Selling online, whether it’s handmade candles on Etsy, vintage sneakers on eBay, or custom T-shirts on TikTok Shop, has never been easier. For many, a side hustle is a fun way to turn hobbies into extra income. While listing your first item can be exciting, the tax rules around online sales may be more complicated than you expect. In this article, Staff Accountant Christopher Kirsch helps you understand the basics now so you can avoid penalties, stay compliant, and keep your hard-earned profits.
- General Information
If you have net earnings from self-employment of $400 or more from gig work, you must file a tax return. Gig work refers to income-generating activities, often through apps or websites. For example, selling goods online through digital platforms like Etsy, TikTok Shop and eBay. You are required to pay tax on any income you earn from this gig work.
- Your Sales May Be Taxable
So, are your online sales taxable? The simple answer: yes. Any income earned, even if it is from a side hustle or hobby, is taxable. The IRS looks to see whether you are running a business to make a profit or if you are just selling for fun as a hobby. If it is a business, you could deduct your expenses regardless of whether you made a profit or not. However, if it is deemed a hobby, you still report your income, and your expense deductions are limited. A good rule of thumb: if you have made a profit in three of the last five years, the IRS usually will see it as a business. To stay on the safe side and potentially save money come tax time, keep records, treat it like a real business, and file using Schedule C if you’re operating for profit.
Even if you’re just selling trinkets online for fun, in the eyes of the IRS, they see that as a business. This means that your sales, even if triggered by a one-off post, are taxable and should be reported on Schedule C of your tax return. Don’t rely solely on forms like 1099-K; instead, you should be using your own real sales records. If you receive goods or services in exchange, that is still considered income and needs to be reported. For example, if someone trades you handmade soap for your custom T-shirt, that is still income and needs to be assigned a value. You should report the fair market value of what you received even if there was no cash exchange.
If you collect sales tax that is to be passed on to the state, it’s not yours to keep, but if it’s baked into your listing price, that amount does count as income. If you collect sales tax from customers to remit to the government, then you do not include that in your reported income. Also remember, even if you don’t receive a form 1099 (1099-NEC, 1099-K), you must still report all income including cash, barter items, tips, and digital payments.
Also note: Personal items sold at a loss aren’t usually taxable. But there are exceptions. In 2024, if your total payments on a platform exceed $600, you may be required to report them, even if some items were sold at a loss. Selling a personal item for less than you paid doesn’t result in a deductible loss but selling it for more than you paid does result in taxable income.
- Meet Form 1099-K
If you receive payments via third-party platforms like Venmo, Cash App, or Etsy, you may be issued a Form 1099-K. Form 1099-K reports your total payments for goods or services to both you and the IRS. However, the amounts shown may not reflect your actual taxable income, since they can include personal transfers or exclude certain business receipts.
For 2024 (filed in 2025), the threshold for receiving a Form 1099-K is $5,000. In 2025 (filed in 2026), it drops to $2,500. Starting in 2026, it is scheduled to fall to just $600. Some states are already enforcing lower thresholds. Regardless, you’re still legally required to report all income from sales or services, whether you receive a Form 1099-K or not.
- Deductible Expenses You Might Be Missing
Starting a side hustle means you’re likely incurring business expenses, and many of these can be deducted to reduce your taxable income. Common deductions include:
- Shipping and packaging supplies
- Platform fees (e.g., Etsy, Amazon)
- Advertising and promotional costs (including social media ads)
- Business-related tools, software, and equipment
One of the most significant deductions for online sellers is the home office deduction. However, it only applies if you’re self employed and use part of your home regularly and exclusively for business purposes. You can calculate this deduction using one of the two following methods:
- Simplified method: Deduct $5 per square foot, up to 300 square feet (maximum $1,500)
- Actual expense method: Deduct a percentage of home expenses (rent, utilities, insurance, repairs) based on your office space
Some other commonly overlooked deductions include:
- Internet and phone bills (business-use portion only)
- Vehicle expenses (e.g., trips to post office or picking up supplies)
- Office supplies or small equipment purchases
Under the de minimis safe harbor rule, you can fully deduct equipment purchases under $2,500 per item in the year they’re purchased.
Additional deductions include business-related education, software subscriptions, bank or merchant fees, business licenses, insurance, and even professional services like bookkeeping or legal advice.
To take advantage of these, it is crucial to keep receipts and track your expenses throughout the year. You should always separate your personal and business expenses and only deduct the portion that directly relates to your business. Using the IRS’s simplified methods can also make your recordkeeping and filing process much easier. By staying organized and informed, you can ensure you’re not leaving money on the table come tax time.
- Keeping Good Records Is Key
One of the most important steps to take when running a side hustle is to keep accurate records; especially if you’re selling online. Keeping good records helps you track income, manage expenses, and ensure you’re claiming all the deductions you’re entitled to. You’re still required to report all income even if you don’t receive a Form 1099, this includes income from gig work or online sales. You should save all receipts, keep a log of transactions, and keep supporting documents like invoices and bank statements. The IRS doesn’t mandate a specific recordkeeping method, so choose a system that works for you – whether it’s a spreadsheet or bookkeeping app – as long as it clearly shows income, expenses, and business activities.
Tip: Use a separate bank account and credit card for your business to simplify tracking.
Keep documents for at least three years, or four years for employment tax records. Remember, you must be able to support your deductions if audited. A basic log is fine for beginners, while more advanced sellers may prefer digital tools that sync with sales platforms. The key is consistency. Update regularly, back everything up, and organize records by category or date to save time and reduce stress.
- Don’t Forget About Self-Employment Taxes
It’s crucial to understand how taxes work, especially self-employment taxes. If your net earnings from self-employment exceed $400 for the year, you’ll owe self-employment tax, which covers Social Security and Medicare.
The rate is 15.3%:
- 4% for Social Security
- 9% for Medicare
Although this may sound like a lot, you can deduct half of the self-employment tax when calculating your taxable income, which lowers what you owe in regular income taxes.
Unlike a traditional job, no one withholds taxes from your side hustle income. If you expect to owe more than $1,000 in federal tax for the year, you must make estimated tax payments quarterly, in April, June, September, and January. These payments cover both income and self-employment tax. If you underpay or miss deadlines, you could face penalties and interest. To avoid this, experts recommend setting aside 25–30% of your earnings for taxes.
- State & Local Considerations
Tax rules vary by state. Some platforms (like Etsy or Amazon), automatically collect and remit sales tax for you. However, this doesn’t apply to every case, especially if you sell through your own website or in states without marketplace facilitator rules.
Depending on where your customers are located, you may need to register for a sales tax permit and handle the collection and remittance yourself.
On the income side, some states already enforce lower 1099-K thresholds. For instance:
- Maryland, Massachusetts, Vermont, and Virginia: $600
- Indiana: $1,000 (with at least 4 transactions)
Remember, you are still required to report all taxable income on your federal and state returns even if you don’t receive a 1099-K. Avoid surprises when it’s time to file your tax returns by keeping detailed records, reviewing platform payouts, and monitoring your state’s reporting requirements.
- Legislative Watch & Threshold Changes
Before 2022, the 1099-K threshold was $20,000 and 200+ transactions. A provision in the American Rescue Plan sought to lower this to $600 (with no transaction minimum), but implementation was delayed after confusion and pushback.
Now, the IRS is changing in phases:
- 2024: $5,000
- 2025: $2,500
- 2026: $600 (scheduled)
Meanwhile, a bill passed by the U.S. House aims to restore the original $20,000/200-transaction rule. Supporters say the lower threshold burdens casual sellers, while opponents argue it increases income transparency. The bill must still pass the Senate and be signed by the President. Until then, the phased changes remain in effect. To stay compliant and avoid surprises, it’s important to stay informed about legislative updates and track all your earnings, even if you don’t receive a 1099-K.
Conclusion:
Running an online side hustle is an exciting way to turn your passions into profit, but it also comes with important tax responsibilities. Whether you’re selling handmade goods, flipping vintage finds, or offering custom merchandise, understanding how your income is taxed is essential. From knowing when your sales become taxable to recognizing what deductions you can claim, staying informed can help you keep more of what you earn and avoid costly surprises at tax time.
Keep in mind that even if you don’t receive a Form 1099-K, you’re still required to report all income. Track your earnings, log your expenses, and separate business from personal finances. Don’t overlook key areas like self-employment tax, quarterly estimated payments, or your state’s specific rules, which may vary.
The good news? When you treat your side hustle like a real business (by maintaining detailed records, setting aside funds for taxes, and claiming legitimate deductions), you set yourself up for long-term success. If the tax rules feel overwhelming, don’t hesitate to consult a professional. A little guidance now can save you time, stress, and money later. With the right preparation, you can grow your online hustle confidently, knowing you’re both compliant and financially protected. If our team can be of service, please contact us.
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