Want to feel completely confident in your ecommerce bookkeeping?

Want to feel completely confident in your ecommerce bookkeeping?

Businesses that document their processes grow faster and make more profit. Download our free checklist to get all of the essential ecommerce bookkeeping processes you need every week, month, quarter, and year.

Download it here

Etsy Tax Guide: Your One-Stop Resource For Etsy Tax Info

If you’re an Etsy seller and you’re new to the platform or still unsure about which taxes you are obligated to pay, this guide is for you.

Here, we’ll break down the three main taxes that most Etsy sellers need to know about: sales tax, income tax, and VAT.

Please remember that tax eligibility differs between business owners based on numerous variables, so it’s always best to seek the advice of a specialist accountant for your unique circumstances.

This guide is part of our Etsy accounting hub and covers:

Want to feel completely confident in your ecommerce bookkeeping?

Businesses that document their processes grow faster and make more profit. Download our free checklist to get all of the essential ecommerce bookkeeping processes you need every week, month, quarter, and year.

Download it here
Ecommerce Bookkeeping Checklist

The taxes that Etsy sellers need to pay

None of us are strangers to taxes.

They’re part of our daily lives, regardless of our profession or whether we sell goods online.

If you are or have been a salaried employee, you’ll have paid income tax before. But your Etsy sales may also be counted as trading income too, which needs to be declared and tax paid on profits.

Then there’s sales tax (or VAT in some countries). Depending on how much you sell and where, you may be liable to collect and remit this. But it’s far from simple - particularly in the US.

And as of July 2021, the EU changed up some of its VAT regulations as well as how remote sellers file it.

Here, we’ll bring all of this together under one Etsy tax roof, so that you know exactly where you stand with your taxes.

Etsy Sales Tax

In 2018, a landmark case changed the game for ecommerce sellers regarding sales tax.

Up until this point, businesses needed a physical presence and address in a state to be eligible to collect and remit it.

But in the years preceding 2018, ecommerce had seen a steady growth trajectory of 1-2% per year, with PayPal alone collecting upwards of $186 billion by the end of the year.

It was worth too much money to states for it to continue flying under the radar, and the courts took notice.

What is sales tax?

“Sales tax” is the name of the tax placed on goods sold in the US.

It’s sometimes referred to as a pass-through tax because while you collect it from the buyer, you then need to pass it onto the relevant tax authority.

As a seller, you don’t keep it, and you don’t pay it. You remit it. You’re simply the collection agent for the state.

Who needs to pay sales tax on Etsy?

As a result of the 2018 Quill v. Wayfair case, sales tax was opened up to include remote sellers, and thresholds were put in place to define who needed to take part and when.

This meant that sellers needed to surpass a revenue threshold before they became legally obliged to collect and remit sales tax.

This helped to mitigate the filing process for lower value sales or sales volumes.

The challenges begin here: every US state has a different tax threshold.

For example: Florida’s sales tax threshold is $100,000.

If you made over this much revenue in the previous year from Florida-based customers, then you are deemed to have economic nexus with the state and must collect and remit sales tax to Florida.

Alabama’s threshold is significantly more, at $250,000.

And then there are the N.O.M.A.D. states which don’t charge any sales tax at all.

Economic nexus is not just determined by revenue, either. For example, if you fulfill your products via Amazon FBA, which you could do even as an Etsy seller, then everywhere you have inventory stored automatically qualifies you for nexus.

Sales tax nexus and eligibility is a big topic, so make sure you understand your obligations thoroughly.

How much is Etsy sales tax?

The challenge continues with sales tax rates.

Just like nexus thresholds, sales tax rates vary both between and within states from 0 - 9.5%+.

And one state may have multiple tax jurisdictions within it.

States don’t necessarily expect you to pay them their own rate of tax, either. Each state is either origin- or destination-based, which dictates whether you pay the rate of tax in your location or the location of your buyer.

Once you know your nexus states, you’ll need to check whether they expect you to remit their own rate or that of another state.

How do you file it?

The light at the end of the sales tax tunnel is that Etsy is a marketplace facilitator, and these entities have certain obligations too.

In some states, Etsy will collect and remit your sales tax for you. Where this is the case, you don’t have to do anything.

If you have nexus with a state that does not require Etsy to manage sales tax on your behalf, you will need to collect and file it yourself.

You’ll need a permit to collect sales tax for these states, and you’ll need to file it individually. You can do this online via the states’ official websites, through an app like TaxJar, or with the help of a specialist accountant.

Check out our guide to sales tax filing options for more information.

Where to get more information

Our ecommerce sales tax hub breaks down everything you need to know in simple terms.

We cover the terminology in greater depth, the nexus thresholds, and the other nexus-qualifying criteria.

We also discuss strategies for filing, how to do it, and ways to automate the process to save time and ensure it’s always accurate.

Etsy income tax

Whether Etsy is merely a side-hustle or your full-time job, you’ll probably need to declare it on your income tax return.

While there isn’t a threshold for this exactly, it is best practice to declare everything you make. This is the safest route in case you are audited.

What is income tax?

Income tax is a direct taxation on money earned, usually as a result of a service provided (but not always).

Income tax is collected by governments and used to build and maintain the infrastructure of our cities and communities, as well as to fund public services and provide for citizens.

Who needs to pay income tax on Etsy sales?

Just about every Etsy seller should be declaring their Etsy income on their tax return, and potentially paying tax at the end of the financial year.

There are very few groups of people that are exempt from paying income tax.

Not-for-profit organizations, citizens living overseas, and taxpayers with many dependents are a few of them. You can find more of these here.

How much is Etsy income tax?

This entirely depends on your income value. The less you make, the less you’ll pay.

The lowest tax bracket for the 2020-2021 year is $0 - $9875 at 10%. As you can see, anything from $0+ earned is taxable.

Rules and rates differ slightly for married couples that file together, and if you are deemed “head of household”.

We strongly recommend you seek the help of an accountant to determine the rates and regulations that apply to you, particularly if you have more than one source of income.

How do you file it?

The tax documents you’ll need to file your income from Etsy and wherever else will depend on your unique circumstances.

In many cases, Etsy sellers will need these three forms:

  1. IRS Form 1040: This is for individuals who are filing their income tax returns. Find out more about what this is and how to file it here.
  2. Schedule C: This form is for sole proprietors to declare their income and expenses. If you are not registered as a sole proprietor, you may need another form. Find out more about this form and how to file it here.
  3. IRS Form 1099-k: For sellers that meet certain sales thresholds, Etsy is required by law to provide the IRS with some information about their business. If you receive this form, you need to check that the information Etsy collected about you is correct before filing it yourself. Find out more about this and how to file it here.

Your income tax return is where you can also claim tax deductions on your business expenses.

Deductible expenses are usually those which you require to run your business. Your Etsy fees, for example, may be tax-deductible.

Etsy has a guide on tax deductions for business owners here.

Etsy VAT and overseas taxes

Just as sales tax within the US has caught up with remote sellers, so too, have overseas tax requirements.

Like with sales tax, sellers are protected in most places by revenue thresholds.

What is VAT?

VAT stands for “value-added tax”.

Similar to sales tax, the key differentiator with VAT is that it is added at each stage of an item’s production. Each time value is added, tax is applied.

But it’s the same deal for sellers as sales tax. The buyer pays it, usually at checkout, and the seller remits it to the relevant tax authority.

We’ll be focusing here on VAT for the UK and Europe.

Who needs to pay VAT on Etsy?

It works similarly to sales tax.

If you do enough business with a country that charges VAT to meet its threshold, then you’ll need to collect and file it.

As of July 2021, the EU has centralized and simplified its VAT collection. All states now have a threshold of €10,000 (revenue in one calendar year).

The UK’s threshold is £85,000.

Sellers that exceed these thresholds are eligible to collect and remit VAT.

The changes introduced in July also made marketplace facilitators like Etsy liable to collect the VAT in some cases.

In these cases, you don’t need to do anything, it’s managed for you.

How much is Etsy VAT?

The EU’s VAT rates vary from one member state (country) to the next.

Typically, they fall between 18-21%.

This is the latest document on rates available on the EU’s website at the time of publication.

How do you file VAT?

Prior to July 2021, sellers needed to register and file VAT with each individual member state with whom they had economic nexus (they met the revenue threshold).

That is no longer the case.

As part of the EU Ecommerce VAT Package for 2021, two new filing systems have been introduced. The One-Stop-Shop (OSS) and the Import One-Stop-Shop (IOSS).

These online systems allow a seller that has nexus with multiple EU member states to remit all their EU taxes in one place. The system will handle the rest for them.

These systems are available to most but not all sellers, so you’ll need to read up on them and figure out whether you are eligible to use them.

If not, you’ll need to register with each state and file individual returns as before.

If you have nexus with the UK, you’ll also need to register and file VAT via HMRC.

Where to get more information

This guide breaks down the latest VAT changes in the UK and Europe and how they affect ecommerce sellers.

Find out about the all-new OSS and IOSS filing schemes, and whether they make sense for your business.

For consistent and regular VAT news and updates, keep tabs on Avalara’s dedicated page here.

Etsy sales tax

Get help with your taxes on Etsy

Taxes are complicated.

It’s easy to get confused and overwhelmed by the requirements, so plenty of help is available if you need it.

You can simplify tax records and collections in your accounting using A2X and a tax app like TaxJar or Avalara.

You can also hire the help of a specialist ecommerce accountant to handle it for you. This is the best way to ensure compliance and stay updated with the changes as they evolve.

What did you think?

This is the final part of our Etsy accounting hub series. If you’ve been on the journey from start to finish with us, we’d love to know what you think.

Did you find anything particularly helpful? Did we miss anything?

We’d love to hear your feedback so that we can make these resources as effective as we can.  Feel free to get in touch with us here. Thank you!

Don’t forget, this is only the tip of the iceberg of our Etsy seller content. Find more,  over on our blog.

Want to feel completely confident in your ecommerce bookkeeping?

Businesses that document their processes grow faster and make more profit. Download our free checklist to get all of the essential ecommerce bookkeeping processes you need every week, month, quarter, and year.

Download it here
Ecommerce Bookkeeping Checklist

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