Etsy Tax Guide
Here is all you need to know and learn about
running an online store through Etsy!
Etsy is a platform that combines an online marketplace with a craft fair. On there you can buy anything from vintage goods to handmade crafts, to up-cycled furniture, making it easy as a seller you can easily set up shop and list items.
Founded back in 2005, Etsy has since grown considerably with over 80 million daily active buyers and over 4 million sellers on the site. With their products ranging from garden furniture to homemade jewellery, sold by independent sellers and small businesses.
Statistics shows around 1 in 76 adults have an active Etsy store in the UK. Which calculates that over 519,000 people earn money through Etsy each year.
While Etsy makes it very easy to sell on their website, it can be tricky to understand taxes. You might be thinking to yourself questions like - Do Etsy manage them? Which parts should you manage? Figuring this out is not straight-forward, which is why we've put together this handy guide.
How to become an Etsy seller
The whole process of creating a shop and then selling on Etsy is pretty simple. It's just 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 to sell on Etsy, you have a decent idea of what your product is, but it can't hurt to do some research on the market as well.
Here’s 5 tips for getting yourself in a good place to do business:
1. Photographing your products: providing your customers with quality images is a great start to sell your product/s. Or why not hire a professional? You could also think about hiring a photographer if you have the money.
2. Adding a personal touch to your page: thinking carefully everything that shows your identity on the page, such as your name, the description in your bio and your thumbnail, all things people will see.
3. Track your performance in the stats page
4. Making sure your products get seen: there're two ways to do 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 media profiles.
How much can I make as an Etsy seller?
This mainly depends on how much time and energy 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, bare in mind 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 take this into account, when pricing up your products for the website.
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 does let you earn £1,000 a year through websites like Etsy without paying income tax.
If you had sales of more than £1,000 a year with Etsy, you'll need to submit a tax return, which 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. Submit a contact form here to see how we can help with your self assessment tax return.
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 learn about paying tax as a side hustle.
If you’re going full-time creator mode then you’ll need to understand paying tax as self-employed.
As you start out you’re more likely to be a sole trader in which case the bands for tax are:
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
It's important to remember if you earn over £11,908 in a year you'll also need to pay National Insurance on your income.
If and when you start hitting that higher tax bracket then it’s worth setting up as a limited company, as 11% of businesses on Etsy did. We can help with this. Submit a contact form here to find out the services we provide. This does means you’ll pay corporation tax on your earnings at 19% rather than the 40%+ income tax. However if you’re on the basic rate it’s worth remaining as a sole trader to avoid the additional admin and costs that come with 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.
The usual cut off date to complete your self-assessment is the 31st of January of the year after your year end (e.g. If your year end is like most 5th April (2023) then the due date for your tax return to be filed is 31st January 2024) if you’re doing it online, and 31st of October if you’re completing the form by post.
What about VAT?
VAT (Value-added tax) 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, however, while it's the buyer that pays for VAT, you as the seller will need to collect and send the VAT to HMRC.
It's important to note not every business needs to manage or charge VAT. Any business with less than £85,000 in sales a year will 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 £85,000 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 don't manage your taxes. It is your own responsibility to stay on top of your income tax and VAT.
Even more so as your monthly statement does show that you are charged some VAT:
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. These costs can be deducted from your taxable profit as long as they're eligible expenses.
Let's break this down, 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 however you won’t be entitled to claim any expenses.
You can find more information on what the Government considers expenses here.
As an Etsy seller, you might claim expenses on 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
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.