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Etsy Tax Guide

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Everything you need to know to about running an online store to sell creative items on the Etsy marketplace.

image of a person on their phone and laptop

Etsy is the platform that combines an online marketplace with a craft fair. On it you can buy vintage goods, handmade wares, and up-cycled clothes from artisans, and as a seller you can easily set up shop and list items.

Founded in 2005, Etsy has grown considerably with over 80 million daily active buyers and over 4 million sellers on the site. On it you’ll find everything from garden furniture to homemade jewellery, sold by independent sellers and small businesses.

Around 1 in 76 adults have an active Etsy store in the UK. Which means over 519,000 people earn money through Etsy each year.

While Etsy makes it very easy to sell on their website, it's tricky to understand taxes. Do Etsy manage them? Which parts should you manage? Figuring this out is not straight-forward, which is why we've put together this guide.

How to become an Etsy seller

The process of creating a shop and selling on Etsy is pretty easy. It all comes down to two clicks, one to go to the Sell On Etsy section, and the other to set up your Etsy business.

Ideally, if you're starting selling on Etsy, you have a decent idea of what your product is, but we advise you to do some research on the market space as well.

Here’s 5 tips for getting yourself in a good place to do business:

1. Photographing your products: provide customers with top quality images is a great starting point to sell your product. You could also think about hiring a photographer if you have the money.

2. Personalising your page: plan carefully everything that shows your identity on the page, such as your name, the description on your bio and your thumbnail, which is what people will see.

3. Track your performance in the stats page

4. Making sure your products get seen: there're two ways for this, pay per click (PPC) advertising, and search engine optimisation (SEO). PPC is where you pay to have your products featured or advertised more prominently on the page. SEO concerns search engines like Google. This is where you include in your description the words that you expect people to search for.

5. Use Etsy’s social marketing tools: connect your Etsy shop with your social profiles.

Read our full article about how to become an Etsy seller here.

How much can I make as an Etsy seller?

This mainly depends on how much effort you put into it. To give you an idea, according to Etsy SEO tool, Sale Samurai, the average Etsy business makes around £35,000 ($44,000). However, this is an average between full-scale businesses making hundreds of thousands every year, and people who create an account, list an item and leave it at that.

Note that you pay £0.20 per listing and Etsy takes 6.5% from each item sold from you and charges the buyer 4% + £0.20 when they purchase. So, make sure to consider this, when pricing your products.

Do I need to pay tax? And how do I pay tax?

This all depends on how much money you make with Etsy (and outside Etsy).

If you had sales of less than £1,000 a year with Etsy you do not need to do anything. HMRC lets you earn £1,000 a year through websites like Etsy without worrying about income tax.

If you had sales of more than £1,000 a year with Etsy, you need to submit a tax return. This doesn't necessarily mean you need to pay tax. It just means HMRC wants to know a little bit more about your business in case you start earning more in the future.

Specifically, as with any self-made income, you’ll need to pay tax on your income if you make over £12,570 in the tax year.

If you’re selling on Etsy on the side then you’ll need to understand paying tax as a side hustle. You can read more about side hustles in our blog post here.

If you’re going full-time creator mode then you’ll need to understand paying tax as self-employed. You can read more about going fully freelance in our blog post here.

As you start out you’re more likely to be a sole trader in which case the bands for tax are as follows in England, Wales and Northern Ireland (they are slightly different in Scotland):

  • Tax allowance: 0% of earnings (You’ve earned between £0 and £12,570)
  • Basic rate: 20% of earnings (You’ve earned between £12,571 and £50,270)
  • Higher rate: 40% of earnings (You’ve earned between £50,271 and £150,000)
  • Additional rate: 45% of earnings over £150,000

Don't forget that you'll also need to pay National Insurance on your income..

If you start hitting that higher rate of tax thenit may be worth setting up as a limited company, as 11% of businesses on Etsy did. This means you’ll pay corporation tax on your earnings rather than 40%+ income tax, though you will then need to pay tax on any dividends you take out. If you’re on the basic rate it’s generally worth remaining as a sole trader and avoiding the additional admin and costs of setting up a limited business.

Each year you need to fill out a self-assessment tax return. What you pay is your freelance tax bill minus the expenses of running your business. You can read more on how to complete your self-assessment tax return in this Earnr article.

The usual cut off date to complete your self-assessment is the 31st of January if you’re doing it online, and 31st of October if you’re completing the form by post.

What about VAT?

Value-added tax or VAT is the tax that you pay on buying things on Etsy. You pay VAT on almost anything you buy in the UK, including things on Etsy. Unfortunately, while it's the buyer that pays for VAT, you as the seller need to collect and send the VAT to HMRC. You can also recover VAT on many things you buy.

Note that not every business needs to manage or charge VAT. Any business with less than £90,000 in sales a year does not need to worry. You can still voluntarily register and manage this, but for most people, it's not worth the hassle.

If you sell more than £90,000 worth of goods, then this changes. Rather than going into the details here, you can read more about how to manage your VAT here.

Does Etsy take care of some of these?

While Etsy helps you set up your business, they do not manage your taxes. It is your own responsibility to stay on top of your income tax and VAT responsibilities.

Confusingly, your monthly statement does show that you are charged some VAT:

Picture of the monthly statement in Etsy

This is the VAT that Etsy charges you for listing your items, rather than the VAT that you need to charge your clients.

What can I expense as an Etsy seller?

As a sole trader you'll have various running costs depending on the work you do. You can deduct these costs from your taxable profit as long as they're eligible expenses.

So if you earn £50,000 and you claim £9,000 in expenses, you’d only be taxed on £41,000 for the year.

Note that if your expenses are under £1,000, you can claim the tax-free trading allowance, meaning that you don’t need to keep your receipts, but you won’t be entitled to claim any expenses.

You can read more on what the Government considers expenses here.

As an Etsy seller, you might expense things like:

  • Use of your home as an office base, meaning bills, phone usage, postage, etc
  • Etsy fees, such as the cost for publishing a listing and the transaction fee that they charge on each of your sales
  • Postage and packaging costs
  • Materials and equipment, such as the material you need to make your products
  • Advertising and photography costs
  • Accountant fees
  • Cost associated with attending shows and event spaces, such as travel costs, lodging (if you need to stay overnight for business reasons) and meals.

Be aware that if you use the same vehicle for traveling for work and for your own personal use then you’ll need to factor this in when any expenses are claimed. If you work out that you use your vehicle 40% of the time for personal use, then you would need to reduce any relevant vehicle running expenses by 40%. The same happens if you use your home as an office base, you should calculate which portion of your bills or phone usage can be counted as running expenses.

How can Earnr help?

Earnr makes self-employed bookkeeping easy, so that you can spend less time worrying about this kind of stuff and more time growing your business. 

You can separate your business transactions from your personal ones, track your expenses and get a real-time tax estimate so you know whether or not you need to submit a tax return. 

Check it out here.

Other Etsy articles

Looking for more? Why not check out some of the other articles we've written to help you with your Etsy business?

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