Quick answer
If you sell on Etsy regularly to make money, you run a business. You report sales on Schedule C, subtract cost of goods and expenses, and pay income tax plus 15.3% self-employment tax on the profit.
- Etsy sends a 1099-K when your gross sales are over $20,000 and you have over 200 transactions in the year. Some states use lower thresholds.
- You owe tax on profit even without a 1099-K.
- For sales tax, Etsy acts as a marketplace facilitator. It collects and remits state sales tax for you in most states. You still handle sales tax on off-Etsy sales.
- Etsy fees, materials, shipping labels and packaging are all deductible.
Hobby or business?
Most Etsy sellers who price for profit, keep records and sell steadily are businesses. A business can deduct expenses and even report a loss.
A hobby seller must still report income but can’t deduct hobby expenses. The IRS looks at whether you run it like a business, your effort, your history of profit and whether you depend on the income.
Selling a few personal items at a loss, like old craft supplies, isn’t business income. See our article Do I Have to Pay Taxes on Reselling.
Your Etsy 1099-K
Etsy issues the 1099-K for sales processed through Etsy Payments. For 2026, the federal threshold is more than $20,000 and more than 200 transactions. Some states require forms at lower amounts. See 1099-K Threshold 2026.
The 1099-K shows gross amounts. That includes shipping buyers paid, before Etsy fees and before discounts and refunds. So the number is always higher than your deposits.
| Gross on the 1099-K includes | Handle it by |
|---|---|
| Shipping charged to buyers | Deduct your label costs |
| Etsy fees taken from sales | Deduct as fees |
| Refunded orders | Subtract as returns and allowances |
You can rebuild the 1099-K total from your Etsy Payments sales CSV. Summing the Gross column for the year should match. If the form is wrong, see Wrong Amount on 1099.
Sales tax: what Etsy handles
States require online marketplaces to collect sales tax on sales they facilitate. Etsy calculates the tax for the buyer’s shipping address, charges the buyer and sends the tax to the state. Etsy now does this in the large majority of states with sales tax.
What’s left for you:
- Off-Etsy sales. Craft fairs, your own website or Instagram orders are your responsibility.
- Your home state. If you have a physical presence, you may still need a seller’s permit and returns, even when you remit nothing for Etsy orders.
- Local rules. Some local taxes may be treated differently.
Sales tax Etsy collects isn’t your income. Don’t count it as revenue or deduct it as an expense.
State rules vary. Check your state revenue department. See Do Freelancers Need a Business License?
Deductions for Etsy sellers
Cost of goods sold
Materials that go into your products are cost of goods sold (Part III of Schedule C). Examples: wax, fabric, beads, blank mugs, paper. You deduct them when the products sell. Supplies still on the shelf at year end are inventory.
Small sellers can often use simpler methods. Many treat inventory as non-incidental materials and supplies, deducted when used or sold.
Other expenses
| Expense | Where it goes |
|---|---|
| Etsy transaction, processing and listing fees | Commissions and fees |
| Etsy Ads and Offsite Ads fees | Advertising |
| Shipping labels and postage | Other expenses or supplies |
| Boxes, mailers, tissue, stickers | Supplies |
| Tools and equipment (sewing machine, printer) | Depreciation or de minimis safe harbor up to $2,500 per item |
| Product photography gear | Depreciation or de minimis |
| Software (Canva, bookkeeping app) | Other expenses |
| Craft fair booth fees | Other expenses |
| Home studio | Home Office Deduction |
| Car trips to the post office or supply store | 72.5 cents per mile Jan to Jun 2026, 76 cents Jul to Dec |
For more ideas, see Self-Employed Tax Deductions.
Worked example
Lena sells hand-poured candles on Etsy in 2026. She is single with no other job.
| Item | Amount |
|---|---|
| Gross sales on 1099-K (including $4,000 shipping) | $38,000 |
| Refunds | $600 |
| Net sales | $37,400 |
| Cost of goods sold (wax, jars, wicks, scents) | $8,200 |
| Gross profit | $29,200 |
| Etsy fees and ads | $4,900 |
| Shipping labels | $3,900 |
| Packaging | $700 |
| Software | $240 |
| Home studio, simplified method (100 sq ft) | $500 |
| Total expenses | $10,240 |
| Net profit | $18,960 |
Lena owes about $2,679 in self-employment tax and about $122 in federal income tax after the standard deduction and QBI. That’s about $2,800, or 15% of her profit. Etsy handled the sales tax on her orders, so none of that is on her return.
Paying tax during the year
Etsy doesn’t withhold income tax. If you expect to owe $1,000 or more, make quarterly estimated payments. Many sellers save 20% to 25% of profit each month. See Quarterly Estimated Taxes and How to Pay Estimated Taxes Online.
Open a separate account for shop money. It makes the 1099-K reconciliation much easier. See How to Separate Business and Personal Finances.
Frequently asked questions
Do I have to pay taxes on Etsy sales if I don’t get a 1099-K?
Yes. Business income is taxable at any amount. You owe self-employment tax once your net profit reaches $400.
Do I need a sales tax permit if Etsy collects for me?
It depends on your state. Some states want marketplace sellers registered, and you’ll need one for off-Etsy sales. Check your state revenue site.
Can I deduct Etsy fees?
Yes. Transaction, processing, listing and advertising fees are deductible business expenses.
Is the 1099-K amount my taxable income?
No. It’s gross sales. Your taxable profit is gross sales minus refunds, cost of goods and expenses.
This article is general information, not tax advice. Consult a CPA or Enrolled Agent for your situation.
Related guides
- Gig Worker Taxes: The Complete Guide for Uber, DoorDash and Instacart
- DoorDash Taxes: How Much Dashers Owe and What They Can Deduct
- Uber and Lyft Driver Tax Deductions
- Gig Worker Taxes: The Complete Guide for Uber, DoorDash and Instacart
About this guide
Written by the Freelancer Tax HQ editorial team, based on our professional experience, official US government sources (IRS, SSA and other agencies) and reputable informational articles listed in the sources below. Last reviewed on . Tax rules change often, and we update this guide when they do. Read our editorial policy or report an error.
Sources
Etsy: How the total on my 1099-K is calculated; Etsy Seller Handbook: Where Etsy collects and remits sales tax; IRS: Understanding your Form 1099-K; IRS: What to do with Form 1099-K; IRS Publication 334, Tax Guide for Small Business. Example figures are FreelancerTaxHQ illustrations.
Official resources linked in this guide: IRS: About Form 1099-K; IRS: Tax preparer credentials.