Running an Etsy shop is exciting! You create, sell, and connect with customers worldwide. But when tax season rolls around or it’s time to calculate profits, bookkeeping can feel overwhelming. Are you manually tracking sales? Struggling to separate business and personal expenses? Or maybe you are unsure about sales tax compliance? 

Proper bookkeeping isn’t just about balancing numbers. It helps you avoid tax penalties, maximize deductions, and scale your business confidently. This guide breaks down bookkeeping essentials for Etsy sellers, covering common challenges, best practices, and automation tools that simplify financial management.

If you’re tired of spreadsheets and want seamless Etsy-QuickBooks integration, you’ll also discover how Webgility automates bookkeeping so you can focus on growing your shop instead of crunching numbers. 

What is bookkeeping for Etsy sellers?

Bookkeeping is tracking and organizing financial transactions and ensuring accurate records of income, expenses, and taxes. For Etsy sellers, this means recording every sale, accounting for Etsy fees, tracking inventory costs, and preparing financial reports.

While bookkeeping focuses on daily financial tracking, accounting involves analyzing financial data and preparing tax filings. Both are essential, but bookkeeping is the foundation that keeps an Etsy business running smoothly.

Here’s a quick comparison between Etsy accounting and Etsy bookkeeping:

As an Etsy seller, you must understand that bookkeeping and accounting work hand in hand. Without accurate records, financial analysis becomes unreliable, and a powerful bookkeeping system is the foundation for better financial planning.

Common bookkeeping challenges for Etsy sellers

Staying on top of your finances is not easy on Etsy. Between Etsy fees, material costs, and shipping expenses, it can feel like money is constantly moving in and out of your account. 

Many Etsy sellers struggle with messy spreadsheets, confusing reports, and hours of manual data entry. These small bookkeeping mistakes can snowball into bigger financial headaches like underpricing products, overpaying taxes, or not realizing a best-seller isn’t actually profitable.

Let’s break down the most common bookkeeping challenges you will face and why solving them is essential for a thriving shop.

Tracking sales and expenses manually takes too much time

Many Etsy sellers rely on manual tracking methods, such as spreadsheets or pen and paper, to keep track of sales and costs. While this might work initially, it can quickly become inefficient as your business grows. A 2024 survey found that businesses spend an average of 25 hours per week just on manual data entry.  

That’s time better spent on marketing, product creation, or, you know, taking a break.

Calculating sales tax across different states is hard

Etsy sellers are subject to various tax obligations, which can change based on location and business structure. For income tax, sellers report net income on their tax returns using forms like Schedule C. 

Calculating this can be challenging, especially when dealing with multiple tax rates. Sales tax adds another layer of complexity as it can vary from state to state and even within different regions of the same state. Some sellers also face the added complexity of economic nexus, where sales volume triggers tax obligations in various states.

Managing these obligations across different states requires attention to detail to avoid compliance issues.

Preparing financial reports for tax season is a nightmare

Preparing financial reports for tax season can be one of the most stressful aspects of running an Etsy shop. To file taxes correctly, sellers must gather all relevant financial information, including income, expenses, and tax records. But if receipts are scattered across emails, apps, and notebooks, tax filing becomes stressful. 

Missed deductions mean overpaying and incorrect records can lead to IRS penalties (two things no seller wants to deal with).

Etsy fees make it hard to track profits

Etsy’s pricing structure isn’t exactly straightforward. Etsy charges a range of fees, including listing fees, transaction fees, and payment processing fees. The listing fee is a flat rate of $0.20 USD per listing, charged regardless of whether the item sells. When you publish an item, this fee is automatically added to your payment account. 

Other listing fees include auto-renew, multi-quantity, and custom listing fees. The platform also charges a 6.5% transaction fee on the total sales price, including shipping fees, and a payment processing fee of 3% plus $0.25 per order for U.S.-based transactions. 

As one Etsy accountant mentioned in a Reddit thread, 

Many sellers struggle to track precisely how much they’re paying, significantly when fees vary based on sales volume and shipping. If you're not carefully tracking these costs, your real profits might be lower than expected, and you might be underreporting income or overspending on transaction-related expenses.

Confusing reports lead to poor financial decisions

Understanding how much you're making requires clear reports, but many sellers struggle with messy spreadsheets or incomplete data. In fact, 45% of businesses say their current financial tools lack proper reporting. Without accurate insights, knowing which products are truly profitable or when to reinvest in your shop is hard.

Disconnected apps create double the work

While Etsy does integrate with some accounting tools, not all sellers take advantage of automation. This leads to redundant data entry, errors, and wasted time. 95% of businesses say that integrating their apps is crucial for scaling. Yet, many Etsy sellers still rely on disconnected Etsy accounting methods or systems, making it more complicated than needed.

Best practices for keeping your Etsy books in order

Accurate bookkeeping helps Etsy sellers avoid tax issues and track profits. A few smart habits can help you keep your books organized, save time, and avoid costly mistakes.

Here are five key practices to keep finances in order:

Separate business and personal finances

Mixing personal and business money can make bookkeeping messy and lead to tax issues. To avoid confusion and ensure precise financial tracking, open a dedicated business checking account and credit card. 

A checking account, rather than a savings account, allows for frequent deposits, withdrawals, and payments (essential for managing day-to-day expenses like shipping fees, material costs, and marketing spending).

You can also get a business credit card for business purchases. This helps establish your business's credit history, provides access to cashback or rewards programs, and simplifies expense tracking.

Categorize expenses correctly

Use specific categories like raw materials, shipping fees, and advertising costs to classify each business expense. You can maintain an Etsy bookkeeping spreadsheet to track where your money is going and get clarity on where you can cut costs. 

Proper categorization also helps identify which expenses are tax-deductible, streamlining the filing process.

Keep track of your inventory

Inventory management is critical to maintaining profit margins and avoiding stock issues. You must manage costs associated with inventory, such as raw materials, storage, and shipping. Too much stock means you're paying extra for storage, but insufficient stock means lost sales and frustrated customers. Finding that sweet spot can be tricky, but it’s key to keeping your operations running efficiently.

One way to stay on top of things is by tracking the cost of goods sold (COGS). This number helps you understand how much you're making and keeps you in the loop on pricing. To figure out inventory costs, many sellers use methods like FIFO (First In, First Out) and LIFO (Last In, First Out):

• FIFO means you sell the oldest items first—great for things that might go out of date, like handmade soaps or seasonal goods
• LIFO sells the newest items first. It works well if your materials’ prices change a lot, but it can affect your taxes

Picking the proper method can make a difference, so talking with a tax professional is a smart move to ensure that you're doing it correctly for your business.

Reconcile transactions regularly

At least once a month, compare your business transactions with your bank statements to ensure accuracy. Look at the sales data on Etsy, your payment processor (like PayPal), and your bank statement.  

Discrepancies can show up in various ways, such as:

• Missing payments: If a payment from a customer didn’t go through or wasn’t processed correctly
• Fees: PayPal or Etsy fees might not be reflected in your accounting right away
• Refunds: If a refund was issued but didn’t show up on your bank statement or Etsy sales record
• Incorrect amounts: Sometimes, a payment might be processed for a different amount than you expected due to exchange rates or errors

Flagging these discrepancies as soon as you notice them will help you avoid costly mistakes in your records. Regular reconciliation also makes sure you’re not overpaying on taxes because your financial records will be more accurate.

Use bookkeeping software (and not spreadsheets) to do all the above

Manually entering transactions takes time and increases errors. Carla Sancho, owner of WeddingCollectibles.com, faced this problem when her family business expanded across multiple online platforms. Two employees spent 80 hours per month syncing orders across accounts. 

After switching to Webgility in 2010, data entry dropped to zero hours, and same-day order fulfilment became possible. Sales increased by 94% between 2010 and 2014, compared to 53% in the previous five years, allowing the business to focus on growth instead of managing repetitive tasks.

How to track income and expenses for your Etsy store

Tracking income and expenses is critical to running a successful Etsy store. Without an organized system, it’s easy to lose sight of where your money is going, miss out on valuable tax deductions, or face surprises when tax season arrives. 

A key part of this process is understanding how Etsy handles payments and fees, ensuring you log your income correctly.

Understanding Etsy's payment structure

Etsy processes your sales and deposits funds into your account after subtracting transaction fees, listing fees, and processing fees. It's essential to keep track of these amounts to avoid confusion and ensure you have an accurate picture of your earnings.

Recording income from Etsy sales

When you make a sale, Etsy takes care of most of the process. However, you should record the net income you receive, which is the amount deposited into your bank account after Etsy’s fees. 

Keep a log of all transactions and payments from Etsy and reconcile them with your bank statements regularly. This will help you stay on top of your revenue and avoid mistakes during tax season.

Managing expenses (supplies, shipping, Etsy fees, marketing, etc.)

Your business expenses can add up quickly, from purchasing supplies and shipping boxes to marketing and paying Etsy fees. Understanding where your money goes helps you claim deductions and reduce your taxes. 

Common deductible expenses for Etsy sellers include:

• Business-related interest
• Car expenses for business use
• Home office or studio costs
• Education expenses
• Employee wages (if applicable)
• Business-related meals, entertainment, and travel
• Insurance premiums
• Retirement contributions
• Bank fees (e.g., PayPal, credit cards)
• Listing and advertising fees
• Shipping and packaging expenses

You may even notice areas where you’re overspending, which can help you cut unnecessary costs and focus on what truly helps your business grow.

Keeping receipts and transaction records

Keep a paper trail of your business-related purchases to back up your tax claims. This becomes easier if you open a separate bank account for your business and use a dedicated credit card. The IRS advises retaining the following records for your reference:

• Bank account statements and invoices
• Cancelled checks
• Credit card receipts and statements
• Cash payment slips
• Receipts related to entertainment, travel, and transportation expenses

IRS rules for deductions and record-keeping can vary by business type and region. Be sure to familiarize yourself with the specific rules to your location to avoid any issues.

The length of time you should keep these documents varies. For tax purposes, records should be kept for at least three years, but keeping them longer provides extra protection in case of an audit. 

Manual bookkeeping can be a hassle, but tools like Webgility, which integrates with QuickBooks to automatically sync sales transactions, can help make this process easier. This ensures your records are accurate and accessible, especially during tax season.

If you prefer a manual approach, you could track expenses in a paper ledger and store receipts in an accordion file. However, paper records are vulnerable to loss, damage, or theft. If you go this route, make digital backups by scanning or photographing receipts to avoid future issues.

How to manage Etsy sales tax & stay compliant

Filing taxes as an Etsy seller comes with specific responsibilities, especially regarding sales tax. Knowing how Etsy handles tax collection, reporting it correctly, and keeping detailed records will help you stay on top of your tax obligations.

Disclaimer: Tax laws vary by location, and they can change frequently. It’s always a good idea to consult with a tax professional or local tax authority to understand your specific obligations and ensure you comply with your region's requirements.

Understanding Etsy’s sales tax collection and remittance

Etsy handles sales tax collection in states where marketplace facilitator laws apply. Etsy automatically charges sales tax at checkout in these states and submits it directly to the appropriate tax authorities.

However, if you sell in states where Etsy doesn’t collect tax, you may be responsible for collecting and remitting sales tax. In such cases, it’s essential to register for a sales tax permit with your state.

Check your state’s tax regulations to determine whether you must charge sales tax and how often you must file your returns. Some states require monthly filings, while others may require quarterly or annual filings.

How to report sales tax correctly

Etsy provides a Sales Tax Report in the Finances section of your Shop Manager. This report lists all the taxes Etsy has collected and remitted on your behalf. If Etsy has already remitted the tax, you don’t need to report it separately. However, if you are collecting tax independently, you must report and pay it directly to the state’s tax office.

When it’s time to file your business taxes, most Etsy sellers will need to complete either Schedule C or Schedule C-EZ on their tax return:

• Schedule C: For businesses with expenses exceeding $5,000, employees on payroll, or inventory deductions spread over time
• Schedule C-EZ: A more straightforward option for businesses with expenses of $5,000 or less, no employees, and inventory expenses deducted as they occur

Keeping up with expense tracking throughout the year helps avoid surprises when tax season arrives.

Avoiding tax penalties by keeping accurate records

Keeping thorough and accurate records is crucial to prevent mistakes and avoid penalties. To stay compliant, be sure to keep copies of the following documents:

• Sales tax reports from Etsy
• Receipts and invoices for business-related purchases
• Bank statements showing income and expenses
• Tax returns and filings for at least three years in case of an audit

Accounting tools like QuickBooks or Webgility can simplify this process. These tools integrate with Etsy and automatically track sales and expenses, giving you a clear view of your taxable income.

Bookkeeping tools for Etsy sellers

Since managing Etsy transactions can get complicated, bookkeeping software can help automate accounting, track expenses, and organize financial records, making tax time easier. With many options available, finding the right tool depends on your shop’s needs.

Below are our top Etsy bookkeeping software picks.

QuickBooks

As one of the most widely used accounting tools, QuickBooks simplifies tracking sales, expenses, and tax calculations, making it a solid choice for Etsy sellers. The platform’s interface is easy to use, even for those without accounting experience. It supports invoicing, expense tracking, payroll management, inventory tracking, and tax preparation. QuickBooks also integrates with many ecommerce platforms, CRMs, and payment processors.

Etsy sellers using QuickBooks can connect their shop through Webgility. This integration automates accounting, inventory management, and transaction posting, saving time on manual data entry.

• Categorize Etsy orders as sales receipts, invoices, or estimates
• Manage discounts, coupons, and payment methods within QuickBooks
• Set posting preferences based on date range or order status
• Automatically record refunds in QuickBooks

Pros

• Real-time financial tracking and synchronization
• Supports invoicing, expense tracking, payroll, and tax preparation
• Integrates with multiple ecommerce and financial tools

Cons

• Can feel overwhelming for new users due to its many features

Webgility

Our in-house favourite, Webgility, is a powerful eCommerce automation solution that integrates Etsy with QuickBooks. It simplifies bookkeeping, order fulfilment, and multi-channel selling, making it ideal for Etsy sellers managing multiple storefronts.

Instead of spending hours on manual data entry, Webgility syncs your sales, expenses, and inventory in real-time, ensuring that every transaction is recorded correctly. Beyond automation, Webgility helps Etsy sellers stay financially organized. It categorizes expenses, calculates taxes, and generates detailed financial reports with minimal effort. 

If you sell across multiple platforms, Webgility ensures inventory levels are updated across all channels, preventing stockouts or overselling. Plus, its AI-powered analytics provide valuable financial insights, helping you make informed business decisions. 

Pros

• Automates accounting and bookkeeping, reducing manual data entry
• Syncs inventory across multiple platforms, preventing stock discrepancies
• Enhances customer experience with streamlined order fulfillment and personalized packing slips
• Integrates with 35+ ecommerce platforms, including Etsy, Amazon, eBay, BigCommerce, Magento, and Shopify
• Tracks sales trends, inventory performance, COGS, and customer insights
• Partners with FedEx, UPS, Endicia, and Stamps.com to generate shipping labels and track orders

Netsuite

NetSuite simplifies bookkeeping by automating transaction tracking, payment management, and financial reporting. With AI-powered automation, it reduces manual work, making it easier to maintain accurate records and comply with financial regulations like ASC 606, GAAP, and SOX.

Connecting NetSuite with Webgility links your Etsy shop to other major sales channels like Shopify, Amazon, eBay, Lightspeed, Clover, and Square. This integration syncs orders in real time, ensuring accurate financial records and up-to-date inventory counts. It also automates essential tasks, such as posting sales data and managing product listings across multiple platforms.

Pros

• Comprehensive financial tools, including accounts payable, receivables, general ledger, and tax management
• Supports multi-currency transactions and global tax compliance
• Integrates with CRM, ERP, and ecommerce platforms for a unified business system

Cons

• Extensive features may feel overwhelming for new users
• High pricing makes it less accessible for small businesses

Xero

Xero simplifies bookkeeping by centralizing financial data, tracking expenses, and automating invoicing. It helps Etsy sellers manage real-time inventory, process payments, and keep financial records accurate. The platform also supports bill payments, showing due dates and enabling batch transactions for better cash flow management.

Pros

• Generates professional invoices and integrates with Stripe or PayPal for quick payments
• Automatically adjusts for exchange rates
• Integrates with over 1,000 third-party applications for expanded functionality

Cons

• The basic plan limits the number of invoices and bills you can process
• Some users report occasional syncing issues with bank feeds

How to set up Webgility for Etsy bookkeeping

After selecting Webgility as your integration solution, setting up Etsy with QuickBooks is simple. Follow these steps to set up your Etsy-QuickBooks integration. 

Step 1: Connect your Etsy store to Webgility

To get started, sign up for a Webgility account and select Etsy as your sales channel. Once you’ve logged in, authorize Webgility to access your Etsy store data. 

This connection enables Webgility to pull order details, customer information, and inventory data directly from your Etsy shop.

Step 2: Link your QuickBooks account

Next, connect your QuickBooks Online or Desktop account to Webgility. You can choose how Etsy orders should be categorized—as sales receipts, sales orders, invoices, or estimates—based on your bookkeeping preferences. 

Webgility’s integration ensures that transactions are posted automatically, keeping your records accurate and eliminating the need for manual data entry.

Step 3: Configure sales tax & payment preferences

Set up your sales tax preferences in Webgility to align with Etsy’s tax collection rules. This ensures accurate tax calculations and compliance with regulatory requirements. 

You can also manage discounts, coupons, payment methods, and card types within QuickBooks, making financial tracking more efficient and organized.

Step 4: Automate transaction syncing

Once your store and accounting system are connected, automate the process of syncing Etsy transactions with QuickBooks. Depending on your accounting needs, you can post transactions as journal entries or at the transaction level. 

Webgility allows you to select a date range or order status for posting, ensuring that your books stay up to date. Refunds are also automatically downloaded and recorded in QuickBooks, reducing the hassle of manual adjustments.

Step 5: Sync inventory and track business performance

Webgility helps keep your inventory levels accurate by syncing product prices and quantities between Etsy and QuickBooks. This prevents overselling and ensures that stock levels remain updated in real-time. You can schedule inventory transfers and track non-inventory items, additional charges, and services. 

Additionally, Webgility’s analytics tools provide insights into business performance, helping you identify top-selling products, forecast revenue, and analyze customer purchase patterns.

Make Etsy bookkeeping easy and precise with Webgility

While you might be focused on your handmade jewellery or custom candles, neglecting your finances can lead to poor decisions and increased risks for your shop.

If managing your finances feels overwhelming, automation is the key. While accounting software offers standard syncing, Webgility goes further by providing seamless integration, real-time profit tracking, and inventory sync tailored for Etsy and multichannel sellers.

With Webgility, you’ll save hours, reduce costly errors, and gain complete financial visibility—so you can confidently grow your shop. 

Start your free trial today and see how effortless bookkeeping can be in 2025 and beyond.

Frequently Asked Questions

How to do bookkeeping for an Etsy shop?

Option 1:

Bookkeeping for an Etsy shop involves five key steps to keep your finances organized: 

• Create a system: The first and most important step to good bookkeeping is having a system in place. Use accounting software or spreadsheets to track sales, expenses, and inventory efficiently.
• Track sales and expenses Regularly monitor your sales and expenses, including taxes, shipping, and materials, to understand your revenue and cost.s
• Review financial statements: Analyze your financial statements to get a clear picture of your business’s health and performance
• Stay updated on tax laws: Keep up with tax laws and Etsy’s regulations, as they can change frequently, ensuring compliance
• Adjust your policies as needed: Review and adjust your bookkeeping system and policies to improve efficiency and stay compliant with any new requirements.

Option 2:

Bookkeeping for an Etsy shop involves five key steps to keep your finances organized: 

• Set up a bookkeeping system: Use spreadsheets or accounting software like QuickBooks
• Track all income: Record every sale, including item price, shipping fees, and discounts
• Monitor expenses: Categorize costs like supplies, Etsy fees, packaging, and advertising
• Keep business finances separate – Use a dedicated bank account and card for Etsy transactions
• Reconcile finances regularly: Compare Etsy reports with bank and PayPal statements to spot errors
• Save financial records: Keep invoices, receipts, and tax documents for future reference.

Do I need to report my Etsy income?

Yes, Etsy income must be reported as business income on your tax return. Depending on your location, Etsy may issue tax forms like 1099-K, but it's essential to keep accurate financial records for tax compliance.

What is the best accounting software for Etsy sellers?

QuickBooks and Netsuite are among the best accounting software options for Etsy sellers, offering automated bookkeeping, inventory tracking, and tax reporting. Webgility enhances these platforms by integrating Etsy sales data with QuickBooks for simplified financial management.

How to keep track of Etsy finances?

Keeping track of your Etsy finances is essential for managing cash flow, filing taxes, and growing your shop. Tools like QuickBooks or Webgility automate transaction tracking, expense categorization, and tax calculations. Open a dedicated business checking account and credit card to keep transactions clear. Record every sale, fee, and expense to monitor profits and avoid surprises at tax time. Compare your Etsy sales, bank statements, and payment processors (like PayPal) to catch errors.