Etsy Tax Deductions: 27 Write-Offs for Sellers (2026)

Tax Disclaimer: This article provides general information about tax deductions that may be available to Etsy sellers. It is not tax advice and should not be relied upon as such. Tax laws vary by jurisdiction and individual circumstances. Consult a qualified tax professional or CPA before making any tax-related decisions.

The typical Etsy seller tracks sales obsessively but forgets to track the $8 roll of packing tape. Or the 147 miles driven to the post office. Or the 120 square feet of their spare bedroom that's now a shipping station.

By April, they've left hundreds—sometimes thousands—in deductions on the table.

Running an Etsy shop means you're self-employed. That comes with tax responsibilities, but also opportunities to reduce what you owe. This guide walks through 27 deductions that Etsy sellers may qualify for in 2026, how to document them properly, and when to get professional help.

Do I Need to Report Etsy Income on My Taxes?

Yes. The IRS typically requires you to report all business income, regardless of whether you receive a 1099-K form.

Under current rules, Etsy sends a 1099-K if you meet both thresholds: $20,000 in gross sales AND 200 transactions in a calendar year. The IRS had planned to lower this to $600, but the threshold was maintained at $20,000 for the 2025 tax year. But here's the thing—even if you earn $500, it's still reportable income.

Many sellers assume "hobby income" gets a pass. It doesn't. If you're selling with the intent to make a profit, the IRS generally treats it as a business.

That means reporting income on Schedule C and paying self-employment tax. But it also means you can deduct ordinary and necessary business expenses.

When in doubt, consult a tax professional. They can help you determine whether your shop qualifies as a business or hobby, which dramatically affects your deductions.

What Expenses Can Etsy Sellers Typically Deduct?

The IRS has one test: expenses must be "ordinary and necessary" for your business (Publication 535). For Etsy sellers, that typically covers anything directly related to creating, marketing, and shipping your products.

Here's the general rule: if you wouldn't have spent the money without your Etsy shop, it may be deductible.

Some examples:

Direct costs like materials, supplies, and shipping boxes are usually straightforward deductions. You bought them to make or ship products.

Indirect costs like a portion of your internet bill or home office space require a bit more calculation. You'll need to determine what percentage relates to business use.

Platform fees are often overlooked. Every Etsy listing fee, transaction fee, and payment processing fee typically qualifies as a deductible expense. Download your annual Etsy fees using the Etsy Fee Calculator—you'll need this number for your Schedule C.

The key is documentation. Keep receipts, bank statements, and records of every business expense. If you can't prove you spent it, you typically can't deduct it.

What Etsy Fees Are Tax Deductible?

Every fee Etsy charges is generally a deductible business expense. Most sellers undercount these because they never download the annual statement.

For a seller doing $30,000 in annual sales, Etsy fees alone can add up to $3,000-$4,000 in deductions. That's real money on your Schedule C.

How to find your annual Etsy fees: Go to Shop Manager > Finances > Payment Account > Monthly Statements. Download all 12 months and add up the fees column. For a detailed breakdown of what each fee covers, see our guide to every Etsy fee explained and payment processing fees.

Home Office Deduction for Etsy Sellers

The home office deduction trips up a lot of sellers. The rules are specific, but if you qualify, it's one of the most valuable write-offs available.

You generally need a dedicated space used regularly and exclusively for business. That means a corner of your bedroom where you package orders may qualify, but only if you don't also use it for personal activities.

Simplified Method

The IRS offers a simplified calculation: $5 per square foot, up to 300 square feet (IRS Publication 587). Maximum deduction: $1,500.

Measure your workspace. If it's 150 square feet, you may deduct $750. No need to track actual expenses like utilities or repairs.

Regular Method

Alternatively, you can calculate the actual percentage of your home used for business and deduct that portion of rent, mortgage interest, utilities, insurance, and maintenance.

This method often yields a larger deduction but requires detailed record-keeping. Most sellers find the simplified method easier unless they have a large dedicated workspace.

Example (for illustration only): Sarah uses a 200-square-foot spare bedroom exclusively for her Etsy shop. Under the simplified method, she may deduct $1,000 (200 × $5). Under the regular method, if her home is 2,000 square feet and her annual housing costs are $18,000, she could potentially deduct $1,800 (10% of $18,000). Your results will vary based on your specific circumstances.

Vehicle and Mileage Deductions

Driving to the post office, craft store, or shipping center typically counts as business use of your vehicle.

You have two options for deducting these expenses.

Standard Mileage Rate

The IRS standard mileage rate is 70 cents per mile for 2025 (the tax year you're filing now) and 72.5 cents per mile for 2026. Track every business mile and multiply by the applicable rate.

This method is simple. Keep a mileage log with the date, destination, purpose, and miles driven. Apps like MileIQ or Everlance can automate this.

Example (for illustration only): Marco drives 2,000 business miles in 2025. His potential deduction: $1,400 (2,000 × $0.70). Individual results depend on actual mileage and proper documentation.

Actual Expense Method

Alternatively, track all vehicle expenses (gas, insurance, repairs, depreciation) and deduct the business-use percentage.

This method often works better if you have high vehicle costs or use your car heavily for business. But it requires detailed records of every expense.

Most Etsy sellers stick with the standard mileage rate. It's easier and typically provides a solid deduction without extensive tracking.

The QBI Deduction Most Etsy Sellers Miss

The Qualified Business Income (QBI) deduction lets you deduct up to 20% of your net business profit from your taxable income. It was made permanent in 2025, so it's not going anywhere.

If your Etsy shop nets $30,000 in profit, you may be able to deduct $6,000 from your taxable income — reducing your federal income tax bill by hundreds or even thousands of dollars.

Most Etsy sellers filing Schedule C qualify if their taxable income is at or below $197,300 (single) or $394,600 (married filing jointly) for the 2025 tax year. Above those thresholds, the deduction phases out.

This is separate from your business expense deductions. You claim it on your personal return (Form 8995 or 8995-A). Many sellers don't know it exists, which means they're overpaying. A tax professional can confirm whether you qualify.

27 Etsy Business Expenses to Track (Print This Checklist)

Here are 27 categories of expenses that Etsy sellers may typically deduct. Keep receipts for everything.

This isn't exhaustive. If it's ordinary and necessary for your shop, it may be deductible.

Before you set aside money for quarterly taxes, run the Etsy Profit Calculator to see your actual taxable income after deductions.

What Is Self-Employment Tax?

Self-employment tax catches new sellers off guard. It's separate from income tax.

When you work for an employer, they withhold Social Security and Medicare taxes from your paycheck. When you're self-employed, you pay both the employee and employer portions.

The rate is 15.3% on your net earnings (IRS Publication 334):

• 12.4% for Social Security (on earnings up to $176,100 for 2025, $184,500 for 2026)
• 2.9% for Medicare (no cap)
• Additional 0.9% Medicare tax on self-employment income exceeding $200,000 (single) or $250,000 (married filing jointly)

Example (for illustration only): Emma's Etsy shop nets $30,000 after deductions. Her self-employment tax would be approximately $4,590 ($30,000 × 0.153). She would also owe income tax on that $30,000, though she can deduct half of the self-employment tax. Actual tax liability varies by filing status and other income.

Quarterly Estimated Taxes

If you expect to owe $1,000 or more in taxes, you generally need to make quarterly estimated payments (IRS Form 1040-ES).

Due dates for 2026:

• Q1: April 15, 2026
• Q2: June 15, 2026
• Q3: September 15, 2026
• Q4: January 15, 2027

Underpayment can trigger penalties and interest. Work with a tax professional to calculate what you should pay each quarter. For the full breakdown of how quarterly payments work, see our Etsy quarterly taxes guide.

How to Track Expenses for Taxes

Good record-keeping makes tax season manageable. Poor record-keeping means scrambling through bank statements in April.

What to Track

Document every business expense with:

• Date of purchase
• Amount
• Vendor name
• Business purpose
• Receipt or proof of payment

For mileage, log the date, starting location, destination, purpose, and miles driven.

Tools That Help

Accounting software like QuickBooks Self-Employed or Wave can automatically categorize expenses by linking to your bank account. They also generate reports for Schedule C.

Receipt apps like Expensify or Shoeboxed let you photograph receipts and store them digitally. Paper fades. Digital lasts.

Spreadsheets work too. Create columns for date, vendor, category, and amount. Simple and free, though more manual than software.

The key is consistency. Pick a system and use it every time you spend money on your business.

Separate Business and Personal

Open a dedicated business checking account. It makes tracking infinitely easier and looks more professional if you're ever audited.

You don't need a business entity to do this. Most banks offer sole proprietor accounts that work fine for Etsy sellers.

5 Tax Mistakes That Cost Etsy Sellers Hundreds Every Year

Even experienced sellers trip over these.

Mistake 1: Not Tracking Small Expenses

That $8 roll of tape seems trivial. But $8 here and $12 there adds up to hundreds in lost deductions.

Track everything. Small expenses are still expenses.

Mistake 2: Missing Quarterly Payments

Waiting until April to pay all your taxes triggers underpayment penalties. The IRS expects you to pay as you earn.

Set aside 25-30% of your profit in a separate savings account. Make quarterly payments on time.

Mistake 3: Deducting Personal Expenses

Your daily latte isn't a business expense, even if you think about product ideas while drinking it.

Only deduct expenses with a clear, direct business purpose. Personal expenses don't count, even if you work from home.

Mistake 4: Poor Mileage Logs

"I drove to the post office a lot" won't fly in an audit. You need dates, destinations, and miles.

Start a mileage log today. Use an app or keep a notebook in your car.

Mistake 5: Ignoring Sales Tax

Many states require you to collect and remit sales tax, even for online sales. Etsy handles this for in-state sales in some jurisdictions, but not all.

Research your state's requirements. Failing to collect sales tax can result in back taxes, penalties, and interest.

If you're in your first year, many of these startup costs are deductible too. See the full list in our Etsy startup costs guide.

When to Hire a Tax Professional

DIY tax filing works for some sellers. But there are situations where professional help pays for itself.

Consider hiring a CPA or enrolled agent if:

You're earning over $50,000 annually. The complexity increases, and the cost of mistakes goes up.

You have employees or contractors. Payroll taxes and 1099 reporting add layers of compliance.

You're operating in multiple states. Sales tax and income tax rules vary widely.

You're planning to scale significantly. A tax pro can help you structure your business for growth (LLC, S-Corp, etc.).

You've been audited or received an IRS notice. Professional representation typically yields better outcomes.

You simply feel overwhelmed. Peace of mind has value. If taxes stress you out, delegate them.

The cost of a tax professional often ranges from $300-$1,000 or more depending on complexity and location. But the deductions they find and mistakes they prevent usually exceed their fee.

Interview a few CPAs who specialize in small businesses or e-commerce. Ask about their experience with online sellers.

Frequently Asked Questions

Can I deduct my Etsy inventory as a business expense?

Inventory is handled differently than regular expenses. You generally deduct inventory as "cost of goods sold" when items sell, not when you purchase materials. Consult IRS Publication 334 or a tax professional for guidance on inventory accounting methods.

Do I need an LLC to take business deductions?

No. Sole proprietors can deduct business expenses without forming an LLC. However, an LLC may offer liability protection and other benefits worth considering as your shop grows.

Can I deduct my phone if I use it for business?

You may typically deduct the business-use percentage of your phone bill. If you use your phone 40% for business, you could generally deduct 40% of the monthly cost. Keep records to justify your percentage.

What if I lost receipts for some expenses?

Bank and credit card statements can serve as backup documentation for many expenses. The IRS prefers receipts, but statements showing the vendor, date, and amount are better than nothing. Going forward, digitize receipts immediately.

Can I write off my Etsy shop even if it's not profitable?

If your shop consistently loses money, the IRS may classify it as a hobby rather than a business. The general rule: if you don't show a profit in at least three of five consecutive years, the IRS may presume it's a hobby. Hobby expenses are not deductible. A tax professional can help you understand the factors the IRS considers.

How long should I keep tax records?

The IRS generally recommends keeping records for at least three years from the date you filed your return (IRS Publication 583). If you underreport income by more than 25%, keep records for six years. For employment tax records, four years is typical. When in doubt, keep them longer.

What is the 1099-K threshold for Etsy sellers in 2025?

For the 2025 tax year, Etsy sends a 1099-K if you had $20,000 or more in gross sales AND 200 or more transactions through Etsy Payments. The IRS had planned to lower this to $600 but delayed the change. Even if you don't receive a 1099-K, all business income is generally required to be reported on your tax return.

What is the QBI deduction and do Etsy sellers qualify?

Yes, most Etsy sellers qualify. You don't need an LLC or S-Corp — sole proprietors filing Schedule C can claim it. The only real gatekeepers are the income thresholds ($197,300 single, $394,600 joint for 2025). File Form 8995 with your return. If you use tax software like TurboTax or FreeTaxUSA, it should calculate this automatically.

Next Steps

You've just read about 27 deductions. Now calculate how much you're actually keeping from each sale.

Four resources to find money you're leaving on the table:

• Etsy Fee Calculator — Add up a year of Etsy fees for your deduction worksheet
• Etsy Profit Calculator — See if you're hitting the $1,000 threshold for quarterly taxes
• Etsy Quarterly Taxes Guide — Deadlines, safe harbor calculations, and how to pay
• Etsy Selling Guide — More strategies to keep your costs down

And remember: this article provides general information, not personalized tax advice. Your situation is unique. Consult a qualified tax professional to ensure you're maximizing deductions while staying compliant.

Every deduction you miss is profit you worked for but didn't keep. Run the numbers now.

Sources

• IRS Publication 535 – Business Expenses – Defines "ordinary and necessary" deductions
• IRS Publication 587 – Business Use of Your Home – Home office deduction rules
• IRS Standard Mileage Rates – 2025 and 2026 rates
• IRS – Self-Employment Tax – SE tax rates
• IRS – Qualified Business Income Deduction – QBI rules and thresholds
• Etsy – Fees & Payments Policy – Official fee schedule
• Etsy – 1099-K Tax Form Guide – Reporting thresholds
• IRS Publication 583 – Recordkeeping – How long to keep records