Expense & Tax Guide for Sellers

Which Item Is an Expenseon Etsy?

Understanding your business expenses is crucial for profitability and tax savings. This guide breaks down every expense category, what qualifies as deductible, and how to track it all properly.

Common expense categoriesTax deduction examplesRecord keeping tipsEtsy fee breakdownHome office deductionsMaterials and supplies

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What Is an Expense?Expense Categories Etsy Fee Breakdown Tax Deductions How to Track Common Mistakes Home Office Record Keeping All FAQs

What Is an Expense Item on Etsy?

An expense item is any cost you pay to operate your Etsy shop and create your products.

Expense Items Include:

All Etsy fees and charges
Materials to make products
Shipping and packaging costs
Tools and equipment
Software and subscriptions
Marketing and advertising
Home office costs
Professional services

NOT Expense Items:

Personal purchases
Non-business meals
Clothing (unless costumes for work)
Personal vehicle payments
Personal phone plan (full amount)
Entertainment unrelated to business

Key principle: If a cost is "ordinary and necessary" for your Etsy business, it's likely an expense item.

Complete Expense Categories

Here's a breakdown of every expense category relevant to Etsy sellers:

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Etsy Fees

Listing fee$0.20 per listing
Transaction fee6.5% of item price + shipping
Payment processing3% + $0.25 per transaction
Offsite ads fee12-15% when Etsy refers sale
Etsy AdsAdvertising budget you set

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Materials & Supplies

Raw materialsFabric, yarn, beads, wood, etc.
Craft suppliesPaint, glue, thread, findings
ToolsScissors, cutting mats, needles
EquipmentSewing machines, Cricut, etc.
ConsumablesBatteries, blades, ink

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Shipping & Packaging

Shipping labelsUSPS, UPS, FedEx postage
Boxes & mailersCorrugated boxes, poly mailers
Packing materialsBubble wrap, tissue paper
Custom packagingBranded boxes, stickers
Printer suppliesLabel printer, ink, thermal labels

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Office & Technology

Computer/devicesLaptop, tablet for business
SoftwareAccounting, design, SEO tools
InternetBusiness use portion
PhoneBusiness calls/data portion
Office suppliesPaper, pens, folders

Etsy Fee Breakdown

Every Etsy fee is a deductible business expense. Here's exactly what you're paying:

Fee Type	Amount	When Charged
Listing Fee	$0.20	Per listing (every 4 months or when sold)
Transaction Fee	6.5%	On item price + shipping charged to buyer
Payment Processing	3% + $0.25	Per transaction when using Etsy Payments
Offsite Ads	12% or 15%	When Etsy refers sale via external ads
Etsy Ads	Your budget	Daily based on your set ad budget
Currency Conversion	2.5%	International sales in different currency
Regulatory Operating Fee	Varies	Select states/regions

Example Calculation

For a $50 item with $5 shipping sold through Etsy Payments:

• Listing fee: $0.20
• Transaction fee: $55 × 6.5% = $3.58
• Payment processing: ($55 × 3%) + $0.25 = $1.90
Total Etsy fees: $5.68 (10.3% of sale)

Tax Deductible Expenses

Deducting expenses reduces your taxable income. Here's what you can deduct:

100% Deductible

All Etsy fees

Shipping costs

Packaging materials

Business insurance

Advertising costs

Professional services (accountant, lawyer)

Bank fees for business account

Business licenses and permits

Partial Deduction (Business Use %)

Cell phone (% of business use)

Internet service (% of business use)

Vehicle expenses (mileage log required)

Home office (dedicated space required)

Computer/devices (if also personal use)

Utilities (home office portion)

Special Rules Apply

Equipment over $2,500 (may need depreciation)

Inventory/materials (deducted when sold)

Startup costs (special rules for first year)

Meals with clients (50% deductible)

How to Track Your Expenses

Set Up a Tracking System

Use accounting software like QuickBooks, Wave (free), or a detailed spreadsheet. Create categories matching tax forms: Cost of Goods Sold, Advertising, Office Expenses, etc.

Download Etsy Statements Monthly

Go to Shop Manager → Finances → Payment Account. Download your monthly statement as CSV. This captures all Etsy fees automatically.

Save All Receipts Digitally

Photograph or scan receipts immediately. Use apps like Expensify, Receipt Bank, or simply organized folders in Google Drive/Dropbox.

Use Separate Business Accounts

Open a dedicated business bank account and credit card. This makes tracking much easier and provides clear documentation.

Reconcile Weekly or Monthly

Compare your expense records against bank statements. Categorize each transaction. Flag anything unusual for review.

Home Office Deduction

If you work from home, you may qualify for the home office deduction:

Simplified Method

Easier to calculate, but may result in smaller deduction:

• $5 per square foot of workspace
• Maximum 300 sq ft = $1,500 max deduction
• No need to track actual expenses
• Can still deduct mortgage interest & property tax separately

Regular Method

More complex but often larger deduction:

• Calculate: (Office sq ft ÷ Home sq ft) × Expenses
• Include: rent/mortgage, utilities, insurance, repairs
• Requires detailed record keeping
• May affect capital gains when selling home

Requirements

• Space must be used exclusively for business
• Must be your principal place of business
• A dedicated room or clearly defined workspace qualifies
• A corner of your living room used sometimes does NOT qualify

Common Expense Tracking Mistakes

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Forgetting Etsy Fees

Etsy fees add up to 10-15% of sales. Download monthly Payment Account statements—don't miss these deductions.

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Mixing Personal & Business

Use separate bank accounts and credit cards. Mixed finances create headaches at tax time and during audits.

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Not Saving Receipts

Digital receipts are fine, but you need them. The IRS can deny deductions without documentation.

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Ignoring Small Expenses

Those $2 ribbon spools and $5 shipping supplies add up. Track everything—small expenses become big deductions.

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Wrong Timing for Materials

Materials are deducted when products are SOLD, not purchased. Track inventory carefully for COGS.

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Missing Mileage

Every trip to buy supplies or ship packages is deductible. Use a mileage tracking app—67¢/mile adds up.

Record Keeping Requirements

What to Keep

Essential Documents

• All receipts and invoices
• Bank and credit card statements
• Etsy Payment Account statements
• 1099-K from Etsy (if applicable)
• Mileage logs
• Home office measurements/photos

How Long to Keep

• General records: 3 years minimum
• If income underreported by 25%+: 6 years
• Employment tax records: 4 years
• Asset/property records: Until 3 years after disposition
• Safe rule: Keep everything 7 years

Recommended Tools

Wave

Free accounting software

QuickBooks Self-Employed

Popular, integrates with banks

Expensify

Receipt scanning app

Track Your Shop's Performance

InsightAgent helps you analyze your Etsy shop performance, research profitable keywords, and make data-driven decisions.

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Frequently Asked Questions

Everything you need to know about Etsy expenses and deductions.

An expense item on Etsy is any cost you incur to run your shop and create products. This includes Etsy fees (listing, transaction, payment processing), materials and supplies, shipping costs, packaging, tools and equipment, software subscriptions, marketing costs, and home office expenses. These are all legitimate business expenses you can track and potentially deduct from your taxes.

Yes, Etsy listing fees are 100% tax deductible as a business expense. The $0.20 per listing fee, 6.5% transaction fee, and payment processing fees (3% + $0.25) are all deductible. Etsy provides a Payment Account statement showing all fees, which you should download monthly for your records. These fees directly reduce your taxable profit.

Absolutely. Shipping supplies including boxes, mailers, bubble wrap, tissue paper, tape, labels, and printer ink for shipping labels are all deductible business expenses. Keep receipts from suppliers like USPS, UPS, Staples, or Amazon. If you buy in bulk, track the cost and deduct it in the year purchased or spread it across usage.

Use accounting software like QuickBooks, Wave (free), or even a spreadsheet. Create categories for: Etsy Fees, Materials, Shipping, Packaging, Tools/Equipment, Software, Marketing, and Other. Save all receipts digitally using apps like Expensify or just photos in organized folders. Download Etsy's monthly Payment Account statements. Reconcile monthly to catch any missed expenses.

Yes, but with conditions. Equipment under $2,500 can typically be deducted fully in the year purchased (Section 179). Larger purchases may need to be depreciated over several years. Items like sewing machines, Cricut cutters, pottery wheels, cameras for product photos, and computers for your business are all potentially deductible. Keep records showing business use percentage if also used personally.

If you have a dedicated space used exclusively for your Etsy business, you can deduct home office expenses. Calculate the percentage of your home used for business (square footage of workspace / total home square footage). Apply this percentage to rent/mortgage interest, utilities, insurance, and repairs. Alternatively, use the simplified method: $5 per square foot, up to 300 square feet ($1,500 max).

Yes, all materials directly used in your products are deductible as Cost of Goods Sold (COGS). This includes fabric, yarn, beads, wood, paint, resin, and any raw materials. Track purchases carefully and assign costs to specific products if possible. Inventory at year-end affects your COGS calculation. Materials become deductible when sold, not when purchased.

Photography supplies for your product photos are deductible business expenses. This includes backdrops, lighting equipment, light boxes, tripods, props, and editing software subscriptions. If you use your phone camera, a portion of your phone expense may be deductible based on business use percentage. These items help you sell products, making them legitimate business expenses.

Yes, advertising is fully deductible. This includes Etsy Ads (both on-site and offsite ads), promoted listings, Pinterest promoted pins, Facebook/Instagram ads, Google ads, and any other marketing expenses. Track ad spend monthly. Etsy Offsite Ads fees (12-15% when Etsy refers a sale) are also deductible.

Yes, software used for your business is deductible. Common examples include: eRank or Marmalead for SEO research, Canva Pro for graphics, QuickBooks for accounting, Mailchimp for email marketing, Dropbox/Google Drive for storage, and any design software like Adobe Creative Suite. Keep subscription receipts and note business use percentage if also used personally.

Keep all receipts (digital is fine), bank/credit card statements, Etsy Payment Account statements, invoices from suppliers, mileage logs for business trips, and a calendar of business activities. The IRS requires records for 3-7 years depending on the situation. Organize by category and year. Use cloud storage for backups.

Yes, if the travel is business-related. Trips to buy supplies, craft fairs, post office runs, and meetings with suppliers qualify. Track mileage using an app or log. In 2024, the standard mileage rate is 67 cents per mile. Keep records of the date, destination, purpose, and miles driven. Actual vehicle expenses (gas, insurance, repairs) can be used instead if they result in a larger deduction.

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