Selling on Etsy puts two institutions between you and the tax authority. One is the platform, which reports your gross sales to the IRS and collects sales tax on your behalf in most states. The other is the IRS, which taxes the profit rather than the sales and expects the fees, the materials and the shipping to be documented by you, because the platform never subtracts them from the number it reports.
That gap between reported and actual is where most Etsy tax confusion lives, so this page works through it in order, using Etsy’s own help centre and the IRS forms for the parts the IRS decides.
Which Tax Year This Page Is About
This page is written for tax year 2026: sales made in 2026, the 1099-K issued the following January, and the return filed by April 15, 2027.
One threshold change is worth naming here even though it does not touch most Etsy sellers. The federal reporting threshold for Forms 1099-MISC and 1099-NEC rises from $600 to $2,000 for tax years beginning after 2025. Etsy’s seller reporting runs through the 1099-K instead, whose $20,000 and 200 sale federal threshold is unchanged, so the change matters to sellers who receive other 1099 income rather than to platform sales.
The 1099-K Etsy Sends
Etsy’s own statement of the rule: it is required to issue a Form 1099-K to sellers who earn $20,000 or more in gross sales in a calendar year and make 200 or more completed sales, and it says several states set different reporting thresholds, so a seller receives the form if they met either the federal threshold or their state’s.
Three details from the same article change how the form should be read:
- It reports gross sales. Etsy describes the figure as the total buyers paid for the year without subtracting fees, refunds or shipping costs, and notes that the list of what it does not subtract is not complete.
- It merges shops that share a taxpayer ID. If you run more than one shop under the same TIN, Etsy adds the sales together, and the same combined form is available for download in each shop.
- It only covers Etsy Payments. Anything paid outside that system, which Etsy illustrates with in-person sales through a card reader, is not included, so the form can equally understate a year.
Etsy also says plainly that the form does not calculate profit and does not indicate a tax liability. That sentence is worth keeping in mind against the instinct to treat the number as a bill.
Sales Tax: What Etsy Handles
Marketplace facilitator laws moved most US sales tax collection onto the platform, and Etsy’s help centre describes how it applies to them: under those laws Etsy automatically calculates, collects and remits US sales tax on behalf of sellers located anywhere in the world when an order ships to a recipient in the US, or a digital order is purchased by a US buyer, and the order meets certain criteria.
Its article lists the states and territories with the date it began collecting in each, running from Minnesota in October 2018 through the states that joined later, and says which cases it does not cover. Two consequences follow for a seller. First, sales tax Etsy collected and remitted is not part of the 1099-K gross figure, because it was never your money. Second, registration and remittance remain a seller obligation in jurisdictions where the platform does not collect, and those rules are set by each state rather than by the IRS or by Etsy.
Business or Hobby, in the IRS's Words
The Schedule C instructions answer this without requiring a test at all. You are in business if your primary purpose for engaging in the activity is for income or profit, and you are involved in the activity with continuity and regularity. Three things are named as things that do not qualify: a sporadic activity, a not-for-profit activity, or a hobby.
Where the income goes if it is not a business is on the same form set rather than nowhere. The instructions point to Schedule 1, and line 8j there is labelled "Activity not engaged in for profit income". The practical stakes are the expenses: business costs belong on Schedule C, where they reduce both income tax and self-employment tax, while hobby costs are treated far more restrictively.
The Fees, and Why None of Them Are on the Form
Etsy’s published fee schedule sets three charges a seller meets immediately, and each is a business expense when the shop is a business:
- Transaction fee: 6.5% of the total order amount in your designated listing currency, which Etsy states applies to shipping and gift wrapping when you charge customers for them.
- Listing fee: $0.20 per listing, charged whether or not the item sells and added when you publish, with listings expiring after four months and auto-renew at the same $0.20.
- Payment processing: set by country, and for the United States Etsy lists 3% plus $0.25 USD per order, separate from and in addition to the transaction fee.
The same fee page lists further lines a seller may meet: regulatory operating fees, Offsite Ads fees, and applicable seller taxes. What matters for the return is that the 1099-K reported gross sales before all of these, so every one of them has to be claimed on the return to bring the reported figure down to something resembling profit.
What You Owe on the Profit
Two taxes, calculated on different bases. Income tax applies to your taxable income at your bracket, which no single article can predict. Self-employment tax is arithmetic: 12.4% for Social Security and 2.9% for Medicare, applied to 92.35% of net earnings, where the IRS defines net earnings as gross income from the business minus ordinary and necessary business expenses. The obligation usually begins at $400 of net earnings.
Estimated taxes are how it gets paid during the year rather than in April. The IRS describes the mechanism as the method used to pay Social Security, Medicare and income taxes when no employer is withholding, worked out on Form 1040-ES.
What Comes Off Before the Tax
The Schedule C expense section is where an Etsy shop's costs land, using the form’s own line labels. The ones that fit this business:
- Line 22, Supplies (not included in Part III): materials, packaging and the small tools of the trade, provided they are not inventory already counted in cost of goods sold.
- Line 18, Office expense: the paper, printer ink, software and similar items that keep the shop running.
- Line 27b, Other expenses from line 48: the catch-all, which requires the item to be listed and totalled in Part V before it can be claimed.
- Line 30, Expenses for business use of your home: the home office, kept separate from Part II by the form's own instruction and requiring Form 8829.
Cost of goods sold is the piece Etsy sellers meet earlier than most: if you buy materials and make something to sell, Part III and the inventory rules decide what that material costs you this year, and line 4 of the income section takes its number from there.
The Arithmetic of a $30,000 Shop
Numbers make the gap between gross and profit concrete. A shop with $30,000 of gross sales in the year, all through Etsy Payments, selling handmade goods:
- Materials and packaging: $6,000.
- Etsy transaction fees at 6.5% of the order total: $1,950.
- Payment processing at 3% plus $0.25 an order, on 600 orders: $1,050.
- Listing and renewal fees at $0.20, on 400 listings and renewals: $80.
Subtract those from the $30,000 and the profit before any home office claim is $20,920. Self-employment tax on that is 92.35% of $20,920, which is $19,319.62, multiplied by 15.3%, which is $2,955.90 before rounding. Income tax is calculated on the same profit at whatever bracket the rest of your income puts you in.
The 1099-K will have said $30,000. The tax is calculated on $20,920. Everything in between is a receipt you kept.
Frequently Asked Questions
Will I get a 1099-K from Etsy?
Etsy states that it must issue the form if you earn $20,000 or more in gross sales in a calendar year and make 200 or more completed sales, and that several states set different reporting thresholds, so you will be issued one if you meet either the federal threshold or your state’s. It also notes that payments not processed through Etsy Payments, in-person sales through a card reader being the example it gives, are not included.
Does the amount on my 1099-K mean I owe tax on all of it?
No, and Etsy says so in its own words: receiving the form does not necessarily mean you will owe taxes, because it does not calculate your profit or indicate any tax liability. What it reports is gross sales, the total buyers paid you for the year without subtracting fees, refunds or shipping. Those come off on your return, which is why the form is a starting point rather than a bill.
Does Etsy collect sales tax for me?
In most US states, yes. Etsy states that under state marketplace facilitator laws it automatically calculates, collects and remits US sales tax on behalf of sellers anywhere in the world when an order ships to a US recipient, or a digital order is bought by a US buyer, and the order meets certain criteria. Its help article lists the states with the date it began collecting in each. What the seller still owns is registration in states where the platform does not collect, and that varies by state.
Is my Etsy shop a business or a hobby?
The Schedule C instructions define the line: you are in business if your primary purpose for engaging in the activity is for income or profit, and you are involved with continuity and regularity, and they say a sporadic activity, a not-for-profit activity or a hobby does not qualify. Income from a nonbusiness activity is reported elsewhere, on Schedule 1, where line 8j is labelled activity not engaged in for profit income. The practical difference is that business expenses belong on Schedule C, while hobby costs are treated far more restrictively.
What are the Etsy fees I can deduct?
All of them, because none are subtracted from the 1099-K. Etsy’s fee schedule sets the transaction fee at 6.5% of the total order amount in your listing currency, applies it to shipping and gift wrap where you charge for them, and sets the listing fee at $0.20 per listing whether or not the item sells, with auto-renew at $0.20. Payment processing is separate and set by country, and for the United States Etsy lists 3% plus $0.25 USD per order. Offsite Ads and regulatory operating fees appear as further lines on the same page.
Do I have to pay self-employment tax on Etsy profit?
If the shop is a business, yes, and it is the part people forget. Self-employment tax is 12.4% for Social Security and 2.9% for Medicare, applied to 92.35% of net earnings, which the IRS defines as gross income from the business minus ordinary and necessary business expenses. The $400 threshold is where the obligation starts. It sits on top of income tax rather than replacing it.
Sources
Platform practice was read from Etsy’s own help centre, and every rate and rule from the IRS document that states it, on September 28, 2026.
- Etsy, what do I need to know about my 1099-K tax form, for the $20,000 and 200 sale threshold, the state threshold exception, and the statement that the form does not calculate profit or indicate tax liability
- Etsy, how is the total on my 1099-K calculated, for the gross sales basis, the fees, refunds and shipping it does not subtract, the merging of shops sharing a taxpayer ID, the exclusion of non-Etsy Payments sales, and the treatment of sales tax Etsy collects and remits
- Etsy, how US state sales tax and fees applies to Etsy orders, for the marketplace facilitator description and the conditions under which Etsy collects and remits, with the state-by-state list and dates
- Etsy, fees and taxes for selling on Etsy, for the 6.5% transaction fee, the $0.20 listing and renewal fees, the country payment processing table listing 3% plus $0.25 USD for the United States, and the further lines including regulatory operating fees and Offsite Ads
- Instructions for Schedule C, for the definition of a business as an activity whose primary purpose is income or profit carried on with continuity and regularity, for the expense line labels, and for the route nonbusiness income takes to Schedule 1
- Schedule 1 (Form 1040), for line 8j, activity not engaged in for profit income
- IRS, self-employment tax topic, for the 12.4% and 2.9% split, the 92.35% factor, the $400 threshold and the definition of net earnings
- IRS, self-employed individuals tax center, for the estimated tax mechanism and Form 1040-ES
For the forms that arrive for marketplace and gig income, see 1099-NEC vs 1099-K. For the form the profit lands on, see Schedule C explained.
