Bookkeeping for Etsy Sellers: The Basics Done Right
That deposit Etsy sends you has already been through a gauntlet of fees, and the IRS taxes the number before those fees, not after. Here is how to record gross sales, track cost of goods, and handle the 1099-K.
Selling on Etsy feels simple: list a thing, someone buys it, money shows up. The bookkeeping behind it is where sellers get tripped up, because that deposit Etsy sends you has already been through a gauntlet of fees, and the IRS cares about the number before those fees, not after. Get this right and Etsy taxes are manageable. Get it wrong and you either overpay or leave deductions on the table. Here is how to keep the books.
Your income is the gross, not the deposit
This is the big one. By the time Etsy pays you, it has subtracted transaction fees, payment processing fees, listing fees, and any ad costs. The deposit that lands is the leftover. But your taxable income is the gross, the full amount buyers paid, and all those fees are deductible business expenses you claim separately. If you only record the deposit, you understate your income and quietly lose every fee deduction. Record the gross, then deduct the fees.
Track your cost of goods sold
Whether you make your products or resell them, what they cost you is deductible as cost of goods sold. For a maker that is materials and supplies, for a reseller it is what you paid for inventory. This is separate from your fees and overhead, and tracking it is what turns your gross sales into actual profit on paper. Our guide to cost of goods sold for resellers covers the inventory math.
Hobby or business?
The IRS draws a line between a real business and a hobby, and it matters. A business run for profit deducts its expenses on Schedule C. A hobby still owes tax on its income but cannot deduct its expenses beyond the cost of goods. The rough test is whether you are genuinely trying to make a profit, and showing a profit in three of five years generally puts you on the business side. Our guide to hobby versus business income gets into the details.
The 1099-K and sales tax
If your sales are large enough you will get a 1099-K. The federal threshold is more than 20,000 dollars and more than 200 transactions, and both have to be true, though some states set theirs lower. The form reports your gross, which is exactly why you record the gross and deduct fees. And the income is taxable whether or not a form ever arrives. On sales tax, Etsy acts as a marketplace facilitator and collects and remits it for you in most states, so that piece is usually handled, though it is worth confirming for where you sell.
Past the net-deposit trap
Bring in your Etsy payouts through your bank, separate the gross from the fees, and keep your cost of goods straight, so your real income and your deductions are both on the books.
Start freeHow Vuuv helps
Vuuv does not connect to Etsy directly today, but it still gets your shop on solid books. By connecting the bank account where your Etsy payouts land, your deposits flow into Vuuv where you record the gross sale, split out Etsy's fees as deductions, and track your cost of goods. From there your Schedule C numbers come together, so you are taxed on real profit instead of the lump sum Etsy happened to deposit.
Frequently asked questions
Is my Etsy income the deposit or the gross sales?
The gross sales. By the time Etsy pays you, it has subtracted transaction fees, payment processing fees, listing fees, and ad costs, so the deposit is the leftover. Your taxable income is the full amount buyers paid, and all those fees are deductible business expenses you claim separately. Record the gross, then deduct the fees, or you understate income and lose the fee deductions.
What can Etsy sellers deduct?
Etsy's fees are deductible, and so is your cost of goods sold, which is materials and supplies if you make your products or what you paid for inventory if you resell. On top of that come the usual business expenses like shipping, packaging, a home office, and mileage. The fees and the cost of goods are the two that sellers most often miss.
Will I get a 1099-K from Etsy?
If your sales are large enough. The federal threshold is more than 20,000 dollars and more than 200 transactions, and both have to be true, though some states set theirs lower. The form reports your gross, which is exactly why you record the gross and deduct fees. And the income is taxable whether or not a form ever arrives.
Does Etsy handle sales tax for me?
In most states, yes. Etsy acts as a marketplace facilitator and collects and remits sales tax on your behalf, so that piece is usually handled for you. It is still worth confirming for the states where you sell, since rules vary.
Related articles
This article is general information, not tax advice. Tax rules change and every situation is different. Confirm the details against current IRS guidance or talk to a qualified tax professional before you file.