Selling on Etsy in 2026: Creativity Standards, factory goods, fees, sales tax, 1099-K, hobby vs. business, quarterly taxes and choosing an entity

Etsy is a U.S. marketplace for handmade goods, original designs, vintage items and craft supplies. The seller is the seller of the goods; Etsy provides the storefront, traffic and payments (Etsy Payments) and collects sales tax in U.S. states. To open a shop you must be in a country where Etsy Payments works, verify your identity with your own ID, link a bank account in the same name and a billing card, and pay a one-time setup fee. New shops can't open in mainland China.

Compared with Amazon or Walmart, Etsy doesn't allow factory goods (see the next section), has no fulfillment warehouses (you ship, or your production partner does), and buyers come for items made or designed by people. Many sellers are individuals crafting, drawing or making digital downloads at home. It starts as a hobby and grows into a business, and that is where most Etsy tax questions come from.

Description: each row is one step of opening a shop, with what Etsy asks for, what to watch, and the tax side.

Step	What Etsy asks for	Watch for	Tax side
Account and shop name	An Etsy account; shop name of 4–20 characters	The shop language can't be changed later	The shop name isn't your legal name; register a DBA if your state requires it
Seller type	"Individual / sole proprietor" or "incorporated business"	A business uses its legal name and EIN	Individuals and single-member LLCs usually both file Schedule C
Bank and card	A U.S. bank account (verified through Plaid); a credit or debit card	The ID name must match the bank account	Keep business money in a separate account
Identity verification	Government ID and a selfie through Persona	Turn on two-factor authentication	—
Taxpayer information	SSN, ITIN or EIN	Reminders at $250 and near $500 in sales; over $500 without it, the shop is suspended	Name and TIN must match IRS records, or payouts may face 24% backup withholding
Shop setup	Policies, returns, shipping profiles, at least one listing	Listings must meet the Creativity Standards	Shipping, packaging and production partner costs are business costs
Setup fee	One-time, non-refundable, amount varies by location	The amount shows during setup	A startup cost of the business

• Where you can open: Etsy says you can only open a shop in a country where Etsy Payments is available. The U.S. and Hong Kong are on the list; China is marked for Payoneer, and Etsy states that new shops cannot open in China and only existing shops can keep using Etsy Payments, paid out every Monday.
• Opening with a U.S. company: Etsy doesn't say a foreign owner can never open a shop through a U.S. company, but it checks IDs, bank accounts and location, and ship-from locations and production partner locations must be accurate. Using someone else's identity or misstating your location breaks Etsy's rules and puts the shop and its funds at risk. The tax side of foreign-owned U.S. companies is covered in the entity section below.
• Fill in your tax information: Etsy reminds you to add an SSN, ITIN or EIN at $250 in sales and again near $500. A shop that passes $500 in a calendar year without valid taxpayer details is suspended until they're added.

Etsy published its Creativity Standards in July 2024. Every item must be made, designed, handpicked or sourced by the seller, and listings show a matching tag such as "Made by ShopName." Items that fit none of them, mainly commercial goods and private-label products, are removed, and repeat problems lead to suspension.

Description: each row is a category, with what it covers, how much outside help is allowed, and common violations.

Category	Covers	Outside help	Common violations
Made by a seller	Physical items you make by hand or with your own tools, including computerized ones such as laser cutters and 3D printers	Help with one step (kiln firing, engraving) doesn't make someone a production partner	Products assembled per a manufacturer's instructions; commercial blanks with only surface changes
Designed by a seller	Your original designs produced or printed by a third party, or sold as digital downloads; AI-assisted designs must be disclosed	Production partners allowed (print on demand, cut-and-sew, contract manufacturers), with disclosure	Someone else's designs or stock images printed as-is
Handpicked by a seller	Vintage (at least 20 years old), items from nature, curated collections such as themed gift baskets you put together	Production partners not applicable	Gift baskets that are entirely resold or drop shipped
Sourced by a seller	Craft and party supplies; items personalized with the buyer's text or image	Personalized items can be made by a production partner	A ready-made product with just a card or tag added

• Reselling: Etsy defines it as selling a commercially available item you didn't make or design. Apart from craft and party supplies, vintage and gift baskets you curate and package, it isn't allowed.
• Drop shipping: ready-made products shipped by a third-party supplier straight to the buyer without your alteration or customization are not allowed, except craft and party supplies.
• Digital items: these fall under "designed by a seller." Bundling stock assets or other people's work isn't allowed, and AI-assisted designs must be disclosed as Etsy requires. The policy page changes from time to time; the current version governs.
• Enforcement: listings get removed and repeat violators are suspended. Removed listings can be appealed within 180 days. Etsy's 2024 Transparency Report says removals and suspensions under the Creativity Standards and Handmade Policy rose from the prior period.

You can sell your design made by a factory: the factory is your production partner and the listing discloses it. You can't sell the factory's product with your shop name on it: ready-made goods from OEM, ODM or white-label manufacturers and wholesalers are reselling, even with new packaging or tags. Craft supplies are the exception and can be bought from factories and sold.

Description: each row is a way of working together, with whether Etsy allows it, the conditions, and the tax and import side.

Arrangement	Allowed?	Conditions	Tax and import
Factory produces your original design (your drawings, samples, colorways)	Yes, "designed by a seller"	Add the production partner with its city, disclose on listings; accurate ship-from location	Production charges, freight and duties go into inventory cost; decide who is importer of record
Print on demand with your artwork	Yes	Same; the design must be yours	Printing and fulfillment fees are cost of goods sold
Factory's own designs, white label, OEM, ODM, repackaged	No, this is reselling	—	—
Wholesale or 1688 stock drop shipped to buyers	No (except craft and party supplies)	—	—
Beads, fabric, buttons, molds and other craft supplies	Yes, "sourced by a seller"	List them as craft supplies	Purchase cost goes into inventory; imports still pay duty
Items personalized with the buyer's photo or text	Yes, "sourced by a seller"	Can be made by a disclosed production partner	Same
A Chinese factory opening its own Etsy shop for its own designs	New shops can't open in mainland China	Existing shops use Payoneer; DDP required on U.S. orders since 2026-07-09	No U.S. operations generally means no U.S. income tax return; a U.S. company or U.S. inventory changes that

• Etsy's definition of a production partner: a company or individual outside your shop that physically produces items from your original designs, such as print-on-demand services, cut-and-sew producers, contract manufacturers and laser-cutting services.
• Who doesn't count: you and your shop members, raw-material suppliers, anyone who helped with only one part of an item you mainly made (such as engraving your handmade jewelry), and white-label manufacturers, OEMs, ODMs, and retailers or wholesalers of ready-made goods. Etsy treats sourcing from them as a reselling violation that can lead to suspension.
• Disclosure in three places: the shop's production partner settings (you can hide the name but must give a description such as "Apparel printer"), the relevant listings, and the ship-from location. If the factory ships from China directly to U.S. buyers, the ship-from location is China.
• The DDP rule: Etsy announced that from July 9, 2026, orders shipped to U.S. buyers from outside the U.S. must include duties and import fees in the price and ship DDP; orders without prepaid duties lose Etsy Purchase Protection, and buyers charged duties on delivery can ask for a refund. The U.S. $800 de minimis exemption has been suspended since August 29, 2025; the tariff layers are in our guide at yclcpa.com/fba.
• Trademarks and IP: other people's brands, characters, fonts and artwork are off-limits. Infringement claims and trademark filings are matters for an attorney.

A U.S. seller's core fees are three: $0.20 per listing (renewed every four months, and per unit when several sell), a 6.5% transaction fee that includes shipping and gift wrap, and Etsy Payments processing of 3% + $0.25 on the total including sales tax. Orders from Offsite Ads add 15% or 12%, capped at $100. Without ads, fees usually run about 10% of the order.

Description: each row is a fee, with the amount, when it's charged and notes.

Fee	Amount	When	Notes
Shop setup fee	One-time, varies by location	At opening	Shown during setup; non-refundable
Listing fee	$0.20 each	Publishing, four-month auto-renewal, auto-renewal after a sale	Charged whether or not it sells; private listings charged when the buyer purchases
Transaction fee	6.5%	On sale	On the order total (item, shipping, gift wrap)
Payment processing	3% + $0.25	Per order	U.S. bank accounts; on the total including shipping and sales tax
Offsite Ads	15% or 12%, max $100 per order	Buyer clicks an Etsy ad off-site and orders within 30 days	Mandatory for life once the shop reaches $10,000 in a 365-day period
Etsy Ads	Your budget	Per click	Can be turned off
Currency conversion	2.5%	Listing currency differs from payout currency	Usually none for U.S. sellers listing in USD
Etsy Plus	$10 a month	Subscription	15 listing credits and $5 in ad credit each month
Share & Save	4% back	Buyer orders within 30 days of clicking your shared link	On by default; a refund, not a fee
Shipping labels	Carrier rates	When bought on Etsy	Taken from your balance

Example (hypothetical numbers, to show the method): a $40 pair of handmade earrings, the buyer pays $6 shipping, and Etsy collects $3.22 in sales tax (assuming 7%).

So when you price, budget about 11% for fees, or about 25% for orders from Offsite Ads, on top of materials, packaging, shipping labels and your time. All of these are deductible if the shop is a business (see "What can makers deduct" below).

Etsy Payments puts sale proceeds, net of fees, into your balance and then deposits them to your bank on a schedule. On orders shipped on time with valid tracking, Etsy covers up to $250 of a refund when a buyer opens a case. Star Seller looks at three things: replying to 95% of first messages within 24 hours, 95% of orders shipped on time with tracking, and an average rating of 4.8 or higher. You set your own return policy.

• Purchase Protection: for eligible orders (shipped within your processing time, valid tracking or an Etsy label, item matches the listing, an estimated delivery date, a reply to the buyer's help request within 48 hours), Etsy covers up to $250 of the refund and you pay anything above that. Etsy says it isn't insurance and it decides coverage.
• Star Seller: evaluated starting 90 days after your first sale, on the 1st of each month, looking back three months, with at least 5 orders and $300 in sales. USD sellers need tracking or an Etsy label on every order; digital downloads don't count for shipping.
• Shipping: state real processing times and shipping profiles; if a production partner ships, list its location as the origin. U.S. orders shipped from abroad need DDP since July 9, 2026 (see the previous section).
• Returns and exchanges: set the return window and conditions in your shop policies; personalized items can be non-returnable if you say so. Refunds reduce revenue and belong in the books.
• Balance and charges: fees, refunds, ads and labels come out of your balance, and your card is charged if the balance falls short. Download the payment account statement and the order CSV every month instead of relying on bank deposits.

As a marketplace facilitator, Etsy collects and remits sales tax on Etsy orders in 46 states plus Washington, DC and Puerto Rico, including digital items. You don't collect or report that tax again. Sales outside Etsy (your own website, craft fairs, wholesale to shops) are yours to evaluate and collect on, and Etsy doesn't pay your state income or franchise taxes.

• Which states: Etsy began collecting state by state from 2018; North Carolina started February 1, 2020. Every state with a sales tax is now covered, subject to the conditions in Etsy's Help Center.
• Colorado retail delivery fee: on physical orders shipped to Colorado, Etsy charges the buyer the retail delivery fee and nets it out of your gross sales the same way as sales tax.
• Collected tax isn't your income: Etsy states that the sales tax it collects is not reported on the 1099-K. That's different from some platforms that include it in gross, so there's nothing to back out.
• Craft fairs and your own site: selling at a North Carolina craft fair requires a North Carolina sales tax registration (see yclcpa.com/salestax); a Shopify store collects its own sales tax, see yclcpa.com/stripetax.
• Digital items: states differ on taxing digital downloads (North Carolina taxes them). Etsy handles Etsy orders; on your own site you decide by the buyer's state. For buyers outside the U.S., Etsy collects VAT on digital items in many countries.

A U.S. seller with more than $20,000 and more than 200 sales on Etsy in a year gets a 1099-K by the end of the following January; if your state has a lower threshold, Etsy uses it. The 1099-K is gross: it includes shipping and isn't reduced by refunds or fees, but it leaves out sales tax Etsy collected. No 1099-K doesn't mean no income to report.

• Where the threshold came from: the One, Big, Beautiful Bill, signed July 4, 2025, restored the federal threshold for third-party settlement organizations to more than $20,000 and more than 200 transactions. Massachusetts, Maryland, Virginia and others use lower state thresholds (details at yclcpa.com/1099k).
• Several shops: shops under the same SSN or EIN are combined into one 1099-K, so keep the names, addresses and TINs consistent.
• Reconciling: 1099-K gross − refunds − canceled orders = your actual gross receipts (Schedule C line 1); Etsy fees and shipping labels are expenses, not reductions of gross. Keep the reconciliation sheet.
• W-9 and backup withholding: the taxpayer details Etsy asks for are your W-9 information. If the name and TIN don't match, the IRS has Etsy send a B notice, and without a fix 24% is withheld.
• Sellers outside the U.S.: non-U.S. sellers without a U.S. address or USD payouts generally don't get a 1099-K; those whose account shows a U.S. address or USD payouts are treated as U.S. sellers unless they provide a W-8BEN (W-8 vs. W-9 at yclcpa.com/w8ben).

It depends on whether you have a profit motive; you don't get to pick. A business reports income and expenses on Schedule C, can use a loss against other income, and pays self-employment tax on net profit. Hobby income goes in full on Schedule 1, line 8j, with no deduction for related expenses (cost of goods sold can still come off first) and no self-employment tax. Profit in three of five consecutive years generally creates a presumption that it's a business.

The IRS weighs nine factors, among them whether you run it like a business (separate account, complete records, prices that cover costs), the time and effort you put in, your or your advisers' expertise, changes you've made to become profitable, your history of income and losses, whether you have other income the losses would shelter, and the personal pleasure involved. No single factor decides it.

Description: the left column is hobby treatment, the right is business treatment, one item per row.

Item	Hobby (no profit motive)	Business (profit motive)
Where income goes	Schedule 1, line 8j, in full	Schedule C, line 1
Materials and goods bought (cost of goods sold)	Can come off first	Can come off
Etsy fees, ads, labels, tools, home office	Not deductible (miscellaneous itemized deductions suspended since 2018, made permanent by OBBBA)	Deductible
Losses	Can't be used	Can offset other income (subject to excess business loss and other limits)
Self-employment tax 15.3%	None	On net profit of $400 or more
Qualified business income deduction (20%)	None	Usually available
Social Security credits	None earned	Earned through SE tax

• A common mistake: "it's small, so it's a hobby and I don't report it." Not so. Income is reportable either way; the difference is whether expenses are deductible and whether SE tax applies.
• Selling your own used things: selling personal items you used (common in vintage) for less than you paid is a nondeductible personal loss and generally not taxable; selling for more than you paid is a capital gain. Keep your purchase records.
• If you want business treatment: use a separate bank account and card, keep monthly books, have a business plan and a pricing sheet, keep records of purchases and training, and have a plan for loss years. That's also your evidence if the IRS asks.

Materials and outsourced production are cost of goods sold, deducted when the items sell. Etsy fees, ads, shipping labels, packaging, software, photography and the business share of your phone and internet are current expenses. Tools and equipment up to $2,500 per item can be deducted in the year bought. Space in your home used regularly and exclusively for the business qualifies for the home office deduction, at $5 per square foot for up to 300 square feet under the simplified method.

• Cost of goods sold: beginning inventory + materials and outsourced production bought during the year − ending inventory. Count inventory at year end: raw materials, work in progress and finished goods, at cost. A small business with average gross receipts over the prior three years of $32,000,000 or less (2026) can use a simplified inventory method and skip uniform capitalization (UNICAP); your own labor isn't added to inventory cost.
• Current expenses: Etsy listing, transaction and processing fees, Offsite Ads and Etsy Ads; shipping labels; packaging; shop and design software, fonts and stock licenses; camera gear and props; classes; craft fair booth fees. Production partner printing and fulfillment charges are cost of goods sold.
• Tools and equipment: sewing machines, laser cutters, 3D printers, kilns, computers. Items or invoices of $2,500 or less can be expensed under the de minimis safe harbor; larger purchases are depreciated or expensed under Section 179, depending on what fits your profit.
• Home office: the space must be used regularly and exclusively for the business; the dining table doesn't count. The simplified method is $5 per square foot, up to $1,500; the regular method allocates rent or mortgage interest, utilities, insurance and depreciation by area, with depreciation recapture when you later sell the home. Space used to store inventory has a looser exclusive-use rule.
• Car: trips to buy supplies, to the post office and to craft fairs can be deducted at the standard mileage rate with a mileage log; commuting doesn't count.
• Not deductible: your own time (a sole proprietor can't pay itself wages), the personal share of your phone and internet, fines.

Etsy doesn't withhold income tax for you. If you expect to owe $1,000 or more in federal tax for the year, pay estimated tax quarterly: for 2026 on April 15, June 15, September 15 and January 15, 2027. Paying 100% of last year's tax (110% if last year's AGI was over $150,000) or 90% of this year's avoids the underpayment penalty.

• SE tax is the one people forget: on top of income tax, Etsy profit carries 15.3% self-employment tax (net profit × 92.35% × 15.3%, with the Social Security part capped at $184,500 for 2026). Many first-year sellers find out only at filing time.
• With a day job you can skip estimates: if you have W-2 wages, update your W-4 so your employer withholds more; withholding counts as paid evenly through the year, which is easier than four payments.
• North Carolina: the 2026 individual rate is 3.99%, and state estimates are paid separately with NC-40.
• Full method, safe harbors and penalties: yclcpa.com/1040es.

When you're starting out with modest profit, a sole proprietorship filing Schedule C is enough. A single-member LLC mainly separates legal liability; for federal tax it's treated the same as a sole proprietorship, with state filing and annual fees on top. Once profit is steadily around $80,000 or more and you work the business full time, model an S corp: you take a reasonable salary and the rest of the profit avoids SE tax. A foreign-owned LLC is a different situation and needs its own plan.

Description: each row is a seller situation, with the suggested entity, annual filings and points to watch.

Situation	Suggested entity	Annual filings	Watch for
U.S. resident, starting out or profit under a few tens of thousands	Sole proprietorship, DBA if needed	1040 + Schedule C + Schedule SE; quarterly estimates	SSN on Etsy; separate bank account; show a profit motive
U.S. resident who wants liability separation	Single-member LLC (disregarded by default)	Same, plus the state annual report (North Carolina: April 15, $200)	No tax saving; keep LLC accounts and contracts separate or the protection is limited (ask an attorney)
U.S. resident, profit steadily around $80,000+, working full time	LLC or corporation electing S corp (Form 2553)	1120-S + K-1; payroll (941, W-2); personal 1040	Reasonable salary must hold up; payroll costs; foreign owners can't be S corp shareholders (yclcpa.com/scorp)
Foreign owner (for example in China) with a single-member LLC	Disregarded by default; can elect C corp treatment on Form 8832	Pro forma 1120 + 5472 ($25,000 per missed form); owner files 1040-NR if there's effectively connected income	Give W-8, not W-9; U.S. inventory or agents can create effectively connected income; after a C corp election you generally can't change again for 60 months
Foreign company with a U.S. subsidiary (C corp)	The subsidiary runs the shop; the home factory is production partner or supplier	1120 + 5472; state returns	Purchases and production charges from the parent must be at arm's length (Sections 482 and 1059A), see yclcpa.com/subsidiary
Multi-platform seller (Etsy + Shopify + Amazon + fairs)	One entity for all channels, books split by channel	Returns for that entity; sales tax by channel	Off-platform sales tax is yours; Amazon warehouse inventory creates physical presence (yclcpa.com/fba)

• An LLC doesn't save tax: a single-member LLC is disregarded for federal tax by default, so income stays on Schedule C with SE tax. Its value is legal and commercial; formation and annual fees vary (North Carolina: $125 to form, $200 annual report; California: $800 minimum franchise tax each year; state comparison at yclcpa.com/llc).
• When an S corp pays off: you pay yourself a reasonable salary, run payroll and file a 1120-S, and the added payroll and filing costs often run a few thousand dollars a year. Around $40,000 of profit it usually doesn't pay; around $80,000 or more it's worth modeling (yclcpa.com/scorp).
• C corp: 21% federal tax, then individual tax again on dividends. Rare for a craft shop; consider it for outside investment, foreign ownership or keeping profit in the company to grow (yclcpa.com/ccorp).
• Foreign-owned single-member LLC: disregarded for tax, so income belongs to the foreign owner. It files pro forma 1120 + 5472 every year, with a $25,000 penalty per missed form (yclcpa.com/5472); the platform should get a W-8 from the owner, not a W-9 under the LLC's EIN (yclcpa.com/w8ben); U.S. inventory, employees or agents can create effectively connected income, and the owner then files 1040-NR. Electing C corp treatment on Form 8832 means 21% federal corporate tax, 30% withholding on dividends to foreign shareholders, generally reduced to 10% under the U.S.–China treaty; under Reg. §301.7701-3(c)(1)(iv), you generally can't change classification again for 60 months. The full analysis is in our guide at yclcpa.com/walmart.
• California and Texas: LLCs and corporations doing business in California pay at least $800 a year; Texas franchise tax is usually zero below the revenue threshold, but the information report is still due.

Etsy is a marketplace for things people make: original and handmade only, per-order fees with no monthly charge, no fulfillment warehouses, sales tax collected for you, and no new shops in mainland China. Amazon, Walmart and TikTok Shop take almost any product and offer platform logistics; Wayfair buys wholesale from suppliers; Shopify is your own site, where you collect sales tax yourself.

Description: each row is a platform, with model and seller of record, main fees, fulfillment, who can join, sales tax, 1099 and payouts.

Platform	Model / seller of record	Main fees	Fulfillment	Who can join	Sales tax	1099	Payouts
Etsy	Marketplace, seller is the seller; handmade, original design, vintage, craft supplies only	$0.20 listing + 6.5% transaction + 3% + $0.25 processing; Offsite Ads 15% / 12%	Seller or production partner ships; no warehouses	Etsy Payments countries; no new shops in mainland China	Etsy collects (46 states + DC + PR)	1099-K ($20,000 and 200)	Etsy Payments to bank; legacy China shops via Payoneer
Amazon	Marketplace, seller is the seller	Professional $39.99/month + referral fees (mostly 8%–15%) + FBA fees	FBA or merchant-fulfilled	Most countries, including China	Amazon collects	1099-K	On the settlement cycle
Walmart	Marketplace, seller is the seller	No monthly fee; referral 6%–15%	WFS or seller-fulfilled	U.S. and listed countries including China, after approval	Walmart collects	1099-K	On the settlement cycle
Wayfair	Supplier sells wholesale to Wayfair; Wayfair is the seller	No seller commission; supplier sets wholesale cost	Supplier drop ships or uses CastleGate	Approved suppliers, including overseas	Wayfair collects as the retailer	Wholesale payments generally not on a 1099-K	Contract payment terms
TikTok Shop	Marketplace; seller is the seller for local stores	About 6% commission (May 2026 category table) + creator commissions	Platform logistics or approved warehouses	Local stores need a U.S. entity; cross-border by invitation	TikTok collects	1099-K	On the settlement cycle
Temu	Full-managed: seller supplies, Temu prices and runs; local store: seller-run	Depends on model	Temu warehouses or seller-fulfilled	Chinese suppliers (full-managed); U.S. local sellers	Temu collects	Local sellers, by threshold	Depends on model
Shopify store	Your own website; you are the seller	Subscription (Basic $39/month billed monthly) + payment fees	You arrange	Anyone	You collect and file	Shopify Payments issues 1099-K	Through the payment provider

• Etsy's upside: cheap to start (no monthly fee), buyers pay for design and handwork, and Star Seller, personalization and digital downloads favor small shops.
• Etsy's limits: no scaling with factory stock; Offsite Ads become mandatory at $10,000; no warehouses, so shipping and service are yours; no new shops in mainland China.
• Running several channels: a common setup is Etsy for original and custom pieces, a Shopify store for brand and repeat buyers, plus Amazon Handmade or another channel. For tax, use one entity and one set of books split by channel; apart from Shopify and in-person sales, the platforms collect sales tax. Each platform's rules: yclcpa.com/amazon, yclcpa.com/walmart, yclcpa.com/wayfair, yclcpa.com/tiktok, yclcpa.com/temu, yclcpa.com/shopify.

Settle four things first: which Creativity Standards category your products fall in, whether you sell as an individual or through a company, which account the money goes through, and how you'll keep books. With those in place, the 1099-K, sales tax and annual return all fall into line.

Description: each row is an item to confirm, with how to do it and why.

Item	How	Why
Product category	Check against the four categories; if a factory makes it, confirm it's your design	Non-compliant listings are removed and shops suspended
Production partner	Add it in shop settings with its city; disclose on listings	Required by policy; also your cost record
Individual or company	Start as an individual; form an LLC when you want liability separation	Decides SSN vs. EIN on Etsy and which returns you file
Taxpayer information	SSN, ITIN or EIN matching IRS records	Shops over $500 without it are suspended; mismatches bring backup withholding
Bank account	A separate business account and card	Shows profit motive; makes bookkeeping and 1099-K reconciliation easy
Pricing sheet	Materials, packaging, shipping, Etsy fees of about 11% (about 25% with Offsite Ads), your time	Many shops lose money because fees aren't priced in
Bookkeeping	Monthly payment account statement and order CSV; photograph supply receipts	Year-end COGS and expenses; answers to IRS questions
Inventory	Count raw materials, work in progress and finished goods at year end	Needed for cost of goods sold
Workspace	A dedicated room or area, measured	Home office deduction
Estimated tax	Estimate the year's profit; schedule four payments or adjust your W-4	Avoid the underpayment penalty and a big April bill
Off-Etsy sales	Register for state sales tax before fairs or your own site	Etsy collects only on Etsy orders
Shipping from abroad	Use DDP and build duties into U.S. prices	Since 2026-07-09, non-DDP orders lose Purchase Protection

Example (hypothetical numbers, to show the method): Ms. Li lives in North Carolina and in 2026 sells silver jewelry she makes on Etsy, as an individual with a separate bank account. She has 520 orders: $40,000 in items and $4,000 in shipping paid by buyers; Etsy collects $3,000 in sales tax; refunds total $1,000. Her husband has W-2 wages, they file jointly, and they're in the 12% bracket.

(Simplified to show the method: fee credits on refunds and the exact Etsy Ads figures come from the actual statements.)

Takeaways:

• Estimated tax: federal tax is about $4,790, well over $1,000. Her husband can raise his W-4 withholding by about $400 a month, or she can pay about $1,200 each in April, June and September 2026 and January 2027; North Carolina is paid separately on NC-40.
• If it were treated as a hobby: $43,000 less $8,000 COGS leaves $35,000 fully taxable, and the $14,220 of Etsy fees, shipping, tools and home office can't be deducted, with no QBI deduction. She doesn't get to choose; her separate account, monthly books and pricing work are evidence it's a business.
• S corp? At $20,780 of profit, no. Revisit when profit is steadily around $80,000.
• LLC? Not for tax. If product liability worries her (children's jewelry, for example), she can form an LLC after talking with an attorney: $125 to form in North Carolina and a $200 annual report.

Start with whether your products meet the Creativity Standards, then look at your income level and your status. These are the common cases.

• Case A: crafting on the side, a few thousand dollars a year. An individual shop is fine; open a separate account and log sales and materials monthly. Work out net profit, and pay SE tax above $400. If you want business treatment, run and record it like a business.
• Case B: full-time Etsy with growing profit. Pay quarterly estimates, count inventory at year end, and model an S corp once profit is steadily around $80,000 (yclcpa.com/scorp).
• Case C: using a Chinese factory to make your designs. Add and disclose the production partner; decide who imports and how duties go into cost; price U.S. orders shipped from China on a DDP basis.
• Case D: based in China and hoping to open a new Etsy shop. Etsy says new shops can't open in mainland China; don't borrow someone else's identity. Options include being a production partner or craft-supply source for U.S. shops, or other platforms (yclcpa.com/temu, yclcpa.com/walmart). Evaluate the tax side of a foreign-owned U.S. company first.
• Case E: Etsy plus your own site, fairs and Amazon. One entity and one set of books split by channel; register and file sales tax for off-platform sales; review states where Amazon holds your inventory.