Etsy may be one of the most popular online shopping spaces but does Etsy report sales to IRS?
It is a common question that many people have in mind when they sign up to sell something on Etsy. Paying your taxes is important, and the legal way to run a business. A business must abide by the laws of the Internal Revenue Service (IRS) if it wishes to avoid any legal troubles.
Not only big companies but also small businesses can be audited by the IRS at any time. Most of the sellers on Etsy are, in fact, small businesses. Thus, it is important for them to know if Etsy reports its sales to the IRS and how it is done.
Understanding all this makes it easier for businesses to find out the tax duties that they have to look into while selling on Etsy.
Selling on Etsy
Selling on Etsy may be the fastest and the easiest way to get your products out in the market. However, just because you are a small online business doesn’t mean that you can evade your taxes. You are a real business and must abide by the rules and laws of the IRS.
Complying with the tax rules of the IRS isn’t hard. They are especially easy to understand when it comes to new businesses. So, if you are a seller on Etsy, then you must understand everything about taxes.
When to Pay Your Taxes
Selling your children’s clothes on Etsy shouldn’t come with any tax consequences. But if you are selling handmade or vintage items on Etsy, then you come under tax laws. Etsy requires all its sellers to report their net income to the IRS and also pay their taxes.
You don’t have to pay taxes when your income is less than your expenses. This is possible if your store qualifies as a hobby. However, paying taxes and reporting your income is a must if you are running a business on Etsy.
Does Etsy Report Sales to IRS?
You must pay taxes if you own a shop on Etsy and also treat it as a business. Etsy will report your sales to the IRS through the 1099-K forms. Etsy sellers don’t have to worry about making any additional reports as Etsy takes care of the 1099-K forms itself.
However, just like any brick and mortar business, you must deduct the business expenses that you bear from your Etsy shop. It includes the cost of materials, advertising, and shipping, etc. This will reduce your taxable income, and you will have to pay less in the form of taxes.
How to Report Income to the IRS as an Etsy Seller
‘Etsy Payments’ Sales are Tracked by Etsy
Etsy sends a Third Party Network Transaction, Payment Card and 1099-K Form to the seller and the IRS. The 1099-K Form reports all the sales that have been made using Etsy Payments. It also includes other information about your sales.
Etsy issues a 1099-K form if you have received 200+ payments in a year through Etsy payments. Similarly, the form is also issued if you make $20,000 or more selling your products on Etsy during the year.
Some payments are exempt from ‘Etsy-Processed Payments’ and are not included in the 1099-K Form. These include the payments made through money orders, checks, PayPal accounts, etc.
The seller must provide their full taxpayer information to Etsy when they reach 100 transactions, and the earning totals over $10,000. Etsy will disable your online shop on its platform if you don’t provide this information and continue receiving payments.
Your business sales are matched with the 1099-K forms by the IRS. Therefore, you must report your sales to avoid getting into any legal trouble with the IRS.
Sales from Outside of Etsy
A number of sellers on Etsy also sell their products in different markets or local fairs. Some of them also have their own website. It is the responsibility of the seller to include their revenues from these sources as well when filing their taxes. Add these profits in your total business income, and you will get the total taxable income you have.
Small Business Owners Qualify for More Tax Deductions
There are different business expenses that you can deduct from the taxable income if you’re a sole proprietor or self-employed. These expenses include the cost of materials, shipping, advertising, supplies, etc.
In addition to these, you can also deduct vehicle expenses from your net income if you use it for business travel. For example, if you use the vehicle for promoting your business or to purchase supplies for your business.
Furthermore, if you have a second phone dedicated solely to business, then its cost can also be deducted. Etsy sellers may also be eligible for a home office deduction.
Operating a Business Like a Business
If you take your Etsy shop as a business and not just a hobby, then any loss from your business can also be used to offset any other income you have, e.g., wages. For this, you have to prove that you run a business on Etsy and it is not just a hobby.
This can be done by having a business plan and demonstrating your expertise. In addition, you can also show the time and effort that you expend in your business. Make sure you have a separate bank account for your business and maintain records.
The IRS will assume that you are business if you have reported a profit for at least 3 years out of 5. However, you may still be considered a business if you can show the IRS that you operate in a business-like way.
An Etsy seller must also pay the self-employment tax if their total income is $400 or more. It can also be paid on your income after you have deducted all the expenses. You must set aside some money on a regular basis to pay state and federal taxes.
Local Government and State Laws
In addition to all the above-mentioned guidelines, you must also abide by your local government and state laws. Research in detail about the state laws of the area that you sell in. Follow their guidelines to collect and remit your taxes as needed.
Now that you know everything about ‘Etsy reporting of sales to the IRS,’ you must follow the guidelines to avoid any trouble.