If you sell unique, creative or handmade products then you’re likely aware of the online marketplace called Etsy. While this platform has many advantages, new sellers often overlook what’s needed in terms of Etsy accounting and bookkeeping. In this blog, we’ll explore all the nuances of bookkeeping and accounting for Etsy businesses so you can decide whether or not you’ll be hiring an Etsy accountant.

We specialize in Etsy accounting, so if you’re set on outsourcing this function of your business, get in touch with us today. Let’s look at some important topics when it comes to selling on Etsy:

Sales Revenue Tracking

Sales revenue tracking involves recording your total income from selling your Etsy products over a specific timeframe. As an Etsy seller, you need to be aware of a few points here:

• Multiple Revenue Sources: As an Etsy seller, you may well generate income from sales in the UK, the EU and beyond. You will need to track these revenue streams separately for each market, which is particularly important when selling across different currencies.
• Etsy Payouts: Etsy collects customers’ payments, deducts the relevant fees (Etsy's transaction fees, listing fees and payment processing fees) and then transfers the net payout to your (the seller’s) bank account. For this reason, you need to separately track your gross sales, fees and net income. If you’d like a comparison of all the top ecommerce platforms and their fees, see our blog on the top ecommerce platforms for UK sellers.
• Multiple Currencies: Etsy allows you to charge customers in different currencies depending on their location. As a result, you must convert all your sales into GBP and track any currency conversion fees for bookkeeping and tax reporting purposes.

VAT (Value-Added Tax) Compliance

VAT is a tax charged on the sale of your products. Since VAT is a complex tax, many sellers work with specialist Etsy accountants to keep their operation VAT compliant - meeting all their VAT obligations. Check out our video covering VAT for UK sellers on our VAT page. Here are some points when it comes to VAT for Etsy sellers based in the UK:

• VAT Registration Threshold: From April 1 2024, all UK businesses must register for VAT when their taxable turnover hits £90,000 or more within a 12-month period. If you aren’t a UK-based business but sell to UK customers, there’s no VAT threshold and you must register for VAT upon making your first sale to a UK customer. 
• Reclaiming VAT on Expenses: Etsy does charge VAT on certain fees you incur as a seller based in the UK. If your business is VAT registered, you can reclaim the VAT on Etsy fees. Etsy also provides VAT invoices which will help with filing your VAT returns. In addition, you can reclaim VAT you’ve paid on other business expenses, provided these are eligible expenses and you’ve kept the VAT invoices.
• Collecting VAT on Etsy Sales in the UK: The manner in which VAT is collected on UK sales depends on where products are located at the point of sale (POS):
  • Goods located in the UK at POS: In such a case, if you’re VAT registered, you have to charge VAT on your sales to UK-based customers.
  • Goods located outside the UK at POS: For such “dropship type” sales into the UK, the VAT treatment depends on the total value of the shipping consignment. If it is:
    • Below £135: You must account for the VAT on the sale (at 1/6th of the final selling price). 
    • Above £135: VAT must be paid by the customer before the item is delivered.
• VAT on International Sales: In some cases where orders are shipped to customers in the EU, Etsy collects VAT on your behalf. However, you need to ensure that this VAT is properly accounted for in your bookkeeping.
• VAT Invoicing: Unfortunately, Etsy does not automatically issue VAT invoices for your customers’ orders, but you can generate your own VAT invoices for UK or EU customers where needed, especially for B2B sales. If your business is VAT registered, this is important to ensure compliance with VAT rules.
• VAT Returns: If your Etsy business is VAT registered, you must submit quarterly VAT returns to HMRC, outlining the details of the VAT you’ve collected and the VAT you’ve paid on expenses.
• VAT on Imports & Import Duties: If you are importing materials/products to sell on Etsy, you’ll likely pay VAT and customs duties when you do so. You must track these expenses as part of your COGS and you may well be able to reclaim the associated VAT you’ve paid provided you are VAT registered.

Expense Tracking

As an Etsy seller, tracking your expenses is essential because these business expenses are tax deductible. Deducting these from your business’s profit will reduce the taxable income and, by extension, your business’s tax bill. Among others, as an Etsy seller, you should keep track of:

• Etsy Fees such as:
  • Listing fees which are charged when you list a product.
  • Transaction fees which are deducted from each of your sales.
  • Payment processing fees when managing payments from customers.
  • Advertising fees for the use of Etsy Ads or Offsite Ads.
• Cost of Goods Sold (COGS) which includes all costs directly related to creating and selling your products on Etsy. (raw materials, packaging and shipping costs). COGS is essential to calculating accurate profit margins.
• Shipping & Fulfillment costs, whether these are paid by you or passed on to your customer must be recorded separately and categorized appropriately.
• Supplies & Overheads such as stationery, utilities, rent software subscriptions or marketing costs should be tracked as business expenses.

COGS & Inventory Management

Your Cost of Goods Sold (COGS) relates to all the costs directly associated with producing and selling your products on Etsy within a specific timeframe. You can calculate your COGS as per this diagram:
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Where:

• Opening Inventory is the value of your business’s inventory at the start of the accounting period.
• Purchases are the costs of any additional inventory purchases your business makes during the period.
• Closing Inventory is the value of your business’s inventory at the end of the period.

This is why your Etsy accountant will ask you for your current inventory numbers at specific points in the year. COGS is an essential number because it’s needed when calculating your Gross Profit as follows:

Gross Profit = Total Sales Revenue - COGS
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Here are some key points regarding COGS for Etsy sellers:

• Total Product Costs: Whether you’re hand making your Etsy products or ordering them from suppliers, your COGS includes all the direct costs (raw materials, labor and shipping) of making or purchasing the products (or materials) needed to make your products available for sale.
• Inventory Valuation: If you are keeping stock of your Etsy products, it's important to record all inventory purchases and track your stock levels. You may use inventory valuation methods such as FIFO (First In, First Out) or weighted average cost but the choice will impact how you calculate your profits (and taxes).
• Stock Write-Offs: If any of your stock is unsold, damaged, or obsolete, you may need to write off the value. Write offs can be recorded as a business loss and deducted from your profit, lowering applicable taxes.

Income Tax Obligations

Here are some important notes regarding the taxation of your Etsy business. If you operate as a:

• Sole Trader on Etsy, you must report your profits to HMRC via a self-assessment tax return by the 31st of January each year for the previous tax year. You will pay income tax and National Insurance contributions on the profit.
• Limited Company on Etsy, you'll need to submit a corporation tax return to HMRC. This is due 9 months and 1 day after the end of your company’s accounting period. You’ll pay corporation tax on the company’s profits and personal income tax on any salary or dividends you personally earn.

Further to the above, you may want to see our blog on the most tax efficient directors salary.

Reconciliation and Record Keeping

To ensure accuracy of the figures you’re recording, consider the following:

• Bank Account Reconciliation: You should reconcile your Etsy payouts with your bank account regularly.
• Transaction Reconciliation: Fortunately, Etsy provides you with detailed financial reports such as fee reports, payment account summaries and monthly statements. You’ll want to reconcile these with your accounting records to ensure accuracy.
• Making Tax Digital (MTD): This initiative means that VAT-registered businesses must keep digital records and use MTD-compatible software to file all VAT returns. You must also keep all your records for at least 6 years.

See how we can manage your bookkeeping for you on our Bookkeeping page.

Accounting Software Integration

There are multiple Etsy accounting software solutions you can consider:

• Etsy Accounting Software: Software such as QuickBooks, FreeAgent or Xero can be integrated with Etsy. These tools can automatically import sales and expense data from Etsy to make revenue, expenses and VAT tracking much easier.
• Etsy Bookkeeping Automation Software: Tools like A2X can be integrated with Etsy and your chosen accounting software. This will automate the reconciliation of your Etsy sales, fees and VAT, reducing your workload as well as manual input errors.
• Inventory Management Software: You can use tools such as TradeGecko or Cin7 to track your stock levels, reorder points and COGS.

See how we can handle your accounting for you on our Accounting page.

Financial Reporting

Once all your systems are in place and working, these are the most important financial reports you should generate for your Etsy business:

• Profit & Loss Statement: A report tracking your revenue, COGS and expenses over a specified period. This provides you with a solid picture of your Etsy business’s profitability and will help you make high-level decisions.
• Cash Flow Statement: This provides you insight into your current cash flow position as well as how to improve it. This statement is critical for ecom business owners. 
• Balance Sheet: This one provides you a snapshot of your Etsy business’s financial health by breaking down your assets, liabilities and equity.
• Etsy Sales Reports: Fortunately, Etsy provides you with detailed sales reports. You should use them to identify your best-selling items and manage any slow-moving stock.

Accounting for Etsy Business Owners in the UK:

1. Automate VAT & Tax Compliance: As much as possible, leverage Etsy’s built-in tools combined with third-party software to automate your VAT collection and filing for all sales (domestic and international).
2. Keep Personal and Business Separate: Use a separate business bank account. This will make life easier when tracking business expenses and sales and avoids confusing personal finances with Etsy income.
3. Run Regular Reconciliations: Regularly reconcile Etsy sales, fees, and payouts with your business bank account and accounting software to catch issues early and avoid discrepancies.
4. Track COGS & Inventory: Calculate your COGS and maintain an up-to-date inventory management system to ensure accurate profit reporting.
5. Consult an Etsy Accountant: If you don't wish to do this all yourself, you could work with a UK based accountant for Etsy businesses who understands this ecommerce platform, VAT, and Etsy-specific accounting nuances. This will ensure proper tax planning, keep your business compliant and optimise your business. At Ecommerce Accountants, we help a host of Etsy sellers do just that, if you’d like to work with us, get in touch today.

That is our overview of the best Etsy accounting and bookkeeping practices for sellers based in the UK. We hope this helps you with your decision on whether or not to hire an Etsy accountant. If you will be, please get in touch with us to see if we’re a fit. If you won’t be, then hopefully this article lays a solid foundation for your own bookkeeping and accounting system.