgot about by year-end. The key to remembering them is to record them in your books! The more deductible expenses your business has, the lower your net income will be on the Schedule C, and the less income tax you’ll owe. It’s also a good to set aside money throughout the year for your income tax bill. Many accountants recommend saving about 20-30% of your net income for taxes.

Helpful Resources about Income Taxes:

 

Sales Tax

WHO do you pay it to?

Sales taxes are governed by your state. That means that the rates and requirements for collecting sales taxes are determined on a state-by-state basis (a few states don’t even have sales taxes at all!). You might be responsible for remitting sales taxes to your county, city, or parish as well (usually they’re all reported on the same form and your state will divvy it out). Generally, you need to charge sales tax in the state in which you live and run your business. If you have nexus in more than one state, you may need to deal with sales tax there as well, like if you sell at an out-of-state craft fair.

WHAT money does it apply to?

Unlike federal income tax, state sales taxes are usually levied on your gross income. That means your total sales, before subtracting any expenses; however, they are only charged on your total in-state sales, not ALL your sales. This is a huge important distinction for online sellers. 

WHO has to pay it?

Again, this varies on a state-by-state basis, but generally anyone who sells from within a state has to deal with that state’s sales taxes. There are a few exceptions (like for garage sales). Most states require you to pay sales tax from the first dollar of sales, and only a handful of states have a minimum sales threshold to meet first. In order to pay sales taxes (and be legit in your state!), you must apply for a sales tax permit (also called a sales tax license or reseller’s permit depending on your state) as soon as you open your business.

WHEN is it due and how often?

Again, how often you have to file depends on your state. Your state might require you to remit sales tax monthly, quarterly, semiannually, or annually. And don’t neglect to file your sales tax return! Even if you have zero sales or zero in-state sales, you usually still need to file the form to avoid having to pay a penalty.

Other Stuff to Know:

Sales taxes don’t need to be nearly as painful as your federal income taxes. That’s because in theory (if you’re doing it right), sales tax should just be money in, money out for your business. You charge your in-state customers sales tax when they buy your good, your customer actually pays the sales tax, you hold onto that sales tax collected for a period of time, and then you remit it over to your state when it’s due. Unless you forget to charge your in-state customers or you’re charging them the wrong rate, it shouldn’t be any actual money out of your pocket.

Helpful Resources about Sales Tax:

Don’t forget to download the tax for makers quick guide, which includes a few other helpful tidbits and a side-by-side comparison of these taxes, all on one handy cheat sheet.

ABOUT THE AUTHOR: Janet is the founder of Paper + Spark, where she offers educational content, tools & spreadsheet templates to help makers and creative become more confident about the financial side of running their business. She’s a maker, Etsy shop owner, and an accountant. Her passion is to help other creative women bring their entrepreneurial dreams to life by going from confused to capable when it comes to their money. Visit her at paperandspark.com.