Selling your kid's old bicycle is not likely to cause any tax consequences, but when you sell crafts, vintage or specialty items on websites like Etsy, you have to report and pay taxes on your net income. You will also likely need to pay self-employment tax on your profits, and in some locations, you may also be responsible for charging and collecting sales tax.
Paying federal and state income tax on Etsy income
If you sell items on Etsy, you will likely need to pay income tax on your income—usually, the total amount you earned by selling your products, less your business expenses. Etsy typically reports your gross income to the IRS on Form 1099-K, but even if you don't receive a 1099-K, you still have to report your Etsy sales income on your tax return. If your state has income tax, you'll need to pay state income taxes on the net income from your Etsy sales as well.
The IRS planned to implement changes to the 1099-K reporting requirement for the 2023 tax year. However, the IRSrecently delayed the implementationof the new $600 reporting threshold for transactions from third party processors like Venmo and Paypal, reverting tax year 2023 back to the previously higher 1099-K reporting threshold (over $20,000 in payments and more than 200 transactions).
However, some individual states have already begun to use the lower reporting threshold. Maryland, Massachusetts, Vermont, Virginia and the District of Columbia have a $600 threshold for requiring 1099-K in effect for 2023. North Carolina and Montana also have a $600 threshold, although state tax officials have said these states may offer relief. If you don’t receive a 1099-K, the IRS still expects you will report all your income, regardless of the amount.
Deducting business losses from Etsy sales
If you sell on Etsy for profit as a business, you can likely deduct business expenses like:
- Cost of materials
- Advertising
- Shipping
Provided that you Etsy activity is considered a business rather than a hobby, these can be deducted even if they exceed the money your business earned. If your business expenses are greater than your Etsy income, you'll have a business loss from your sales. This can typically be deducted from other income you have—even from another job or business. This deduction can reduce your taxable income.
Business expenses if your business is a hobby
If your Etsy selling is considered a hobby by the IRS then you cannot take business loss deductions to directly reduce your selling income. For tax years prior to 2018, you can take them as an itemized deduction on Schedule A. For tax years beginning with 2018, you are not be able to reduce your hobby income by any hobby expenses. Therefore, most taxpayers will try to avoid having their Etsy selling being classified as a hobby.
You are more likely to avoid hobby classification if you run the operation in a businesslike manner, depend on the income from the business, keep precise business records and show a profit in three out of five years.
Paying self-employment tax
If your total net income from self employment including Etsy sales is $400 or more, you'll also need to pay self-employment tax on this income. Self-employment tax includes Social Security and Medicare taxes. The amount due is comprised of the percentage that would normally be withheld from your paychecks as an employee, plus the percentage your employer would have contributed. When you're a self-employed individual you're responsible for paying both types of taxes yourself.
This means a total of:
- 12.4% of the first $160,200 in 2023 you earn for Social Security tax increasing to $168,600 in 2024
- 2.9% of your total income for Medicare
If your income is considered a hobby, then it will be subject to income taxes but not to self-employment taxes.
Charging, Collecting and Paying Sales Tax
Some state and local governments charge sales taxes—usually a percentage of the value of each sale. In many cases, it’s the responsibility of the online seller to collect this tax from the buyer and send it on to the taxing authorities.
Sales tax laws are not the same in each jurisdiction, so make sure to research the rules in your area.
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