it would be great if you could also add a list of what the commonly used forms are, for people who are filing for the first time...I think that would be really beneficial. this was a great article by the way.

I am a CPA and have put together a useful group of links for Etsy shop owners to look at straight from the IRS. http://www.etsy.com/forums_thread.php?thread_id=5423306 This article is good advise. As my experience as an accountant, I have seen that lack of organization is often the biggest hindrance to filing an accurate tax return. I hope this link helps some of you out! :)

Another often overlooked business expense is mileage. http://www.irs.gov/newsroom/article/0,,id=163828,00.html You have to keep up with quite a bit of record keeping though, but it is probably worth it.

Tax time is super scary - especially when the government takes about 30% of your profit! Don't be afraid to hire an accountant - they are great at finding deductions you might have forgotten. Mine also told me I don't need to keep up with my travel "eating" receipts, because there's a flat amount you can claim per day, depending on the city and that is so much easier. I am terrible at keeping up with mileage...

I use TaxCut for my taxes, and it makes things so much easier. It's $40, I think, but I feel that it's well worth it, especially if you go in on it with a few people. (I split a copy with my parents and boyfriend, which makes it cost next to nothing.)

great advice....thank you! I think I am a hobby (ist)!

I'm a little confused by the Hobby Loss rule. If I spend $1000 on supplies for my craft but only sell a little bit of it (say $200 in sales for a profit of $50) then because my expenses for the stuff I didn't even try to sell are much bigger than my sales, I don't have to pay income tax on the sale revenue/profit? Do I still have to declare the income and the losses or will that just annoy the IRS? (For the record I am definitely a hobbyist, I haven't started selling yet but it would only be a small fraction of what I make. And I don't live in the US but as a US citizen I still have to file, even if I almost never have to pay US taxes.)

Thanks for the article. I would also like to know more about the hobby loss rule. I've been reading but haven't found the information I am looking for. I think every one of us hopes we can have a profit with our Etsy business/crafting. However, if you don't have a profit for three years, can/will you lose the deductions you took in the years you were operating at a loss and be required to pay additional tax for those periods? Or is it enough to recognize at that point that you are a 'hobbyist" and change how you are reporting?

Interesting points mentioned here most of which are relevant to any country.

Are etsy sellers getting tax ID #'s?

I would like to know the answer to blusaffron's question and also would like to know if when you sell something to someone in your state, do you have to charge them sales tax. I have not notice anyone adding sales tax. Do they incorporate this in the price of the article or is it not necessary if this is your hobby?

I am looking into selling, and have been looking for information on how to charge sales tax. I have sold in the past at art fair's and charge the state sales tax. I also have a tax id #. Could any please fill me in.

If the our shop specifies state tax is included in the $40 price, can we just keep records of that and put the tax from $40 in a pot to pay the state?

Like others I would really like to know how I can charge sales tax to those who purchase within the state I run my shop. We do have tax id so do already file a state return already. Hope I didn't miss anything in my set up of shop.

I am trying to find information on when to charge sales tax. My business is TN. Do I only charge sales tax to those who purchase within TN?

Hi there, what about being in Canada? What considerations to make? Thanks.

So much to know...Its scary! I need step by step (taxes for stupid people) instructions on where to go and what to do.....

Yes - any guidance on sales tax, tax id #'s .. when/if to get one ... is much needed and appreciated!!!

Tax time really doesn't have to be scary! As the article says, accurate and timely records will give you the foundation for a breeze of a tax return. I have a simple Profit & Loss spreadsheet you can download for free from my blog. It is a great way to track your income and expenses and keep your business finances organized. http://www.accountingspotonline.com/2009/07/free-download-simple-profit-loss.html

19 comments thus far and not a one solution or person or advisor on this whole website to direct and answer people's questions regularly, it's really pretty frustrating. People are trying to be honest upright citizens and Etsy is nowhere to be found helping their sellers out with someone writing more than an article who is "not an Accountant". They can do alot better....

Just found this article people might want to perk up to as it deals with the aforementioned hobby-loss rule - which is coming under scrutiny by the IRS and tax preparers. http://www.forbes.com/2009/07/10/irs-taxes-hobbies-personal-finance-hobby.html D'OH!

hey guys! i was wondering if anyone had any photo/styling tips for me... i sell original art and prints, so i feel that scans are the best way to show what the artwork actually looks like, especially the ones on paper, but i feel like the scans are a bit boring. if anyone wants to check out my pics and give any advice it would be really appreciated! ill check out your stuff too if you like!

gearing up to do my taxes as well, so this is great!

Once you have all the numbers , it's very easy for me . I give everything to my accountant and let them do the dirty work of filling the documents , also my accountant tells me about all that can be deductible . One advice is to do good Bookeeping , gather all the expenses + sales data and calculate the total at the end of each month or week depending on how much you sell , if you wait at the end of the year and have hundred's of sale it might be a more difficult task . At the same time it will helps you see how much you make and have more control over your expenses .

For the tax id questions - I have a legally filed business (sales tax license, local business license, and claim my business on my federal taxes) and for me, I set up the business as a sole proprietorship and my EIN is my social security number. Everything federal is processed through my name and my social. Hope that helps : )

For the sales tax questions - you need to contact your state department of revenue to file for a sales tax license, and they will provide you with all of the necessary forms to apply and then monthly/quarterly forms for filing your report and paying sales tax due. Sales tax is not part of your federal income tax filing btw. Just in case you are new and were going to ask ; )

Just a tip that might help. I have had my business account open for over 5 years. For taxes, I just do a sales & expenses excel spreadsheet and take the payments and deposits directly from my business account. I balance the spreadsheet to my statements and determine my profit. But EVERYTHING I do comes in and out of this account. So if you don't have a business account strictly for your handmade business, do it now while it's still January. It's the easiest way. I'm terrible with numbers and it's easy for me. I do have a tax guy though that handles the rest with filing the forms, etc. Hope this helps a little!

Thanks for this article! willow

I have managed to file my own taxes for a while now. I find that the IRS website at www.irs.gov and their free helpline are really good! What I do is try to figure out as much as I can on my own with the website and forms, and then I write up questions to ask when I call the helpline. :)

Good advice here. I use AccountingSpot free spreadsheet and it's great! Thanks! For those asking about the Sales Tax: you can set it up on Paypal, it adds it automatically during checkout depending on how you set it up: to the product, to product and shipping, and what state. Then, you just let your buyers know in your announcement, policies or listings.

It is in your Paypal - Profile - Sales Tax

You should also keep in mind that tax preparation services are not accountable if they make a mistake on your return, you are. Many states offer free tax consultation through their department of workforce services, so even if you have it prepared have one of them review it before signing the document. Oh and one thing that annoyed me to no end when I worked at the IRS. People there is no such thing as a 100% partner, so if you 1065 or 1120S was done through a tax preparer and has that on it go get your money back.

Thanks for the great advice!

Thank you for the advice!

Great advice. This is my first year as a "business" and I am terrified. I do recommend that newbies such as myself open up a personal bank account that helps to keep things on track. I'm hiring a professional. Taxes scare me!

Hi everyone - I'm a tax accountant but unfortunately, I work with partnerships...I have some experience with individuals and small businesses so I'll try to shed some light. Forms: If you're just a regular person who is selling on Etsy as your business, you'll likely be filing a Form 1040. Your business income and deductions go on Schedule C. You may have other schedules that will be necessary. As a sole proprietor, your EIN is your social. State sales tax: If you need to charge it, who you need to charge it to and how/when to remit it is determined by each state so you need to find out your state. As an example, I'm in MA. Our sales tax rate is 6.25%. I'm required to collect 6.25% on the sales price of items I sell to customers located in MA and remit that to the state. Clothing (and some other items) are exempt so if I'm selling clothing, I do not need to collect sales tax. States don't care how you collect their money, just that you do. For the $40, tax included example...if you were in MA you would report that your sale was for $37.65. The other $2.35 would be sales tax collected. Hobby loss: This is a HUGE area that the IRS looks at. They would love to be able to deem everyone's business on Etsy a hobby because then you can only deduct as much as you made. If they think you're participating in a hobby, you are still required to report your income and deductions (expenses) but you cannot take a loss. This is a very complex area so if anyone has any questions, let me know. I've done a decent amount of research in this area. There is much more to it than whether or not you make a profit. Essentially, treat it like a business if you want it to be considered a business. For most of us, we're doing this because we enjoy it. There's nothing wrong with that, but don't mix it up with your personal items. For the question of "what if I only sell a portion of what I make?" Realistically, you should have 2 sets of everything - a business set and a personal set. If you mix them, it is very difficult to make the case that you have a business. You should keep detailed records. If you're shopping for the business, only use those items for the business. If you buy something in bulk and want to use it for both, split it at the time of purchase and record a portion of the price and quantity in your records. Say you buy a dozen handkerchiefs for $24 and you want to use 8 for the business but want to make 4 for yourself. Record in your business records (an Excel spreadsheet, a journal log book, whatever you use) that you purchased 8 handkerchiefs for $16. Keep EVERYTHING separate. Oh and tax preparation services (like people who prepare your taxes...not software) actually are accountable if they make a mistake on your return. There are preparer penalties now. Additionally, the IRS is beginning a program to regulate all independent tax preparers (scary that they were unregulated before). You are still ultimately responsible but there is liability on the preparer's side as well. Always beware anyone who refuses to sign your return as the paid preparer. Sorry if that was long winded...hopefully it made some things a little clearer. Feel free to convo me if you think I can explain something. Please know that I cannot give you tax advice for your specific situation. I can explain a concept in general but I am not responsible or liable for your application of my explanation as I am not your accountant and not aware of your entire situation.

Do I have taxes to do if I haven't sold anything? As sad as this is, my parents give me money to help fund my etsy. I've been making pick earrings on the side to sell to my mom's co-workers to help fund with my supplies. Coop

The teacher analogy makes me feel good about the profit I did make in 2009. I thought it was small, but it looks like it's a real business to the IRS, which is how I view it.

Anyone have some Canada specific advice to share? Thanks for the article :)

lilcoop1 - Technically anything you sold to your mom's co-workers is income that should be reported (the IRS wants to know what you made, from whatever source, even if it's on the side, under the table, etc). There is a threshhold for having to file though. I'm not sure what it is this year but if you check out irs.gov and look up the instructions for Form 1040, there's usually a part that says something like "who needs to file" "when to file" "where to file" and they also have a hotline if you still have questions. I remember a few years ago it was right around $8,000 (from all jobs and income, so if you have a regular W-2 job, that counts too) but you should check it out to make sure. Each state has different requirements as well

Thanks miriada!

This goes for sellers from the US right? Cuz I dont believe that crafters in Macedonia pay taxes...or do they?!?!?! I'm confused now

Helpful article and comments. Thanks.

okay i have a fairly scary/complex question for any tax expert out there who can help - or someone else in a similar position. I am an Australian citizen living in New York on an E3 visa. Technically i am not allowed to work for another person in the US other than my sponsor employer. I previously set up an etsy shop in Australia and would like to continue making things to sell while i am in the US. *Is it okay to run my own small business from here? If so do i need to register my side business with the state of NY? *Or should i run it under my Australian business even though i will be making and sending from my US address? I can still use my Australian bank account to receive payments. I know its a headache! if anyone can help it would be much appreciated. thanks, Chela.

Beware that reporting your Etsy business as a for-profit business may affect your ability to collect unemployment income if you lose your day job. It's a real kick in the pants if you're trying to start up a side business from home while keeping your day job. I lost my day job, which was my primary income, and now it looks like the fact that I have this Etsy business prevents me from collecting unemployment, even though my Etsy business is still in the start up phase and not yet profitable. I'm trying to find an exception in the law. But it doesn't look good and is something that others may want to be aware of.

I'm in the same boat you are ALN. I am also having to pay sales tax on any tools/equipment I bought outside of NC to use in my business.

Great info miriada! Thanks

I e-mailed Etsy help about sales tax a few months ago, and I didn't get a really clear answer about how the majority of sellers deal with it. I got the feeling that people are including sales tax in their prices mostly, so I raised the prices on all the items in my store. It seems like there should be a way to add it in at checkout though because I understood that you really need to pay sales tax for online sales in your state. Especially if you live in NYC the price listed without the sales tax could be much more equally competitive, where as with tax in for NYC the price will be subsatantially higher. 8.875%! But there are also limits to income for this, I thought it was that if you earned above $10,000 profit you are obligated in NY State to pay sales tax for online sales. Does anyone know if this is still true? I was also wondering what people see as pros and cons of being an S-corp, small corporation versus sole proprietorship, and what this means for tax responsibilities, which is easier on your pocket in the beginning years. I became an s-corp, but am wondering if it's really worth it at this point.

As for the tax question, if you use Paypal, you can have the percentage automatically added to the invoice for in-state sales. The option is under "merchant services" and "tax calculator" in Paypal.

ALN - I'd be interested in hearing how that works out for you and wish you the best of luck in it. My dad's in a similar situation except with landscaping/lawncare instead of crafting. He anticipated a major layoff at work which motivated him to finally start the small lawncare business. He just lost his day job and is trying to figure out if he unintentionally made things worse. Marina - Every country has separate tax laws. I only really work with US tax laws so you may be right about Macedonia. Check with your local government or taxing authority to make sure. Most countries do have a personal income tax; however, some do not. In the US, we have a federal income tax imposed by the US government, a state income tax (in most states) and even a city/local tax in some places.

AuraDror - My understanding is the S corps are a bit of a dying breed. They were more popular before LLCs came into existence mainly because they allowed for a small business to be taxed as a flow through (just 1 level of tax) but have limited liability like a C corp and were the only option for this in general use. I rarely see new companies organizing with S status because LLC has fewer restrictions. LLCs are a creature of state laws and not federal so an LLC is treated as a partnership by the IRS unless you file form 8832 to be taxed as a corporation. If you organize a single member LLC, the company is disregarded for federal tax purposes and when you file your taxes you'll basically be treated as a sole proprietor (instead of the default partnership - can't have a 1 person partnership). Unfortunately, as a disregarded entity, you're also subject to more personal liability than a multi-member LLC would be. If you're organizing as something other than a sole proprietor for liability protection, a single member LLC might not be for you. That's really a question for a lawyer because I'm not sure just how much liability protection it would afford vs. an S corp.

Thanks for all the ideas! This is the toughest thing for me: just making time and adding up the reciepts. Thanks for the help!

Great help! Thanks so much!

sarah, you are such a wise lady!

miriada, thanks for that great bit of info. All in all this topic is one that I don't know much about-so thanks for taking the time to enlighten us. Thank you for shedding light on this dredded topic!

miriada, thanks for all that helpful info!

Hi! I'd also love step-by-step guide for dumm...! I also didn't get if a tax ID is being assigned as I register the shop(?). If yes, then where/how I can figure out what it is... And yes (no), - I didn't get the business/hobby matter and what is worse and how it works either In other words I would love to understand, so Can anyone dive me a hand?

Today (Feb 11th, 2010) the lady who did our taxes at H&R Block said if I sell over the internet, that I am responsible for paying sales tax to each state in which I sell to! :(

I haven't even opened my shop yet and Iam more confused with all this tax stuff and everything in general. Along with ThriveOnArt can anyobe give us a hand?

What if you are married, you're husband claims you as a dependent and you are trying to get started with etsy selling (vintage clothing and upcycle). I am excited about starting to sell, but decided to check out the tax stuff first.... It's very confusing. I don't want my husband to get in trouble for claiming me ( I have no income) and then I start selling. HELP.

miriada - thanks for all the info. Has anyone considered forming an LLC solely to protect their personal assets? Is it expensive? For example, say a customer was harmed by my product -- i.e., if I sell jewelry, and someone chokes on it...probably being waaayyy too paranoid here, but seems liek that's a potential risk. I'm planning on selling jewelry soon, so I was going to to file with my ssn as my ein, but I am concerned about liability.

I am just starting out. I really hope that I will be making a profit 3 out of 5 years, but what happens if I don't?

Wow...this stuff is so confusing. I'm trying to figure out what I want to do for next year. I'm glad I am thinking about this now!

does this mean that i needed to keep the receipts for all the stuff i bought, to make my jewelry? and if so, what if i don't have the receipts? please answer my question

Hey! For those out there who have IRS debt check out Phoenix Tax Solutions. The entire process was quick and easy. They reduced my debt for a low cost and now I am planning my very 1st vacation.

Wow this is great. An area I was so unsure of and found so much useful guidance and reference. Thanks to everyone who has take the time to share and comment!

I am from the States but live in Africa. I want to sell magnets, but am confused as to how the tax situation will work--can I legally file my business if I am overseas? And how do I do my taxes for that? I do know it would be a sole proprietorship. The article mentions the IRS can decide whether it is a business or a hobby. But how do you decide that? By that I mean, what do I have to do to make it a business or keep as a hobby?

Lots of useful information above; thanks to all. It's important to realize that when you open an Etsy shop, you are running a business and it isn't that much different than if you open a store in your town except your start-up costs are much lower. Record keeping is critical. I use Excel (but you can use paper record keeping too) and record every income and expense item related to my shop. You can also buy a small-business record keeping book at your bookstore for this purpose (and record the expense of that book!). Don't forget to record your PayPal fees and Etsy transaction fees as expenses. Keep all your paper receipts in a folder and copies of your electronic receipts in a computer folder -- you won't need these, though, unless you are audited. If you keep good records of your income and expenses like this, then it should not make doing your income tax return complicated. Again, running your Etsy shop is a business and requires the same attention to basic record keeping as any other business. Fortunately, an on-line business is much simpler than a brick and mortar business -- we don't have to deal with rent, insurance, utilities, physical shop maintenance, and all that. Best wishes to everyone for successful selling!

Thanks Jan! I am finding that I should have been [much] more organized with my paperwork. I've started 2012 record keeping off great! I am in the office right now trying to get the paperwork done before my filing deadline. Let me ask you this; My business is new (May 2011) but I started buying supplies to make my jewelry back in 2010. Can I still claim those items as well??

ZuriEarthlyDesigns: I'm not an accountant and I'm far from qualified from giving any tax advice (other than to advise people to keep good expense and income records)! I'm guessing you can only deduct business expenses in the year that you had them, so you probably can't deduct 2010 expenses unless you file an amended tax return for 2010. But, really, I'm not qualified to answer!!

I am personally working on opening an Etsy shop soon and doing as much reading as possible to be preparred. Because I am under 18, my parent has to oversee the account. But my question is-what all do I need to know about taxes and such for my shop? Any money I earn will be added to my student PayPal account and we have no ACTUAL buisness-just the Etsy shop-so will we even need to worry about sales tax or anything? Somebody please let me know!