Etsy tax documents: the 1099-K and the maker records behind it

The IRS names craft and maker marketplaces among the sites that send Form 1099-K (IRS, Understanding your Form 1099-K). Their federal line is payments over $20,000 in more than 200 transactions, and they may send one for less (IRS, Understanding your Form 1099-K). The same line holds for 2026 sales (IRS FS-2026-07).

Fairs change the picture. If buyers at a market pay you by card through your own reader, the card processor sends a Form 1099-K for any amount (IRS, Understanding your Form 1099-K). Bring every form, labeled by where the sales happened, so nothing is counted twice.

Etsy does not send a W-2 to shop owners. A sole proprietor is a person who runs a business alone without forming a company, and an Etsy shop usually fits that. Shop income then goes on Schedule C (IRS, What to do with Form 1099-K).

The 1099-K total is gross. The IRS says it is not reduced for fees, credits, refunds or shipping, and you subtract those from your records (IRS, What to do with Form 1099-K). On Etsy that means listing fees, transaction fees, payment processing fees, ad fees and refunds.

Your shop’s monthly statements and order exports carry those numbers. Download the full year as CSV files, so the preparer can sum fees by type. Cash sales at a fair count too, since all income is reported whether or not a form shows it (IRS, Understanding your Form 1099-K).

For a maker, inventory is more than finished stock. The IRS lists raw materials, work in process, finished products, and supplies that become part of the item for sale (IRS Publication 334). Beads, yarn, clay, fabric and wood all belong here until the piece sells.

In that list, work in process is a piece you have started but not finished, such as a quilt still on the frame. The silver wire in a necklace still on your shelf in December is not a cost yet. It becomes one the year the necklace sells, so a big supply order late in the year may lower this year’s bill less than you hoped.

So count what is on your shelves at the start and end of the year, at cost, and keep receipts for every material bought. Schedule C, Part III, turns those counts into cost of goods sold (Schedule C instructions).

Tools are different. A sewing machine, kiln or cutting machine is equipment, not inventory. Without audited statements, a shop can elect to expense items up to $2,500 per item or invoice (IRS, Tangible property regulations); the small business checklist covers the election.

Many makers work at a kitchen table, which does not count. A home office deduction needs space used regularly and only for the business (IRS Publication 587). Sellers have one exception: if your home is the only fixed location of a business selling products, space used regularly to store inventory can count without exclusive use (IRS Publication 587).

Either way, the preparer needs two numbers: the square feet of the studio or stock shelves, and the square feet of the whole home. The home office checklist covers the two ways to figure the deduction and the bills each one needs.

A photo of the space helps too, taken from the door. It shows the shelves of stock, the work table and the tools, and it answers the question a reviewer would ask first.

A shop run for fun, with no aim of profit, is taxed as a hobby. The IRS looks at factors such as keeping complete records, changing methods to earn more, and the time you put in (IRS, Hobby or business). Hobby income still goes on Schedule 1 (IRS Publication 525).

A hobby maker gets no deduction for yarn, fees or booth rent, though. Publication 525 allows hobby expenses only as an itemized deduction (IRS Publication 525), and miscellaneous itemized deductions are barred for every year after 2017 (26 U.S.C. 67).

Bring what shows how you run the shop: a separate bank account, prices set above cost, records kept all year, and time spent each week.

• IRS, Understanding your Form 1099-K: Marketplaces, including craft and maker marketplaces, send Form 1099-K over $20,000 in more than 200 transactions and may send one below that; a card processor sends one for any amount; all income must be reported.
• IRS, What to do with Form 1099-K: The 1099-K gross is not reduced for fees, credits, refunds or shipping; personal items sold at a loss can be zeroed out; items sold at a gain go on Form 8949 and Schedule D; sellers in business report on Schedule C.
• IRS FS-2026-07: Gig workers may deduct up to $25,000 of qualified tips for 2025 through 2028, capped at net business income, only if the tips are inside a 1099-NEC, 1099-MISC or 1099-K total; QBI is permanent; the 1099-K line is over $20,000 and over 200 transactions.
• IRS Publication 334: A business expense must be ordinary and necessary; inventory includes merchandise, raw materials, work in process, finished products and supplies that become part of the item; beginning inventory is the cost of stock on hand at the start of the year.
• Schedule C instructions: With the standard mileage rate, add parking and tolls and do not deduct depreciation, lease payments or operating costs; Part III covers cost of goods sold and inventory valuation.
• IRS, Tangible property regulations: A taxpayer without an applicable financial statement may use the de minimis safe harbor to deduct up to $2,500 per invoice or item.
• IRS Publication 587: A home office must be used regularly and only for business; space used regularly to store inventory qualifies when the home is the only fixed location of a business selling products.
• IRS, Hobby or business: The IRS lists factors that separate a hobby from a business, such as keeping complete books, changing methods to improve profit, and the time spent.
• IRS Publication 525: Income from an activity not for profit goes on Schedule 1; its expenses cannot exceed that income and can be taken only if you itemize on Schedule A.
• 26 U.S.C. 67: No miscellaneous itemized deduction is allowed for any taxable year beginning after December 31, 2017.