Etsy Bookkeeping: Record Sales, Fees, Shipping and Deposits

Do I need real bookkeeping for my Etsy shop, or are the shop's reports enough?

The shop's reports are not enough on their own. The IRS expects books that summarize your transactions and show gross income, deductions and credits, backed by supporting documents. A shop's statements are supporting documents; they do not show what you pay outside the shop, such as materials, packaging and supplies (Publication 583).

A deposit is not the sales number. Fees, shipping labels and refunds come out before the money reaches your bank, so books built from deposits understate sales and hide expenses. Form 1099-K reports the gross amount before those items (IRS: 1099-K FAQs).

A shop is no longer simple when the Form 1099-K, the shop's totals and your bank will not agree, months of sales were never recorded, sales run through more than one channel, buyers are in many states, you hold stock, shop money passes through a personal account, or the books have outgrown a spreadsheet. Those are the points to bring in a bookkeeper or preparer.

To start, gather the monthly payment-account statements, the year-end sales report, any Form 1099-K, bank statements and supply receipts.

What records do I keep for an Etsy shop?

Keep the shop's monthly statements, its order-level sales report, bank statements, every Form 1099-K and a receipt for each cost. Download your own copies: business records must be available at all times for IRS inspection (Publication 583; IRS: What kind of records should I keep?). How long to keep them is in how long to keep business records.

Use the names on your own statement. Each platform labels its fees in its own way.

Should I enter the listing fee every time it is charged?

No. Post each fee type once a month from the monthly statement; one entry for each type is generally enough. Publication 583 says it is generally best to record transactions daily, but it lets you use any recordkeeping system that clearly shows income and expenses, and its own sample system rolls daily entries up into monthly summaries (Publication 583).

Three conditions keep a monthly entry supportable:

1. Keep the statement the monthly total came from.
2. Post each fee type as its own line (listing, transaction, payment processing, ads), because they may go on different Schedule C lines.
3. Check that the month's fee lines add up to the fees on the statement.

Do I record each sale at full price, or only the deposit?

Record each sale at its full price and put fees, shipping labels and refunds on their own lines. Schedule C starts from gross receipts, and its instructions say to check the Forms 1099 you received against that line. Books built on net deposits will not tie to either (IRS: Schedule C instructions).

Record each payout as a transfer from the shop's payment account to your bank; what is left should equal the balance on the shop's statement. If a payout is also recorded as income, the same sale is counted twice.

Which Schedule C lines do shop fees, shipping, packaging and supplies go on?

Sales go on line 1, refunds on line 2, and each cost on the expense line that fits it. A sole proprietor, including a single-owner LLC that has not elected to be taxed as a corporation, files Schedule C with Form 1040 (IRS: Topic no. 407).

Line 10 carries a condition. The instructions say commissions and fees paid to facilitate the sale of property must generally be capitalized: not deducted as a fee on this line, but taken off the amount realized on the sale in the year of the sale (26 CFR 1.263(a)-1). The exception is a dealer in property, defined as a person who regularly sells property in the ordinary course of their trade or business; a dealer enters them on line 10 (IRS: Schedule C instructions; IRS: Schedule C). A shop that sells regularly as its business appears to match that wording; one that sells only now and then may not. Settle which treatment fits your shop with your preparer before the return is prepared.

Line numbers follow the latest published Schedule C; confirm them on the form for the return you file. Whether materials are an expense now or inventory is in inventory or supplies for small sellers.

Is the sales tax the platform collects for buyers part of my income?

Generally no. State and local sales tax imposed on the buyer, which you are required to collect and pay over to the government, is not income (Publication 334). It is not a deduction either (IRS: Schedule C instructions).

When the platform collects the tax from buyers and pays it to the state, it is generally not shop revenue, because the tax is imposed on the buyer and passes to the state. Keep it out of both sales and expenses. Look for it as its own line on the statement. The IRS pages describe tax you collect yourself; they do not address a platform that collects it for you.

The rule flips for tax that state law imposes on you as the seller and that you collect: that amount goes into gross receipts, and the tax is deducted on line 23. Separately, if a state lets you keep part of the buyer tax you collect, that part is income on line 6 (IRS: Schedule C instructions).

Form 1099-K can include buyer sales tax, so its total may exceed your sales (Publication 334). Whether you must collect tax yourself on sales outside the platform is covered in when you must collect sales tax.

Which year does a sale belong to when the money is paid out days later?

Under the cash method, which many sole proprietors with no inventory use, a sale counts in the year you actually or constructively receive the money. Constructive receipt means the amount is credited to your account or made available to you without restriction, even if you have not withdrawn it (Publication 334).

A sale credited to the shop's payment-account balance in late December and deposited in the bank in early January may therefore belong to the earlier year, although the Form 1099-K can still show it in the later year, as the next section explains. A hold or reserve on the money may change that. If the platform receives the buyer's payment as your agent, you are treated as having received it when the platform did (Publication 334). The IRS sources do not settle this for every platform's terms, so settle the year-end treatment with your preparer and apply it the same way every year.

Under an accrual method, income counts in the year all events that fix your right to it have occurred and the amount can be determined, whatever the payout date. A shop that needs an inventory to show its income must generally use accrual for sales and purchases. A small business taxpayer, with average annual gross receipts of $32,000,000 or less over the prior three tax years, can choose not to keep an inventory (Publication 334). The full test is in inventory or supplies for small sellers.

Your books must use the same method as your return, and once a method is set, changing it generally needs IRS approval, requested on Form 3115 (Publication 334).

Why does my Form 1099-K not match the shop's year-end totals or my bank?

Form 1099-K reports gross payments, so it will not match a deposit, and it can differ from the shop's year-end totals for timing and scope reasons. Box 1a is not reduced for fees, credits, refunds, shipping or discounts (IRS: What to do with Form 1099-K).

The form also shows gross payments for each month; set them against your monthly statements to find the month that differs (Form 1099-K instructions).

Whether a platform sends a form depends on its type and your state, and one required to file must send you a copy by January 31 of the next year (IRS: Understanding your Form 1099-K); the thresholds are in the 1099-K threshold guide. No form does not mean no income (IRS: Gig Economy Tax Center); see reporting income when no form arrives.

If the form is wrong, only the issuer can correct it. Keep the correspondence and file on time even if no corrected form arrives (IRS: What to do with Form 1099-K). The line-by-line bridge from deposits to the form is in reconciling sales, payouts and Form 1099-K.

Should I use a spreadsheet for Etsy bookkeeping, or do I need accounting software?

A spreadsheet is acceptable. The IRS generally does not require a particular system, and electronic records must meet the same requirements as paper ones (IRS: What kind of records should I keep?).

A spreadsheet works while each month is a few lines you can tie to the statement and the bank. A workable layout is one row per month, with columns for gross sales, refunds, each fee type, postage, supplies, shop payouts, bank deposits and the difference between payouts and deposits. Clear that difference each month, or explain it as timing, before moving on.

Accounting software is worth considering when:

• Sales run through several channels or payment accounts.
• You hold stock and need a cost for each item.
• You collect sales tax yourself.
• Tying the month out by hand takes longer than the month's sales.
• The books are already behind.

To compare tools, see choosing a bookkeeping app for Schedule C. To weigh doing the books yourself against hiring help, see doing your own books or hiring a bookkeeper.

What do I hand a bookkeeper or preparer at year end?

Hand over the statements, sales reports, forms, bank records and receipts, plus a short list of anything you cannot explain.

• Every monthly payment-account statement for the year.
• The year-end sales report for each channel.
• Every Form 1099-K, and a note on any you think is wrong.
• Bank statements for the account that received payouts, and for any card that paid shop fees.
• Receipts for postage, packaging and supplies, and purchase invoices for materials or stock, with a count of what is unsold at year end.
• Any sales tax reports, and last year's return if there is one.
• A list of unexplained deposits, missing months and holds.

The list of unexplained items matters most. It sets how much work the books need before a return can be prepared.

Example

These examples are illustrative; all amounts are in US dollars.

A deposit is not the sales number

A print seller sells $18,000 of prints in the year. The shop takes $2,400 in fees and $1,500 in shipping labels, and pays out $14,100 in total. The books show $18,000 of sales and $3,900 of expenses, not $14,100 of income. Supplies bought outside the shop, such as $1,200 of mailers, are further expenses that never appear in the payouts.

Three hundred listing fees in a month

A shop is charged about 300 listing fees of $0.20 in one month, $60 in all. The seller posts one $60 listing-fee line for the month from the statement and keeps the statement. If the same statement shows $45 of transaction fees, that is a second line, not part of the first.

A second channel and stock for resale

A shop sells $45,000 on its first channel and $15,000 on a second, $60,000 in all, and buys $20,000 of stock to resell. Either channel may send a Form 1099-K or none, but all $60,000 is gross receipts. Each form is checked against that channel's own sales report, not against the $60,000 total. The seller needs monthly books and a year-end count of unsold stock. With two channels and stock to count, this is where a spreadsheet stops being enough.

Different for you?

• Months or years of sales were never recorded: rebuild them from the old statements and bank records. See catching up on overdue books and get bookkeeping help.
• The Form 1099-K, the shop's totals and the bank will not agree: start with reconciling sales, payouts and Form 1099-K. Differences you cannot explain are the point to bring in bookkeeping help.
• Sales have outgrown a spreadsheet, with several channels or stock to count: see choosing a bookkeeping app for Schedule C and bookkeeping help.
• You buy materials or stock: see inventory or supplies for small sellers and cost of goods sold for handmade products.
• An IRS notice says your income does not match a Form 1099-K: see CP2000 notice: how to respond. If your books cannot show where the difference comes from, that is the point to bring in bookkeeping help.
• Buyers are in many states: see when you must collect sales tax.
• Shop money lands in a personal account: see business income in a personal account.
• You are not sure the shop is a business yet: see hobby, personal sales or business.
• The shop has two or more owners, or is run through a corporation (or an LLC taxed as one): this page assumes one owner. A married couple's shop is generally a partnership, unless both spouses work in it and elect qualified joint venture treatment by filing a joint return with separate Schedules C (IRS: Election for married couples). An LLC cannot make that election. See spouse and family LLCs, how partnerships are taxed and bookkeeping help.
• You want the tax on the profit: see income tax for online sellers and quarterly estimated tax payments.