Etsy & Online Seller Taxes: COGS, Platform Fees, 1099-K & Deductions (2026)

Selling handmade goods, vintage finds, or products online is a real business — and the IRS treats it like one the moment you turn a profit. Whether you run an Etsy shop, an eBay store, a Shopify site, or an Amazon listing, the same core tax rules apply. The difference between sellers who keep their earnings and those who overpay usually comes down to one thing: understanding cost of goods sold and tracking the fees each platform quietly takes. This guide covers all of it.

Hobby or business? The IRS cares about the answer

If you sell occasionally with no real intent to profit, the IRS may classify your shop as a hobby— you report the income but cannot deduct expenses. If you operate with the intent to make money, keep records, and put in consistent effort, you're running a business, file a Schedule C, and can deduct every legitimate cost. Most active online sellers fall firmly into the business category, which is where the tax advantages live.

Cost of goods sold: the number that changes everything

This is the single most important concept for a product business, and the one new sellers most often get wrong. You are not taxed on your gross sales — you're taxed on your profit. Cost of goods sold (COGS) is what it cost you to produce or acquire the items you actually sold, and it comes straight off your revenue before tax.

COGS typically includes:

• Materials and supplies that go into a finished product — yarn, beads, wood, fabric, blanks, resin, ingredients.
• Inventory you purchase to resell — the wholesale or thrift cost of items you flip.
• Packaging that ships with the product — boxes, mailers, tissue, labels, filler.
• Production labor you pay someone else for, and manufacturing or print-on-demand costs.

One nuance: COGS is based on the items you sold, not everything you bought. Materials sitting in a drawer as unsold inventory at year-end are counted when they sell, not when purchased. For small sellers, tracking what you spend and what you sell as you go keeps this simple.

Platform fees are fully deductible — and they add up fast

Every marketplace takes a cut, and every cent of it is a deductible business expense. Most sellers dramatically underestimate how much they're paying:

On a platform taking 10–15% all-in, a shop grossing $20,000 can pay $2,500–$3,000 in fees a year. Left untracked, that's thousands in deductions thrown away. Because the fees are withheld before the money reaches you, they're easy to forget — which is exactly why you have to record them deliberately.

The rest of your deductions

• Shipping postage you pay to send orders (separate from packaging materials).
• Equipment and tools — cameras for product photos, printers, a heat press, craft tools, a dedicated laptop.
• Software — design apps, listing and inventory tools, bookkeeping software, email marketing.
• Home office — if you have a space used regularly and exclusively for your shop, a share of your rent and utilities is deductible.
• Mileage — trips to the post office, craft stores, suppliers, and markets are deductible at the IRS standard rate.
• Marketing — off-platform ads, business cards, samples sent to reviewers.

Understanding the 1099-K

If you take payments through a marketplace or processor, you'll likely receive a 1099-K reporting your gross transaction total for the year. Two things surprise sellers about this form:

1. The number is gross — it includes sales tax the platform collected, shipping the buyer paid, and the fees that were deducted before you got paid. It is not your profit and not even your true take-home revenue.
2. You owe tax on your actual profit, which is that gross number minus COGS, fees, shipping, and every other deduction. Your records are what bridge the gap between the big scary 1099-K figure and what you really owe.

What about sales tax?

Sales tax and income tax are completely different things, and confusing them causes real headaches. The good news for most online sellers: under marketplace facilitator laws, platforms like Etsy, eBay, and Amazon now collect and remit sales tax on your behalf in most states. You generally don't need to handle it for those sales. If you sell through your own Shopify store or in person, however, you may be responsible for collecting and remitting sales tax where you have a tax obligation — worth confirming for your states.

Quarterly estimated taxes

Marketplace payouts arrive with nothing withheld, so the IRS expects estimated payments four times a year:

Because your true profit is smaller than your sales, base your set-aside on net profit after COGS and fees — typically 25–30% of that number.

A simple system for online sellers

1. Record the cost of materials and inventory as you buy them.
2. Log platform fees and shipping for every order — or reconcile monthly from your payout reports.
3. Track which items sold so your COGS reflects real sales.
4. Set aside 25–30% of net profit for taxes.
5. Pay your four quarterly estimates on time.

The bottom line

Online selling is a margin business, and taxes are just another cost to manage. Sellers who track cost of goods sold, capture every platform fee, and understand that the 1099-K is a starting point — not their tax bill — routinely keep far more than those who don't. Know your true profit on every sale, and both your pricing and your tax return get a lot clearer.

Related reading

• How Much Should Self-Employed Workers Set Aside for Taxes?
• Freelancer & Consultant Taxes: The Complete Guide

This article is for general educational purposes and is not tax advice. Sales tax obligations and inventory accounting can be fact-specific — consult a qualified tax professional about your situation.