Bookkeeping 101 for Etsy Sellers

Who better to describe the best feeling of receiving an Etsy sale notification than you?

Someone out there found your creation, loved it, and decided to make it theirs. 

Doesn’t that make all the effort feel worthwhile? Packaging late into the night, juggling endless to-dos, and dreaming of what’s next for your shop.

That’s what entrepreneurial journey is all about for most Etsy sellers.

But then there’s that other feeling. The one that comes up when you sit down to figure out how much of that sale is actually yours after deductions on platform fees, supplies, and shipping. 

It’s not that you’re bad with numbers; it’s just that bookkeeping probably wasn’t what excited you about running a shop. 

After all, you signed up for creativity, not crunching spreadsheets, right?

Still, knowing your finances well is the key to keeping your shop sustainable and successful. 

If the thought of balancing books sends a shiver down your creative spine, don’t worry. 

This guide will simplify bookkeeping into straightforward steps, offering practical tips that fit the unique needs of Etsy sellers like you.

And if you’re ready to skip the stress altogether, a demo with our bookkeeping experts will show you how to keep your finances running seamlessly.

Let’s dive in. You’ve got big things to create, and we’ll help you make the numbers work with Etsy bookkeeping.

Setting up Your Etsy Bookkeeping System: It’s Not Easy

A good Etsy bookkeeping system can help you track every penny, avoid financial stress, and keep you tax-ready. 

Here’s how to set up an efficient bookkeeping system tailored for your Etsy shop.

Separate Your Finances

This is the golden rule for any small business: Keep Your Personal and Business Finances Separate. 

Using the same account for both might seem harmless at first, but it creates a tangled mess when it’s time to track expenses or file taxes.

Here’s what you can do:

✅ Open a business bank account solely for your Etsy shop. This account will handle your sales income, supply purchases, and other shop-related expenses.

✅ Use a business credit card (or debit card) for expenses like shipping supplies or advertising.

Use a Chart of Accounts for Etsy Shops

Think of a Chart of Accounts as a financial map for your business. It’s a categorized list of all the income and expenses your Etsy shop will encounter. 

Having this in place ensures your bookkeeping is organized and detailed.

For Etsy shops, your Chart of Accounts might include:

✅ Income: Etsy sales, custom order revenue.

✅ Fees: Etsy listing fees, transaction fees, and payment processing fees.

✅ Expenses: Shipping costs, packaging supplies, advertising (Etsy ads, social media promotions), and craft supplies.

You can set this up in accounting software like QuickBooks or even in a simple spreadsheet. 

The goal is to have every dollar accounted for under a clear category, making it easier to track where your money is coming from and going.

Why this matters: A Chart of Accounts lets you pinpoint your most significant expenses and adjust your budget. 

For instance, if you see that Etsy fees are eating into profits, you can reevaluate your pricing.

Choose Your Accounting Method

Your accounting method determines how and when you record transactions. 

Etsy sellers typically should choose between two methods:

✅ Cash-Based Accounting: Income and expenses are recorded when the money actually moves. 

For example, you record a sale when the money hits your account, not when the order is placed.

✅ Accrual-Based Accounting: Income and expenses are recorded when they’re earned or incurred, even if the payment hasn’t been made yet. 

For instance, you’d record a sale when the order is placed, even if the money hasn’t hit your account.

Which one should you choose?

If your Etsy shop is a side hustle or just starting out, Cash-Based Accounting is straightforward and easier to manage.

If your shop is growing or you work with bulk suppliers, Accrual-Based Accounting might give you a clearer view of your finances.

Tracking Your Etsy Shop Income

Keeping track of your income is one of the most important parts of running your Etsy shop. 

Don’t worry if tracking your income feels overwhelming; let’s break it down step by step in a way that’s easy to follow.

Record Every Sale To Know Where Your Money Comes From

Start by tracking every sale that happens in your shop. This includes details like the item sold, the date of the transaction, and the total sale amount after Etsy fees.

Here’s how you can stay organized:

👉 Log All Sales Regularly. Use a spreadsheet or accounting software to record each sale, including Etsy’s deductions like transaction or payment processing fees.

👉 Include Other Income Streams. If you sell at craft fairs or through other platforms, record those sales in the same place to get a complete financial picture.

Use Etsy Payment Reports To Understand Your Earnings

Etsy provides detailed reports that break down every transaction, fee, and payout. 

These reports make it easy to see where your money is going and how much is reaching your bank account.

Here’s what you should do regularly:

👉 Download Your Monthly Payment Report. Log in to your Etsy seller account, find the reports section, and download your monthly breakdown.

👉 Match Reports To Bank Deposits. Compare the total payouts listed in the report to the deposits in your bank account. If there’s a mismatch, investigate delays or errors.

👉 Note Every Fee. Etsy deducts listing, transaction, and processing fees from your sales, so tracking these ensures you know your actual profit.

Why it’s important: Etsy bookkeeping fees can add up, and reviewing these reports ensures you’re aware of all deductions while helping you plan better for taxes and business growth.

Keep Clear Records Of Discounts, Refunds, And Promotions

Discounts and refunds can affect your bottom line especially when running promotions, so it’s essential to track them accurately for your etsy bookkeeping process

Here’s how to do it:

👉 Log Discounts Separately. If you offer a discount, make sure you record the final sale amount, not the original price, to reflect your actual income.

👉 Document Refunds Thoroughly. Record the refunded amount, date, and reason (e.g., damaged item or customer return), as well as any fees that Etsy doesn’t reimburse.

👉 Track Promotional Expenses. If you’re running Etsy ads or paid promotions, log these costs as separate expenses to measure their impact on your sales.

Managing Etsy Expenses

Let’s explore a few ways to manage your Etsy business expenses:

Breaking Down Etsy Fees

Etsy’s fee structure can feel overwhelming, especially for new sellers, but understanding the details ensures you don’t lose sight of your profit margins. 

Let’s break it down:

Listing Fee

Every product you list on Etsy comes with a flat $0.20 listing fee per item.This fee renews every four months or when the item sells and gets relisted.

Even if the product doesn’t sell, you’re still charged the fee, making it important to manage inactive listings.

Example: If you list 50 items in your shop, you’ll pay $10 upfront in listing fees, which will renew if the items don’t sell within four months.

Transaction Fee

Etsy charges 6.5% of the total sale price. This includes the item price, shipping cost, and any additional charges like gift wrapping. If you don’t account for this fee in your pricing, it can eat into your profits.

Example: For an item priced at $20 with $5 shipping, Etsy will deduct 6.5% of $25, which equals $1.63.

Payment Processing Fee

This is the fee for handling payments, and it varies depending on your country.

In the U.S., it’s 3% of the total sale amount plus $0.25 per transaction. If the sale involves a different currency, Etsy may also charge a conversion fee.

Example: If you sell an item for $30, Etsy will charge $0.90 (3% of $30) plus $0.25, for a total of $1.15.

Offsite Ads Fee

If Etsy promotes your product through offsite ads and it leads to a sale, you’ll be charged 12% to 15% of the sale price. 

Sellers earning less than $10,000 annually can opt out of offsite ads, but those earning above that threshold are required to participate.

Example: If you sell an item for $50 through an offsite ad, you’ll pay a fee of $6 (12% of $50).

Understanding these fees is critical to setting a realistic pricing strategy. Ignoring these costs can lead to underpricing, where you may not make the profit you’re aiming for.

Tracking Business Expenses

Beyond Etsy fees, running a shop involves various expenses that can add up quickly. 

Keeping meticulous records ensures you have a clear picture of your finances and helps you during tax season.

Here’s a detailed breakdown of what to track:

Materials and Supplies

This includes all the raw materials required to make your products.

Example: If you make jewelry, you’d track costs for beads, wires, clasps, and any tools you need for production.

Shipping Costs

Don’t forget to log every expense related to shipping, such as boxes, bubble wrap, packing tape, and postage. Keep receipts from shipping services to cross-check later.

Marketing and Advertising

Expenses for Etsy Ads, social media promotions, or collaborations with influencers fall under this category.

Advertising costs directly impact your profitability and need to be evaluated for effectiveness.

Software and Tools

If you use tools like QuickBooks for bookkeeping, Canva for design, or scheduling apps for social media, include these as part of your business expenses.

Overhead Costs

These are the costs that don’t go directly into your products but are necessary for running your business, such as a portion of your electricity bill, internet charges, or rent for workspace.

How to Track These Expenses:

✅ Use a simple spreadsheet with categories for each type of expense.

✅ Consider accounting software to automate tracking and reduce errors. Or you take help from doola’s Bookkeeping experts.

✅ Save all receipts and invoices for at least three years — they’re essential for audits or claiming tax deductions.

Now that you’re clear on tracking individual expenses, it’s time to zoom in on the Cost of Goods Sold (COGS) — the total cost of creating each product. 

Understanding COGS is quite important because it shows you how much it really costs to produce your items, helping you set prices that cover expenses and generate profit.

Without knowing your COGS, you might unknowingly underprice your products, eating into your earnings. 

Let’s break down how to calculate it step by step.

How To Calculate COGS (Cost of Goods Sold)

COGS includes all direct costs of making a product, such as materials, labor, and overhead. Here’s how to calculate it:

Material Costs

Include all raw materials for one unit of your product. For example, a handmade necklace might require beads, clasps, and string.

If you buy materials in bulk, calculate the per-unit cost.

Example: If a $100 spool of thread makes 50 necklaces, the cost per unit for the thread is $2.

Labor Costs

Even if you’re the one making the products, your time has value. Assign yourself an hourly rate and calculate how long it takes to make one item.

Example: If you value your time at $15/hour and it takes 2 hours to make a product, the labor cost is $30.

Overhead Costs

These include indirect costs like utilities, workspace rent, and tools. Divide monthly overhead by the number of products produced in that month to get the per-item cost.

Example: If monthly overhead is $100 and you make 50 items, the overhead cost per item is $2.

COGS Formula

Here’s the formula to calculate COGS:

COGS = (Cost of Materials) + (Labor Cost) + (Overhead Cost)

Let’s calculate the COGS for a handmade candle: Materials:Wax: $3Wick: $1Container: $2 Total Material Cost = $6 Labor:1 hour at $20/hour = $20 Overhead:Monthly overhead: $100Monthly production: 50 candles Overhead Cost per candle = $100 ÷ 50 = $2 COGS = Materials + Labor + Overhead COGS = $6 + $20 + $2 = $28 per candle

Tax Time Made Simple for Etsy Sellers

Managing expenses, tracking income, and calculating COGS are all vital parts of running a profitable Etsy shop. 

But when tax season rolls around, knowing how to handle sales tax and maximize deductions is equally important. 

Once you have a handle on your shop’s finances, it’s time to ensure you’re tax-ready. 

Let’s understand what you need to know about sales tax collection and the deductions that can save you money.

Sales Tax Collection by Etsy

If you’re wondering whether you need to handle sales tax yourself, here’s the good news: Etsy collects and remits sales tax on your behalf in most U.S. states. 

This means when a customer places an order, Etsy automatically calculates the sales tax, charges the buyer, and sends it to the appropriate tax authority.

What You Should Know:

📌 Where Etsy Collects Sales Tax: Etsy collects sales tax in states where marketplace facilitator laws are in place. This includes most U.S. states.

📌 Do You Still Need to Report It? Even though Etsy handles the collection and payment, you may still need to report those sales on your state tax return. Check with your state’s tax authority to confirm your obligations.

📌 Sales Tax for International Sellers: If you’re an Etsy seller outside the U.S., you may need to handle VAT or GST depending on your country’s tax laws. 

Etsy often collects VAT or GST at checkout, but it’s your responsibility to stay informed about local tax regulations.

Example Scenario: Let’s say you sell a $40 handmade mug to a buyer in California, where the sales tax rate is 7.25%. 

Etsy will charge the buyer $42.90 ($40 + $2.90 in tax), collect that tax, and send it to California’s tax authority. 

You don’t need to remit this tax yourself, but you may need to include it in your tax reports depending on state requirements.

Common Tax Deductions for Etsy Sellers

Once you understand sales tax, the next step is reducing your taxable income by taking advantage of deductions. 

As an Etsy seller, many of your business expenses qualify for deductions, which can significantly lower how much tax you owe.

Here’s a list of deductions you can claim:

Materials and Supplies

This includes all the raw materials you purchase to create your products.

Etsy Fees

All fees charged by Etsy, such as listing fees, transaction fees, and payment processing fees, are deductible.

Example: If you paid $1,200 in Etsy fees throughout the year, you can deduct that full amount.

Shipping Costs

Deduct expenses for postage, packing supplies, and shipping labels.

Home Office Deduction

If you use a dedicated space in your home exclusively for your Etsy shop, you can deduct a portion of your rent, utilities, and internet costs.

Example: If your workspace is 10% of your home’s total square footage, you can deduct 10% of your rent and bills.

Advertising and Marketing

Expenses for promoting your products, such as Etsy Ads, social media campaigns, or sponsored posts, are deductible.

Mileage for Business Travel

Driving to the post office, craft fairs, or to pick up supplies can be deducted. Use a mileage tracking app to log your trips.

Should You Outsource Your Bookkeeping?

Bookkeeping can be time-consuming, especially when you’re balancing product creation, marketing, and customer service as an Etsy seller.

 So, should you outsource your bookkeeping? 

The answer depends on your time, budget, and confidence in managing finances.

When Outsourcing Makes Sense:

✅ You’re Short on Time: If bookkeeping feels like one more thing on your endless to-do list, hiring a professional can free you up to focus on growing your shop.

✅ You’re Struggling With Accuracy: If tracking expenses, categorizing fees, or reconciling statements feels overwhelming, outsourcing ensures nothing slips through the cracks.

✅ You’re Preparing for Growth: As your shop scales, managing larger transactions, multiple revenue streams, and tax compliance becomes more complex. A professional can help you handle the increased workload.

DIY If:

✅ You Have a Simple Setup: If your shop is small and you’re comfortable tracking income and expenses using software, you can save money by doing it yourself.

✅ You Want to Save Costs: If you’re on a tight budget, using software like doola may be enough as we offer scalable solutions tailored to Etsy sellers.

Best Software for Etsy Bookkeeping in 2025

If you’re searching for a bookkeeping service that’s as passionate about your business as you are, doola Bookkeeping might just be your perfect match. 

doola Bookkeeping

Known for helping entrepreneurs with LLC formation and compliance, doola also offers bookkeeping services tailored to the needs of Etsy sellers.

Key Features:

✅ Seamless Etsy Integration: Automatically syncs your Etsy sales data, fees, and taxes without manual input.

✅ Real Time Financial Dashboards: Provides instant insights into your revenue, expenses, and profit margins.

✅ User-Friendly Interface: Designed with small business owners in mind, no accounting expertise required.

✅ Scalability: Supports business growth with features like payroll processing and multi-channel sales integration.

✅ Tax Preparation Support: Categorizes expenses,  tracks deductions, collaborates with tax professionals for easy filing.

✅ Dedicated Bookkeeper: Assigns a professional bookkeeper to manage your finances, categorize transactions and reconcile accounts.

✅ Inventory Management Integration: Helps you monitor stock levels to prevent stockouts.

✅ Multi-Currency Support: Handles international transactions with real time currency conversions.

✅ Security Features: Offers encryption, two-factor authentication, and regular data backups.

✅ Customization Options: Has different bookkeeping packages to suit your specific business needs.

Free Trial: 

Offers a 30-day free trial for the bookkeeping software

Pricing:

Plans start at $25 per month for the bookkeeping software.

Flexible pricing tiers to match your business size and needs.

Avoid These Common Bookkeeping Mistakes as an Etsy Seller

Even seasoned Etsy sellers can fall into bookkeeping pitfalls. 

Avoiding these common mistakes can save you from financial headaches later.

Mixing Business and Personal Finances

Using the same account for personal and business expenses creates confusion when tracking your shop’s financial health. 

Open a separate business account to keep your Etsy income and expenses organized. This makes it easier to calculate profits, track deductions, and prepare for taxes.

Ignoring Small Fees

Overlooking small fees, like Etsy’s transaction or payment processing fees, can add up to significant costs that affect your profitability. 

Regularly review Etsy’s monthly fee reports to account for every deduction and include them in your bookkeeping.

Not Reconciling Regularly

Failing to reconcile your bank account with Etsy deposits can result in errors or missed transactions. Set aside time monthly to reconcile your bank statements with Etsy payouts. 

This ensures your records are accurate and up-to-date.

doola’s Pro Tips for Etsy Bookkeeping Success

• Track Expenses Weekly: Don’t wait until the end of the month. Regular tracking helps you stay organized and prevents a backlog of receipts.

• Use Bookkeeping Software: Automating your bookkeeping with tools like doola reduces errors and saves time.

• Separate Sales Channels: If you sell outside of Etsy (e.g., craft fairs or your website), categorize these sales separately for accurate reporting.

• Plan for Taxes: Set aside a percentage of your earnings for taxes to avoid surprises during tax season.

• Monitor Profit Margins: Regularly review your income and expenses to ensure you’re pricing your products for profit.

Simplify Your Etsy Journey With doola Bookkeeping

Running your Etsy shop should be about creating and selling, not stressing over bookkeeping. 

That’s where doola Bookkeeping comes in. 

We help Etsy sellers like you manage every financial detail — tracking expenses, handling reports, and making tax season a breeze.

Why waste precious time on spreadsheets when you could focus on growing your shop? 

With doola, bookkeeping becomes effortless, so you can channel your energy into what you love most.

Ready to take the hassle out of bookkeeping? 

Schedule a free demo today and see how doola can keep your finances on track.