US Taxes for Etsy Sellers
My name is Jason Malinak and I hope this article finds you sleeping well at night . . . not fearing an IRS audit of your Etsy shop!
I’ve been helping Etsy sellers understand their taxable obligations since 2007 through my Etsy shop, JJMFinance – helping your Etsy shop thrive!
First off, I’m just going to remind you that if you are an Etsy seller in the US with hopes to make a profit . . . you are a business. You have taxable obligations. If you don’t report this income, you are breaking the law, and will eventually be found out. (I’m not going to get into all the details behind this reminder in this blog article, but in summary – 99% of all US Etsy sellers have taxes they need to take care of – Don’t fall trap to all the half-truths that you don’t have a taxable obligation).
I am a CPA, which means I read all types of “exciting” (Zzzzz) documents produced by the IRS. This week, I was looking at recent updates to a training book that IRS agents read on how to conduct their audits of individual tax payers. I thought Etsy sellers would find one chapter particularly interesting . . .
Chapter 8 in their audit technique training manual is titled, “The Underground Economy”.
If you and your Etsy shop don’t do anything related to taxes, this is what the IRS considers your business . . . an underground economy – it sounds sinister! You could also call it simple tax avoidance.
A few “fun” highlights that are hopefully not describing you and your Etsy shop, but most likely are if you aren’t paying all your taxes:
“The underground economy represents income earned under the table and off the books. The underground economy is characterized by small, single, entrepreneurial businesses. . . The main goal is to avoid reporting income and paying taxes to governments. Areas for potential abuse include eBay sellers, craft fairs, selling homemade. . . Some may hold a daytime job and operate in the underground by having a sideline business.”
Note: we often call it “selling handmade” – they call it “selling homemade” . . . same thing in the eyes of Mr. and Ms. IRS Audit Agent.
At the end of the chapter they have a list of seven techniques that will uncover your Etsy business if you end up as part of an IRS audit. Some of them are a bit technical to cover in this article, but let me summarize them for you, “You will be found out. They have good audit techniques. Don’t try to skip reporting your Etsy shop income. Ignorance of the tax law will not get you any leniency.”
Seriously, you are not going to trick the IRS – the techniques to find your income work.
So, what’s the best way to not be an “underground economic entity”?
- Have a basic understanding of the tax law surrounding your Etsy shop.
- Follow the law and pay your appropriate taxes. Sleep well at night.
Pay the taxes you owe and not a penny more or less.
Taxes are part of the reality of having an Etsy shop. You must deal with it or it will catch up with you eventually. You must have a basic understanding of Form 1040, Schedule C, self-employment taxes, quarterly tax payments, sales tax, home office deduction, Cost of Goods Sold (COGS), inventory methods, equipment taxation, and a handful of other relevant topics. You can’t just outsource this basic understanding to your accountant or tax preparer, because you are ultimately held responsible for your taxes. Unfortunately, many tax-preparers don’t understand the nuances of Etsy seller tax requirements, and in a couple of hours of learning, you can have confidence that you know what you need to know as a small business owner and then file your own taxes or have confidence that anyone you hires isn’t messing up.
So what’s an Etsy seller to do?
I started helping Etsy sellers with their bookkeeping needs in 2007, but soon found many of the questions I was helping Etsy sellers with were related to taxes. There is a lot of information to cover, but I have put it all in one place for Etsy sellers to grasp – The Etsy Tax Guide.
Almost every Etsy seller I come into contact with does not want to break the law, they just don’t know where to start when it comes to being a legal business with regards to their taxes. My Tax Guide ebook series has been the answer for hundreds of Etsy sellers. It’s all in one place and from a source you can trust specifically for Etsy sellers -by a CPA, too.
FYI – Every Etsy seller will also need a bookkeeping system in order to accumulate all the financial data that will be required to pay your taxes. (I can’t cover everything about bookkeeping in this blog post too, but here is a paper and pencil system I have developed and here is a spreadsheet based system I have developed). Both work well for Etsy sellers – it is just a choice of personal preference in how you want to keep your books.
You can always go to IRS.gov (straight to the source) for all the tax laws that apply to your business. It is sometimes harder to understand and you never quite know if you have read every tax law that applies to your business or not. You can also read other blog posts and forum posts regarding the tax law and Etsy sellers, but beware of half-truths regarding the tax laws and misinterpretations.
Know that the IRS has a chapter in their audit training manual that is designed to find Etsy sellers that don’t pay their taxes and take my encouragement to do the right thing and understand and follow the tax laws that apply to your Etsy shop. Don’t lose sleep about taxes! Do the right thing. It’s easier to start now than keep putting it off.
If you pay taxes on your Etsy business transactions accurately and in a timely manner – you are not an underground economic entity.