The Quick N' Easy Etsy 1099 Guide To Filing Your Taxes

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Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

If you are an Etsy seller, then you may be wondering about how to file your taxes for the year. This can seem like a daunting task at first, but it is actually quite easy. Look, we'll show you. In this article, we will be going over all of the steps that you need in order to get your Etsy 1099 filed and taken care of.

We'll break down everything from the types of taxes you'll owe, quarterly taxes, a list of 1099 deductions, and how to file your Etsy taxes. Your State and local governments have different requirements and you may owe State and Local sales tax on your Etsy sales.

Let's dive in and get started with the IRS tax forms you'll receive for all your Etsy sales.

Note: Bonsai Tax can help you manage your freelancer taxes from A to Z. We help you track and organize all your tax deductions as well as send reminders for filing deadlines. Claim a 14 day free trial here.

1099 Forms For Etsy Payments

You'll receive different types of IRS tax forms depending on how many transactions you had during the year, or what platform you receive your Etsy payments. We'll break down each of the IRS forms below.

Breaking Down The 1099-K Form

The 1099-K Form is used to report the total gross sales income received through Etsy Payments. Your gross sales volume is the total amount of sales processed through direct checkouts on the platform. You can verify and download your Etsy payments from Etsy.com (Sign into your account, navigate to Shop Manager, Settings, Options, and then Click Download Data). If you need help with viewing the forms for how much you got paid and to download, contact Etsy. Although Etsy cannot give you tax advice, they can provide you all of the tax forms for payments and reporting. A simple way to see if you qualify for a 1099-K is to check your Etsy account.

Here is a link to your taxpayer ID page.

Due to the American Rescue Plan developed by President, Joe Biden, 1099-K thresholds have been altered for some States which will impact Etsy sellers. Etsy is an online marketplace which means they are legally required to send out a tax form 1099-K for reporting.Etsy and other third-party transaction networks like PayPal only typically send you a 1099-K form if sellers have over $20,000 or more in sales and at least 200 transactions. Since Etsy processes credit card payments for Sellers through Direct Checkout, they will send you a 1099-K.

Etsy is required to issue a 1099-K form to you and the IRS both of these requirements are met...

Requirements To Receive A 1099-K

During the calendar year, you had $20,000 USD in gross sales through Etsy Payments
You received 200 or more sales through Etsy payments over that same period.

If you meet both of these requirements to receive a 1099-K form, Etsy will email you towards the end of the calendar year to confirm your taxpayer information and mailing address.

This form is typically sent via mail to freelancers around January 31st each year. International sellers who are not paid in U.S. dollars (USD) will not receive this form.

Specific State Requirements For A 1099-K Form

Certain States have different requirements for when to send out the 1099-K. Here are some State-specific rules for sending out the tax form.

Maryland, Massachusetts, Vermont, or Virginia, District of Columbia

If you sell $600 or more through Etsy Payments in a calendar year, you'll get a 1099-K form.

New Jersey

If you sell $1000 or more through Etsy Payments in a calendar year, you'll get a 1099-K form.

If you meet the $20,000 minimum for online sales and 200 transactions, your income will be reported to the IRS and State tax authorities. If you don't receive a 1099-K and you know you probably should have, check your account data and verify if it is the address is correct. The form may have been sent to an incorrect or old address.

What To Do If You Have Multiple Shops

If you have multiple stores, the total sales income will be combined to determine if you need to receive a Federal 1099-K form. Although they are separate shops, all of your Etsy stores are required to have the same taxpayer information.

If your combined shop totals meet the above qualifications, you will receive a single 1099-K form with the combined gross totals from your shops.

If you don't receive an IRS 1099 tax form, you are still responsible for filing and reporting your taxes. Since the Federal threshold for issuing a 1099-K is $600, Etsy does not have to distribute to sellers a 1099 under $600 of transactions.

Taxes You Will Need To File As A Seller On Etsy

As an Etsy seller, if you earn $400 or more, you will be responsible to pay self-employment tax (Social Security and Medicare) as well as income tax. Self-employment tax equals about 15.3% of your net earnings. To quickly figure out how much you'll owe, use our 1099 tax calculator.

It is your dirty to figure out your total gross income earned, to report taxable income on your income tax return. You only have to pay taxes on your profits (gross sales income minus the business expenses). We'll go over deductions you qualify for later on in the article. First, let's talk about quarterly taxes.

Quarterly Taxes You Need To Pay

Since the U.S operates on a "pay-as-you-go" system, you'll need to pay the IRS every quarter for estimated taxes you'll owe.

Quarterly taxes are meant to help business owners pay their tax liability throughout the year instead of all at once at the end of the year. Your estimated tax payments are due on April 15th, June 15th, September 15th and January 15 of the following year.

The rules for quarterly payment are different depending on how much you expect to make in a particular period:

For example, If your business's total tax liability (self-employment tax, income tax, and any other taxes) is $6000 for the previous year, you'll only need to pay $1,500 every quarter.

You can pay online through the IRS' direct pay.

You should be setting income aside from every sale to handle Federal and State taxes.

Etsy Hobby Versus Actual Business

just because you are making sales online, does not actually mean you are a real business in the IRS' eyes.

You need to figure out if you are selling as a hobby or as a business. knowing whether you selling as a hobby or an actual business is important because it will impact your taxes. Here are the IRS' guidelines to determine if what you make is pastime income or a business.

Requirements

In short, the requirements can be summarized as:

If you are selling your products for no profit, your shop may be considered a hobby
If selling on Etsy is something you are doing seriously or dedicate time to on a consistent basis (your shop is meant to produce profits) you are a business

Perhaps your income does not exceed your expenses and your shop is labeled as a hobby. Then you cannot deduct them from your income under the "hobby loss" rule.

However, even though you never realize a profit, but you operate like business, you may still have to pay self-employment tax as an Etsy seller.

If you plan on taking your hobby shop to transition into an actual business, keep organized records of your receipts, so at the end of the year, you can file as a business.

Tax Deductions Available For Etsy Sellers

As an independent contractor selling on Etsy, you have the luxury of lowering your tax bill by writing off business expenses. Remember, you only pay taxes on your net profit for your sales.

Etsy sellers may qualify for the following deductions:

Shipping and handling expenses
eBay fees (credit card processing fees)
Taxes (you can deduct Federal, State, Local and Foreign taxes attributable to your business as a write-off
You can deduct business-related expenses for your home office (e.g., printer paper)
Marketing and advertising costs, if these are specific to Etsy sales
The cost of items or supplies you purchase in order to sell them on the platform (e.g., clay, fabric)
You may be able to deduct vehicle expenses for travel to buy supplies or advertise your business
Deduct business related cell phone expenses

For an easy way to automatically track your write-offs, try Bonsai Tax, a 1099 expense tracking software. We categorize and organize your receipts for you. Download your expense reports and watch as you save save money at the push of a button.

Claim a 14 day free trial of our software here.

It's Time To File Your Etsy Tax Return!

There you have it. Now you have everything you need to report your Etsy income to the IRS. We talked about all the requirements for receiving a 1099-K, quarterly taxes, self-employment taxes, deductions and much more.

We recommend for you to contact a tax accountant or professional for their services if you have any questions related to your taxes. They can give you proper tax advice.

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

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Say hello to digital contracts

Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.

There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.

Benefits of written contracts

A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.

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