As an Etsy seller, navigating the world of taxes can feel daunting. One crucial document you need to understand is the 1099-K form.
In this post, we explain what the Etsy 1099K form is about, what you’ll need to do with it once received, and what to do if you don’t receive one.
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The 1099-K form
Around the end of January, many Etsy sellers in the US will receive a form in the post called the 1099-K.
Form 1099-K (otherwise known as “Payment Card and Third Party Network Transactions”) is a tax document sent out annually by card payment processors to sellers using their services.
This form is for the payment processor to report to the IRS how much money was processed through their services and by whom. This empowers Internal Revenue to keep better tabs on the amounts taxpayers are actually earning and is an attempt to minimise the “tax gap”.
The “tax gap” is a term commonly used to describe amounts of unreported income not claimed as taxable income by businesses: cross checking in this way means that the IRS can know if a business is underclaiming their revenue.
Here’s why it matters:
- Income Reporting: The 1099-K reports your gross sales income to the IRS, which means you’ll need to account for this income on your tax return.
- Compliance: Properly managing your 1099-K helps ensure compliance with federal tax regulations, reducing the risk of audits and penalties.
What’s a payment processor?
A payment processor is any company who takes and processes a payment from a customer on your behalf. You’ll receive a 1099-K from Etsy if you use their Direct Checkout for your shop (and meet the minimum threshold requirements, see below for details). PayPal and Stripe are other examples of payment processors, as is any bank that provides merchant card services.
Who should receive a 1099-K?
The American Rescue Plan (ARP), put into law in 2022 by the Biden administration, changed the threshold for the 1099K substantially. Before 2022, a 1099-K would have usually be only sent to you if you make $20,000 or more in the taxable year, or 200 or more sales (transactions) on Etsy - this meant that this tax form was only generally only received by the top Etsy sellers.
Now, due to the ARP, it’s anyone who has made over $600 in a calendar year. This now means most Etsy sellers will receive a 1099K going forward.
In November 2023, due to feedback that this threshold change was far too sudden and wide reaching, the IRS announced a 1 year delay of the new $600 dollar reporting threshold and have instead implemented a temporary “phase-in” threshold of $5000 for the duration of 2024.
For the 2023 financial year, if you reached more than $20,000 USD (gross sales) and more than 200 transactions, or a met a threshold for your state, Etsy will provide 1099-K form you should use when filing for the 2023 tax year.
For the 2024 financial year, if you make over $5000 then you will likely need to look out for your 1099K in the mail.
State 1099K Requirements
To complicate things further, several states now also have different reporting thresholds for 1099K:
Arkansas: 2500 USD
District of Columbia: 600 USD
Illinois: 1,000 USD and 4 transactions
Maryland: 600 USD
Massachusetts: 600 USD
New Jersey: 1000 USD
Vermont: 600 USD
Virginia: 600 USD
You’ll usually receive 1099 forms in the mail from the end of January - exact timings depend on the schedule of your provider.
Note: Your credit card merchant account provider is required to file a form 1099-K for your business regardless of the volume or amount of transactions you process.
Tip: You can see the totals that will appear on your Etsy 1099K over on your Taxpayer ID page.
What If I Don’t Receive a 1099-K?
If you don’t receive a 1099-K but believe you should have, here are the steps you should take:
- Check Your Sales Data: Verify your yearly sales and transaction count on Etsy to ensure you met the thresholds (we cover these above).
- Contact Etsy Support: Reach out to Etsy customer support to inquire about the status of your 1099-K.
- Report Your Income Regardless: Whether you receive the form or not, you’re still responsible for reporting all your income. Maintain thorough records of all sales and related expenses.
What to do when you receive your 1099-K form
Receiving a 1099-K can be intimidating, but here’s a step-by-step approach to handle it effectively:
- Review the Form: Ensure all information, including your taxpayer identification number (TIN) and gross sales total, is accurate.
- Record Keeping: Match the 1099-K details with your own bookkeeping records. Your records should include all sales, refunds, and fees.
- Report Your Income: Use the information on your 1099-K when filing your Schedule C form. Remember, the amount on the 1099-K is your gross income before any deductions, so you’ll need to calculate your net income separately.
- Consult a Tax Professional: If you’re unsure about any part of the process, it’s wise to consult a tax professional who understands e-commerce and DTC businesses.
Read more: Etsy Bookkeeping: Your Guide for Maker Success
Why Etsy Sellers Should Consider Using Craftybase
Effective tax compliance requires meticulous record-keeping and accurate income reporting, which can be a daunting task for busy Etsy sellers.
Craftybase is a powerful Etsy accounting software solution specifically designed for Etsy entrepreneurs, helping you keep detailed records of your sales, expenses, and inventory.
With Craftybase, you can automatically sync your Etsy sales data, track your income and expenses in real-time, and easily generate the reports you need for filing your taxes.
This not only ensures compliance with federal tax regulations but also reduces the risk of costly errors and audits. Take control of your Etsy business finances today — start your free trial with Craftybase and simplify your tax season.
The Ultimate Etsy Seller 1099K FAQ
I didn’t get a 1099-K, does this mean I don’t have to file taxes this year?
If you don’t receive a 1099K form, this does not mean that you will not have to file a tax return - all businesses engaging in selling activity for profit are required to lodge annually no matter how much they make.
I’m a “Hobby” Etsy business, so 1099K doesn’t apply to me, right?
Wrong! For anyone running what they consider to be an Etsy “hobby business” (we discuss the difference between a hobby and a business here) it’s important that the IRS doesn’t differentiate. If you have made over $600 in the last calendar year on Etsy, and if you are caught not upholding your tax obligations you will potentially be fined.
While it may seem daunting to take the step of running your handmade business legitimately, it’s quite simple in the US - you don’t even need to register a company, you can simply start by providing your SSN to Etsy, keeping track of your expenses and revenue and lodging your Schedule C alongside your personal tax return.
There are many benefits to consider in starting your own legitimate Etsy business - you can claim the costs of your inventory and the cost of producing your products, and even claim mileage on your car and the use of your home office. All of these deductions can make a huge impact on your tax bill, and in some cases even result in a refund.
To ensure that you are covering the costs of running your Etsy store, the first step to take is to start being aware of your expenses and adjust your pricing to ensure you are still making a profit. Our blog post here has some great tips and tricks to use: How to set the right price for your Etsy products
Will I receive a 1099-K if I sell under multiple Etsy shops?
The 1099-K is issued per SSN/EIN. If you operate multiple Etsy shops under the same SSN/EIN, Etsy will aggregate the sales and transactions for all shops when determining if the thresholds are met.
How do refunds affect my 1099-K totals?
The 1099-K form reflects your gross sales, including any refunds. Make sure to keep track of all refunds and returns in your records.
Do I need to report personal transactions on my 1099K?
Your reporting requirements do not apply to transactions of a personal nature (such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill). These payments are not taxable and should not be reported on Form 1099-K.
My 1099-K doesn’t match my revenue totals on Etsy!
Keep in mind when using the form to compare to your tracked revenue on Etsy bookkeeping software like Craftybase that your total revenue will not directly match the one reported on your 1099-K.
This is because the “Gross sales” calculation on the 1099 usually includes a bit more than your actual order revenue: card processing fees and canceled orders are some of the amounts that will be included in the final reported tally that will not be part of your actual revenue total.
Conclusion
Understanding the 1099-K form is essential for Etsy sellers looking to stay compliant and manage their taxes effectively. By knowing what to expect, keeping detailed records, and consulting with professionals as needed, you can confidently navigate tax season and focus on growing your business.
If you’re looking for ways to streamline your inventory management and manufacturing workflow in your Etsy shop, consider integrating Craftybase Bookkeeping + Inventory into your operations. Our software is designed to help DTC brands like yours scale efficiently and maintain accurate financial records. Ready to take your business to the next level? Get started with Craftybase today!
Please note that tax laws change frequently. This information is for educational and informational purposes only should not be construed as tax or legal advice. Please consult a licensed financial expert in your area with specific questions or concerns.
