Etsy taxes 2026: what Etsy sellers owe and what you can deduct

This choice decides how your Etsy income is taxed. The test is whether you sell with the intent to make a profit.

• Business. You report sales on Schedule C and deduct materials, Etsy fees, shipping and other costs. Net earnings of $400 or more are subject to self-employment tax.
• Hobby. You report the income on Schedule 1 of Form 1040. Under current law, IRC Section 67(g) bars miscellaneous itemized deductions, so hobby expenses are generally not deductible. Hobby income is not subject to self-employment tax.

The IRS lists factors such as running the activity in a businesslike way, changing methods to improve profit, and the time and effort you put in. No single factor decides it. Under IRC Section 183(d), an activity that shows a profit in 3 or more of 5 consecutive years is presumed to be for profit.

Practical signs of a business: a separate bank account, bookkeeping, pricing that covers costs, and records of what you changed when sales were slow.

Etsy sends a Form 1099-K when your sales processed through Etsy Payments pass the federal threshold of more than $20,000 and more than 200 transactions, or a lower state threshold. The federal test comes from IRS IR-2025-107. Shops tied to the same SSN or EIN are combined.

• Where to find it: Shop Manager, then Finances, then Legal and tax information. Pick the right tax year before you download.
• What it includes: gross sales. Etsy says fees, refunds, shipping costs and sales tax you collected are not subtracted.
• What it leaves out: sales tax Etsy collected and remitted for you.
• How to tie it out: download the Etsy Payments Sales CSV and total the Gross column for the year.

Your taxable profit is far lower than the 1099-K for most sellers. See 1099-K for online sellers for the full reconciliation.

Etsy’s help center says it automatically calculates, collects and remits U.S. sales tax for orders shipped to states with marketplace facilitator laws. Sellers cannot opt out, and Etsy does not charge extra to do it. See How US State Sales Tax and Fees Applies to Etsy Orders.

What you still own:

• Sales tax on sales outside Etsy, such as craft fairs, markets and your own website, in states where you have nexus.
• State returns where you are registered. Etsy’s Seller Handbook notes that a seller with a physical presence in a state may still need to file a return there, even though Etsy remits the tax on Etsy sales.
• Clean books. Etsy-collected sales tax is not your income and not an Etsy fee.

For nexus rules across states, see e-commerce sales tax and economic nexus.

• Materials as cost of goods sold. Fabric, beads, wood, ink and blanks become a cost when the finished item sells. What is left at year end is inventory, not a deduction yet. See inventory and COGS for small businesses.
• Every Etsy fee. Listing, transaction, payment processing and Offsite Ads fees, plus Etsy Ads.
• Shipping labels and packaging. Including labels bought through Etsy.
• Equipment. Sewing machines, cutting machines, printers and cameras, often deductible in the year bought.
• Home studio. A home office deduction if the space is used regularly and only for the business.
• Software and subscriptions used for design, photos and bookkeeping.

Keep receipts and match them to your Etsy monthly statements. Read more in IRS Publication 334.

Best for: Etsy sellers whose shop has grown past a side project, who received a 1099-K for the first time, or who also sell on their own website or at markets. We work with clients nationwide.

1. Free initial consultation. Tell us about your shop, what you make and where else you sell.
2. Fees quoted upfront, in writing. Transparent, fair fees in an engagement letter before work starts.
3. Organize. We tie your 1099-K, Etsy statements and receipts together and set up cost of goods sold.
4. File. We prepare your tax return with the right hobby or business treatment.
5. Plan. We set quarterly estimates and help you keep simple books going forward.