The growth of eCommerce has made this sector profitable and prominent. A lot of revenue comes from the eCommerce sector every year. One of the eCommerce platforms that we should talk about is Etsy. Etsy is a profitable eCommerce platform where thousands of small businesses and artists sell handmade products. When you start selling products on Etsy and make a profit, you become a business owner.
However, to become a business owner with an operated business on Etsy, you must deal with a lot of paperwork and taxes. In this article, we will learn about the taxes you must pay on Etsy and how to handle them for more success. Let us go into detail about Etsy taxes and how to tackle them.
Do You Need To Pay Taxes On Etsy?
You want to make more profits and save taxes as a business owner. So, if you see a window to save taxes on Etsy, you should. However, there are some taxes that you need to pay for smooth functioning on Etsy. You must pay income taxes on Etsy, depending on how much you earn from the platform. Before delivering them, you need to know about all the taxes to prepare you for the financial crunch.
Some Etsy tax deductions are mandatory for every seller on the platform. The website reports your gross earnings on the form 1099-K. But you must also register the Etsy sales income on your income taxes even if there is no form 1099-K. In states with mandatory sales taxes, you must pay taxes on all the Etsy sales that happen.
Apart from the taxes you pay on your income as a business owner, you must also pay other taxes like taxes on profit or loss on sales.
Profits or losses
Whether you registered the Etsy shop as a business or not, you must file for a Schedule C yearly. Under certain circumstances, you can also file the Schedule C-EZ form. The Schedule C-EZ form is a simpler version of the Schedule C form, which you might file if there is no net loss from your company sales.
Self Employment taxes
You need to pay a type of tax if you are self-employed. The self-employment tax is paid by anyone who has his means of employment and earns more than $400 from the same mode. Schedule SE forms are filled and paid to fulfill the self-employment taxes. The self-employment taxes are paid once every year. You can find more about this type of tax from the IRS website.
State income taxes
Some states have state income taxes; you must pay state income taxes if you have an operating business on Etsy. The state income taxes are also paid annually and are very simple to pay once you understand the rules. Some states have regulations to pay taxes on a quarterly estimated basis. The rules for state income taxes differ from one place to the other. Therefore, you can check your state taxes and determine the tax you have to pay. You can also have an accountant in place to discuss state-specific taxes and how they are handled.
State sales taxes
Business owners with direct sales must pay state sales taxes in certain states. The sales taxes are also state-specific taxes that business owners on Etsy must deal with. The state collects sales taxes to fund endeavors like roads, schools, and other publicly funded infrastructure. The sales taxes are different because these taxes are not deducted after the sales. The tariffs are specified according to the products in question, and then the seller has to add the taxes to the original price.
This increased price is taken from the customer's pocket. Sales taxes are a flexible type of tax that you can remit either monthly, quarterly, or annual. As a business owner, you must take sales taxes when you sell a product to a customer from the state.
Whether Etsy collects sales tax also depends on your business type. You must pay the associated taxes if it is a full-fledged business made for taxes and revenue. If it is a hobby business that you did not plan for tax management, there are different taxes that you might need to give out. Moreover, a hobby business that makes a regular profit every month is seen as a business by the IRS. Most of the Etsy shops are operating in this form. Therefore, you must see how much taxes you must pay to the tax department in such an instance.
Let us know about the difference between a hobby and a business-
It can be a simple hobby if you expect little profit from the Etsy shop. On the other hand, if you put a lot of money and effort into the shop's operations and the aim is to generate a lot of revenue, it qualifies as a business. Floating an Etsy shop initially might make losses or break even in the first few years. However, if profit is expected, you are running a business rather than a hobby. Even if you are operating as a hobby, but the income is less than the expenses to continue the pursuit, you experience a hobby loss. Consider it before determining how you want to handle all the Etsy taxes.
There is also a huge possibility that the business started as a hobby but is now full-fledged, profitable. If this happens, you need to plan for handling and paying taxes.
What Taxpayer ID Should You Have As An Etsy Shop Owner?
When you are the only owner of the Etsy shop, then you need to go for the sole proprietor tag or taxpayer ID. Sole proprietors are owners not incorporated into any corporation or liability company. Sole proprietors can deal with their taxes with their social security numbers.
Another way of handling taxes for the business is to give an employer identification number to the company or the business owner. The EIN is different from the social security number. If you are unsure about using a social security number, go for the EIN to protect your identity against identity theft. Using the EIN gives you more credibility and protection as a business owner.
Sales Tax As An Etsy Seller
Does Etsy charge sales tax? Local and state governments usually charge sales taxes on a portion of sales generated from the products on Etsy. The rules governing sales taxes differ from jurisdiction to jurisdiction. To help you pay the taxes, Etsy has revised and modified its sales tax collection process. The state sales taxes are difficult to deal with manually as they fluctuate from place to place. Thus, Etsy has partnered with tax agencies in different states and has automated the process of tax collection so that the state gets the sales taxes on time, and the business owner does not have to worry about it.
Etsy automatically remits these sales taxes for most orders. So, when there is a purchase through the platform, the price is updated by adding taxes. There are 42 states in the USA from where Etsy collects the taxes automatically and gives out the tax to the authorities on behalf of the sole proprietors. If the state is covered under the Etsy tax policy, you do not have to pay additional taxes, but if it is not covered, you must file for other taxes.
Let us now talk about the annual and quarterly taxes from Etsy. There are some Etsy shop taxes that you must pay annually, then some taxes that you must deal with quarterly.
Annual Income Taxes
The annual income taxes are the ones that you have to pay under the schedule c form. The taxes are filed under the profit of loss from the business category. You owe these annual taxes on the net profit you make. The yearly taxes in the United States differ significantly from other countries, and here you have the pay-as-you-go model. You must pay your income taxes as you earn money, not at the year's end. Therefore, the quarterly model is more feasible for self-employed people on Etsy who have to pay it from their pocket.
If the annual taxes you owe to the government is more than $1000, then the state expects you to pay them quarterly. This is an excellent thing to consider because you do not have to spend much money in one go, and you can manage your finances.
The IRS expects you to pay a fourth of the taxes you owe in one go. So, you pay a quarter of your total taxes. The quarterly taxes are owed on April 15, June 15, September 15, and January 15. These dates vary slightly throughout the year but only partially go off the charts. Since you know the dates you must pay the taxes, you can plan your financials accordingly.
To pay the quarterly taxes, you must fill out form 1040-ES and send it to the IRS office near you. If you want to avoid filling out the taxes in the offline mode, then you can manage them online. You can do it online via the Electronic Federal Tax Payment System (EFTPS). As a business owner, you must enroll in the EFTPS and then pay taxes.
Once on the platform, you can set up an auto-debit system for your quarterly taxes. With the EFTPS, you can also pay taxes over the phone. These taxes that you need to pay quarterly are all estimated taxes. The tax you pay will fall under the estimated amount given. Since it is an estimated amount, you can also evade any legal action as long as you are paying last year's taxes, even if you cannot pay the estimated taxes because the profits have not been that good.
What Are The Different Forms You Have To Fill Out For Your Taxes?
Now that we have answered whether you must pay taxes on Etsy sales, you can know which forms to fill up as tax documentation for the year. The usual conditions are as follows-
Form 1040, US Individual Income Tax Return, is the basic form filed by any individual in which the person's gross annual income is stated. The self-employed businessman on Etsy also has to file this form. Taxpayers can lower their tax payments via this form by claiming additional expenses and deductions.
Schedule C and Schedule C-EZ
The Schedule C and Schedule C-EZ forms are forms for business owners that you must file as an Etsy business owner. You must fill out the Schedule C-EZ form if you have a business profit exceeding $5000 on Etsy.
The Schedule SE form
Self-employed individuals fill out the Schedule SE form if their total income on Etsy is more than $400 in US currency.
These are some of the details and documentation that every business owner must know about. There are guides on Etsy that help you know about your tax obligations on the eCommerce platform.
This article's tips and advice can simplify your Etsy tax situation and keep your business running efficiently. There are numerous nuances to consider, but the key takeaway is to stay organized and take the time to learn about relevant tax laws and regulations that pertain to Etsy sellers. Taking care of your taxes now will benefit you in the long run, as it will help prevent problems with potential audits or compliance concerns. Finally, connect with a qualified tax advisor specializing in eCommerce sales if needed – they can help provide further guidance tailored just for you! Need help to fulfill eCommerce orders? Contact Simpl today, and let us support your business success!