Etsy is a popular online marketplace where creative individuals can sell homemade crafts and other handmade goods. With over 2.1 million registered sellers, it's one of the largest online marketplaces; however, many Etsy sellers are left wondering whether they need a business license to sell on Etsy. Etsy's own policies page doesn't offer any help with this question at all, and the answers available elsewhere are murky at best. Fortunately, we're here to help.
Do Etsy sellers need a business license?
Whether or not you need a business license to sell on Etsy depends on a few factors. To help you decide whether you need a business license to sell on Etsy, ask yourself the following questions. If you answer "yes" to any of the questions below, you'll likely need a business license to operate legally.
How to decide if you need a business license:
- Are you operating your Etsy store as a business or a hobby? While the IRS gives vague guidelines on how to judge whether your store is a hobby or for-profit, here's the summarized version: If you're doing it for profit, it's a business, not a hobby. Businesses will be required to get the appropriate business licenses in order to operate legally.
- Are you making a profit on Etsy? If you're making a profit on your Etsy store, you're required to report your earnings to the IRS. Etsy will report your gross income to the IRS, but you must also report your earnings on your personal tax return.
- Is your company a partnership or LLC? If you have formed your Etsy store as a partnership or LLC, you'll be required to get an EIN for your business, as well as the requisite business licenses.
What business licenses do I need to sell on Etsy?
If you are operating your shop as a business and are turning a profit, you'll be required to get a business license to sell on Etsy. Just because you're selling on a marketplace instead of your own website does not exempt you from getting the appropriate licenses. We've put together a quick list of the most commonly-needed licenses for Etsy merchants below.
The 3 most commonly-needed business licenses for Etsy sellers:
- A basic business operation license. This is a permit that allows you to operate your business within the local government's geographical jurisdiction. License requirements for operating a business vary by state and city, so contact your local Small Business Administration office to ask what permits are required in your city. For ecommerce merchants, the licensing requirements are usually minimal, and the application costs are usually between $50 and $100 (although this varies by city and state).
- An Employer Identification Number (EIN). An Employer Identification Number is how you'll report taxes to the IRS. If you've registered your business as a sole proprietorship, which is very common for Etsy sellers, you’re not required to get an EIN since you'll report taxes on your personal tax returns. If you've formed a partnership or LLC, you'll need an EIN.
- Home Occupation Permits. If you're operating your business out of your home, you may be required to get a Home Occupation Permit. For most online merchants, this isn't an issue, but if you're making your products out of your home (as many Etsy merchants do), you might need this permit. Check with your city's local SBA or city hall to see the local requirements.
Since the requirements for business licenses and permits vary quite a bit by location, we highly recommend that you contact your local SBA to get a complete list of your local permit requirements. Most places have an office dedicated to helping small businesses get started, and they'll be able to walk you through the paperwork and help you do everything correctly. For a list of more licenses you might need, check out our guide to ecommerce business licenses.
Is it safe to sell on Etsy without a business license?
Only if you're running it as a hobby, not a business. While many large sellers continue to sell on Etsy without the appropriate business or tax licenses, they risk being caught by the IRS, and may be susceptible to local or state fines as well. Our advice is to make sure you have the appropriate licenses if you're serious about building your Etsy store into a real business since most people who tangle with the IRS don’t come out on top.
As long as you're not operating your Etsy store as a legitimate business and aren't making profits, you don't have to worry about getting a business license. In other words, hobbyists, crafters, and other casual Etsy users (which comprise most of their sellers) don't need a business license.
If you're attempting to run your Etsy store as a legitimate, profitable business, you will need to report your income and get business licenses. If you're just starting your business and aren't sure if it's profitable yet, you can use the five-year exemption to postpone having to decide.
Business and Hobby Classification
When running an Etsy shop, you'll likely want to avoid having your business listed as a hobby. While this will decrease your licensing and reporting requirements, it will also decrease the number of business-related tax deductions you can take.
For merchants serious about making money on Etsy, operating a for-profit business (and acquiring the proper business licenses) is a necessity. Not only do “hobby businesses” lack the tax breaks of more established business models, but you must be unprofitable to remain classified as a hobby business. To legitimize your Etsy business, make sure to operate it as a “for profit” business by keeping thorough records and getting the proper licensing.
Even if you're operating your Etsy business for profit, you can elect to have the “for-profit presumption” made after 5 years of business operations rather than immediately. What this means is that you can operate your business for the first 5 years without the IRS deciding whether your business is for-profit or not by filing form 5213 with the IRS. If your business is profitable 3 out of those 5 years, your business will be ruled for-profit, and you'll be required to pay back taxes on your income for that period.
You can submit form 5213 within 3 years of your first year of operating the store. This will give you a fairly significant testing period for your online business—if you aren't able to turn a profit, your business won't be considered (or taxed as) a for-profit business. Not only will this allow you to operate without filing business taxes during your early years, but you can also deduct a lot of small business expenditures, so you'll typically save money. However, if you're classified as a hobby business at the end of those five years, you won't be liable for business taxes—but you also won't be eligible for business-related tax breaks on purchases made to grow your business.
Local Business License Requirements
Depending on your local regulations and what industry you're in, you may need to file for business permits even if you're not required to register your business with the IRS.
For the most part, Etsy sellers won't need to get local business licenses in order to operate unless they're also registering their business with the IRS—most local business licenses are for professionals such as AC repairmen, cosmetologists, and electricians. However, check with your local permit offices to see if you need a permit. You can usually figure this out with a quick phone call to your local Small Business Association (SBA) or a quick skim of their licensing website.
In Conclusion
If you're really wanting to make sure you're following all of the rules to the letter, you may want to contact a small business lawyer or an online legal service—they'll be able to give you expert advice regarding business licenses and taxes, and can help you sleep a little better at night.