Wondering how taxes work for your Etsy shop? Then read on! In this guide, you’ll find out more about registering your Etsy store I also talk about what UK Etsy tax sellers have to pay, and how they tell HMRC about their earnings.
Table of contents
- 1. Do You Need to Register Your Etsy Store as a Business?
- 2. How to Register as an Etsy Seller
- 3. How Much Tax Do You Pay as an Etsy Seller?
- 4. Tax Deductions for Etsy Store Owners
- 5. Keep Tax Records for Your Etsy Shop
- 6. VAT for Etsy Shop Owners
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. Do You Need to Register Your Etsy Store as a Business?
You need to register as an Etsy seller when your income (not profit) before Etsy fees exceeds £1,000. If you are selling on other platforms such as Amazon, eBay and Instagram, then you’ll need to include your sales from these revenue streams when calculating whether you’ve exceeded the £1,000 trading allowance. You may even find some platforms like eBay have now changed their rules and require that all new sellers have to register with HMRC, regardless of their income, just to sign up.
For some, their Etsy store is just a hobby. A hobby does not attract tax, so there is no requirement to set up a business. If you are struggling to decide whether you have a hobby or a business, then here are some questions you can ask yourself:
- Are you selling regularly to make a profit?
- Do you buy stock and hold onto it?
- Do you make items to sell on at a profit?
- Are you a registered business on Etsy?
- Do you buy things at wholesale to sell on?
- Are you working towards creating a brand?
If you answered yes to any of these, then it is likely that you are in business and will need to register as an Etsy seller with HMRC.
2. How to Register as an Etsy Seller
The quickest and easiest way to register your shop is to register as self-employed with HMRC. You’ll need to make sure you’ve registered by the 5th October following the end of the tax year that you started your business or you went over the £1,000 threshold. So, if you set up your Etsy shop on 1 January 2021, you’ll need to register with HMRC by 5th October 2021.
There are other business structures other than going self-employed, including:
- Limited Company
Depending on how much you make as an Etsy seller and whether you have a business partner, these may offer you better tax savings depending on your earnings. However, they often carry more reporting responsibilities meaning you need to engage an accountant.
For the rest of this guide, I’ll assume that you are registered as self-employed.
3. How Much Tax Do You Pay as an Etsy Seller?
Self-employed Etsy store owners pay the following types of tax based on the amount of profit (business income less business expenses) they make:
- Income Tax
- Class 2 National Insurance
- Class 4 National Insurance
You’ll pay income tax at the same rate as everyone else. So for the 2021/2022 tax year, you can earn up to £12,570 tax-free. After this, you’ll pay income tax at 20% on all your earnings up to £50,270 and 40% over that amount, until you reach £150,000 and have to pay 45%. Income tax is a cumulative tax, so the rate you’ll pay is based on your combined income.
In addition to income tax, you’ll need to pay two types of National Insurance when you’re self-employed – Class 2 and Class 4 on just your self-employment income. Again, the more you earn the more you’ll pay. Here are the current rates:
|Class 2 National Insurance||£3.15 per week on profits over £6,725 per year||£3.05 per week on profits over £6,475 per year|
|Class 4 National Insurance||9.73% on profits between £11,909 and £50,270|
2.73% on profits over £50,270
|9% on profits between £9,658 and £50,270
2% on profits over £50,270
Read this guide to self-employed tax to see some examples of calculating tax and National Insurance, as well as finding out when you need to pay your taxes.
4. Tax Deductions for Etsy Store Owners
You’re allowed to deduct expenses from your business before working out how much tax and National Insurance you owe. Most of the things you pay for will be allowable business expenses that you can claim for on your tax return such as:
- Laptop, computer, printer
- Equipment and tools
- Website design, build and hosting
- Marketing and advertising
- Phone and data
- Branded clothing and protective wear
- Tools and equipment
- Travel to events of craft fairs for example, when you use a taxi, tube or bus
- Mileage for using your own car (currently 45p for the first 10,000 miles of driving and 25p thereafter)
- Training and courses
- Use of home as an office
- Travel and mileage
- Business coaching
- Accounting & bookkeeping fees
- Card processing charges
- Etsy fees
- Bank charges for a business bank account.
There may be some expenses you pay for that you use personally and for business, like your mobile phone. In these cases, you can only claim a portion as a business expense. So, say you use your mobile phone for 60% work and 40% personal, then can claim 60% of the total bills to put against your taxes.
Whilst most things you pay for as part of being in business are tax-deductible, there are some things you may pay for that you cannot claim against your taxes. This includes things like:
- Fines and penalties eg: parking fines
- HMRC interest and penalties
- Training and courses for new skills
- Food, except in certain circumstances
- Personal expenses
5. Keep Tax Records for Your Etsy Shop
Once you’re self-employed, you are legally required to keep records and paperwork that support all your income and expenses and hold onto them for 6 years. That way, if HMRC ever investigates how you arrived at the figures on your tax return, you’ll be able to show them evidence.
Your records include things like statements from Etsy, invoices to your customers, cash sales and receipts for any expenses you may wish to claim. It also includes bank statements. The simplest ways to keep your records in order and speed up filling in your tax return is to:
- Open a separate bank account so all your payments are in one place. It will also help you budget for your tax bill (take a look at Starling);
- Store your records and paperwork using a secure cloud-based storage system like Google Drive or Dropbox;
- Set aside time on a regular basis to check all your finances are in order and do your bookkeeping;
- Set up Xero which integrates with your business bank account and Paypal.
6. VAT for Etsy Shop Owners
Value Added Tax (shortened to ‘VAT’) is a tax added to the price most goods and services consumers buy. Only businesses with a turnover of £85,000 or more are required to register for VAT. Once VAT registered, a business must charge VAT to its customers and pay this over to HMRC. This is after deducting any VAT they have paid to their suppliers as well as submitting VAT returns, usually quarterly.
There is VAT included on Etsy Seller Fees as well as listing fees, but all figures on Etsy are quoted VAT-inclusive to avoid confusion. The rate of VAT you are charged is based on the country that you are in, in the UK that’s 20%.
Etsy began charging VAT back in 2015 as a result of changes to EU VAT regulations that were bought in to tackle VAT avoidance on goods and digital products sold on the internet. This is known as VAT MOSS (Mini One Stop Shop) which affects all digital businesses not just those on Etsy.
You can see how much VAT Etsy have charged you by downloading your monthly invoice within the finance section of your Etsy Shop Manager. If your turnover is below the VAT registration threshold, you can avoid paying VAT on Etsy seller fees by voluntarily registering for VAT.
Once registered you can then claim back VAT you pay on all your purchases, including Etsy. However, you’ll also need to pay over 20% VAT on your sales. So, to cover that cost you’ll either need to increase your prices making you less competitive. Alternatively, you could take it out of your sales price which may erode your profit margins.
If you are registered for VAT HMRC will issue you with a VAT registration number, which you can then enter into your Etsy Account (within the Finance section) and Etsy will stop charging you VAT on seller fees.
6.1 VAT On Physical Products to Customers in the EU
If you are sending physical products to EU Countries then you may be affected by VAT regulations known as ‘One Stop Shop’. This is where if you sell more than €10,000 to any EU member states, you’ll be required to register for VAT in the EU. Under the One Stop Shop, you can fill in a single EU VAT return in one country. Then, you can collect and pay VAT to EU authorities.
6.2 VAT On Digital Products to Customers in the EU
VAT MOSS affects Etsy UK Shops who sell digital products to individuals in EU countries. This makes the business selling responsible for charging VAT on the sale at the VAT rate that the buyer lives in. However, it has caused considerable problems for Etsy UK sellers but potentially, there could ways to avoid it affecting you.
In order to ensure that all sellers on Etsy remain compliant as well as saving the sellers the hassle of reporting to HMRC under VAT MOSS, Etsy handles the VAT on digital products for you. This is why you may see adjustments. However, when your customers view your products they view the tax-inclusive price, to make the buying process seamless.