Hola friend! I’ve been helping Etsy sellers and creative entrepreneurs get their finances in gear since 2015. So I’ve been around the block a few times. Today, I’d like to briefly walk through the top five financial mistakes I see Etsy shop owners making.
Before I dive in, let me say there’s no shame in setting up your shop without fully crossing all the “T”s or dotting all the “i”s. Of course that’s the goal, but we’re human. We get so excited about out new venture, making sales, and creating pretty things. We start out with the best intentions, but it’s easy to get distracted, side tracked, or discouraged.
I’m not about scare tactics here, so we’ll review the mistake, take a deep breath, and then talk about how to avoid them (or fix them if you’re already there!). If you find yourself on this list, no worries. There’s almost always time to rectify your mistakes and get your shop legit. A good place to start is with this free checklist. .
Top 5 Financial Mistakes by Etsy Sellers
Not separating business from personal funds.
I totally get that this is sometimes hard to do when you’re just setting up shop, but getting those funds separate as soon as you can afford to do so is essential for good bookkeeping practices. It’s also important in case you ever have a tax audit. I’ve got more info on how to go about setting up a separate bank account for your biz here.
Not registering for sales tax and not charging sales tax to customers.
In the exciting period of setting up your online shop, sales tax is often an after thought. Most states require us to register for a sales tax permit and begin charging sales tax to our in-state customers from the very first sale. I’ve seen a lot of shop owners forget about sales tax, which is a bad thing because you can get hit with fines, penalties, or interest later on.
Dealing with sales tax is a dual issue too, because you have to not just apply for your permit with your state, but you also have to get it set up correctly in your shop. Many Etsy sellers don’t take the time to set up the shop-side of things correctly, and then end up having to pay sales tax out of their own pocket. You want to make sure you’ve got everything running smoothly so that sales tax is correctly charged to your customers and you can easily just remit that money over to your state when due. I’ve got some more info on sales tax here.
Not understanding what tax rules apply to them right now.
Unfortunately, setting up shop online doesn’t come with a handy Tax 101 manual (although this checklist is a great place to start!). Lots of Etsy sellers are unclear on what tax requirements apply to them and at what point in time. Many think they can just set up shop and experiment for a bit before becoming an official “real business”. I see a lot of Etsy sellers try to skate under the radar until, months or years later, they realize they’ve been doing something wrong and get hit with the overwhelming task of trying to back track.
Don’t fall into the trap that hobbies don’t have tax responsibilities. And don’t get confused about whether you even really are a hobby vs. a business. It’s up to you to get up to speed on what financial stuff you need to be dealing with from Day 1, so take the time to take control, get educated, and get help if you need it.
Not recording transactions in a bookkeeping system.
This sort of ties in with the previous point. A lot of online sellers put off dealing with the bookkeeping side of things until they make more money, or “really become a business”, or eventually hire an accountant. Even if you’re not making much in sales, recording those expenses is a really good idea. Having records of them means more tax deductions later on.
Setting up good habits now is great for when your business eventually is rolling in the dough (that’s the goal, right?!). You never know at what point things are going to take off and you’re scrambling to set up a system. Back tracking on re-creating a year’s worth of financial transactions is probably the biggest, most time-consuming and frustrating mistake I see Etsy sellers make. (That’s why I created an entire course just to help with that! But if you do it right, you don’t need my course haha!)
Not understanding what inventory is for tax purposes and how it applies to them.
Oooh inventory. Another common mistake I see is handmade sellers getting surprised by the concept of inventory, especially when it comes to taxes. They’re a year or two into their journey of selling, with thousands of dollars tied up in their fabric/bead/paint stash, and then they learn about inventory. Then it looks a lot like this: